Insolvency law defines the condition of a person who is insolvent; inability to pay one’s debts; and lack of means to pay one’s debts. It is a relative condition of man’s assets and liabilities that the assets, if all made immediately available, would not be sufficient to discharge the whole debts. Or it is the condition of a person who is unable to pay his debts as they fall due, or in the usual course of trade and business. A person is insolvent who either has seized to pay his debts in the ordinary course of business or cannot pay his debts as they fall due or is insolvent within the meaning of Insolvency Act.
The condition which marks a man’s or a firm’s liability to meet full monetary obligations, when a person is in this strait, he can either call his creditors together and endeavor to come to some private arrangement with them according to the nature of his assets, or he can place himself in the hands of the Bankruptcy Court, which will administer the estate and distribute the assets for the benefit of the creditors. Complete and Without Conditions: For example, a bankrupt, usually after nine months receives an Absolute Order of Discharge, which means all of his debts, with certain exceptions, are wiped out.
A debtor is said to be insolvent when he cannot pay his debts as they become due, out of his own moneys. It is, therefore, quite possible for a person to have assets exceeding his debts, and yet be insolvent, because he cannot realize his assets.
The term has always been held to mean not merely being behind the word if an account were taken, but insolvency to the extent to being unable to pay just debts in the ordinary course of trade and business.
THE PROVINCIAL INSOLVENCY ACT, 1920
OBJECT OF THE ACT
The object is to seize the property of an insolvent before he can squander it and to distribute it amongst his creditors. The jurisdiction of the Court commences when certain acts take place which are known as acts of insolvency and which give a right to his creditors to apply to the Court for his adjudication as an Insolvent.
The insolvency law has two fold purposes to serve. One is to give relief to the debtor from harassment of his creditors whose claims he is unable to meet and the other is to prevent a scramble among the creditors to get at the assets of the debtor promoting fraud and collusion between the creditor and debtor and provide a machinery by which creditors are equitably satisfied.
HISTORY OF THE ACT
Pakistan has always been, in the main, an agricultural country. There never was a necessity left in this country for a system of insolvency law and there was no native law of insolvency in Pakistan. The present day Pakistan’s law of insolvency is simply and solely the creation of statute. Two systems of insolvency law have been simultaneously in vogue in Pakistan, one applicable to presidency—towns and the other to the mofussil. The first enactment on the law of Provincial Insolvency is to be found in the Insolvency Chapter of the Civil Procedure Code of 1859. The provisions of that act were somewhat extended to the Civil Procedure Codes of 1877 and 1879, but from 1877 till the enactment of Act III of 1907 they remained in Chapter XX of the Civil Procedure Code.
When the Provincial Insolvency Act of 1907 was passed into law, the idea of insolvency was not present in the minds of the people, hence the Act was an unsatisfactory measure and there were many defects in it. So on the 4th September, 1918, a Bill to amend the Provincial Insolvency Act was introduced in the Indian Legislative Council and was passed into law as Act V of 1920.
APPLICABILITY OF THE ACT
Any person who is sui juris and non compos mentis or anybody of persons called a firm can take protection of the Act. The Act is not applicable to minors, lunatics, juridical persons and to corporate bodies.
CONSTRUCTIONS AND INTERPRETATION OF THE ACT
The Act is self-contained and as such the sections have to be interpreted by themselves, without reference to any extraneous statute. The English law does not apply in this country despite the fact that insolvency law in general in this country is based on the insolvency law of England, and we have got to keep within the provisions of the Provincial Insolvency Act.
Principle behind Section 46 is to prevent injustice which would arise after a person who is insolvent’s creditor on one account and his debtor on other is compelled to pay entire amount due by him, receiving only a dividend an amount due to him. Where two persons have dealt with each other on mutual credit and one of them becomes insolvent, account can be settled between them and balance only, which is found due on either, is treated as payable. In order that Section 46 may apply, both claims, must be debts, both must be pecuniary, both must lie between same parties (i.e. Insolvent and creditor) and both must be in same capacity or right.
