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Report No. 14

23. Insolvency

1. Laws relating to insolvency in India.-

There are two principal Acts governing insolvency: one is the Presidency towns Insolvency Act of 1909 which is applicable to the three Presidency towns alone while the other, the Provincial Insolvency Act of 1920 governs insolvency procedure outside the Presidency towns. Separate Insolvency Acts modelled on the Provincial Insolvency Act are in force in some of the former Part B States like Mysore and Kerala. For a long time, it has been felt, that two different procedures and enactments are unnecessary.

2. Reasons for the existence of two systems.-

When for the first time a statute to deal with insolvency was sought to be enacted in India, a single Bill was introduced to regulate the procedure throughout what was then British India. It was however felt that the proposed legislation was too ambitious in its scope, and, in due course two different Acts applying respectively to the Presidency towns and the mofussil came to be passed.

To a certain extent, differing procedures were no doubt needed in the two areas, principally for the reason, that the conditions of life, economic and commercial, in the large cities were different from those obtaining in the mofussil. But the difficulties arising from the existence of such differing conditions can be adequately met by having a special set of provisions and a special machinery applicable to places, where insolvencies of large commercial firms are likely to occur, without having two separate enactments dealing with the same subject-matter.

3. Exclusive jurisdiction of High Courts in the Presidency towns to continue.-

It is to be noticed that the insolvency jurisdiction in the Presidency towns has been conferred exclusively upon the High Court. As the entrustment of this jurisdiction to the High Court is necessary in the interests of the better administration of the insolvency law, we are of the opinion that such exclusive jurisdiction should continue even though the two Acts are consolidated into one.

4. Consolidation of enactments desirable.-

There is a general consensus of opinion, that the two Acts should be consolidated into one. It was stated by some witnesses that the conditions in the mofussil areas had greatly changed and that with the growth of trade and industry, the differences between the conditions of life in the Presidency towns and in the principal cities in the mofussil had ceased to be appreciable. It has to be remembered, that the principal object of all insolvency law is to effect a proper distribution of the assets of the insolvent among his creditors, and broadly the procedure provided is intended to achieve this object.

It is true, that in the case of large insolvencies complicated questions of law and fact tend to arise, which may need a superior Court for their proper determination. This need can be met by conferring an exclusive jurisdiction on the High Courts or the superior courts in the mofussil. We are in agreement on the whole with the view favouring the consolidation of the insolvency laws. A detailed examination of provisions of the two Acts,with a view to their revision and consolidation has been undertaken by us and will form the subject matter of a separate report.

5. Appointment of Official Receivers.-

We propose therefore to consider in this report only two matters, namely, the avoidance of delays in the administration of insolvents' estates and the provision for the appointment of Official Receivers.

Under section 28 of the Provincial Insolvency Act, on the making of an order of adjudication, the whole of the property of the insolvent vests in the Court or in a receiver. Under section 56 of the Act, the Court may appoint a receiver for the property of the insolvent. Further, under section 57 the State Government has the power to appoint such persons as it thinks fit to be Official Receivers under the Act within such local limits as it may prescribe.

Under this Act the Court may take one of three courses. The Court itself may take possession of the property and deal with it. Or the Court may appoint a suitable person to be receiver of the property of the insolvent. When the State has appointed a person to be the Official Receiver for a local area, in all cases of insolvencies arising in such an area, the Official Receiver shall be the receiver for the purpose of every order appointing a receiver or an interim receiver issued by any Court, unless the Court otherwise directs for special reasons. The main duty of the receiver or the Official Receiver in whom the property has vested is to take steps for the realisation of the assets of the insolvent and to effect a distribution of the assets among the creditors in accordance with the procedure laid down in the Act.

6. Defects of the present system.-

We have been informed that in several States, the State Government has not appointed Official Receivers under section 57. There prevails instead the practice of appointing as a receiver a suitable person from among the lawyers practising in that Court. It happens that different lawyers are appointed receivers in different insolvencies. The lawyer is naturally busy with his practice and the result is, that more often than not, the administration of the insolvents' estate does not receive adequate personal attention from him but is left in the hands of a clerk. Sometimes junior members of the Bar or in some cases even members of the ministerial staff of the Court are appointed receivers.

The administration of an insolvent's estate requires experience and ability and we are of the view, that duties of this nature cannot be satisfactorily performed by this class of persons. In most insolvency cases attention has to be paid to the details of day-to-day administration. A receiver may have to take proceedings under sections 53 and 54 of the Provincial Insolvency Act. He may have to issue notices to the creditors, scrutinise proofs submitted to him, prepare a schedule of creditors and perform other duties.

If a i composition or a scheme of arrangement is proposed, the receiver may have to take steps in that connection. The distribution of assets among the creditors is a fairly onerous and responsible task. All these duties are bound to take a considerable amount of time particularly in the case of substantial insolvencies. In making the appointments of receivers, it is therefore necessary to ensure that they are in a position to devote the time and attention, which the performance of these duties require.

