INSOLVENCY – Very Briefly

There are two statutes which govern the laws of insolvency in India. One is Presidency Towns Insolvency Act, 1909. This Act is applicable to three Presidency Towns namely – Calcutta, Madras and Bombay. The High Court of Calcutta, Madras and Bombay has the jurisdiction to try the Insolvency proceedings under this Act. The second Act is Provincial Insolvency Act, 1920 and it is applicable to all parts of India except the three above towns; and the District Courts has the jurisdiction to try the Insolvency proceedings under this Act.

On the passing of an order of insolvency, all the properties of the insolvent, wherever situated, shall be vested in the official Assignee, for its realization and distributed among the body of creditors. One of the important effect of vesting is that the insolvent cannot deal with his property. No buyer from the insolvent can get a good title.

Instituting Insolvency proceedings may be very effective way of instilling a healthy fear in the minds of dishonest debtors that if they do not pay the debt, they may be adjudged as an insolvent.

Insolvency is a proceeding, wherein on the alleged “act of insolvency” committed by the debtor, the possession of property of a debtor is seized up for the benefit of the body of creditors, generally by an officer appointed for the purpose by the Court.

When a person is declared as an insolvent, he is subject to many disqualifications in respect of his civil rights. Although it is not a crime per se, yet insolvency brings the collapse of self esteem and perhaps humiliation in the social background. Also, unless a person is personally liable, he cannot be declared as insolvent. AIR 1929 Mad 573, Somasundaram versus Kanoo (died).

In an old case Lord ELLENBOROUGH stated - “The principle of bankruptcy (insolvency) laws is to prevent persons craftily obtaining into their hands great substance of other men's goods, at their own will and pleasures consuming the substance......”


THERE IS NO BAR AGAINST CRIMINAL PROSECUTION: Provisions of the Insolvency Act apply to civil proceedings and the proceedings are against the properties of the insolvent. There is absolutely no bar against any criminal prosecution against the debtor to which he may be subject to under the laws of the land. For example – a criminal prosecution of the insolvent under section 138 of the Negotiable Instrument Act 1881 for the dishonour of cheque issued by him cannot be stayed even if the same debt has been the basis of insolvency petition. Bharath N Mehta versus Mansi Finance Ltd, (1999) 1 CTC 687.

The Bombay HC in a case held that the Magistrate’s jurisdiction to try an insolvent for an alleged offence under section 421 of IPC is not taken away by anything in the insolvency legislation. Emperor versus Mullshankar Harihand Bhatt, ILR 35 Bom 63.


INITIATION OF INSOLVENCY PROCEEDINGS

A decree holder may initiate insolvency proceedings against the judgment debtor by issuing prior notice to him. A creditor may institute a Insolvency petition against the debtor to declare him as an Insolvent, by filing a Insolvency Petition in the competent court of jurisdiction. After that the creditor has to establish in the court (1) that he is a creditor of the debtor (2) there exist a legally enforceable ascertained debt between the debtor and the creditor (3) that the debtor has committed an “act of insolvency” as contemplated in the Act. Conditions for instituting insolvency Petitions by Creditors. AIR 1971 Mys 255 ATP Shivchandra versus Swarna Silk House.



WHO CAN BE DECLARED AS INSOLVENT: A person who is competent to contract can be declared as Insolvent.

Even a partnership form can also be declared as Insolvent. Chaturbhu versus KevalRam AIR 1931 Sind 179; Firm Mukanlal versus Purushottam Singh AIR 1968 SC 1182. However, companies cannot be declared as Insolvent. Winding up proceedings can be instituted against the defaulting company.


Unless a person is personally liable, he cannot be declared as insolvent. AIR 1929 Mad 573, Somasundaram versus Kanoo (died)

An admission by debtor relating to his inability to pay may be an act of insolvency. AIR 1996 Mad 143 Chellathurai Nadar versus Ramaswami Pillai

Conditions for instituting insolvency Petitions by Creditors. AIR 1971 Mys 255 ATP Shivchandra versus Swarna Silk House

Sections 6, 7, 19, 79 – Bombay Provincial Insolvency Rules 1924 – Rule 25 – K Devidas Pai versus P Y Maiankar – 2010 All MR (Supp) 365 – Para 7



INJUNCTIONS UNDER INSOLVENCY
In the case of Johrilal Soni versus Bhanwari Bai, AIR 1977 SC 2202, the Hon'ble SC also cited a passage from the observations of another Division Bench: “It is incorrect to say that prior to adjudication of Insolvency status of a debtor, the presiding court has no jurisdiction at all to get at the properties of the debtor and to preserve them. Special provisions in that direction are contained in section 20 and 21. These powers are conferred upon the court to see that the property of the insolvent is not wasted or taken out of the reach of the court during the pendency of the insolvency petition. (AIR 1953 Tra-Co 95 [DB]); Injunctions under Insolvency- Order 39 of CPC. Temporay Injunctions under Insolvency Petitions- AIR 1928 Rang 241 Ally Mohammed versus Bham.