Decision under Section 53 operates as res-judicata in subsequent suit for title based on conveyance, Held: Decision in an insolvency case under section 53, avoiding certain conveyance operates as res-judicata in a subsequent suit for declaration of right to possession based on the conveyance. Secured creditor would be entitled to adjustment of Security.
Bar under Section 8 which bars insolvency petition against corporation etc. does not debar a person from initiating insolvency action in respect of a debt which he owes to Corporation etc. mere fact that Corporation etc. is impleaded as party to insolvency petition and debtor wants to escape debt liability, does not render as incompetent debtor’s insolvency petition.
Secured creditor cannot claim any preferential treatment in distribution of assets of insolvent. He has a right to realize security or to relinquish as provided by Section 47. Order of adjudication as to insolvency would not affect position of secured creditor as after adjudication he would be free to deal with his security and to realize if for payment of debt. It was not necessary to give any preferential treatment or priority to secured creditor in respect of debt which remains unsatisfied after realization of security, as right of a secured creditor has sufficiently been protected and liberty to deal with security has been given to him.
Secured creditor if he has not relinquished his security is entitled to adjustment of security. He can make claim in respect of such balance amount of debt which remains unsatisfied after realization of security.
The object of Section 4 is to define limits of jurisdiction of Courts exercising powers in insolvency.
ACTS OF INSOLVENCY
A debtor commits an act of insolvency in each of the following cases namely:
- If, in the Provinces and the Capital of the Federal or elsewhere, he makes a transfer of all or substantially all his property to a third person for the benefits of his creditors generally;
- If, in the Provinces and the Capital of the Federation or elsewhere, he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors;
- He departs or remains out of the Provinces and the capital of the Federation;
- He departs from his dwelling house or usual place of business or otherwise absents himself;
- He secludes himself so as to deprive his creditors of the means of communicating with him;
- If, in the Provinces and the Capital of the Federation 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;
- If, with intent to defeat or delay his creditors
- If any of his property has been sold in execution of the decree of any court for the payment of money;
- If he petitions to be adjudges an insolvent under the provisions of this Act;
- If he gives notice to any of his creditors that he has suspended, or that he is about to suspend payment of his debts; or
- If he is imprisoned in execution of the decree of any Court for the payment of money.
Explanation 01: For the purposes of this section the act of an agent may be the act of the principal.
If a debtor commits an act of insolvency, an insolvency petition may be presented either by a creditor or by the debtor, and the Court may on such petition make an order (hereinafter called an order of adjudication) adjudging him an insolvent.
Explanation 02: The presentation of a petition by the debtor shall be deemed an act of insolvency within the meaning of this section, and on such petition the Court may make an order of adjudication.
CONDITIONS ON WHICH CREDITOR MAY PETITION
A creditor shall not be entitled to present in insolvency petition against a debtor unless:
- the debt owing by the debtor to the creditor, or, if two or more creditors join in the petition, the aggregate amount of debts owing to such creditors, amounts to five hundred rupees, and
- the debt is a liquidated sum payable either immediately or at some certain future time, and
- the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition.
If the petitioning creditor is a secured creditor, he shall in his petition either state that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent, or give an estimate of the value of the security. In the later case, he may be admitted as a petitioning creditor to the extent of the balance of the debt due to him after deducting the value so estimated in the same way as if he were an unsecured creditor.
CONDITIONS ON WHICH DEBTOR MAY PETITION
A debtor shall not be entitled to present an insolvency petition, unless he is unable to pay his debts and
- his debts amount to five hundred rupees; or
- he is under arrest or imprisonment 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.
A debtor in respect of whom an order of adjudication whether made under the Insolvency (Karachi) Act, or under this Act has been annulled owing to his failure to apply, or to prosecute an application for his discharge, shall not be entitled to present an insolvency petition without the leave of the Court by which the order of adjudication was annulled. Such Court shall not grant leave unless it is satisfied either that the debtor was prevented by any reasonable cause from presenting or prosecuting his application, as the case may be, or that the petition is founded on facts substantially different from those contained in the petition on which the order of adjudication was made.
