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How to File Insolvency Petition


How to File Insolvency Petition

An individual can file an insolvency petition if he/she is unable to pay his/her debts and needs protection from creditors. Filing of insolvency is governed by the Provisional Insolvency Act of 1920 and in this article, we look at the procedure for filing insolvency petition in India.

When can the Individual file for Insolvency Petition?

An individual can file an insolvency petition if he/she is unable to pay his/her debts on fulfilment of any of the following three conditions:

  • Debts amount to more than Rs.500
  • The individual is under arrest or imprisonment in the execution of a money decree
  • There is a subsisting order of attachment against his/her property in execution of such decree

When can the Creditor file for Insolvency Petition?

A creditor can file an insolvency petition under the following conditions:

  • The total amount of debt due to the creditor is more than Rs.500
  • The debt is already due or at a future date
  • Insolvency petition has been filed within three months of the commission of the act of insolvency

Where to file the Insolvency Petition?

An insolvency petition is filed at a district court having jurisdiction in which the debtor resides or carries on business. If the debtor has already been arrested or imprisoned, then the insolvency petition can be filed where he/she is in custody. Once an insolvency petition is filed, the Court can appoint an interim receiver after the presentation of the insolvency petition or before an order is made. On making an order of adjudication, the property of an insolvent individual would vest with the official assignee or the receiver and becomes divisible among the creditors.

Distribution of Assets

The distribution of assets of an insolvent individual executes as per the priority of debt provided by the Provincial Insolvency Act of 1920. Under the Act, the following dues have the highest priority to all other debts:

  • Debts due to the local government or any local authority;
  • Salary or wages, not exceeding Rs.20, of any clerk, servant or labourer, for services rendered to the insolvent individual during four months preceding the date of presentation of insolvency petition.
  • Rent due to the landlord, for an amount not exceeding one month’s rent.

Once the above payments are made, all debts in the insolvency petition are to be paid according to the number of debts, without any preference amongst the creditors. After the order of adjudication and taking into consideration the report from the official assignee or receiver, the court may grant an absolute order of discharge. The order of discharge releases the debtor from all debt payable, except for any debt due to the Government and any debt incurred due to fraud or fraudulent breach of trust.