In order to promote investment activity and ensure effective revival of stressed assets, Insolvency, Bankruptcy and Winding up are few methods which corporate world adopts. Insolvency is the situation where the debtor is not able to pay back to the creditor. Bankruptcy is the legal declaration of Insolvency. So, Insolvency is a financial condition and Bankruptcy is a legal position. All insolvencies does not resulted into bankruptcy. Winding up is the process of dissolving a company. While winding up, a company ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors, and distribute any remaining assets to partners or shareholders.
Before the enactment of The Insolvency and Bankruptcy Code, 2016, the provisions relating to insolvency, bankruptcy and winding up were fragmented and there was no single law to deal with insolvency and bankruptcy in India. The Insolvency and Bankruptcy Code, 2016 applies to companies and individuals. It provides for a time-bound process to resolve insolvency,which was lacking earlier regulations. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
Winding up can be compulsory i.e. through NCLT or voluntary. Compulsory Winding up can be for the situation viz. (a) company is unable to pay its debts (b) company resolved by special resolution to wind up by the Tribunal (c) company has acted against the interest of the sovereignty and integrity of India, the security of the State, friendly relations with foreign states, public order, decency or morality (d) Tribunal has ordered the winding up of the company under Chapter XIX etc. (e) If the company has not filed financial statements or annual returns for the preceding five consecutive financial years. (f) If the Tribunal is of the opinion that it is just and equitable that be company should be wound up. Voluntary Winding up can be done, (a) if company passes a special resolution for winding up of the Company (b) The company in general meeting passes a resolution requiring the company to be wound up voluntarily as a result of the expiry of the period of its duration, if any, fixed by its articles of association or on the occurrence of any event in respect of which the articles of association provide that the company should be dissolved.