Every insolvency petition shall be presented to a Court having jurisdiction under this Act in any local area in which the debtor ordinarily resides or carries on business, or personally works for gain, or if he has been arrested or imprisoned, where he is in custody. Provided that no objection as to the place of presentment shall be allowed by any Court in the exercise of appellate or revisional jurisdiction unless such objection was taken in the Court by which the petition was heard at the earliest possible opportunity, and unless there has been a consequent failure of justice.
CONTENTS OF PETITION
- 1.Every insolvency petition presented by a debtor shall contain the following particulars, namely:
- a statement that the debtor is unable to pay his debts;
- the place where he ordinarily resides are carries on business or personally works for gains, or, he has been arrested or imprisoned, the place where he is in custody;
- 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;
- 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;
- the amount and particulars of all his property together with:
- a specification of the value of such property not consisting of money;
- the place or places at which such property is to be found and
- a declaration of his willingness to place at the disposal of the Court all such property save in so far as it includes such particular (not being his books of account) as are exempted by the Code of Civil Procedure, 1908, or by any other enactment for the time being in force from liability to attachment and sale in execution of decree;
- a statement whether the debtor has no any previous occasion filed a petition to be adjudged an insolvent, and (where such a petition has been filed);
- Every insolvency petition presented by a creditor/creditors shall set forth the particulars regarding the debtor specified in clause (b) of sub section (1), and shall also specify:
- the act of insolvency committed by such debtor, together with the date of its commission; and
- the amount and particulars of his or their pecuniary claim or claims against such debtor.
The term bankrupt is defined as: The state or condition of one who is unable to pay his debts as they are, or becomes due, amenability to the bankruptcy laws. The condition of one who has committed as “an act of bankruptcy”, and is liable to be proceeded against by his creditors therefore, or of one whose circumstances are such that he is entitled, on his voluntary application, to take the benefit of the bankruptcy laws. The term includes a person against whom an involuntary petition has been filed, or who has filed a voluntary petition, or who has been adjudged a bankrupt. Person or municipality referred to as a “debtor”.
A person who has made an assignment or against whom a receiving order has been made, or the legal status of that person.
The taking of possession by the trustee of the property of the bankrupt actually or constructively in his possession at time of filing of petition in bankruptcy, the distribution of the proceeds received from such property, ratably, among bankrupt’s creditors whose claims have been filed and allowed, and the discharge of bankrupt from liability for the unpaid balance of such claims. Bankruptcy (in the sense of proceedings taken under the bankruptcy law) is either voluntary or involuntary; the former where the proceeding is initiated by the debtor’s own position to be adjudged a bankrupt and have the benefit of the law, the latter where he is forced into bankruptcy on the petition of a sufficient number of his creditors. Bankruptcy proceedings are governed by the Bankruptcy laws and official rules and forms.
ADJUDICATION OF BANKRUPTCY
The judgment or decree of the bankruptcy court that a person against whom a petition in bankruptcy has been filed, or who has filed his voluntary petition, be ordered and adjudged to be a bankrupt.
Order of Bankruptcy Court which discharges bankrupt from all dischargeable obligations and debts. For effect of, and exceptions to, discharge.
After payment of administration, priority and other debts and expenses of bankrupt estate, trustee in bankruptcy makes prorate distribution to creditors.
Official forms used in Bankruptcy Court for most matters (e.g. petitions, schedules).
Rules governing proceedings in bankruptcy courts; a great many of which make the Federal Rules of Civil Procedure applicable.
Official forms for listing of bankrupt’s assets, liabilities, and all unsecured creditors.
One appointed by Bankruptcy Court to take discharge of bankrupt estate, to collect assets, to bring suit on bankrupt’s claims, and to defend actions against it; he has power to examine bankrupt, to initiate actions to set aside preferences, etc.
An English term for “insolvent”. The bankruptcy law is distinguished from the ordinary law between debtor and creditor as involving these three general principles:
- a summary and immediate seizure of all the debtor’s property;
- a distribution of it among the creditors in general, instead of merely applying a portion of it to the payment of the individual complaint; and
- the discharge of the debtor from future liability for the debts then existing.