Injunctions under Insolvency- Order 39 of CPC.
Temporay Injunctions under Insolvency Petitions- AIR 1928 Rang 241 Ally Mohammed versus Bham.


The following acts are regarded as “acts of insolvency” -
1. If in India or elsewhere, the debtor makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally.

2. If in India or elsewhere, the debtor makes a transfer of his property or any part thereof with intent to defeat or delay his creditors.

3. If, in India or elsewhere the debtor 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 an insolvent. Fraudulent preference – is that if a person is not able to pay his debts from his sources as debts becomes due and he is declared an insolvent, then any transfer of property, or every payment made or every obligation incurred or any judicial proceeding taken or suffered by the debtor within three months before the presentation of a petition against him, shall be deemed to a fraudulent preference and shall be void. It shall be annulled by the court.

4. If with intent to defeat or delay his creditors, the debtor departs or remains out of the territories to which the respective Act extends; or if the debtor departs from his dwelling house or usual place of business or otherwise absents himself; or if the debtor secludes himself so as to deprive his creditors of the means of communicating with him.
(1873) 8 Ch A 37, Ex Parte
AIR 1949 EP 359 Jagannath versus Badriprasad.
AIR 1923 Bom 107, In re Mohammed Hasham & Co
1970 ALJ 940, Nassen Badkhan versus Maqbool Begum
AIR 1975 Ker 195 Mathai Varkey versus Achuthan Damodaran
AIR 1936 Lah 176 Munilal versus Bansi Daob bank
(1984) 2 Kar LJ 202, Abdul Wahid Khan versus Alan Chavans.
AIR 1935 Rang 218, Maung Nyun versus Saw En Hoke
AIR 1968 Mad 216 Sarangapani versus Perumal Naidu.


It may also be informed that even a single Creditor can maintain an insolvency Petition. Please refer this Judgment. AIR 1983 A P 13, Nagappa versus Sahakka.


Delay in payment to creditors may amount to act of insolvency. AIR 1982 Mad 83. Maranaicken versus Saradhambal.


5. If any of the property of the debtor has been sold in execution of the decree of any court for the payment of any money.

6. If the debtor himself makes a petition in the court to declare him as a insolvent.

7. If the debtor gives notice to any of his creditors that he has suspended, or that he is about to suspend, payment of his debts. The notice need not be in writing and it is enough if the debtor gives a clear impression of his conduct that he is not going to make payment of his legal debts. The dishonour of cheque is a suspension of payment and thus is an act of insolvency. The dishonour of cheque has been held to be a suspension of payments under the Presidency Towns Insolvency Act. Soontram Ramntrajan Das versus SARM, Chettyar, AIR 1933 Rang 363. It has also been held that although the creditors has always the remedy of instituting civil suit to realise his debt, this ordinary remedy does not extinguish or diminish the creditor's statutory right to proceed under the Insolvency Act. A. Sree Nivasan versus ramesh Doshi, (1999) 1 cal LT 257 (Cal) : (2000) 1 Indian Civil Cases 280.

8. If the debtor is imprisoned in execution of the decree of any court for the payment of money.

9. A Bombay amendment provides an additional ground known as Insolvency Notice. A Decree holder, may give notice in prescribed form demanding payment giving at least one month's time. If it is not complied, Insolvency petition may be filed.


Insolvency jurisdiction.-
(1) The District Courts shall be the Courts having jurisdiction under this Act: Provided that the State Government may, by notification in the Official Gazette, invest any Court subordinate to a District Court with jurisdiction in any class of cases, and any Court so invested shall within the local limits of its jurisdiction have concurrent jurisdiction with the District Court under this Act.
(2) For the purposes of this Act, a Court of Small Causes shall be deemed to be subordinate to the District Court.


Petition and adjudication.- Subject to the conditions specified in this Act, if a debtor commits an act of insolvency, an insolvency petition may be presented either by a creditor or by the debtor, and the Court may on such petition make an order (hereinafter called an order of adjudication) adjudging him an insolvent. Explanation.-- The presentation of a petition by the debtor shall be deemed an act of insolvency within the meaning of this section, and on such petition the Court may make an order of adjudication.


Conditions on which creditor may petition.-
(1) A creditor shall not be entitled to present an insolvency petition against a debtor unless--
(a) the debt owing by the debtor to the creditor, or, if two or more creditors join in the petition, the aggregate amount of debts owing to such creditors, amounts to five hundred rupees, and
(b) the debt is a liquidated sum payable either immediately or at some certain future time, and
(c) the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition: 2[ Provided that where the said period of three months referred to in clause (c) expires on a day when the Court is closed, the insolvency petition may be presented on the day on which the Court re- opens.]

