Insolvency

Insolvency

When any person has more debts due to various circumstances,   it is not possible for him to pay debts fully.  Then he takes shelter of government to get rid of his debts.  His property is sold under the supervision of government. The amount realized by sale of his property is distributed amongst his creditors according to the provision of law.  Then   debtors   are freed from his various debts.  In India, insolvency is governed by two acts namely:

1. The presidency towns insolvency act 1909

2 .The provincial insolvency act 1920

Insolvency word is used in India and Bankruptcy word is used in United Kingdom. BY THE WAY

Presidency towns’ insolvency act- This act applies in the presidency towns of Bombay, madras and Calcutta.

Provincial   insolvency act- THIS act applies in whole India except the presidency towns of Mumbai, madras and Calcutta. This act applies in other state except Mumbai madras and Calcutta.

   See   the differences between presidency town’s insolvency act and provincial insolvency act:

1. All kinds of tax payable to government i.e. sales tax, income tax, and water tax.

2.  Workers compensable payable.

3.  Salaries to clerk for last four months will not be more than rs 300 only.

4. Wages payable to worker or servant for last four months will not be more than rs100.

5. Rent payable to landlord for one month only.

Provincial insolvency act

1. All kinds of tax payable to government i.e. sales tax, income tax, water tax .

2. Workers compensable payable

3. Salaries to clerk for last four months will not be more than rs20 only.

4. Wages payable to worker or servant for last four months will not be more than rs20 0nly.

5. No rent will be preferential.

See items in the time of preparing questions. 

Unsecured creditors as per list A-   Bills payable,  promissory  notes,  unsecured amount of bank overdraft, Creditors on open account, bills receivable and expected to be dishonored, amount of salaries and wages which is not preferential.

Fully secured creditors as per list B- Loan is lesser than securities.

Partly secured creditors as per list c- Loan is greater than securities.

Preferential creditors as per list D-   Salaries, wages, rent and rates etc.

Sundry assets as per list e-   All assets are written in it except bills receivable, debtors, assets used on securities, promissory notes.

Book debts as per list F– 1.Good- out

2. Doubtful- under

3. Bad- under

Bills of exchange as per list G—bills receivable, promissory notes, bills of exchange

Surplus carried away from list b as per contra

Preferential creditors as per contra

Deficiency as per list H—   Balancing figure

Mortgage on building—- it will be written in fully secured creditors as per list B ONLY.  It will be treated to be as loan.

Value of building realized-   It will be written in fully secured creditors as per list B only.   It will be treated to be as securities.

Share, life insurance policy, debentures are written in the assets side of the statement of affairs.

Preference share and equity share will not be written in statement of affairs.

Wives loan included in unsecured creditors as per list A:

Calculation:  Amount of wives loan is deducted to unsecured creditors as per lit A. It will be written in debit side of deficiency account.

Preferential creditors included in unsecured creditors as per list A

Calculation-Amount of preferential creditors is deducted to unsecured creditors as per list A.

Note: An insolvent can apply the petition in the court for insolvency, when his liabilities are more than rs500 from his assets.  Format of statement of affairs:

Gross liabilities Expected to rank Assets Estimated to produce
  Unsecured creditors as per   Sundry assets as per list E  
  List A   (EXCEPTS debtors, bills receivable  
  Fully secured creditors as per list B   Promisory notes, assets used on securities)

Assets(estimated value)

 
      Bookdebts as per list F  
  Partly secured creditors as per list c   Good

Doubtful                         under

out
  Preferential creditors as per list D   Bad                                   under  
      Bills of exchange as per list G  
  Surplus   Surplus  carried away from list B as  
      contra  
      Less: Preferential creditors as per  
      contra  
      Deficiency as per list H  
         
         
         
         
         

 

Next process after finding out the statement of affairs

Deficiency A/c

Capital   Drawings  
profit   Other losses  
Interest on capital   ASSESTS(Estimated value- value realized)

Bad debts

Contingent liabilities

out
Wives loan   Other expenses (preferential creditors)  
    Bills receivable and expected to be dishonored.  
Deficiency   surplus  
       
       

 

Note- Balancing figure of statement of affairs A/c must be equal to the balancing figure of deficiency account.

2.  Amount realized by sale of assets are written in the assets side (estimated to produce)    of the statement of affairs.

Don’t be nerves in the time of solving it, this is very easy chapter.

Problem.1

From the following figures, prepare statement of affairs and Deficiency account as at 31st December, 2010. Assume that the stock realized 2/3 of its value, the fixtures1/2, the share at par and doubtful debts 1/3. On 1st January, 2oo8 the debtor’s commenced business with capital of rs6350.His profit for the first two years amounted to RS4, 054 and his drawing were 3000 per year:

Cash-     rs230

Stock in trade-    rs1020

Debtors (good) –    6980

Debtors (doubtful) – 1800

Debtors (bad) – 1500

Fixture –   564

Shares- 500

Creditors unsecured – 12000

Creditors secured- 2500

Value of securities held by creditors- 3500

Preferential claims for rates and taxes – 190

Solution-

 

Gross Liabilities Expected to rank Assets Estimated to produce  
12000 Unsecured creditors as per list A 12000 Sundry assets as per list E

Cash                                              230

Stock in trade                            1020

Fixtures                                        564

Shares                                          500

 

230

680

282

500

 
      Total sundry assets as per list E 1692  
  Fully secured creditors as per list B                 2500

Less: securities      3500

 

 

 

Bookdebts as per list F

Good

Doubtful                                 1800

Bad                                           1500

 

6980

600

 
                                   1000   TOTAL Bad debts as per list F 9272  
Nil Partly secured creditors as per list c nil Add: surplus 1000  
10272  
  Preferential creditors as per list D              190   Less : preferential creditors as per contra 190

 

   
    10082
           
      Deficiency as per list H 1918  
           
           
    12000   12000  
           
           
           
           
           

Deficiency account

Capital 6350 Drawings 9000
PROFIT 4054 Other losses  
Deficiency 1918  Stock                                      340  
    Fixture                                    282  
    Bad debts                              2700 3322
       
  12322   12322

 

Let’s be care some items in the time of preparing questions

In this question, the amount of deficiency, contingent liabilities, and rent are given then in this case First step is to calculate statement of affairs,   contingent liabilities and rent will not be written in first step.  Amount of deficiency will be written in the assets side of the deficiency account. And preferential creditors will not be written in first step.  Fully secured creditors will be written in first step. Partly secured creditors as per list c will be written in first step. BY THE WAY

Next step is to find out statement of affairs.   Contingent liabilities and rent will be written in unsecured creditors as per list A.   Rent will not be written in preferential creditors as per list D. Remaining will be written in preferential creditors as per list D excepts rent. Fully secured creditors and partly secured creditors will be written in the statement of affairs 2.  Last step is to find out deficiency account.  Contingent liabilities and rent + remaining expenses (preferential creditors as per list D) will be written in the credit side of the deficiency account.   Questions are given below related with this topic.  Solve these questions:

   Question: The assets of Mrs. Mohan as on 30th June, 2007 as shown by his books were 70000rs and his liabilities rs60000. He filed his petition for insolvency and estimated his deficiency to be rs40000. After making the above estimate he found the following items not passed through his account books:

1. Interest at 6% per annum on capital

2. A Contingent liabilities for rs3000 on bills discounted by him for rs12000

3. Amount due as wages rs300, salaries rs700, Rent rs300, taxes rs300.

Prepare his statement of affairs and deficiency account.                                                            

That’s it

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