The Insolvency Act-1997

The Insolvency Act-1997

 

Origin of the Law of Insolvency

 

The law relating to Insolvency first introduced in this subcontinent in India. At that time there were two acts:

 1). The Presidency Town Insolvency Act-1909:

      which applied for Calcutta, Mumbai and

       Madras

 2). The Provincial Insolvency Act-1920: which

     applies for the remain India. 

 

After the independence of Bangladesh, both of the acts are approved by the first parliamentary session.

a)The first act was applied for Dhaka and

b)The second was applied for remain of the country.

But at last the act was changed again in 1997 that was known as –

“The Insolvency Act-1997” 

 

What is Insolvency?

 

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:

   (i) Protection of debtors and

   (ii) Safeguarding the interests of creditors , as far as possible. 

 

These objects are sought to be achieved in the following way:

 (a) Distribution of insolvent’s property

 (b) Cancellation of debt and removal of disqualification

 (c) Benefits of creditors

 (d) Fresh start in the life of debtors 

 

(a)(a) 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. 

 

(b) Cancellation of debt and removal of disqualification:

After the distribution is complete, the unpaid debts are cancelled and 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. 

 

(c) 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 to dispose of his properties in any way he liked. He might have wasted the properties or might have paid one creditors proportionately more than the other creditors.

 

(d) 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.