Insolvency of a business may be defined in terms of ‘economic’ or ‘financial’ distress. While the former relates to its ability to produce and sell goods and services efficiently, the latter signifies its capacity to service debts. It is widely recognised that as long as a failing company remains economically viable, it should be subject to a ‘rescue’ process first. Unlike liquidation, where the company is closed down, rescue involves reorganisation wherein every effort is made to enable the company to return to commercially viable operations.
A robust corporate insolvency regime helps in rescuing viable businesses under financial distress, improves the availability of credit in the economy, and helps inefficient allocation of resources from failed firms to more efficient ones. This reallocation plays a critical role in supporting productivity and growth. An effective corporate insolvency regime can also promote entrepreneurship by providing a reasonably specific indication of the downside risks and costs that the promoters and investors expose themselves to when starting a venture.
Despite being a fundamental requirement for any well-functioning economy, India lacked an efficient bankruptcy system for most of its history. Vidhi initiated the bankruptcy law reform process in India and advised the government on the design, drafting, and implementation of the Insolvency and Bankruptcy Code, 2016, including all subsequent amendments to it.
Vidhi’s work on this reform has transformed India’s insolvency regime and continues to strengthen it.
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