Proof Of Claims In Insolvency: A Transformation In The Regime

Anshul Mittal, Fairfield Institute of Management and Technology, GGSIPU

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC/Code) provides for resolution of stress of a company, a limited liability partnership, a proprietorship, or partnership firm, or an individual. The stipulations under the Code are being implemented in a phased manner. Currently provisions relating to corporate insolvency (resolution process, liquidation process and voluntary liquidation process), and individual insolvency dealing with resolution and bankruptcy process of personal guarantors to corporate debtors (CDs) are in operation. The provisions relating to individual insolvency dealing with fresh start process, proprietorship, and partnership firms and other individuals are yet to come into force. This report, therefore, limits to corporate insolvency, which has been in vogue for over five years now, nevertheless, the principles and recommendations made herein can be used in the context of individual insolvency as well.

For reasons within its control or otherwise, a company may experience stress in terms of mismatch in the assets and liabilities in its balance sheet, which may eventually lead to situation of default. Elementary economics indicates that when a company has inadequate assets, claim of an individual creditor may be consistent with its assets while claims of all creditors put together may not. In such a situation, creditors may rush to recover their claims before others do, triggering a run on the company’s assets. They recover on a first come first served basis till the assets of the company are exhausted, bleeding the company to death. This is termed as negative-sum game.