Causes of Insolvency and It's Consequences.

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Offline rayhanul.bba

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Causes of Insolvency and It's Consequences.
« on: March 30, 2019, 01:56:59 AM »
   What is Insolvency?
   
Insolvent: An insolvent is one who is unable to pay his debt.
 
 But no man can be called “insolvent” unless the competent court declares him an insolvent. 
 
Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts 
   
   Business insolvency is defined in two different ways: 
 
1).Cash flow insolvency: Unable to pay debts as they fall due. 
2) Balance Sheet insolvency: Having negative net assets – in other words, liabilities exceed assets. It includes its contingent and prospective liabilities. 
   
 The object of the insolvency
 
 
Insolvency legislation has two fold objective: 
1.   Protection of debtors and
2.   Safeguarding the interests of creditors, as far as possible. 
   
These objects are sought to be achieved in the following way: 
 
1. Distribution of insolvent‟s property: 
-   After a person is declared insolvent by the court, his properties are taken over by an officer of the court, known as Official Assignee or the Official Receiver. 
-   The properties are converted into cash and distributed among his creditors in proportion to the claim of each.
 
2. Cancellation of debt and removal of disqualification: 
-   After the distribution is complete, the unpaid debts are cancelled 
-   the insolvent is allowed to engage in trade or services without any of his former obligations. 
-   The creditor lose a part of their claims,  -    the debtor gets a fresh start in life. 
 
3. Benefits of creditors: 
-   It ensures the equitable distribution of the debtor‟s remaining properties among all the creditors. 
-   If there were no insolvency laws there would have been free dispose of insolvent‟s properties in any way he liked. 
-   He might have wasted the properties 
-   might have paid one creditors proportionately more than the other creditors. 
   
4.  Fresh start in the life of debtors: 
-   Prior to the passing of insolvency legislation, a debtor who was unable to pay debts was regarded as a sort of criminal and was very often sent to jail. 
-   It was realized in course of time that inability to pay debt is more often due to misfortune than to misconduct and sending the debtor to jail is oppressive.
-   Insolvency legislation provides a method by which the debtor can free himself from his past obligations and get a fresh start.
 
 When can a person be declared insolvent?
   
Two conditions must be satisfied before a person can be adjudicated insolvent: 
 
1.   He must be a debtor, that is he must owe money to others and his assets must be insufficient to meet all claim upon them; 
 
2.   The debtor has committed an „act of insolvency‟. 
   
   Act of Insolvency
   
An act of insolvency is some act of the debtor which shows that he is financially embarrassed. 
 
Only those acts which are listed by the insolvency act are considered to be acts of insolvency. 
 
   Each of the following acts committed by the debtor is an act of insolvency: 
 (1). If he makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally. 
   
 (2). If he makes a transfer of his property or any part thereof  to defraud or to delay his creditors. 
 (3). If he makes a transfer of his property or any part thereof it would under this act or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged as insolvent.   
   
 (4). If, with intent to defeat or delay his creditors- 
   i) He departs from or remain out of Bangladesh    ii) He departs from his dwelling house or usual place of business or otherwise absent himself   iii) He keep himself away  from contract with other people to deprive his creditors of communicating with him. 
 
(5). If any of his property has been sold or attached for a period of not less than 21 days in execution of the decree of any court for the payment of money. 
 (6). If he petitions to be adjudged an insolvent 
 (7). If he gives notice to any of his creditors that he has suspended, or that he is about to suspend, payment of his debt. 
   
 (8). If he is imprisoned in execution of the decree of any court for the payment of money.   (9). If a creditor has served an “insolvency notice” in respect of any decree or order for payment of money, and if the debtor has not paid the money within the period specified in notice. 
 
 The rules regarding notice are stated below: 
1.   The notice must be given according to the prescribed form and prescribed manner 
2.   It must specify the amount due. 
3.   It must specify the period for its compliance, i.e., not less than 01 month. 
4.   It must specify the consequences of non-compliance (The practice of obeying rules). 
   
   Procedure of adjudication
 
   What is the order of adjudication? 
 
The order of court by which a person is declared to be insolvent is called the Order of adjudication. 
Before the court can pass an order of adjudication there must be a petition presented to it either by a creditor or by the debtor. The petitioning creditor or debtor must fulfill certain conditions. 
 
