INSOLVENCY OF NON-CORPORATES

Law of insolvency is basically a social legislation that has been enacted to provide respite
and relief to the honest debtors who due to any unfortunate or unforeseen circumstances
become incapable of paying back their debts. Its object is also of securing distribution of
a debtor’s estate among his creditors equitably and thereafter to release him under certain
conditions from liability in respect of his debts and obligations.

The Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 are
two major enactments that deal with personal insolvency and have parallel provisions and
their substantial content is also similar but the two differ in respect of their territorial
jurisdiction. While Presidency Towns Insolvency Act, 1909 applies in Presidency towns
namely, Kolkata, Mumbai and Chennai, Provincial Insolvency Act, 1920 applies to all
provinces of India. These two Acts are applicable to individuals as well as to sole
proprietorships and partnership firms and are not applicable to corporations or against
any association or company registered under any enactment. Section 107 of The
Presidency Towns Insolvency Act, 1909 and Section 8 of The Provincial Insolvency act,
1920 specifically prohibits any insolvency petition against any against any corporation or
against any association or company registered under any enactment for the time being in
force.

The Presidency Towns Insolvency Act, 1909 consists of 127 sections and 2 schedules.
The Provincial Insolvency Act, 1920 consists of 83 sections and 2 schedules.
Persons who can be adjudged insolvent
The law has prescribed the category of persons who can be declared insolvent by court.
• Any person who is capable of entering into a contract (i.e., who has attained the
age of majority and is of sound mind and is not disqualified from contracting by
any law) can be adjudged insolvent provided he is a debtor and he has committed
an act of insolvency. Since a minor is not competent to contract, he cannot
therefore, be adjudged insolvent under any circumstances.

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 • If the debtor is a lunatic, he can be adjudged insolvent for the debts contracted by
him when he was sane.

• A minor partner in a firm cannot be adjudged an insolvent but his share in the
property of the firm is, however, liable for the debts of the firm.

• A partnership firm may be adjudged insolvent in the name of the firm when each
of the partners has committed an act of insolvency or a joint act of insolvency.

• A deceased person cannot be adjudged an insolvent on any proceedings initiated

after his death.

• A foreigner in India may be adjudged insolvent if he is a debtor and has

committed an act of insolvency.

• In case of a Hindu joint family, when all the members are personally liable on a
joint debt and have committed a joint act of insolvency, the members of the Hindu
joint family can be adjudged insolvent.

Background of insolvency law in India

Before the British came to India, there was no insolvency law in India. The Indian
regulation that dealt with insolvency law was initially found in Government of India Act,
1800.
In 1828, a statute was passed which marked the beginning of special insolvency
legislation in India and the statute applied to Presidency towns namely Bombay, Madras
and Calcutta. It was originally meant to be in force for a period of four years but was
extended till 1843. In 1848 another statute of insolvency law namely the Indian
Insolvency Act, 1848 was passed which made a distinction between traders and non-
traders. Insolvency jurisdiction under the statute was transferred to High Courts. Its
jurisdiction was also limited to presidency towns. In 1909 the present Presidency Towns
Insolvency Act, 1909 was passed.
Insolvency law in mofussil/districts was made in 1877 by incorporating the rules of
insolvency in Chapter 20 of the Code of Civil Procedure, 1877. Jurisdiction in relation to
insolvency matters was given to District Courts. These rules were modified by Chapter

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20 of the Code of Civil Procedure, 1882. Later on the Provincial Insolvency Act, 1907
was passed which was repealed by present Provincial Insolvency Act, 1920.
Insolvency of sole proprietorship
The owner of a sole proprietorship is not a separate legal entity from the business of the
sole proprietorship. So the laws governing bankrupt individuals also govern insolvent
sole proprietorships. Individuals can file a petition for their own bankruptcy or a court
may declare them bankrupt if they are unable to pay their debts.

