Bankruptcy and insolvency laws are legal frameworks designed to address financial distress and

the inability of individuals or businesses to meet their financial obligations. These laws vary
across jurisdictions, but they generally serve the following purposes:

1. Debt Resolution: Bankruptcy and insolvency laws provide a legal process for the
resolution of debt-related issues. This may involve restructuring the debt, negotiating
repayment plans, or liquidating assets to satisfy creditors.

2. Creditor Protection: These laws aim to balance the rights of debtors and creditors.
Creditors are given a fair chance to recover their debts while debtors are afforded some
protection from aggressive creditor actions.

3. Fresh Start or Rehabilitation: Bankruptcy laws often include provisions for individuals
and businesses to have a fresh start after financial difficulties. This may involve
discharging certain debts, allowing debtors to rebuild their financial lives.

4. Orderly Distribution of Assets: In cases of liquidation, the laws dictate the orderly
distribution of assets among creditors. Certain creditors may have priority over others,
and the process helps ensure a fair distribution.

5. Avoidance of Preferential Transfers: Bankruptcy laws often include provisions to

prevent debtors from favoring certain creditors over others shortly before filing for
bankruptcy. Transactions made to preferred creditors can be undone or reversed.

6. Bankruptcy Chapters or Types: Many jurisdictions, especially in the context of the

United States, have different "chapters" or types of bankruptcy for individuals and
businesses. For example, Chapter 7 involves liquidation, while Chapter 11 involves
reorganization for businesses.

7. Cross-Border Insolvency: Given the global nature of commerce, some legal systems
address issues related to cross-border insolvency, determining how assets and
proceedings are handled when a debtor has connections to multiple jurisdictions.

It's important to note that bankruptcy and insolvency laws can be complex and subject to
frequent changes. Local legal advice is crucial for understanding specific provisions and
procedures in a given jurisdiction. Additionally, the effectiveness and fairness of these laws may
vary, and their interpretation can depend on the specific circumstances of each case.

Bankruptcy and insolvency laws vary by jurisdiction, so it's important to consult the specific
laws applicable in your region. However, I can provide you with a general overview.

In many legal systems, individuals, as well as businesses, can be adjudged as insolvent. Here are
some common categories of individuals who may be adjudged as insolvent:
 1. Individuals:

 Consumers/Debtors: Regular individuals who are unable to meet their financial

obligations may be subject to insolvency proceedings. This often involves the
inability to pay debts as they become due.

2. Business Entities:

 Companies/Corporations: Businesses facing financial distress may file for

insolvency or bankruptcy if they are unable to meet their financial obligations.
This could include debts to creditors, suppliers, and other stakeholders.

3. Professionals and Sole Proprietors:

 Individual Proprietors/Entrepreneurs: Individuals who operate their own

businesses as sole proprietors or in certain professional capacities may be subject
to insolvency proceedings if their businesses cannot meet financial obligations.

4. Partnerships:

 Partnership Firms: If a partnership is unable to pay its debts, partners may face
personal liability, and the partnership itself may go through insolvency
proceedings.

5. Financial Institutions:

 Banks and Financial Companies: In some cases, financial institutions

themselves may face insolvency proceedings if they are unable to meet their
financial obligations.

The criteria for determining insolvency and the procedures for adjudication may vary, but
common triggers for insolvency include the inability to pay debts, a negative net worth, or a
situation where liabilities exceed assets. Insolvency laws often provide a legal framework for the
fair distribution of assets among creditors and a mechanism for restructuring or winding up the
affairs of the insolvent entity.

It is essential to consult the specific insolvency laws and regulations applicable in your
jurisdiction for accurate and up-to-date information. Legal advice from a qualified professional is
recommended for specific cases.

WHO CAN BE DECLARED AS AN INSOLVENT?

Any person, man or woman, who has attained majority, can be declared insolvent if the
conditions laid down in the insolvency acts are fulfilled. Certain special cases are discussed
below:
Minor:
In India a minor is not personally responsible for his debts and is not capable of entering into
contracts. Therefore a minor can’t be adjudicated an insolvent. If by error a minor is adjudicated
an insolvent the order must be annulled cancelled.
Lunatic:
A lunatic can be adjudged insolvent for debts incurred by him while he was sane. The other
condition necessary for passing an order of adjudication must be satisfied there must be an act of
insolvency. It must be noted that a lunatic can’t commit those acts of insolvency which insolvent
conscious volition acts which involve intent. Thus a lunatic can’t stay away from his place of
business with intent to defeat and delay his creditors.
Woman:
In India a married or a unmarried woman does not suffer from any contractual incapacity. She
can own property contract debts. Therefore she can be declared insolvent under appropriate
circumstances.
Foreigner:
A foreigner can be adjudicated an insolvent if he commits an act of insolvency in India which
resident here.
Joint Debtors:
When money is borrowed by two or more persons jointly, all of than can be declared insolvent
on a single petition provided some act of insolvency is committed by each of them or jointly by
all.
Partners:
Since every partner is responsible for all the debts of the firm, the creditors of a firm can file an
insolvency petition against any partner or all the partners for any debt due and owed by the firm
but it must be prove that the partner concerned has committed an act of insolvency. A minor
partner can not be declared insolvent for a partnership debt.
Joint Hindu family:
A creditor of a joint Hindu family can present a petition for the adjudication of all the members
of the family as insolvent provided the debt is one for which all the members are responsible and
act of insolvency has been committed by all members jointly. Minor members will not be
declared insolvent.
Deceased person:
A dead man can not be declared insolvent. His debts will be paid prorate in course of the
administration of his estate.
Legal representative:
The legal representative of a deceased debtor can not be declared insolvent for a decree obtained
against him as legal representative, because he is not personally responsible for such debts.

