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How can an Individual file for Insolvency: Lawyers Advice

 > Corporate Lawyer  > How can an Individual file for Insolvency: Lawyers Advice

How can an Individual file for Insolvency: Lawyers Advice

The Insolvency Laws of India were introduced by the Britishers and like the other laws, it owes its origin to English Law. The insolvency Laws were divided into two statutes on the ground of geographical division. The first is the Presidency Towns Insolvency Act, 1909 which applies to the presidency towns of Calcutta, Bombay and Madras and the second is the Provincial Insolvency Act, 1920 which applies to the entire territory of India except for these presidency towns. Both the Acts deals with the insolvency process of Individuals and firms.

According to the 26th Report of the Law Commission of India, the objectives of the Insolvency Law are:

  1. To give relief to the debtor from the harassment of his creditors whose claims he is unable to meet, and
  2. To provide a piece of machinery by which creditors who are not secured in the payment of their debts are to be satisfied.
    These objectives are based on the Roman principle of ‘Cessio Bonorum’.
    By the notification of 15th November 2019, Part III of the Insolvency and Bankruptcy Code, 2016 has come into effect from 1st December 2019. Section 243(1) in Part III of Code repeals the Presidency Towns Act, 1909 and the Provincial Insolvency Act, 1920. However, according to Section 243(2)(i), all the proceedings pending under both these acts before Part III came into effect will be governed under the aforementioned Acts by the concerned courts in the manner that these acts have not been repealed.

Acts of Insolvency under the Provincial Insolvency Act of 1920
According to section 6 of the Provincial Insolvency Act, 1920, a person is said to commit an act of insolvency if:

  1. He transfers all or substantial part of his property to some other person for the benefit of the creditors.
  2. He makes a transfer of his property to defeat or delay the creditors.
  3. He makes a transfer of his property which is termed as a fraudulent preference in any law of the country.
  4. Intending to delay of defeat the creditors, he departs, remain absent or secludes himself to deprive the creditors to contact him.
  5. Any of his property being sold to execute a decree by any court for payment of money.
  6. He gives notice of the suspension of payments of debts to his creditors.
  7. He files a petition to be adjudged as an insolvent
  8. He is arrested and imprisoned for the execution of a decree by a court for payment of money.

Jurisdiction of the Court under the Provincial Insolvency Act of 1920
Section 3 of the Provincial Insolvency Act, 1920 empowers the district courts to be the competent court having jurisdiction to try a case under this act. However, a state government through a notification can empower a subordinate court with jurisdiction of a case under this act. As held in the case of Gopal Lal Vs. Daulat Ram Mulk Raj (AIR 1976 Raj 254), the court held that “under Section 3(1) of the Act, the District Court is the only court having jurisdiction to deal with cases of insolvency in the absence of any notification of the Government empowering any court subordinate to the District Court with jurisdiction to deal with cases under the Act.”

Initiation of the Insolvency Procedure
As per Dhanna Lal (Now Smt. Meera Devi Wd/O Dhanna Lal and ors.) Vs. Chhagan Lal and ors. [RLW 1987 326 (RAJ)] the process regarding declaring a person to be insolvent starts with an application filed under Section 7 of the Act and if the Court, prima facie, concludes that the applicant is unable to pay the debt in entirety or substantially, the court shall admit the application and adjudged the debtor as insolvent.
A. Conditions for the Creditor to file a petition (Section 9)
• The minimum debt shall be Rs.500,
• The debt is due to be paid or at a specific future time, and
• The petition should be filed within three months of the act of insolvency.
As held in the case of G.R Subbiah Gowda and Ors. v. Mohamed Alam and Ors. (AIR 1962 Kant 197), Section 9(1)(c) of the Act, which prescribes that the time frame of three months to file a petition, is a ‘condition’ and not a ‘limitation’.
B. Conditions for the Creditor to file a petition (Section 10)
• The collective debts shall be minimum of Rs.500, or
• Under arrest or imprisoned in execution of money-decree.
• An order of attachment has been made by the court in execution of a decree which was subsisting against his property.

