Insolvency, in the Indian business and financial context, refers to a situation where an individual or a company is unable to pay their debts when they become due. It means the total liabilities are greater than the total assets, or the business is unable to meet its financial obligations on time.
In India, insolvency is primarily governed by the Insolvency and Bankruptcy Code (IBC), 2016, which provides a legal framework for resolving insolvency in a time-bound and efficient manner. This process aims to protect the interests of creditors while giving the debtor a chance to either restructure or liquidate the business in an orderly fashion.
For small business owners and startups, understanding insolvency is important because it signals financial distress. Recognizing early signs of insolvency can help avoid legal complications and protect the business. Filing for insolvency under the IBC allows companies to seek resolution before the situation worsens, and it can also offer relief from ongoing legal action by creditors.
In practical terms, insolvency may come into play during financial audits, annual compliance filings, or while seeking funding. Financial institutions and investors often assess a company’s solvency before providing loans or capital. A declaration of insolvency can also affect business registration status, contract terms, and vendor relationships.
For more details on how insolvency is handled and resolved in India, visit our dedicated page on Insolvency.