Insolvency of Partnership firm

Each of the partners is jointly and severally liable for the debts of the partnership. On
dissolution of a partnership, the assets of the partnership have to be first applied towards
the repayment of debts of the partnership to third parties. If the assets are not sufficient to
repay the debts, the creditors may take proceedings against the partners. According to
Section 41 of the Indian Partnership Act, 1932 a partnership will be dissolved if all but
one of the partners becomes insolvent.

Insolvency proceedings
A person does not become insolvent just by the fact that he is a debtor and is unable to
pay his debts. He also does not become insolvent just because his liabilities are more than
his assets. It is necessary to initiate insolvency proceedings against him and get an
adjudication order against him under the law of insolvency.
Insolvency proceedings can only be initiated against a person who is a debtor under the
provisions of the Act of 1920 or who is a debtor under the provisions of the Act of 1909.
According to Section 2(b) of Act of 1909 and Section 2(a) of Act of 1920, debtor
includes a judgment-debtor. Judgment debtor is a person who has suffered a decree
against him that is against whom a decree has been passed.
The debt to be recovered from the debtor has to be a provable debt which includes all
debts and liabilities, whether present or future, certain or contingent provided the
obligation for which they became due was incurred before the date of adjudication. The
claims which are not capable of being fairly estimated or demands in the nature of
unliquidated damages are not provable debts. However demands in the nature of

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unliquidated damages arising by reason of a contract or breach of trust are provable.
(Sec.46 of Act of 1909 and Sec.34 of Act of 1920)
The commission of an act of insolvency by the debtor is a pre-condition for filing
insolvency petition. There are 8 acts of insolvency out of which six are voluntary and two
are involuntary. (Sec.9 of the Act of 1909 and Sec.6 of Act of 1920). By an amendment
in 1978, non-compliance to an insolvency notice given by a creditor has also been added
as an act of insolvency. A debtor is supposed to have committed an act of insolvency in
the following cases:
(a) If, in the States or elsewhere, he makes a transfer of all or substantially all his
property to a third person for the benefit of his creditors generally;
(b) If, in the States or elsewhere, he makes a transfer of his property or of any part
thereof with intent to defeat or delay his creditors;
(c) If, in the States or elsewhere, he makes any transfer of his property or of 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;
(d) If, with intent to defeat or delay his creditors,--
(i) he departs or remains out of the States,
(ii) he departs from his dwelling-house or usual place of business or
otherwise absents himself,
(iii) he secludes himself so as to deprive his creditors of the means of
communicating with him;
(e) If any of his property has been sold or attached for a period of not less than
twenty-one days in execution of the decree of any Court for the payment of
money;
(f) If he petitions to be adjudged an insolvent;
(g) If he gives notice to any of his creditors that he has suspended, or that he is
about to suspend, payment of his debts;
(h) If he is imprisoned in execution of the decree of any Court for the payment of
money
Filing of Insolvency Petition

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After the commission of an act of insolvency, insolvency proceedings can be initiated by
filing an insolvency petition either by a creditor or by the debtor.
If the creditor wants to file a petition against his debtor, he has to prove that an act of
insolvency has been committed and also that the amount of debt due from the debtor is
five hundred rupees or more. He can file it only within three months of commission of
the act of insolvency. (Sec.12 of Act of 1909 and Sec.9 of Act of 1920)
Even a debtor can present an insolvency petition against himself. Filing of such a petition
by the debtor is one of the enumerated acts of insolvency and the creditors also can file
an insolvency petition against him on the basis of a debtor’s petition. For filing an
insolvency petition against himself, the debtor has to prove any of these three conditions,
namely his debts amount to five hundred rupees or he has been arrested and imprisoned
in execution of the decree of any court for the payment of money or an order of
attachment in execution of such a decree has been made and is subsisting against his
property. (Sec.14 of Act of 1909 and Sec.10 of Act of 1920)
No petition, whether presented by a debtor or by a creditor, should be withdrawn without
the leave of the Court.
When two or more insolvency petitions are presented against the same debtor or where
separate petitions are presented against joint debtors, the Court may consolidate the
proceedings of any of them, on such terms as the Court may think fit.
Jurisdiction for filing Insolvency Petition
Insolvency jurisdiction under Section 3 of the Presidency Towns Insolvency Act, 1909
vests in the High Courts at Kolkata, Madras and Bombay.
Insolvency jurisdiction under Section 3 of the Provincial Insolvency Act, 1920 vests in
District Courts but 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.
Powers of the Insolvency Court
Section 4 of the Act of 1920 confers complete and full powers on the insolvency court to
decide all questions of title or priority or of any nature, whatsoever, which may arise in
any case of insolvency.