In Bonagiri Yellalu v. Nagulayaram Chenchu Subbaiah (AIR 1972 AP 221), the court observed that it is an essential pre-requisite for the debtor-petitioner under section 10 of the Act to satisfactorily prove that, “He is unable to pay the debts”, after this only he will get an order of adjudication.
In Ch. Venkat Subba Rao v. S.M Verkalaih [1986 (2) APLJ 50 (SN)], it was observed that “The execution of the decree by way of the arrest of the judgment debtor who is declared as insolvent can be ordered even in the absenteeism of leave of court if the execution proceedings were allowed earlier to the date of declaration and judgment debtor failed to avail protection under section 32.”

Contents of the Petition (Section 13)
• An insolvency Petition by the debtor shall contain:
a. Statement of incompetency to pay his debts.
b. Place of ordinary residence or work or in case if he is imprisoned, the place of custody
c. If arrested, he is supposed to mention the court by whose order he has been arrested or an order of attachment of the property has been passed, with the particulars of the decree.
d. The amount and specifications of every pecuniary claim against him, with the address and names of the creditors to the extent they are known or ascertained by him.
e. The amount and specifications of all the debtor’s property with a declaration of his willingness to place his property for disposal of the court.

• An insolvency Petition by the creditor shall contain:
a. The act of insolvency committed by the debtor, with the date of its commission and
b. The value and specifications of his pecuniary claims against the debtor.
In cases where two or more insolvency petitions against the same debtor are presented in the court, the court can consolidate the proceedings of any of them as per its discretion following section 15 of the Act.

Withdrawal of Petition (section 14)
As held in the case of I.R. Narayana Reddy Vs. Yaram Ramana Reddy and Anr. (AIR 2009 Kar 26),” Section 14 of the Act mandates that no insolvency petition shall be withdrawn without the leave of the Court. The court ought to have afforded an opportunity of hearing to the creditors before considering granting of leave under Section 14 of the Act for withdrawal of the insolvency petition.”

Admission of Petition (section 19)
When the insolvency petition is admitted by the court, it shall fix a date of hearing the petition by an order. Notice of the order shall be given to the creditors and if the debtor is not the petitioner then a notice of the order shall be served to him in the manner of service of summons.
The court after the admission of the petition shall appoint an Interim Receiver of the property of the debtor or at any time before the order of adjudication as per section 20, which can take immediate possession of such property on the direction of the court. The Interim Receiver shall confer his powers on the direction of the court.
The court on its motion or on the application of the creditors at the time of admitting the petition or at any time before the adjudication may pass an interim order of:
a. Debtor to give reasonable security for appearance.
b. Attaching the actual Seizure of whole or part of the property in the possession or control of the debtor.
c. Issue an arrest warrant against the debtor with or without bail.
However, as per section 23 and as held in the case of Sanapala narasamma and ors. v. Mallana Laxminarayana and Ors. [1999 (5) ALD 464], “District court can release an arrested insolvent.”

Appointment of the Interim Receiver under the Provincial Insolvency Act of 1920
Section 20 of the Act 1920 talks about the appointment of interim receiver (IR). Interim receiver is appointed by the court through an order after admitting the petition. The court can appoint an interim receiver at any point of time before the order of adjudication. The IR takes possession of property of the debtor and works in accordance with the direction of the court and powers conferred upon him.
The court in D.J. Rajendran v. Dr. K. Kathirvel & R. Ramanathan, [(2012) 6 CTC 396] held that, under Section 20 of the Act, a power is given to the Court to appoint Interim Receiver when Application is filed to declare himself as insolvent and the purpose of appointing Interim Receiver is to protect and preserve the properties of the Debtor.

