Last updated: May 24th, 2024 12:21 PM

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. If any of a person property sold in execution of the decree of any Court for the payment of money.
6. If a person petitions being insolvent.
7. 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.
8. If a person is imprisoned in execution of the decree of any Court for the payment of money.
9. 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:

1. his/her debts amount to Rs.500 or more;
2. he/she is under arrest for imprisonment in the execution of a money decree;
3. 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:

1. the total amount of debt due to the petitioning creditor or creditors is Rs.500 or more;
2. the debt is a liquidated sum payable immediately or at a future date;
3. 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:

1. all debts due to the Government or to any local authority;
2. all salary or wages, subject to regulations.
3. 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:

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

For online legal advice or to consult a Lawyer regarding debt relief, visit IndiaFilings or Nearest.Expert