The Individual Insolvency Framework in India

As part of our blog series on “Insolvency in India”, in this post we look at the framework for individual insolvency in India.

While the corporate insolvency framework has seen a lot of activity, the individual insolvency framework in India consists merely of a pair of statutes legislated in the British era which today lie dormant for all practical purposes. The application of these enactments is split geographically; while the Presidency Insolvency Act, 1909 is applicable to the Presidency Towns – Calcutta, Bombay and Madras, the Provincial Insolvency Act, 1920 pertains to the whole of India except these towns. The body of the law as laid down in the two Acts is almost similar.

The term insolvent refers to a “person who cannot or does not pay his debts in full or has committed an ‘act of insolvency’ and has been adjudged an insolvent by an Insolvency Court.” The following acts are regarded as ‘acts of insolvency:

•  If the debtor makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally.
• If the debtor makes a transfer of his property or any part thereof with intent to defeat or delay his creditors.
• If 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.
• 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.
• If any of the property of the debtor has been sold or attached for a period of not less than 21 days in execution of the decree of any court for the payment of money (Presidency Towns Insolvency Act). Under the Provincial Insolvency Act, it is only sale of property in execution of a decree of any court for the payment of money that can operate as an act of insolvency. Attachment of debtor’s property for however long a time, is no ground for founding an insolvency petition.
• 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.

Insolvency proceedings are started by a petition filed either by the debtor or the creditor of the debtor for the adjudication of the debtor as insolvent. On such petition the debtor is adjudged insolvent by the court provided he has committed an ‘act of insolvency’.

On such adjudication, the properties of the insolvent stand vested in an officer of the court known as the Official Assignee (in case of Presidency Act) or the Official Receiver (in case of the Provincial Act). When the Official Assignee or the Receiver takes overs the property of the insolvent, it becomes his duty to sell the property with all convenient speed, at reasonable price and distribute the sale proceeds in the following order:

i. Fully secured creditors.
ii. Partly secured creditors to the extent they are secured.
iii. Realization expenses and remuneration of the Official Receiver or Assignee.
iv. Preferential creditors.
v. Unsecured creditors.

Property would include anything that is in the debtor’s name – house, car, shares or any other investments that can be converted into cash. When the work of distribution is completed, the insolvent is required to obtain a certificate of ‘absolute discharge’ from the court, which is granted only when it is proved that insolvency was caused by misfortune and not by misconduct of the insolvent and that the conduct of the insolvent has been satisfactory during the insolvency proceedings. On obtaining the ‘absolute discharge certificate’ the unpaid debts are cancelled the insolvent debtor is liberated from the demands of his creditors.

Practically speaking, the statutes governing insolvency in India appear to have become dormant, evidenced by a telling paucity of case laws in recent times analysing these statutes.

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References:
‘Business Laws’ by Nirmal Singh