Debt Relief: Insolvency Laws in India

Debt relief in India is provided through insolvency laws that trace its history to the British-india period. The insolvency laws in India provide debt relief threefold. First, an insolvent person is adjudicated and protected. Second, the arrangement is made to realize and equitably distribute the property of the person amongst the creditors most expeditiously and economically. Third, the insolvent person is discharged from the demands of creditors. In this article, we look at insolvency laws and processes for providing debt relief for an insolvent person.

What is insolvency in India?

The following are classified as acts amounting to acts of insolvency by the Provincial and Presidency Insolvency enactments:

If in India or elsewhere, a person makes a transfer of all or substantially all of his property to a third person for the benefit of his/her creditor.
If in India or elsewhere, a person makes a transfer of his/her property or of any part thereof with intent to defeat or delay his/her creditor.
If in India or elsewhere, a person makes any transfer of his/her property, or of any part thereof, under this or any other enactment for the time being in force, be void as a fraudulent preference if he is insolvent.
If, with intent to defeat or delay his/her creditors:
1. where a person departs or remains out of the territories of India.
2. a person departs from his/her dwelling-house or usual place of business or otherwise absents himself.
3. a person secludes him/herself to deprive his/her creditors of the means of communicating with him.
If any of a person property sold in execution of the decree of any Court for the payment of money.
If a person petitions being insolvent.
If an individual gives notice to any of his/her creditors that he has suspended, or that he is about to suspend, payment of his/her debts.
If a person is imprisoned in execution of the decree of any Court for the payment of money.
If a debtor has obtained a decree or order against a person for the payment of money (the order is final, and its execution has not stayed) serves the person with notice and the person does not comply with the notice in the period specified therein.

Debt Relief or Insolvency Petition

A debtor (insolvent person) can file an insolvency petition if he/she is unable to pay his/her debts on fulfilment of any of the following three conditions:

his/her debts amount to Rs.500 or more;
he/she is under arrest for imprisonment in the execution of a money decree;
there is a subsisting order of attachment against his property in execution of such decree.

A creditor (lender) can bring an insolvency petition on a person, under the following conditions:

the total amount of debt due to the petitioning creditor or creditors is Rs.500 or more;
the debt is a liquidated sum payable immediately or at a future date;
the petition presented within three months of the commission of the act of insolvency.

How Debt Relief is Provided through Insolvency Laws

As per insolvency laws in India, any person filling insolvency petition filed by a person/lender should present to the court having jurisdiction in any local area in which the debtor ordinarily resides or carries on business, or personally works for gain.

If the Court deems fit for the protection of the estate, the Court will appoint an interim receiver any time after the presentation of the insolvency petition and before an order of adjudication made. On the making of an order of adjudication, the property of an insolvent person would vest in the official assignee or the receiver appointed by the Court and becomes divisible among the creditors.

The assignee or receiver then makes payments to the debtors as per the priority of their debts. The following debts will be in priority to all other debts:

all debts due to the Government or to any local authority;
all salary or wages, subject to regulations.
rent due to landlord from the insolvent person, where the amount payable does not exceed one month's rent.

After serving all debts on priority, any amount remaining will be payable according to the amount of debts without any preference.

After the order of adjudication, an insolvent person may apply to the Court for an order of discharge. On hearing the same and after taking into consideration the report of the official assignee or receiver, the Court may grant an absolute order of discharge. The effect of a discharge is to release the insolvent person from the debt payable. However, in case of discharge of debt payable by a Court, the following debt or liability will not be discharged:

where any debt due to the Government.
any debt or liability incurred by any fraud or fraudulent breach of trust to which he/she was a party.
any debt or liability of a person who has obtained forbearance by any fraud to which he was a party.

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Frequently Asked Questions

Common questions about Insolvency Laws and Debt Relief in India.

According to the article, under Indian insolvency laws, certain acts are classified as acts of insolvency, such as transferring all or substantially all property to a third party for the benefit of creditors, transferring property with the intent to defeat or delay creditors, departing or absenting oneself to deprive creditors of communication, having one's property sold in execution of a court decree, and giving notice to creditors of suspension of debt payment.

Both a debtor (insolvent person) and a creditor (lender) can file an insolvency petition in India. A debtor can file if their debts amount to Rs. 500 or more, they are under arrest for a money decree, or there is an attachment order against their property. A creditor can file if the total debt due is Rs. 500 or more, the debt is a liquidated sum payable immediately or in the future, and the petition is filed within three months of the act of insolvency.

After an order of adjudication is made, the property of the insolvent person vests in the official assignee or receiver appointed by the court, and the property becomes divisible among the creditors. The assignee or receiver then makes payments to the creditors according to the priority of their debts.

Debts due to the government or local authorities, salary or wages (subject to regulations), and rent due to a landlord (up to one month's rent) are given priority over other debts in an insolvency case.

After the order of adjudication, an insolvent person can apply to the court for an order of discharge. Upon considering the report of the official assignee or receiver, the court may grant an absolute order of discharge, which releases the insolvent person from the payable debts.

Yes, certain debts or liabilities are not discharged after an order of discharge, such as debts due to the government, debts or liabilities incurred by fraud or fraudulent breach of trust, and debts or liabilities where forbearance was obtained by fraud.

Both for a debtor and a creditor, the minimum amount of debt required to file an insolvency petition is Rs. 500 or more.

The court having jurisdiction over the area where the debtor ordinarily resides or carries on business has the authority to appoint an interim receiver, make an order of adjudication, appoint an official assignee or receiver, and grant an order of discharge in an insolvency case.

The purpose of an insolvency petition is to initiate a process for the realization and equitable distribution of the insolvent person's property among creditors, and ultimately discharge the insolvent person from the demands of creditors.

After the order of adjudication, the insolvent person's property vests in the official assignee or receiver appointed by the court. The assignee or receiver then makes payments to the creditors according to the priority of their debts, with any remaining amount payable based on the amount of debts without any preference.