   Conditions of a creditor’s petition: 
The following conditions must be fulfilled before a creditor can present a petition for the 
 
   adjudication of a person as insolvent: 
 
1.   The amount owned must be Tk 500,000 or more. 
2.   The debtor must have committed an act of insolvency within one year before the presentation of the petition. 
3.   If he is a A secured creditor that is one who holds some movable or immovable property of the debtor out of which he can realize his claims. 
 A secured creditor can present an insolvency petition if the following conditions are satisfied: 
1.   He gives away his security in favor of all the creditors, or 
2.   The security is insufficient to meet his claim of minimum Tk 500,000. 
   
 Conditions of a debtor’s petition: 
1.   His debt amount of Tk 500,000 or 
2.   He has been arrested and imprisoned in execution of the decree of any court for the payment of money, or 
3.   An order of attachment in execution of a money decree has been made and is subsisting against his property. 
 
 Debtor's bankruptcy petition
A debtor can petition for his own bankruptcy only on the grounds that he is unable to pay his debts. The petition must be accompanied by a statement of affairs in the prescribed form
 Form and content of the petition
The petition must contain the following information in relation to the debtor:-
a.   His/her name, addresss and occupation; 
b.   the name(s) in which he/she carries on business and whether he/she carries on that business alone or with others; 
c.   the nature of his/her business and the trading address(es); 
d.   the names or names in which he/she has carried on business during the period in which the bankruptcy debts were incurred and whether he/she carried on those businesses alone or with others; and
e.   any address(es) at which he/she has resided or carried on business during that period, and the nature of that business.
If the debtor has used any other names than the one given, these must be included in the petition. 
 
 Admission of insolvency
1.   The petition must contain a statement that the debtor cannot pay his debts and a request that a bankruptcy order be made against him.
2.   Details of previous bankruptcies together with information regarding any composition scheme of arrangement or voluntary arrangement into which the bankrupt has entered or administration order to which he has been subject in the previous 5 years must be given and if there is a voluntary arrangement currently in force, the name and address of the supervisor must also be given. 
 
   Statement of affairs
The petition must be accompanied by a statement of affairs verified by a statement of truth, prepared on the statutory forms. The statement of affairs should contain details of the debtor‟s creditors and his assets and liabilities 
 
   
   Who can not be declared insolvent?
 
 Any person, man or women, who has attained majority can be declared insolvent if the conditions laid down in the insolvency act. 
 
The following persons can be considered:
 
1.   Companies: A company can not be declared insolvent because companies are directed by the Company Act-1994 approved by the govt. 
 
2.   Govt. Body: Any govt. body can not be declared insolvent. If any creditor claim any due from the govt. organization, it is considered as the liability to the government. And government is bound to pay the amount at any time. 
 
3.   Convict: A prisoner in the jail can be declared insolvent. 
 
4.   Deceased Person: A dead man can not be declared insolvent. If a debtor dies after the presentation of the insolvency petition, his estate will be administered by the Official Assignee as upon insolvency, unless the court otherwise directs. 
 
5.   Minor: A minor is not personally responsible for his debts and is not capable of entering into the contracts. Therefore a minor can not be declared an insolvent. 
 
6.   Partner: Since every partner is responsible for his debts of the firm, the creditor of a firm can file an insolvency petition against any partner or all of the partners for any debt due and owned by the firm. 
   
 
   Activities After announcing as  insolvent:
An insolvent can‟t be:
1.   Can‟t be a magistrate
2.   Can‟t be a part of local authority (councilor etc.)
3.   Can‟t be a candidate of public voting
 
An insolvent should do:
1.   Should help an assignee to perform his duty
2.   Should help to find out each and every creditor
3.   Can‟t change title of property
4.   Can‟t change ownership of property or transfer the property to other person
 
   Reputed ownership or re-known ownership:
Goods that at the beginning of the bankruptcy of a trader are in his possession with the consent of the true owner Such goods are:
1.   Returned to true owner if true owner claims
2.   Treated as the bankrupt's own goods and are therefore available for distribution to his creditors and that‟s why submitted to assignee if- a) Goods are in insolvent‟s position.
b)   If those goods are used for insolvent‟s business or activity purpose
c)   If true owner handovers owner ship to reputed owner
 
   Adjudication of insolvency will be cancelled if:
1.   Different result is given by the higher court
2.   Its proved that the person who is announced is minor
3.   Its proved that the person who is announced insolvent is mentally unsound
4.   Fraudulent activity is find out to prove someone insolvent
5.   Discharge or withdrawal of case 
 
   In which condition insolvent person can’t be discharged from case:
1.   If holds government debt
2.   If fraudulent activity is proven for bringing money.
Md. Rayhanul Islam
Senior Lecturer
Department of Real Estate
Facuty of Business & Entrepreneurship
Daffodil International University