Companies:
A company can not be declared insolvent. In case of insolvent companies the proper procedure is
winding up.
Convict:
A prisoner in the jail can not be declared insolvent.
Who is an Undischarged Insolvent?

The phrase “undischarged insolvent” is not specifically defined in IBC. The term “undischarged
insolvent” is mentioned under clause 3 of section 79, but the term ‘bankrupt’ is defined.
‘Bankrupt’ is the person who is – a debtor who has been adjudged as bankrupt by a bankruptcy
order under section 126;

Each of the partners of a firm, where a bankruptcy order under section 126 has been made
against the firm; is adjudged as an undischarged insolvent.

A person who is not able to pay his debts can initiate insolvency proceedings. Creditors who are
not paid their dues by a company can also initiate insolvency proceedings against the firm. The
Court has the power to “discharge” the debtor and release him of his debts through some
financial arrangement, like attachment of his movable and non-movable assets. Till the time the
insolvent is not discharged by the court, from the time the insolvency proceedings have been
initiated, he remains an “undischarged insolvent“, which puts several limitations on him
concerning his financial dealings, candidature for elections, etc.

Also, it might be confusing as insolvency seems to be the same as bankruptcy, but it is not.
Insolvency is a condition of financial distress, whereas bankruptcy is a court order that decides
how an insolvent debtor will deal with unpaid obligations. However, in both situations, the
parties either approach the National Law Company Tribunal or Debt Recovery Tribunal (as the
case may be) as their Adjudicating Authority. Insolvency is a situation where the liabilities of an
individual or an organization exceed its asset and that entity is unable to pay the debts as they
become due for payment.

Whereas, Bankruptcy is when one asks for help from the government to pay off his debts to his
creditors. There are various disqualifications for an undischarged insolvent. Under Article 102
(1) (c) a person shall be disqualified for being chosen as, and for being, a member of either
House of Parliament if he is an undischarged insolvent; Article 191 (1) (c) disqualifies a person
for being chosen as, and for being, a member of the Legislative Assembly or Legislative Council
of a State if he is an undischarged insolvent.

Under the Companies Act, 2013, a person is not eligible to be appointed as a director of a
company, if he is an undischarged insolvent. Under Rule 145 of Trade Marks Rules, 2002, a
person is debarred from registration of the trademark, if he is an undischarged insolvent. Under
Rule 103A of The Patents Rules, 2003, it is stated that a person shall not be eligible to be
included in the roll of scientific advisors if he is an undischarged insolvent. So it is clear that
many provisions in India disqualify a person if he’s an undischarged insolvent. Though it has
been interpreted many times in the court of law.

In the case of SBI vs. Bhushan Energy Ltd[1], NCLT stated that while a company is under
Corporate Insolvency Resolution Process (CIRP), it cannot be said to be ‘undischarged
insolvent’ and for the determination of who is ‘undischarged insolvent’ has been vested with a
court of competent jurisdiction, which it isn’t under the IBC. However, who is the competent
authority to decide this question, has not been answered. Multiple cases have discussed the term
undischarged insolvent.

Section 29A of Insolvency and Bankruptcy Code talks about the conditions in which a person
becomes ineligible to become a resolution applicant. Any person who is an undischarged
insolvent gets ineligible to become a resolution applicant. Any person who is undischarged
insolvent is debarred from filing a resolution plan. IBC has used the term ‘bankrupt’ and
‘undischarged bankrupt’ and not ‘undischarged insolvent’. Under the Provincial Insolvency Act,
1920, a person is adjudged insolvent and unless he is discharged by the Court, he remains subject
to disqualifications.

Therefore, a person adjudicated as insolvent is considered as undischarged until he is discharged

by a competent court. The expression undischarged insolvent has acquired a particular legal
connotation and such expression cannot be used otherwise than in terms of the insolvency
enactments. Insolvent and Undischarged insolvent are two different terms and often confuse
people. It was clarified in the judgment of Thampanoor Ravi v. Charupara Ravi & Ors[2], the
court said that the term used under article 102 and article 191 is ‘undischarged insolvent’ and not
merely ‘insolvent’, and both the terms have different meanings.

The court observed that an insolvent is a person who is unable to repay his debts and as long as
he remains in that position he is an undischarged insolvent, that is, as long as he has not
discharged his debts he is an “undischarged insolvent“. And the person who has not been
discharged may be called bankrupt.

Covid-19 is having a major economic impact on countries, companies, and businesses. The
outbreak of the virus has resulted in drastic financial distress among the companies. Due to a
lack of supply chains coupled with lower customer demand, many industries and businesses are
on the verge of being shut down. In this type of circumstance, more insolvency and bankruptcy
cases could be lined up before the courts.

A recent amendment has been made by the government by implementing and introducing section
10A in IBC, it would suspend the operation of Sections 7, 9 & 10 of the Insolvency and
Bankruptcy Code, 2016 concerning defaults arising on or after 25.03.2020 for six months,
extendable up to a maximum of one year from such date. Sections 7, 9, and 10 of the IBC enable
a financial creditor, operational creditor, and the promoter, respectively, to initiate insolvency
proceedings against a company.
The main aim of the amendment is to provide some relief to those corporate debtors who are
directly affected due to the COVID-19 pandemic which has resulted in widespread disruption of
business operations across the country. However, section 29A is streamlined to avoid
unintended exclusions i.e., Persons ineligible u/s 29A will not benefit from this amendment in
any manner. It means that the persons ineligible under section 29A would still be prohibited from
proposing a resolution plan. Although, an insolvency check is a must on the target companies to
prevent any kind of disruptions in the future.