Further, in Dasari Siva Prasada Rao and another v. Pasupuleti Satyanarayana and others, [(2005) 4 ALT 798], the court observed that, Section 20 of the Act clearly indicates that the appointment of Interim Receiver can be only in respect of “the property of the debtor or of any part thereof”. The provision does not enable the court, to appoint an interim receiver, in respect of any property of which, the debtor is not the owner, at relevant point of time.

Also, a suit instituted with the leave of the insolvency Court by an interim receiver appointed under section 20 of the Provincial Insolvency Act, during the pendency of an insolvency petition, for recovery of property belonging to the insolvent from third parties is maintainable in law. There is nothing in the Provincial Insolvency Act which prevents the insolvency Court from according sanction to an interim receiver to institute suits even against third parties for the vindication of the rights of the debtor in respect of whom an insolvency petition is pending.

Procedure for Hearing (Section 24)
On the day of hearing set by the court:

  1. The debtor-petitioner shall require to satisfactorily prove on prima facie grounds that he is unable to pay the debts.
  2. The creditor-petitioner need to prove that the debtor, if not appeared in the court, has been duly served with the notice to appear in the court on the said date.
  3. An act of Insolvency is done by the debtor.
    As per section 24(1)(c) of the Act, if satisfied by the prima-facie evidence presented before, the court is not bound to hear any further evidence. This, however, does not absolve the debtor-petitioner from the obligation of proving that, “He is unable to pay the debts”. [Bonagiri Yellalu v. Nagulayaram Chenchu Subbaiah (AIR 1972 AP 221)]

Order of Adjudication (Section 27 -30)
When the petition has not dismissed an order of adjudication is passed and time can be prescribed in which the debtor can apply for its discharge. After which, the all or part of the debtor’s property is shall be identified and its valuation shall be done.
Ram Chand and Ors. v. Mohara Sah and Ors. (IR 1937 Mad. 182), in which it has been held that even after granting an application for discharge, the court has jurisdiction to give direction as to the distribution of the assets amongst the creditors and such power is not taken away because of the insolvency discharge
Further, in Mool Chand v. Deep Chand (AIR 1935 All. 272), it was held that the insolvency proceedings terminated with an unconditional discharge and therefore, insolvency proceedings cannot be revived.

Priority Distribution of Assets (Section 61)

  1. Local authority and government debts.
  2. Repayment of landlord’s rent, not exceeding rent of a month.
  3. Wages and salary which were unpaid, during four months preceding the date of presentation of insolvency petition.
  4. The debts to the secured creditors and unsecured creditors.
    After the order of adjudication and report taken from the Interim receiver, the court grants an Absolute Discharge (Section 41) to the debtor. After the order of discharge is passed by the court, the debtor is released from all its debts payable, except for any debt due to the government or debt took place due to any fraud.

Appeals under the Provincial Insolvency Act of 1920
Section 75 of the Provincial Insolvency Act, 1920 states that, a debtor, creditor, receiver or any person affected by the order or decision taken by the insolvency court subordinate to the district court can appeal in the district court. Further, an appeal against the order or decision of the District court can be made in the High Court. In Joint Hindu Family Firm v. Firm Narain Dass-Faqir Chand of Amritsar, [ILR (1959) 1 P&H 647 (P&H) (DB)], it was held that in section 75, the word ‘aggrieved’ does not mean ‘disappointed’ but shall be ‘deprived of something’.
As held in the case of A. Rajan v. Bhagavathiappan, [(2013) 1 MWN (Civil) 693 (Mad)], by virtue of Section 75, an order passed by the insolvency court/subordinate court is only appealable before District Court.

Also, in Kewal Singh v. Ram Chander, [AIR 1990 All 99], the court held that, “Court of District Judge is a primary court of insolvency. Subordinate Court, when invested with the jurisdiction under the act, was found to have same powers of that of a district court, but it still would not become Principal Civil Court of Original Jurisdiction. It is still be considered subordinate to the district court. If any of the parties to the matter are dissatisfied with this order an appeal can be filed within 30 days under Section 75 of the Act, 1920. An order granting absolute discharge, shall have no immediate effect upon any proceedings, which may be pending under either Section 53 or 54 of the Act, 1920 in the Insolvency Court itself or in Court of appeal and such proceedings can be continued unless a contrary order is passed by the Insolvency Court. In some cases, the High Court, if satisfied can also voluntarily take up an order of the District Court and decide on it as they deem fit.

