Law of InsolvencyINTRODUCTIONREASONS OF INSOLVENCYJURISDICTION OF INSOLVENCY COURTSPROSECUTIONWHO CAN BE DECLARED AS INSOLVENTACTS OF INSOLVENCYCOMMITTEES ON INSOLVENCYPROCESS OF RECOVERY OF DEBTS IN INDIA
InsolvencyInsolvency is when an individual, corporation, or otherorganization cannot meet its financial obligations forpaying debts as they are due. Insolvency can occurwhen certain things happen, some of which mayinclude: poor cash management, increase in cashexpenses, or decrease in cash flow.A finding of insolvency is important, as specific rightsare enabled for the creditor to exercise against theinsolvent individual or organization. For example,outstanding debts may be paid off by liquidating assetsof the insolvent party.
BankruptcyBankruptcy is not exactly the same as insolvency.Technically, bankruptcy occurs when a court hasdetermined insolvency, and given legal orders for itto be resolved.Bankruptcy is a determination of insolvency madeby a court of law with resulting legal ordersintended to resolve the insolvency.Insolvency describes a situation where the debtoris unable to meet his/her obligations.Bankruptcy is a legal move in which an insolventdebtor seeks relief.
Reasons behind insolvencyThe main reasons behind insolvency are primarily poormanagement and financial constraints. This is much moreprevalent in smaller companies. Specifically, the reasonsare:• Market – Company did not recognize the need for change• Bad debts – obviously money owed by customers• Management – failure to acquire adequate skills, imprudent accounting, lack of information systems• Finance – loss of long term finance, over gearing or lack of cash flow• It is however observed that the larger the company, the better the chance of survival and of receiving remedial treatment and of paying creditors.
JURISDICTION OF INSOLVENCY COURTSThere are two statutes which govern the laws of insolvency inIndia.• Presidency Towns:Presidency Towns Insolvency Act, 1909. This Act is applicable tothree Presidency Towns namely – Calcutta, Madras and Bombay.The High Court of Calcutta, Madras and Bombay has thejurisdiction to try the Insolvency proceedings under this Act.All the matters in respect of which jurisdiction is given by thePresidency Towns Insolvency Act are ordinarily transacted anddisposed of by or under the direction of one of the judges of theHigh Court, and Chief Justice assigns from time to time.
Rest of India:• In the rest of India, insolvency matters are dealt with by the District Courts. The State Government may, by the notification in the local Official Gazette, invest any court subordinate to a district court with insolvency jurisdiction.• The insolvency court have the full power to decide questions: (i) whether of title or priority or of any nature whatsoever, and (ii) whether involving matter of law or of fact, which may arise in case of insolvency (Prov. Sec. 4).• 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 effects of vesting is that the insolvent cannot deal with his property.• 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. (Somasundaram vs. Kanoo (died).
NO BAR AGAINST CRIMINALPROSECUTIONProvisions of the Insolvency Act apply to civilproceedings and the proceedings are against theproperties of the insolvent. There is absolutely nobar against any criminal prosecution against thedebtor to which he may be subject to under the lawsof the land. For example – a criminal prosecution ofthe insolvent under section 138 of the NegotiableInstrument Act 1881 for the dishonour of chequeissued by him cannot be stayed even if the samedebt has been the basis of insolvency petition.Bharath N Mehta versus Mansi Finance Ltd, (1999)
• 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). Firm (Mukanlal versus Purushottam Singh).• 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.(Somasundaram versus Kanoo (died))• An admission by debtor relating to his inability to pay may be an act of insolvency.
• The following acts are regarded as “acts of insolvency”• 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.• 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.• If in India or elsewhere the debtor makes any transfer of his property.• If the debtor himself makes a petition in the court to declare him as a insolvent.
• 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.• If the debtor is imprisoned in execution of the decree of any court for the payment of money.• COMMITTEES ON INSOLVENCY• Shri. T. Tiwari Committee• Justice V.B. Balakrishna Eradi Committee• N L Mitra Committee