Bankruptcy Case Study
Bankruptcy is a proceeding by which, when a debtor cannot pay his debts or discharge his liabilities or the persons to whom he owes money or has incurred liabilities cannot obtain satisfaction of their claims, the courts in certain circumstances take possession of his property by an officer appointed for the purpose, and such property is realized and distributed in equal proportions among the persons to whom the debtors owes money or has incurred pecuniary liabilities. In simple words a person is insolvent or bankrupt who cannot pay his debts or discharge his liabilities on the due date. The creditors or the debtor himself may present a petition to the court that a receiving order should be made.
The object of bankruptcy is protection of honest debtors and safeguarding the interests of creditors by means of equitable distribution of the assets of an insolvent debtor among his creditors.
When a person is adjudicated bankrupt, all his assets are taken over by an officer of the court and distributed in equal proportions among his creditors. After the distribution is complete, the unpaid debts are cancelled and the bankrupt is allowed to engage in trade or service without any of his previous obligations. The creditors lose a part of their claims and the debtor is free to make a new start in life.
In general any person capable of entering into a contract may be made bankrupt except: Minors or Infants: It is only if an infant has incurred debts which are legally enforceable against him such as for the purchase of necessaries that he can be declared bankrupt. Lunatics: A person of unsound mind may be made bankrupt if the act of bankruptcy was committed during a lucid interval.
Partners: A creditor may present a petition of bankruptcy against any one partner or he may present a joint petition against two or more of them. Corporations: No bankruptcy petition can be presented against any corporation or association or company registered under any enactment. Thus a company registered under Companies Act cannot be made insolvent; it must be wound up under the Act.
There are seven stages in the process by which a debtor is declared bankrupt and ultimately obtains his discharge to start a new life in his trade or profession.
- Bankruptcy petition: A bankruptcy petition may be presented by a creditor or the debtor. If presented by a creditor, section 6 sets out the following conditions: The debt is a liquidated sum, payable either immediately or at some certain future time, the act of bankruptcy has been committed by the debtor and the act of bankruptcy on which the petition is based has been committed within the last three months.
- Receiving order: The order is made immediately if the petition is made by the debtor himself. But in case the petition is made by a creditor, the court will appoint a court receiver after a formal court hearing of the creditor. The court must be satisfied of the existence of the debt and the creditor must prove that the petition was presented to the debtor.
- Debtor’s statement of Affairs: The debtor must provide the official receiver with the statement of his affairs supported by his affidavit. The debtor must also submit the names and addresses of all his creditors together with any securities in their control. The statement is open to such creditors for inspection.
- Creditors’ First Meeting: The official receiver summons the creditors to a meeting with the debtor, at which he will be a chairman. The object of this meeting is to decide whether to accept composition or any scheme of arrangement or to have the debtor adjudicated as bankrupt. The main difference between composition and scheme of arrangement is that in composition and scheme of arrangement is that in composition the debtor keeps his assets and pays from them a certain sum to his creditors, while in a scheme the debtor’s assets are transferred to a trustee who will then make payment to the creditors.
- Public Examination: As soon as possible after a receiving order is made by the court, the official receiver arranges for the debtor to be publicly examined as to his conduct, dealings and property. Here the debtor may be questioned by the official receiver, by the trustee, and by any creditor who has proved his debt. The debtor is duty bound to answer all questions, and if he refuses to answer any question he shall be guilty of contempt of court. If the debtor does not attend his public examination, having had notice, a warrant may be issued for his arrest.
- The Adjudication Order: If the creditors do not accept composition or a scheme of arrangement, the debtor will be adjudicated bankrupt. All his assets are applied by the trustee or the official receiver to satisfy his debts.
- Annulment of Adjudication: An adjudication of bankruptcy may be annulled by the court: When the debtor ought not to have been adjudged bankrupt, if the creditors accept a composition or scheme after adjudication and where the debts of the bankrupt are paid in full.
The Act provides that a bankrupt may apply for an order of his discharge as soon as the debts have been paid in full or proportionately out of the available assets. The court will fix a day to hear his application in the presence of his creditors, but before this he must undergo a public examination. This is conducted in the open court and the debtor may be questioned by the official receiver, trustee and the creditors. If the court is satisfied that the bankruptcy is not fraudulent, it may grant an absolute discharge.
An order discharging a bankrupt releases him from all debts provable in bankruptcy except: Any debt due to the government and any debt or liability incurred by means of any fraud or fraudulent breach of trust to which he was a party.. The law of bankruptcy states “when a person is adjudicated bankrupt, all his assets are taken over by an officer of the court and distributed in equal proportions among his creditors.
After the distribution is complete, the unpaid debts are cancelled and the bankrupt is allowed to engage in trade or service without any of his previous obligations. The creditors lose a part of their claims and the debtor is free to make a new start in life.”| From the above it can be seen that after bankruptcy and proper procedures have been followed the firm does not remain the debtor.
1) Hussain,A. General Principles And Commercial Law
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