(2) If the petitioning creditor is a secured creditor, he shall in his petition either state that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent, or give an estimate of the value of the security. In the latter case, he may be admitted as a petitioning creditor to the extent of the balance of the debt due to him after deducting the value so estimated in the same way as if he were an unsecured creditor.

Court to which petition shall be presented.- Every insolvency petition shall be presented to a Court having jurisdiction under this Act in any local area in which the debtor ordinarily resides or carries on business, or personally works for gain, or if he has been arrested or imprisoned, where he is in custody:

Verification of petition.- Every insolvency petition shall be in writing and shall be signed and verified in the manner prescribed by the Code of Civil Procedure, 1908 (5 of 1908 ), for signing and verifying plaints.


Contents of petition.-
(1) Every insolvency petition presented by a debtor shall contain the following particulars, namely:--
(a) a statement that the debtor is unable to pay his debts;
(b) the place where he ordinarily resides or carries on business or personally works for gain, or, if he has been arrested or imprisoned, the place where he is in custody;
(c) the Court (if any) by whose order he has been arrested or imprisoned, or by which an order has been made for the attachment of his property, together with particulars of the decree in respect of which any such order has been made;
(d) the amount and particulars of all pecuniary claims against him, together with the names and residences of his creditors so far as they are known to, or can by the exercise of reasonable care and diligence be ascertained by, him;
(e) the amount and particulars of all his property, together with--
(i) a specification of the value of all such property not consisting of money;
(ii) the place or places at which any such property is to be found; and
(iii) a declaration of his willingness to place at the disposal of the Court all such property save in so far as it includes such particulars (not being his books of account) as are exempted by the Code of Civil Procedure, 1908 , (5 of 1908 ), or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree;
(f) a statement whether the debtor has on any previous occasion filed a petition to be adjudged an insolvent, and (where such a petition has been filed)--
(i) if such petition has been dismissed, the reasons for such dismissal, or
(ii) if the debtor has been adjudged an insolvent, concise particulars of the insolvency, including a statement whether any previous adjudication has been annulled and, if so, the grounds therefor.

(2) Every insolvency petition presented by a creditor or creditors shall set forth the particulars regarding the debtor specified in clause (b) of sub- section (1), and shall also specify--
(a) the act of insolvency committed by such debtor, together with the date of its commission; and
(b) the amount and particulars of his or their pecuniary claim or claims against such debtor.


Procedure for admission of petition.- The procedure laid down in the Code of Civil Procedure, 1908 (5 of 1908 ), with respect to the admission of plaints, shall, so far as it is applicable, be followed in the case of insolvency petitions.


Procedure on admission of petition.-
(1) Where an insolvency petition is admitted, the Court shall make an order fixing a date for hearing the petition.
(2) Notice of the order under sub- section (1) shall be given to creditors in such manner as may be prescribed.
(3) Where the debtor is not the petitioner, notice of the order under sub- section (1) shall be served on him in the manner provided for the service of summons.


Power of Court to decide all questions arising in insolvency.-
(1) Subject to the provisions of this Act, the Court shall have full power to decide all questions whether of title or priority, or of any nature whatsoever, and whether involving matters of law or of fact, which may arise in any case of insolvency coming within the cognizance of the Court, or which the Court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case.
(2) Subject to the provisions of this Act and notwithstanding anything contained in any other law for the time being in force, every such decision shall be final and binding for all purposes as between, on the one hand, the debtor and the debtor' s estate and, on the other hand, all claimants against him or it and all persons claiming through or under them or any of them.
(3) Where the Court does not deem it expedient or necessary to decide any question of the nature referred to in sub- section (1), but has reason to believe that the debtor has a saleable interest in any property, the Court may without further inquiry sell such interest in such manner and subject to such conditions as it may think fit.


Appointment of interim receiver.- The Court when making an order admitting the petition may, and where the debtor is the petitioner ordinarily shall, appoint an interim receiver of the property of the debtor or of any part thereof, and may direct him to take immediate possession thereof or of any part thereof, and the interim receiver shall thereupon have such of the powers conferrable on a receiver appointed under the Code of Civil Procedure, 1908 (5 of 1908 ), as the Court may direct. If an interim receiver is not so appointed, the Court may make such appointment at any subsequent time before adjudication, and the provisions of 1[ this section] shall apply accordingly.


