There are two statutes which governs the laws of insolvency in India. One is Presidency Towns Insolvency Act, 1909. This Act is applicable to three Presidency town 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.
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, and at their own will and pleasures consuming the substance......”
Insolvency is a proceeding by which 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. When a person is declared as a 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).
Instituting Insolvency proceedings may be the most effective way of instilling a healthy fear in the minds of dishonest debtors that if they do not pay the debt after receipt of notice from the creditor, they may be adjudged as an insolvent.
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.
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. AIR 1931 Sind 179, Chaturbhu versus KevalRam. AIR 1968 SC 1182 Firm Mukanlal versus Purushottam Singh. However, companies, Ltd or private, cannot be declared as Insolvent. However, winding up proceedings can be instituted against the defaulting company.
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.
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 to you 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.
when a creditor intends to institute a Insolvency petition against the debtor to declare him as an Insolvent, the creditor, before moving the court, must issue a notice to the concerned debtor as contemplated under the Act. 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.
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 the most effective way of instilling a healthy fear in the minds of dishonest debtors that if they do not pay the debt after receipt of notice from the creditor, they may be adjudged as an insolvent.
Sandeep Jalan
Advocate
Mumbai.
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