Friday, 24 June 2016

Position of Insolvent’s Property

                                         Position of Insolvent’s Property


The term “Insolvent”, in common parlance is referred as Pauper or Bankrupt. An insolvent is not considered a legal person for the purpose of enforcement of any obligation committed by him either during the pend ency of insolvency proceedings or after he is adjudged as insolvent.

In India, jurisdiction of the courts to adjudicate a person as an insolvent has been conferred by two Acts, namely, the Presidency towns Insolvency Act, 1909, which is applicable in the Presidency towns in India and the Provincial Insolvency Act, 1920, applicable in the muffusil area

To adjudicate a person as an Insolvent, such a person has to be a “Debtor” and should have committed an act of insolvency. A debtor, under these Acts, includes only those who are subjected to Indian laws, either by birth or by domicile including a temporary residence. Thus, a foreigner cannot be adjudged insolvent by a court in India unless the alleged act of insolvency was committed or suffered by that person during his personal residence in India.

Minor cannot be adjudged insolvent

Under Indian Laws, as a minor is not competent to enter into a contract he cannot be adjudged Insolvent even on his own petition. In the case of a minor being a partner in a firm consisting of adult and minor partners and if adjudication order is sought against the firm, the same shall be binding on the firm/partners except the minor.

The expression “Property of an Insolvent”, has been defined as only the property of the insolvent which is divisible amongst the creditors and not otherwise. It includes any property over which or over the profits of which any person has the power of alienation which can be exercised for his own benefit. 

The word 'property' includes the right in the property or things of a person. However, to constitute the property, an insolvent should have an interest in praesenti to dispose of the same and not such an interest which may depend upon the fulfillment of certain conditions or contingencies.

Under section 17 of the Presidency Town Insolvency Act or section 28(2) of Provincial Insolvency Act, 1920, after the order of adjudication, the property of an insolvent vests in the Official Assignee and becomes divisible amongst the creditors, irrespective of its situation. However, when an order of adjudication has been passed under the Presidency Town Insolvency Act,1909, any order of adjudication passed against the same insolvent by the District Court of another place, at a later date under Provincial Insolvency Act will not operate since the said property is already vested in the Official Assignee under the Presidency Town Insolvency Act. 

The order of adjudication operates as a statutory transfer to the Official Assignee of all the property of the insolvent person in India, whether movable or immovable. Similarly, the movable property of an insolvent situated in foreign country shall vest with the Official Assignee or Receiver. But, the immovable property of an insolvent situated in a foreign country, shall be governed by the law of the country within whose jurisdiction such property is situated.

The property which is divisible amongst the creditors of the insolvent can only vest with the Official Assignee or the Receiver, which may be:

1 Property belonging to an insolvent at the time of commencement of insolvency proceedings.

2 Property which may be acquired by or devolve on the insolvent after the order of adjudication and before his discharge.

3 Goods in possession, or disposition of the insolvent.

The properties which are not divisible amongst the creditors of the insolvent falls into two classes

(a) Property held by the insolvent in trust for any other person and

(b)Tools of trade, apparel and other similar property.

Vesting of property in the Official Receiver or Assignee

Immediately upon an order of adjudication by the Court, the property of the insolvent wherever situated vests in the official assignee/receiver. Till an Official Receiver is appointed by the Court, all the rights and powers exercisable by the Receiver can be exercised by the Court itself.

The right and interest of an insolvent over the property do not automatically get transferred in favour of the Official Receiver upon passing of an adjudication order by the court unless the Official Assignee intervenes on behalf of the insolvent. Where the official assignee does not intervene and the insolvent transfers the said property to another person who takes it in good faith and for value, the transferee acquires a good title to the property.

With the order of adjudication, the property of the insolvent vests in the Official Assignee or the receiver and it is the duty of the assignee to realize such properties of the insolvent expeditiously and to distribute dividends to the creditors entitled thereto. However, before exercising the power of realization of properties of an insolvent, abundant caution has to be exercised by the assignee to avoid unnecessary litigations.

Under the aforesaid Acts, certain powers have been vested with the assignee:

 Power to sell: The Receiver is empowered to sell the insolvent's property without the consent of the Court. But the aforesaid Acts do not empower the receiver or the official assignee to sell anything more than the property of the insolvent which vests in him by reason of the adjudication. 

 Power in case of mortgaged property: Where a Receiver is appointed by consent of the parties after passing of a decree in a mortgage suit for sale of such mortgaged property and it is agreed that the receiver shall recover the rents of the property for a period of one year to hand over the same to the mortgagee, the mortgagee's right to receive the rents will not be affected by insolvency of the mortgagor at any time during this period and neither the official assignee nor other decree-holders will be entitled to a rateable distribution of such rents.

Section 53 of the Provincial Insolvency Act provides that a transfer of property not being a transfer in favour of a purchaser in good faith and for valuable consideration shall, if the transfer  is adjudged insolvent within two years after the date of transfer, be voidable as against the Receiver. Further, where the debtor transfers all or substantially all the properties in consideration of the past debts, such a transfer constitutes an act of insolvency since it has the effect of withdrawing all the property from the legal process, which his creditors have a right to enforce against the insolvent. 

Thus, an order of adjudication of insolvency will deprive the insolvent from dealing with his properties which shall be dealt with by the Official Assignee or Receiver when once such a person is appointed by the Court.

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