Interim proceedings against debtor.- At the time of making an order admitting the petition or at any subsequent time before adjudication the Court may either of its own motion or on the application of any creditor make one or more of the following orders, namely:--
(1) order the debtor to give reasonable security for his appearance until final orders are made upon the petition, and direct that, in default of giving such security, he shall be detained in the civil prison;
(2) order the attachment by actual seizure of the whole or any part of the property in the possession or under the control of the debtor, other than such particulars (not being his books of account) as are exempted by the Code of Civil Procedure, 1908 (5 of 1908 ), or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree;
(3) order a warrant to issue with or without bail for the arrest of the debtor, and direct either that he be detained in the civil prison until the disposal of the petition, or that he be released on such terms as to security as may be reasonable and necessary: Provided that an order under clause (2) or clause (3) shall not be made unless the Court is satisfied that the debtor, with intent to defeat or delay his creditors or to avoid any process of the Court,--
(i) has absconded or has departed from the local limits of the jurisdiction of the Court, or is about to abscond or to depart from such limits, or is remaining outside them, or
(ii) has failed to disclose or has concealed, destroyed, transferred or removed from such limits, or is about to
1. Subs. by Act 34 of 1939, s. 2 and Sch. I, for" this sub- section".
conceal, destroy, transfer or remove from such limits, any documents likely to be of use to his creditors in the course of the hearing, or any part of his property other than such particulars as aforesaid.


Procedure at hearing.-
(1) On the day fixed for the hearing of the petition, or on any subsequent day to which the hearing may be adjourned, the Court shall require proof of the following matters, namely:--
(a) that the creditor or the debtor, as the case may be, is entitled to present the petition: Provided that, where the debtor is the petitioner, he shall, for the purpose of proving his inability to pay his debts, be required to furnish only such proof as to satisfy the Court that there are prima facie grounds for believing the same and the Court, if and when so satisfied, shall not be bound to hear any further evidence thereon;
(b) that the debtor, if he does not appear on a petition presented by a creditor, has been served with notice of the order admitting the petition; and
(c) that the debtor has committed the act of insolvency alleged against him.

(2) The Court shall also examine the debtor, if he is present, as to his conduct, dealings and property in the presence of such creditors as appear at the hearing, and the creditors shall have the right to question the debtor thereon.

(3) The Court shall, if sufficient cause is shown, grant time to the debtor or to any creditor to produce any evidence which appears to it to be necessary for the proper disposal of the petition.

(4) A memorandum of the substance of the examination of the debtor and of any other oral evidence given shall be made by the Judge, and shall form part of the record of the case.




Dismissal of petition.-
(1) In the case of a petition presented by a creditor, where the Court is not satisfied with the proof of his right to present the petition or of the service on the debtor of notice of the order admitting the petition, or of the alleged act of insolvency, or is satisfied by the debtor that he is able to pay his debts, or that for any other sufficient cause no order ought to be made, the Court shall dismiss the petition.

(2) In the case of a petition presented by a debtor, the Court shall dismiss the petition if it is not satisfied of his right to present the petition.


Order of adjudication.-
(1) If the Court does not dismiss the petition, it shall make an order of adjudication, and shall specify in such order the period within which the debtor shall apply for his discharge.
(2) The Court may, if sufficient cause is shown, extend the period within which the debtor shall apply for his discharge, and in that case shall publish notice of the order in such manner as it thinks fit.


Effect of an order of adjudication.-
(1) On the making of an order of adjudication, the insolvent shall aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among his creditors.
(2) On the making of an order of adjudication, the whole of the property of the insolvent shall vest in the Court or in a receiver as hereinafter provided, and shall become divisible among the creditors, and thereafter, except as provided by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable under this Act shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding, except with the leave of the Court and on such terms as the Court may impose.
(3) For the purposes of sub- section (2), all goods being at the date of the presentation of the petition on which the order is made, in the possession, order or disposition of the insolvent in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof, shall be deemed to be the property of the insolvent.
(4) All property which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall forthwith vest in the Court or receiver, and the provisions of sub- section (2) shall apply in respect thereof.
(5) The property of the insolvent for the purposes of this section shall not include any property (not being books of account) which is exempted by the Code of Civil Procedure, 1908 (5 of 1908 ), or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree.
(6) Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.
(7) An order of adjudication shall relate back to, and take effect from, the date of the presentation of the petition on which it is made.



Publication of order of adjudication.- Notice of an order of adjudication stating the name, address and description of the insolvent, the date of the adjudication, the period within which the debtor shall apply for his discharge, and the Court by which the adjudication is made, shall be published in the Official Gazette and in such other manner as may be prescribed. Proceedings consequent on order of adjudication


Power to arrest after adjudication.- At any time after an order of adjudication has been made, the Court may, if it has reason to believe on the application of any creditor or the receiver that the debtor has absconded or departed from the local limits of its jurisdiction with intent to avoid any obligation which has been, or might be, imposed on him by or under this Act, order a warrant to issue for his arrest, and on his appearing or being brought before it, may, if satisfied that he was absconding or had departed with such intent, order his release on such terms as to security as may be reasonable or necessary, or if such security is not furnished, direct that he shall be detained in the civil prison for a period which may extend to three months.


Sandeep Jalan
Advocate
Mumbai.