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Section 7 of the Act of 1909 also invests Insolvency Courts with the same power as are
given under the Act of 1920 but the questions of title are not mentioned in Section 7 but
the Court has power to decide all questions whether of law or fact. Under Section 8, the
Court has the power to rescind, review or vary any of its own orders.
Contents of Insolvency Petition

Section 13 of the Act of 1920 deals with the particulars to be mentioned in the insolvency
petition. Every insolvency petition presented by a debtor should 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;

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 (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 77 (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.

Every insolvency petition presented by a creditor or creditors should set forth the
particulars mentioned above and should 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.

Proceedings on admission of Insolvency Petition

According to Sec.20 of the Act of 1920, when the Court makes an order of admission of
the creditor’s petition, it may and in the case of admitting the debtor’s petition, the Court
shall appoint an interim receiver of the debtor’s property and direct him to take
immediate possession.
Section 16 of the Act of 1909 contains similar provisions, only difference being that there
is no distinction between creditor’s petition and debtor’s petition and it is at the Court’s
discretion to appoint an interim receiver at the time of admission of petition or at any
subsequent stage before adjudication.
Dismissal of Debtor’s / Creditor’s petition
Under Sec.25 of the Act of 1920, the Court may dismiss the creditor’s petition for
insolvency if it 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 for any other
sufficient cause. In case of a petition presented by a debtor, the Court may dismiss the
petition if it is not satisfied of his right to present the petition. Similar procedure is
prescribed under Sec.13 & 15 of the Act of 1909.
Order of Adjudication
If the Court does not dismiss the petition, it should make an order of adjudication and
specify in that order, the period within which the debtor should apply for discharge. The

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order of adjudication is passed under Sec.13 & 15 of the Act of 1909 and under Sec.27 of
the Act of 1920. The order of adjudication should be published in the Official Gazette as
per Sec.20 of the Act of 1909 and Sec.30 of the Act of 1920.
Proceedings subsequent to the Order of Adjudication
The effects of an order of adjudication are enumerated under Sec.17 of the Act of 1909
and Sec.28 of the Act of 1920. The effects are that the property of the insolvent vests in
the Court or official receiver / assignee and will become divisible among his creditors.
There are certain classes of properties that shall not be vested. The order of adjudication
also places an embargo on the creditors that they shall not have any remedy against the
property of the insolvent in respect of the debt provable in insolvency. They are also not
permitted to commence any suit or other legal proceeding except with the leave of Court
and on such terms as the Court may impose. This bar does not apply to criminal
proceedings. Under Sec.18 of the Act of 1909, the Court is authorized to stay any suit or
other proceedings pending against the debtor before any Judge or Judges of the Court or
in any other Court subject to the superintendence of the Court. The court is also
authorized to stay any insolvency proceedings pending against the debtor in any court
subject to the superintendence of the Court. On an application by the insolvent, the Court
can make an order for protection of the insolvent from arrest or detention for any debt to
which the order of adjudication applies.

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Solvency Proceedings from Commencement to Termination

Debtor + Act of Insolvency

Creditor’ Debtor’s
s petition petition

Admission of
Petition

Dismissal of Order of
Petition Adjudication

Annulment Discharge

7.0 OVERVIEW OF LAWS RELATING TO CORPORATE

INSOLVENCY

Indian Corporate Insolvency Law – Present Scenario

The issue of corporate insolvency has attained great significance with the globalization of
economy. A need has been felt for bringing about reforms in the sphere of law of
insolvency. The basic objectives of corporate insolvency are:
• to restore the debtor company to profitable trading where it is practicable;

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