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Report No. 26

2. Historical Background.-The law of insolvency in this country, like most other laws, owes its origin to English law. Before the British came to this country there was no indigenous law of insolvency in India1. The common law in England did not deal with the subject of bankruptcy. The Bankruptcy Law was purely a creature of Statute2. The earlier Statutes passed in the 16th century and subsequent years contained only rudimentary provisions as to bankruptcy. The important statutes on the subject are the Bankruptcy Acts3 passed by the British Parliament in 1849, 1869, 1883 and 1914.

In India, the necessity for an insolvency law was first felt in the three Presidency-towns of Calcutta, Bombay and Madras where the British carried on their trade. The earliest rudiments of insolvency legislation can be traced to sections 23 and 24 of the Government of India Act, 1800 (39 and 40 Geo. III c. 79), which conferred insolvency jurisdiction on the Supreme Court at Fort William and Madras and the Recorder's Court at Bombay. These courts were empowered to make rules and orders for granting relief to insolvent debtors on the lines intended by the Act of the British Parliament called the Lord's Act passed in 1759 (32 Geo. II c. 28).

The next step was taken in 1828 when Statute 9 (Geo. IV c. 73) was passed, which can be said to be the beginning of the special insolvency legislation in India. Under this Act, the first insolvency courts for relief of insolvent debtors were established in the Presidency-towns. Although the insolvency court was presided over by a Judge of the Supreme Court, it had a distinct and separate existence. The insolvency court was to sit and dispose of insolvency matters as often as was necessary. But the court at Calcutta was to sit at least once a month. The Act of 1828 was originally intended to remain in force for a period of four years, but subsequent legislation extended its duration up to 1848 and also made certain amendments therein4.

A further step in the development of insolvency law was taken in 1848 when the Indian Insolvency Act, 1848 (11 and 12 Vict. c. 21) was passed. The Act preserved the distinction between traders and non-traders in certain respects on the lines of the corresponding Bankruptcy statutes then in force in England. It continued the courts for the relief of insolvent debtors established by the Act of 1828 in the Presidency-towns. The Indian High Courts Act, 1861 (24 and 25 Vict. c. 104) abolished the Supreme Courts in the Presidency-towns and in their place the present High Courts were set up. The insolvency jurisdiction in the Presidency-towns was thus transferred from the Supreme Court to the High Court.

The provisions of the Indian Insolvency Act, 1848, were, however, found to be inadequate to meet the changing conditions. In the seventies Sir James Fitzjames Stephen proposed an Insolvency Bill for the whole of India modelled on the Bankruptcy laws then in force in England. But this proposal was dropped, as the conditions in the mofussil were not favourable for a comprehensive legislation on the subject. The Act of 1848 was in force in the Presidency-towns until the enactment in 1909 of the present Presidency-towns Insolvency Act, 1909.

1. Mulla Law of Insolvency in India, (1958), pp. 1-2, para. 2.

2. Cf. Jowitt Dictionary of English Law, (1959), Vol. 1, p. 205, right.

3. See Holdsworth, HEL, (1938), Vol. XI, pp. 445-446 and Vol. VIII, pp. 229-245.

4. See Mulla Law of Insolvency in India, (1958), p. 16.

3. While there was special insolvency legislation for the Presidency-towns, there was no insolvency law in the mofussil. The main reason for this difference was the absence of any flourishing trade and commerce in the mofussil. In the mofussil for a considerable period the ordinary principle of distributing the sale proceeds pro rata among decree-holders after satisfaction in full of the amount due to the attaching decree-holder seems to have prevailed. (See the Civil Procedure Code of 1859). The first attempt to introduce insolvency law in the mofussil was made in 1877. Some rules were incorporated in Chapter 20 of the Code of Civil Procedure, 1877, which conferred jurisdiction on the district courts to entertain insolvency petitions and grant orders of discharge. These rules were re-enacted with certain modifications in Chapter 20 of the Code of Civil Procedure, 1882.

The provisions in the Civil Procedure Code of 1859 were described1-2 as the "germ and nothing more than a germ of an insolvency law" and this criticism was regarded as applicable3 to the subsequent codes also. They could be made use of by those debtors only who were arrested or imprisoned in the execution of a decree for money or against whose property an order of attachment was passed in execution of such a decree. In other words, the provisions were limited to cases in which legal proceedings were instituted and judgment obtained. Creditors of a debtor were not entitled to file an insolvency petition. These defects were removed by the Provincial Insolvency Act, 1907 (3 of 1907). This Act created a special insolvency jurisdiction laying down the conditions under which a debtor could be adjudicated on his own petition or on a petition by a creditor. The Act of 1907 was repealed by the Provincial Insolvency Act, 1920 (5 of 1920) which is the Act now in force in the mofussil.

1. See Lord Hobhouse's observations cited in the speech of Sir Erle Richard on leave for introduction of the Bill which led to the Provincial Act of 1907.

2. See also Mulla, (1958), p. 19.

3. See, ibid.

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