In Sahrad Mansukhlal Mutha v. Videocon Leasing and Industrial Finance Ltd. [(1999) 2 Bom CR 747], it was observed that, “an order made in exercise of insolvency jurisdiction by a court subordinate to a district court in section 75(1) mean any order and should be given a wider interpretation and not a restricted interpretation limiting it to an order of final nature excluding an order of interlocutory order.” Further, according to Section 75(2) of the act, every order made by a District Court, otherwise than in appeal from an order of a subordinate court which is specified under schedule I, is appealable to the High Court. [Himanshu Ray Parekh v. Debendra Kumar Chowdhary, (2012) 4 CHN 480 (Cal) (DB)]

Penalties & Punishment under the Provincial Insolvency Act of 1920
As per section 69, if a debtor, before or after the order of adjudication:

  1. Intentionally does not perform his duties mentioned under Section 22 or he fails to deliver the possession of the property which is to be divided among the creditors or it is under the possession of the court
  2. He acts fraudulently with the intent to defeat or delay the objectives of the Act,1920
  3. Fraudulently hide the sums or conceal any debt due or has made away with, charged, mortgaged or concealed any part of his property
    That debtor shall be punished with the imprisonment up to one year.

According to section 71, A person who is guilty as per section 69 of the act cannot be exempted even if he has been discharged from the debt or anything else. However, where an insolvent had obtained credit after his adjudication but before his discharge, the court had no jurisdiction to make an order under section 72(2) of the Provincial Insolvency Act for his prosecution after the insolvent had been discharged.
Section 72 of the Act, 1920, if an undischarged debtor who has been declared as an insolvent receives a credit of above Rs.50, without informing that person about his undischarged insolvency shall be convicted and punished with imprisonment which may extent up to six months.

As held in the case of Gangabishnu Singha v. Kahn and Kahn & Co., AIR 1931 Cal 508 (Cal), “According to Section 22 of the Provincial Insolvency Act, 1920, it is the duty of the debtor to produce all his books of account and audits on making of the order admitting the petition for adjudication.” Under Section 69 of the Act, the court may proceed against the debtor for the acts of bad faith and take action against him at any time for offences committed both before or after the adjudication order.

Further, the as per Section 79(2) of the Act, 1920, the High court is empowered to make rules regarding the audit of accounts of receivers and its cost. It is unnecessary under section 70, Provincial Insolvency Act to establish, before launching a prosecution, the various offends referred, to in section 69. All that section 70 requires is that the court should be satisfied that there is ground for enquiring into any offences referred to in s 69. It is not necessary, and the court is not bound, to make a preliminary enquiry even. (Janapareddi Tirupati Rao v. Kancheria Veeraswami, [AIR 1951 Mad 686 (1)])

The process regarding declaring a person to be insolvent starts with an application filed under Section 7 of the Act, 1920 and if the Court, prima facie, concludes that prima facie the applicant is not in a position to pay the entire debts due in him, in a lump sum or substantial part, the court shall entertain the application and order that the applicant is adjudged insolvent.

Thereafter, the applicant has to apply such an application is made by the applicant within the time specified by the court, for the discharge of the debts. When the application is given by the applicant in accordance with the time mentioned for the notices of it are also given to all creditors, the creditors can oppose the it and present evidence on their behalf. If the application is not presented under Section 43, the order of adjudication made prior can be annulled. In matter where the court comes to a point looking to the evidence mentioned in the case, then that applicant is authorized to an unconditional discharge, such adjudication shall be passed by the insolvency Court. If dissatisfied, an appeal can be filed in the appellate court.
Authored By: Adv. Anant Sharma & Rityunjay Sharma

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