In the Roman era, bankruptcy law was a species of criminal law and a bankrupt was regarded as a criminal and subjected to cruelty, public flogging, imprisonment or sold as a slave along with family. Bankruptcy codes evolved in medieval Europe to tackle failures in contracts of merchants as they engaged in trade across continents, given the high probability of loss in such business.
Today, the fundamental goal of the US bankruptcy code is to give an honest but unfortunate debtor, a new opportunity in life by releasing a debtor from personal liability of specific debts and prohibit creditors from taking any action to collect those debts. India’s prevailing archaic laws tilt more towards prison for the insolvent than to quick resolution and rehabilitation.
In April 2010, the Calcutta High Court passed an interesting order for investigation into irregularities in insolvency petitions made by individuals, on an application filed by five private sector banks that a racket was in operation to help people declare themselves insolvent.
From 2000 to 2010, total insolvency applications aggregated to 1,427 out of which 1,018 were filed in 2009. The global financial crisis of 2008 led to world-wide recession, loss of jobs and EMI defaults on credit cards, housing mortgages, consumer and personal loans.
Banks and NBFCs recovered loans through muscle men who even resorted to physical assault. Small borrowers faced hard times as they had borrowed to go with the tide of consumerism without being able to predict the disaster. Reports of suicides by defaulters surfaced.
The Reserve Bank of India was forced to intervene and court orders were passed to stop banks from using muscle men. During this period voices for review of the personal insolvency laws surfaced.
The terms insolvency and bankruptcy are not synonymous, though both deal with liabilities exceeding assets — insolvency refers to a ‘financial state’ and bankruptcy to the distinct legal ‘private state’.
The laws regulating insolvency are the Presidency Town Insolvency Act of 1909 covering Kolkata, Chennai and Mumbai and the Provincial Insolvency Act, 1920 for the rest of India. Bankruptcy and insolvency is specified in Entry 9 of the Concurrent List of the Seventh Schedule, under Article 246 of the Constitution. The statutes have been amended infrequently by a few states with the last visible amendment being in 1979.
The trigger for a creditor to file an insolvency petition in court are defined acts of insolvency by