Insolvency refers to a financial state of an entity where the entity is not able to pay back the debt to the creditors it owes.
The purpose of the insolvency laws is to address such an. entity Insolvency laws are directed towards the following goals:
- Protecting the debtor who is insolvent.
- Arranging the distribution of the debtor’s property among the creditors in the most economical manner.
- Discharging the insolvent person from the demands of the creditors.
Acts of insolvency
The following are the acts of insolvency in India:
- If a person/ company transfers all or most of their its property to a third person for the benefit of its creditor
- If a person/ company transfers all or part of their property to delay the repayment to their creditor
- If a person/ company transfers all or most of their property, after being considered insolvent.
- If the debtor does the following to delay the creditors:
- Remain or depart out of the territories of India.
- Departs out of their residence.
- Avoid any sort of communication with the creditor.
- If the person/company has been judged as insolvent.
- If the property of the debtor has been sold to the government in order to repay the creditor.
- If the debtor has given notice to its creditor that he has stopped, or about to stop, the payment of their debts.
- If the debtor is imprisoned in execution of any for court for the payment of money.
Under NCLT (National Company Law Tribunal), the debtors are the corporate debtors. These corporate debtors can be any form of business entity such as One Person Company, Private Limited Company, Limited Liability Partnership, or any other form of legal business entity in India.
Section 8 Demand notice under insolvency
- If there is default in any payment, then the financial/operational creditor can deliver a demand notice of unpaid operational/financial debt copy of an invoice demanding the payment of amount involved in the default to the corporate debtor.
- The corporate debtor, 10 days after the receipt of the demand notice shall bring the following to the notice of the operational/financial creditor:
- Repayment of the unpaid financial/operational debt:
- By forwarding the attested copy of the record of the electronic transfer of the unpaid amount from the corporate debtor’s bank account.
- By forwarding the copy of the record that shows that the operational/financial creditor has cashed the cheque given to him/her by the corporate debtor.
- The existence of a dispute: if there are any records of the dispute, then the corporate debtor has to show the record related to the disputed amount through:
- Showing the record of the pendency of the suite or
- Showing the invoice related to the dispute or
- Arbitration proceedings filed before the receipt of the demand notice from the operational/financial creditor
Note: Demand notice refers to the notice that the operational/financial creditor serves in order to demand repayments of the operational/financial debt in respect of which fault has occurred in the payment.