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Bankruptcy may be a new term or less familiar with most of you but it is of higher importance. Bankruptcy is a legal status of a person or other entity that cannot repay debts to creditors. We may consider it as a white-collar fraud. First let me clear that bankrupt can be defined as different act in various jurisdiction but generally bankruptcy statutes involve concealment of assets, concealment or destruction of documents, conflicts of interest, fraudulent claims, false statements or declarations, and fee fixing or redistribution arrangements etc. Bankruptcy fraud is a federal crime in the USA and India.
In US, There are two major types of bankruptcy
Chapter 7: The U.S. Securities and Exchange Commission states that under Chapter 7 of U.S. Bankruptcy Code the company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the company's assets, and the money is used to pay off debt.
Chapter 11: This proceeding of the U.S. Bankruptcy Code involves not a closure, but a reorganization of the debtor's business affairs and assets. The company undergoing Chapter 11 expects to return to normal business operations and sound financial health in the future.
The Parliament of India in the first week of May 2016 passed Insolvency and Bankruptcy Code 2016 (New Code). Earlier a clear law on corporate bankruptcy did not exist, even though individual bankruptcy laws have been in existence since 1874. The earlier law in force was enacted in 1920 called the Provincial Insolvency Act. Still, clear picture of bankruptcy not mentioned in Indian panel law.
There are many pharmaceuticals which went bankrupt or even avoided bankruptcies but below an interesting example is mentioned. This is a very popular case of bankruptcy which raised many eyebrows from all over the world.
KaloBios Pharmaceuticals case
In November 2015, KaloBios, a publicly traded company, announced that it was planning to go out of business. Some of its experimental drugs had not worked in clinical trials, and it was running out of cash and options. Mr. Shkreli scooped up 70 percent of KaloBios’s shares on the open market, at prices generally under $2 a share. Once his involvement became known, shares shot up briefly to more than $40 each. In December 2015, KaloBios Pharmaceuticals Inc filed for Chapter 11 bankruptcy protection with a Delaware bankruptcy court. Mr. Shkreli is accused of using money from his first pharmaceutical company, Retrophin, to pay off money-losing investors in hedge funds he operated. He is also accused of misleading investors in the hedge funds. Later in Dec 2015, Shkreli was arrested and he was removed as CEO from KaloBios. KaloBios was developing cancer treatments, has $8.4 million in assets and $1.9 million in liabilities, according to the bankruptcy filing. Now, KaloBios is functioning as Humanigen Inc.
Recently, A Director of Gujarat-based pharma firm was sent to one day custody of Enforcement Directorate, which arrested him in a money laundering case related to an alleged Rs 5,000 crore bank fraud case.
Still rules for bankruptcy is in infancy in our country but it is required clear picture for protection of investors and public interest. Also there should be fair chance given to companies to pay their debts.
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