Bankruptcy
Bankrupt means a person who is not in a position to pay his liabilities in full and has been declared as a Bankrupt by a Bankruptcy court. Bankruptcy means the procedure by which the State takes in its possession the property of the debtor for realization and equitable distribution among the creditors of the Bankrupt.
Procedure for Bankruptcy
If a debtor is unable to pay his debts, a petition can be filed by the debtor himself or any of his creditors to the suitable bankruptcy court for getting the debtor declared as a Bankrupt. If the court is fulfilled, it may pass an order declaring the debtor as a Bankrupt. Such an order is known as Order of Adjudication. The property of the debtor vests in an official appointed by the court, on being declared as a Bankrupt. Such an Official is termed as Official receiver under the Provincial Bankruptcy Act and official assignee under Presidency Towns Bankruptcy Act. The Official Receiver or assignee realizes the debtors property and makes an equitable distribution of it among his creditors.
The order of adjudication disqualifies the debtor for certain acts. The debtor can later apply for his discharge by making an application to the court. In case the court passes an order of discharge, the disqualification imposed on account of the order of adjudication are removed, the debtor again becomes a free man and gets all the rights and privileges of an ordinary citizen of the country. He is no more responsible for any debt which could have been fulfilled in full during his Bankruptcy proceedings, on account of his property being inadequate.
Interest after Bankruptcy
A creditor is normally not allowed any interest after the date of Bankruptcy. Still if all the claims of the creditors have been fulfilled in full, interest at 6% per annum is allowed up to the date of payment.
Individual and Partnership Bankruptcy
In case of Bankruptcy of an individual no distinction is made between personal assets and liabilities and the business assets and liabilities. In other words, total assets of the individual (personal as well as business), will be distributed equitably among the total creditors of the individual (personal as well as business).
In case of a partnership firm a distinction is made between firms assets and liabilities and personal assets and liabilities of the partner. Firms assets are first used for making payment of the firms liabilities, while the personal assets of a partner are first used for making payment of the personal liabilities of a partner. Similarly, in case there is a surplus on account of excess of partners assets over a partners liabilities, such surplus can be used for making payment of the firms liabilities.
Loan from Wife
A loan from wife is presumed to have been given out of her personal property. Her position is, therefore, like that of any other creditor. However if it is proved that the loan advanced by the wife is out of the money given to her by her husband, the wifes loan will be taken as a part of the capital of the debtor and she will have no right to claim the money with other creditors, in Bankruptcy proceedings.
Doctrine of Reputed Ownership
According to this Doctrine, goods belonging to other persons but in the possession of the bankrupt under circumstances which show that the goods belong to the Bankrupt can be taken as a property of the bankrupt. The official receiver or the assignee will have a right to realize such goods and distribute the proceeds so raised among the creditors of the bankrupt.
The doctrine is applicable only to a bankrupt who is a trader, carrying on a regular trade or business in those very goods or with the help of those goods. Goods held for personal use shall not be taken to be goods-in-trade.
Statement of Affairs and Deficiency Account
A person or a firm being adjudicated as a bankrupt has to submit to the court the following:
1. Statement of Affairs
2. Deficiency Account
Statement of Affairs
Statement of Affairs shows the financial position of the debtor on a particular date. It is prepared in the prescribed form. It contains details regarding his assets and liabilities, both in terms of their book value and the value expected to rank or produce.
The liabilities include the various creditors of the bankrupt. These creditors are classified into the following categories with details in separate lists attached with the statement of affairs.
List A: Unsecured creditors.
List B: Fully secured creditors.
List C: Partly secured creditors.
List D: Preferential creditors.
The assets of the debtors are also classified in the following categories with details give in separate lists attached with the statement of affairs.
List E: Properties, such as cash and bank balances, stock-in
trade, machinery, fixtures, furniture, etc. It may be noted that such assets which have been given by way of a fixed charge in favor of creditors will not be included in such a list. The value of such assets will be adjusted against the specific liabilities and surplus will be shown separately in the statement of affairs.
List F: Details regarding good, doubtful and bad debts contained in book debts.
List G: Bills of exchange.
The difference of the two sides of the statement of affairs will show either a deficiency or a surplus. In case the estimated realizable value of the assets is more than the amount of liabilities expected to rank, the difference will be a surplus. In a reverse case it will be a deficiency. The details of such deficiency or surplus are given in List H.
Deficiency Account (List H): The deficiency account explains the reasons for the deficiency. On the left hand side of the account, the capital plus all items that increase capital are put, while on the right hand side losses, withdrawals or all such items which decrease capital are put. In case of an individual any excess of private assets over private liabilities will be shown on the left hand side and any such deficiency will be shown on the right hand side. The excess of right hand side over left hand side is the deficiency. This amount must agree with the figure appearing on the statement of affairs. The deficiency account should cover the period as specified by the official assignee or the official receiver.
Missing Information
In case complete information regarding preparation of a deficiency account is not available, it can be ascertained by making a trial balance on the basis of the book values given. Usually figures regarding loss incurred during a period are not available. The excess of the total of the credit side of the trial balance over that of the debit side will be the amount o such loss.
Bankruptcy of a firm
In case of bankruptcy of a firm, separate statement of affairs and deficiency or surplus accounts will be prepared in respect of the firm and each partner of the firm. In case surplus is shown in a partners statement of affairs such surplus will be transferred to firms statement of affairs.
Preferential creditors
Creditors which shall be paid in full in priority to all other creditors except the secured creditors are known as Preferential creditors. Such creditors rank equally between themselves. They must be paid in full so long as the property of the debtor is sufficient to meet them. In case the property of the debtor is insufficient for there is insufficient for their full payment, they shall abate in equal proportions between themselves, subject to the retention of sums as may be necessary for the expenses of administration or otherwise.
Following are the preferential creditors according to the Provincial Bankruptcy Act:
1. All debts due to the Government or to any local authority.
2. All salaries or wages, not exceeding rupees twenty in all, of any clerk, servant or laborer in respect of services rendered to the bankrupt during four months before the date of presentation of the petition.
Presidency Towns Bankruptcy Act provided for the following preferential creditors.
1. All debts due to the Government or to any local authority.
2. Salaries and wages due to any clerk, servant and laborer in respect of services rendered during four months before date of the presentation of the bankruptcy petition, provided the amount in the case of each clerk does not exceed rupees three hundred and in respect of each servant or laborer rupees one hundred in all.
3. Rent due to the landlord for a period of one month only.
Preferential creditors are shown in the statement of affairs under List D in the inner column. Their amount is deducted from the assets side and only the remaining assets are available for distribution among the unsecured creditors of the business.
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