Legally defining insolvency is a situation where the liability of a person exceeds its assets. Insolvency can be defined as a situation where a person or a company or firms either partnership firms or limited liability firms fall into a situation where they are not able to meet their financial obligations whether in terms of repayment of loan or paying off any debts to their creditors. There are various reasons for insolvency like poor management, failures of startups, loses due to calamities, increase in expenses, etc. in short, your loses are more than profits and you are unable to pay for those loses. For all the individuals and companies and firms, insolvency is regulated by the bankruptcy code for resolution of insolvency. The code contains sections and definitions on insolvency and there are adjudicators, regulators, insolvency professionals and information utilities for resolution of insolvency.
The insolvency bankruptcy code was enforced in 2016 and from then insolvency professionals have played an important role in management of resources with the individuals, companies and firms.
Reasons for insolvency
- Poor management- one of the basic reasons for insolvency is poor management by the companies or individuals. This happens because people do not have an expertise or proper knowledge as to where to invest and save. So then they do not receive any returns and ends up being insolvent.
- Market- apart from own conditions, there are external factors too which affect the business and result in loses, like when the market is in unfavorable conditions. And it is unpredictable to know in which direction market is leading.
- Bad debts- these are those debts which are not repaid by the customers. The loans which they take are not paid by them.
- Finance- lack of cash flow to run the business. Because of the lack of cash flow/ money it becomes difficult to invest in profitable investments and gain further benefits.
- Other conditions relating to environment and conditions for different businesses.
Qualification and experience required for insolvency professional
An individual will be eligible for becoming an insolvency professional only when-
- He has successfully passed the national insolvency examination.
- He has successfully passed limited liability examination and has 15 years of experience in field of management and a graduation degree from a recognized institution.
- After he has passed and qualified the limited liability examination he should have 10 years of experience in any of the following –
- As a chartered accountant enrolled as a member of ICAI.
- As a cost accountant enrolled as a member of ICWAI.
- As a company secretary enrolled as a member of ICSI.
- As an advocate enrolled in bar council of India.
Individuals who cannot become insolvency professionals
- A minor person- below age of 18 years cannot become an insolvency professional.
- The insolvency professional should be a resident of India.
- The person who is convicted by any competent authority for an offence which is punishable with imprisonment for a term of more than 6 months or for an offence of moral turpitude and after that the period of 5 years has not been elapsed from the date of expiry of the punishment/ imprisonment.
- Any person who is guilty of an offence which is punishable with imprisonment of term of 7 years or more.
- Any person who does not have minimum required qualification of experience.
- Any person who is not fit and of sound mind to do duty.
The eligible candidates / individuals, who want to practice as insolvency professionals, have to register with the concerned board by filing of the application in Form A of the 2nd schedule. The applicant also needs to submit few related documents. The board inspects those documents and acknowledges the application within 7 days. They might also ask for various other documents too. The applicant is required to pay a fee of Rs. 10,000 which is non- refundable in nature. Once the boards is satisfied with the applicant’s application, they will grant a certificate for practice of insolvency professional to the applicant in form B of 2nd schedule within 60 days of the application.
Insolvency professional firms
Any firm or partnership can be established to do business as an insolvency firm. This can be registered with the board in Form C type application. The requirement is that the majority of the partners of the firm or the majority of directors shall be insolvency professionals.
Visit Company Vakil for any legal registration requirement.