7. Official Assignees in the Presidency towns.-

Under the Presidency towns Insolvency Act, there is a permanent full-time officer known as the Official

Assignee in whom the properties of the insolvent vest on the making of an order of adjudication. (Section 17 of the Presidency towns Insolvency Act). Under this Act there is a single officer for the whole of the Presidency town in charge of the estates of all the insolvents.

8. Appointment of Receivers in the mofussil.-

In the mofussil, appointments of Official Receivers are made from different sources in different States. In Madras and Andhra Pradesh, full-time Official Receivers are appointed by the State Government under section 57 of the Provincial Insolvency Act. They are appointed for particular areas and deal with all the insolvency matters arising within those areas. Wherever the insolvency work is not sufficient to occupy their whole time, they are employed on additional duties such as Small Cause Court Judges and Rent Controllers.

They are borne on a regular cadre like other Government Servants. In some other States, the Insolvency Courts select one of the practising lawyers to act as a receiver. They are appointed ad hoc and receive remuneration by way of commission generally calculated on the basis of income from or realisation of the insolvents' assets. In some other places, the courts select a ministerial officer to act as a receiver in a particular insolvency.

We understand, that the system of appointing Official Receivers on whole-time basis as regular Government Servants in Andhra Pradesh and Madras has been functioning quite satisfactorily. They are recruited from among members of the Bar and such of them as are found suitable, are eligible for recruitment as district munsifs. For the purpose of this recruitment, they are included in the category of other ministerial officers, such as Sheristadars, Head Clerks, Superintendents in the Secretariat Legal Department etc. We have, however, elsewhere made a general recommendation that ministerial officers should not be promoted to the Judicial Service.

In the absence of reasonable prospects for their promotion, we cannot recommend the creation of a separate cadre of Official Receivers, as it would not be possible to get efficient hands on the comparatively low salary which the post of an Official Receiver would normally carry. The practice of appointing ministerial officers of the court who are mostly not legally qualified as receivers is undesirable. Their hands are generally full with the normal routine work of their office and as such, they are hardly in a position to devote the required time and attention to the insolvency work. The only source, therefore, from which the Official Receivers can be selected is the Bar.

It is true, that it may not be practicable for busy lawyers to be appointed as receivers as they may not have either time or the inclination to take up insolvency work; but we feel, that it should be possible to select some of the capable junior members of the Bar for this work. We heard complaints that if lawyers are appointed as receivers on commission basis, there is a tendency among them to prolong the proceedings in the hope of getting larger remuneration., It is possible that there may be some justification in this complaint. This objection can, however, be met by appointing a member of the Bar ad hoc as an Official Receiver, but as a regular part-time officer with a fixed monthly salary, in the same way as part-time lecturers are appointed in law colleges.

They may be appointed for a fixed term, say three to five years and their term may be extended from time to time. They should be allowed the right of private practice at the Bar. We think that this will ensure a certain degree of security of tenure to the holder of the post, who can be expected to devote the required time and attention which the performance of the duties of an Official Receiver require. However, in places where the insolvency work is sufficient to occupy the whole time of an officer, full time Official Receivers may be appointed on monthly salary from among the members of the Bar.

9. Suggestions for amendment of law.-

We may also refer to some suggestions made to us. It is stated that the examination of a debtor under section 24 of the Presidency towns Insolvency Act, 1909 with regard to his conduct, dealings and property before the order for adjudication is made, is premature as there is hardly any material on which the debtor could be examined at that stage. It is accordingly suggested, that there should be a provision in the Provincial Act also for the public examination of the insolvent after the adjudication order is made.

A suggestion was also made, that the Court may be empowered to annul the adjudication in cases where the insolvent has been found guilty of keeping false books or suppressing them, or of suppression of and fraudulent disposition of assets, or of non-compliance with the duties imposed upon him by the insolvency law, such as assisting the Official Assignee or the Official Receiver as the case may be; by not filing the schedule, and failing to serve a notice of adjudication on the creditors. In our opinion these suggestions deserve acceptance.

10. It has also been suggested that the Official Assignee or the Official Receiver in big commercial cities should have at least one qualified accountant attached to his office, so that he may be able to have a thorough and complete investigation of the affairs of the insolvents made with his assistance. This in our view is a very necessary step which should be taken whenever sufficient funds are available with the Official Assignee or Receiver.

11. Summary of recommendations.-

Our recommendations regarding Insolvency Administration can be summarised as follows:-

(1) The several laws relating to insolvency which are in force in different parts of India should be consolidated into one enactment.

(2) The High Courts should continue to retain their exclusive jurisdiction in insolvency matters in the Presidency towns.

(3) Official Received may be appointed ad hoc from among the members of the Bar as regular part-time officers, like Lecturers in law collage on a fixed monthly salary. They may be appointed for a fixed term of three to five years, which may may be extend from time to time.

(4) But wherever the insolvency work is sufficient to occupy the whole time of an officer, a full time Official Receiver may be appointed for that area, to look after the insolvency work arising in that area.

(4) Whenever sufficient funds are available with the official assignee or an official receiver, a qualified accountant should be attached to his office.

(5) The suggestions for the amendment of the insolvency law set out in paragraph 10 ante should be accepted.

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