Insolvency can be defined as a financial stage where an organization/Individual declares their inability to pay the debt to the creditors or the Investors in a particular time or completely defaults the debt. The Insolvency and the Bankruptcy Code, 2016(IBC) is the law for Bankruptcy, which sets the guidelines, framework under the Insolvency process in India. Resolving the Insolvency, providing the solution to the debtors, and protecting the investors from making their business easy to get back their money is the main aim of this act. It also ensures that it provides an exit strategy for foreign companies with their investments; all the creditors are given an equal chance during payments.
- Provision of a specific time for the Insolvent to pay the debt outstanding
- Setting the guidelines for the debtors/creditors to solve the Insolvency and provide the solution on mutual agreement
The Insolvency Act, on an overall basis, monitors the Insolvency Resolution process, provides the solution for both creditors to get back their investments and the debtors an effective way to come out of insolvency.
Insolvency is generally of two types:
The first case occurs because the organizations do not have any more money reserves or the liquidity to pay the debts. In the second case, Insolvency occurs because the organization has more liabilities than the assets and also unable to recover the losses it is incurring. To find out the type of Insolvency; generally, the Cash Flow test is done in which the status of the current and the future in-flow of the cash is determined to estimate the performance of the organization. If the organization has less liquidity and more assets, it can cover the debts by selling its assets and be debt clean. In this case, the Insolvency process is a temporary issue and can be easily solved.
Impact of Insolvency
Once an Organization declares Insolvency, the IBC rules/Insolvency Act decides the virtue of the organization in terms of the organization’s recovery from the debts or out of business depending on the current situation of the organization and its day-to-day business process. The Bankruptcy quote plays a significant role in deciding the critical decisions and their approvals in the organization.
The organization is allocated a trustee who looks after the decisions like selling the assets of the organization, paying the debts, including both investors and creditors. The payment of debts is generally carried in terms of the risk taken by the creditors. Usually, the least risk investors are paid-off first, followed by high-risk creditors. Under least risk investors, comes the Secured Creditors who are generally (like banks) are preferred first, Unsecured Creditors (Bondholders), the Stockholders.
This process is followed because the least risk-takers give the credit under collateral surety by taking the assets under the mortgage. The bondholders also have a more exceptional ability to get paid because bonds usually are the debt of the company, and the bondholders are paid the interest and the principle as assured by the organization. The stockholders possess a higher risk because they invest in the company, assuming that they make profits when the organization/company performs well. These are the basic bankruptcy laws that ensure the payment to creditors and the payment order.
Even after Insolvency registration, the securities of a company can continue in trading activities. Still, generally, the organizations may fail to fulfill the criteria of stock exchanges, they may get delisted. In most scenarios, the reorganization plan by the companies will result in the cancellation of the equity shares. The organizations can continue to run their business operations, become successful again, returning to profitability, keeping their securities market. These kinds of re-organization plans are generally negotiated by the organization with their creditors and stockholders to collectively take the decisions to make sure the company performs good and thus shortening the repayment time. Among the many formal procedures followed in the Insolvency, the generally adopted processes are Liquidation, Company Voluntary Arrangement.
In the Insolvency Liquidation procedure, the two types of procedures involved are Creditors Voluntary Liquidation (CVL) and Compulsory Liquidation. CVL is initiated by the director of the organization; on the other hand, Compulsory Liquidation is the process where action by force is taken from the creditor’s side on the Insolvent organization. When an organization/individual files for the Insolvency, they cannot start the old business under a new company name or entirely begin a new business. This rule is applicable until the Insolvency filed in the court is solved; the organization gets a discharge certificate from the court.
How Solvemint helps in overcoming the problem
Provides the features of best insolvency software considering the stakeholders like Creditors (secured and unsecured), Stockholders, Employees, Auditors, etc., from their perspectives to attain the best possible solution in a crisis. Through its interface, Solvemint offers a very simple process for the claims of creditors and employees, which makes their job easier. Through its assets management interface, it is effortless to track the information regarding the sale of the assets, auctions. It organizes and also provides a platform for the bidding of the assets, auction, facilitates the information to buyers and auctioneers. All these decisions were taken through an organized E-boarding process to help the decision making the process easier for creditors and stockholders through a blockchain-based application.
It also has other advantages like Automatic Notice Generator, which provides all the required legal notices with a click. Solvemint always focuses on providing the best platform to its customers and is the pioneer in bringing the updated features, which makes it best in the Cooperate Insolvency Management.
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