This article is written by Anumeha Karnatak,  a law student from National Law School, Bangalore during her internship at iPleaders.Personal Insolvency is governed under two statutes in India which came into force way back during the British era. There is hardly any significant difference between the provisions under the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 except that under the latter, the procedure is slightly more rigid and stricter than in the former. The term ‘insolvent’ has nowhere been defined under any of the legislations but in general, an ‘insolvent’ is a person who is unable to pay his debts or has committed an ‘act of insolvency’ and has been adjudged an ‘insolvent’ by an insolvency court.

Rationale behind the Insolvency laws

Before the aforementioned legislations were brought into force, every person who was unable to pay his debts was treated as an offender and put behind the bars. Both honest (not possessing any legitimate monetary means to repay the loan amount) and dishonest (possessing the necessary means but dealing with the property in unscrupulous or suspicious manner so as to appear broke) debtors were treated in the same manner. To protect the former category of debtors, insolvency legislations were brought into force. Today, insolvency laws serve two major purposes:

• They seek to protect the honest and unfortunate debtor from facing criminal proceedings when he/she has agreed to surrender all the property in favor of the debtors.
• They seek to protect the interests of the creditors by making sure that the property of the debtor is distributed among the creditors in such a manner that each is able to receive a fair and rightful share.

Acts of Insolvency:

Following are the ‘acts of insolvency’ as specified under the two legislations (except a few minor differences here and there, the acts of insolvency remain largely similar under both the Acts):

• If, in India or elsewhere, he makes a transfer of all or substantially all of his property to a third person for the benefit of his creditors generally. Through this act, he shows his willingness to accord legitimate shares in his property to the creditors.
• If, in India or elsewhere, he makes a transfer of his property or any part thereof, with an intent to defeat or delay his creditors. In such circumstances, the debtor deliberately and dishonestly tries to shield his property from the creditors in order to avoid making payments of debt.
• If in India or elsewhere, he makes any transfer of his property or any part thereof, which would under this, or any other enactment for the time being in force, be void as a fraudulent preference, if he were adjudged insolvent. Fraudulent preference necessarily means giving preference, for certain ulterior motives, to one creditor over the rest while transfering property or making any payment of debt.
• If with intent to defeat or delay his creditors, (i) he departs or remains out of India, (ii) he departs from his dwelling house or usual place of business or otherwise absents himself or, (iii) he secludes himself so as to deprive his creditors of the means of communicating with him.
• If any of his property has been sold in execution of the decree of any court for the payment of money (under the Provincial Insolvency Act, 1920).
• If any of his property has been sold or attached for more than twenty one days in execution of the decree of any court for the payment of money (under the Presidency Towns Insolvency Act, 1909).
• If he petitions to be adjudged an insolvent.
• If he gives notice to any of his creditors that he has suspended, or is about to suspend, payment of his debts. Through this act, he tries to inform his creditor(s) of his incapacity to repay the debts.

Insolvency Courts:

Under the Presidency Towns Insolvency Act, 1909, the High Courts of Bombay, Calcutta and Madras have been accorded the jurisdiction or judicial authority to try insolvency cases. Under the Provincial Insolvency Act, 1920, the same has been accorded to district courts but it is flexible in the sense that the state government can, if the need be, accord the jurisdiction to a lower court also. The orders of these courts are not full and final and can be appealed against in higher courts if the aggrieved party so desires.

Procedure:

Insolvency proceedings can be explained through the following points:

• An insolvency petition has to be filed either by the debtor himself or a creditor of the debtor in an insolvency court.
• For an insolvency petition to be accepted by the court, the amount of debt must be more than Rs. 500.
• On the admission of petition by the court, a date of hearing is fixed.
• An interim receiver is appointed by the court to take immediate possession of the property of the debtor. He continues to function till a regular officer is appointed.
• On the date of hearing, the court if satisfied that the petition is reasonable shall make an order of adjudication.
• After the passing of the ‘order of adjudication’, the debtor becomes an ‘undischarged insolvent’. After this declaration, all his property is vested in an officer called ‘Official Assignee’ under the Presidency Towns Insolvency Act and ‘Official Receiver’ under the Provincial Insolvency Act, appointed by the court to conduct insolvency proceedings.
• It then becomes the Official Assignee’s duty to sell the property of the insolvent within a reasonable period of time.
• Whatever money is generated in the form of sale proceeds is then distributed among the creditors.
• After the process of distribution is completed, the insolvent is required to collect a certificate of ‘absolute discharge’ which is granted only when it is proved that the insolvency resulted due to misfortune and not because of any dishonest or unscrupulous behavior on part of the debtor. Another point taken into consideration is the behavior of the debtor during the insolvency proceedings which must have been satisfactory.
• On the award of ‘absolute discharge certificate’, the remaining, unpaid debts of the debtor are cancelled and he cannot be forced or threatened by any creditor to repay the debt amount.

Sources:

1. MC Kuchhal, MERCANTILE LAW, 493-500 (2008).
2. Nirmal Singh, BUSINESS LAWS, 622-624 (2009).
3. Provincial Insolvency Act, 1920.
4. Presidency Towns Insolvency Act, 1909.