Did you know you can file for bankruptcy if your debt exceeds Rs 500? Yes, you heard it right. Under current laws, an insolvency petition can be filed either by the debtor or the creditor for an amount exceeding as little as Rs 500.
While bankruptcy filing process for corporate entities is well-organised under the Insolvency and Bankruptcy Code, 2016 (IBC), it is not as streamlined for the Individuals as of now. The IBC does contain a chapter relating to insolvency and bankruptcy process for individuals and partnership firms, but the rules for individual bankruptcy are yet to be notified.
“Both the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 provide for the legal framework in relation to insolvency process for individuals. Although Section 243 of the Insolvency and Bankruptcy Code, 2016 provides for repeal of current insolvency laws, the said Section has not yet been notified,” says Dipankar Bandyopadhyay, Partner, VERUS Advocates.
Presidency Towns Insolvency Act, 1909: Under this Act, the High Courts of Bombay, Calcutta and Madras have been conferred the jurisdiction to try insolvency cases.
Provincial Insolvency Act, 1920: Those living in India other than Mumbai, Kolkata or Chennai are governed by Provincial Insolvency Act.
However, the provisions of both the Acts are similar.
Conditions for filing bankruptcy
Currently, an insolvency petition can be filed for an amount exceeding Rs 500. However, the act of insolvency on which the petition is grounded has to occur within 3 months of filing the petition.
“On analysis of case laws, it has been found that the court shall not entertain a petition for insolvency against an individual filed by a creditor unless he proves certain crucial conditions — that he is a creditor to the debtor, that there exists a legally enforceable ascertained debt between him and the debtor, and that the debtor has committed an act of insolvency as suggested under the Act,” Bandyopadhyay explains.
After analysing if the conditions for filing of bankruptcy have been met, the court may accept or reject the petition. Once a petition is accepted, here’s what will follow:
Hearing and interim receiver
After you file the petition, a date of hearing is fixed and the court appoints an interim receiver. “The interim receiver appointed by the court takes immediate possession of the property of the debtor. Such Interim receiver continues to function till a regular receiver is appointed,” says Rachit Sharma, Manager, Research & Development at Taxmann Publications.
On the date of hearing, the court — if it is satisfied that the petition is reasonable — shall make an ‘order of adjudication’. After the passing of this order, the debtor becomes an ‘undischarged insolvent’.
“Following the adjudication, the property of the debtor will be vested with an ‘Official Assignee’ under the Presidency Towns Insolvency Act and ‘Official Receiver’ under the Provincial Insolvency Act, appointed by the court to conduct insolvency proceedings,” Sharma added.
Distribution of sales proceeds
Hereafter, it is the Official Assignee’s duty to sell off the insolvent’s property within a reasonable time. Money recovered in the form of sale proceeds is distributed among the creditors.
Certification of absolute discharge
According to Sharma, “Once the process of distribution is completed, the insolvent is required to collect a certificate of ‘absolute discharge’ which is granted only when it is proved that the insolvency resulted due to misfortune and not because of any dishonest or unscrupulous behaviour. Besides, the behaviour of the debtor during the insolvency proceedings is also taken into consideration. On the award of ‘absolute discharge certificate’, the remaining, unpaid debts of the debtor are cancelled and he cannot be forced or threatened by any creditor to repay the debt amount.”
Can courts refuse the insolvent a discharge?
Yes, they can. Section 39 of the insolvency act prescribes grounds on which discharge can be refused.
Vineet Naik, Senior Advocate, says, “There are no specified grounds for discharge as it is based on the discretion of the court, which has to arrive at a finding by taking into consideration all relevant factors. Firstly, if the insolvent commits any offence set out under Section 421 to 424 of IPC or any offence under the Insolvency Act, then the discharge can be refused. However, a discharge may be granted if the insolvent consents to decree against him whereby he agrees to pay the balance part of his proven debt from his future earnings or after-acquired property.”
Will filing for bankruptcy discharge you from all your debts?
No, filing for bankruptcy won’t discharge an insolvent from all his debts.
“Even after the order of discharge, an individual would be liable for providing maintenance to his wife under the order of maintenance made u/s 488 of CrPc. Further, the order of discharge does not exempt an individual from paying of any debt due to government, any debt or liability incurred by means of any fraud or fraudulent breach of trust and debt or liability in respect of which he has obtained forbearance by any fraud,” says Sharma.
“While passing an order for discharge, the court takes into consideration the objections filed, if any, by the creditor or the report of the receiver, where a receiver has been appointed, Additionally, where a debtor is said have committed any offence set out under Section 69 of PIA, he shall be punishable on conviction with imprisonment which may extend to one year,” Bandyopadhyay further added.
Is the insolvent entitled to maintenance?
No. As a matter of right, the insolvent is not entitled to maintenance. However, it is a discretionary relief that varies from case to case.
“On perusal of Provincial Insolvency Act (PIA) it was found that, no specific provision in relation to debtors’ entitlement to receive any maintenance amount was found. However, provisions of Section 60 (Special Provisions in regard to Immovable Property) of PIA as amended for the state of Haryana and Punjab provides an exemption from alienating the portion of land by the receiver pursuant to a court order, having regard to the income of the debtor from all sources except such income as is dependent on the will of another person, is sufficient to provide for the maintenance of the insolvent and the members of his family who are dependent on him, and such portion shall be deemed not to form part of the estate under administration,” says Bandyopadhyay.