UNIT 2
Insolvency Accounts
Q1) Explain insolvency.
A1) An insolvent is a person unable to pay or settle his debt. Insolvency usually leads to insolvency proceedings, in which legal action can be taken against the insolvent, and assets may be liquidated to pay off the outstanding debts.
Insolvency and bankruptcy mean the same thing. The latter term is used in the United Kingdom, the former in India. It 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 State, in certain circumstances, takes possession of his property through an officer appointed for the purpose, and such property is realized and distributed in appropriate proportions among the persons to whom the debtor owes money or has incurred pecuniary liabilities.” The officer is called Official Receiver and is appointed by the Court.
Individual and partnership:
There is one difference between insolvency of individuals and partnership firms. In case of individuals, no distinction is made between private assets and business assets and similarly for liabilities.
In case of partnership, a distinction is made between firm’s liabilities and assets and private liabilities and assets of partners. Private assets must first be utilized for paying private liabilities. If there is a surplus, it is utilized to pay firm’s liabilities.
Q2) Explain insolvency accounts.
A2) Insolvency accounts
Insolvent has to submit following documents to the court of law −
Statement of affairs
When a person or a firm is determined as insolvent, he or the firm has to prepare a statement showing the financial position. By preparing the balance sheet the true financial position can be shown. The only point to remember is that the “balance sheet” must show the assets at realizable value and not at book value. The purpose is to show how much money will be available for distribution among creditors. All liabilities should be recorded. This can be done by setting down assets at their realizable value and the amount payable to creditors.
Statement of Affairs:
(As required by the Indian Insolvency Act)
In the Court of Justice:
In insolvency
To the insolvent – you are required to fill up carefully and accurately, this sheet and the several sheets, A,B,C,D,E,F,G, and H, showing the state of your affairs on the day on which the order of adjudication was made against you viz. the …………day of …………..20…….
Such sheets, when filled up will constitute your Schedule and must be verified by Oath or Declaration.
Gross Liabilities (Rs.) | Liabilities (as stated and estimated by the debtor) | Expected To rank | Assets (as stated and estimated by the debtors) | Estimated to produce |
| Unsecured Creditors as per List A Fully Secured Creditors as per list B Less: Estimated value of Securities Less: Amount thereof carried to List C Balance thereof contra Partly secured creditors as per List C Less: Estimated value of Securities Preferential Creditors as per List D (Creditors for rent, taxes, salaries and wages, etc.) payable in full as per contra |
| Property as per List E, viz.
Book debts as per list F, viz. Good Doubtful Bad Estimated to produce Bills of exchange or other similar Securities on hand as per List G Estimated to produce Surplus from securities in the hands of creditors fully secured (per contra) Deduct: Creditors for preferential rent, rates, taxes, wages, etc. (per contra) Deficiency as per explained in list H |
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I /We ………………make oath, solemnly affirm, and say, that the above statement and the several lists hereunto annexed marked A,B,C,D,E,F,G, and H are to the best of my/our knowledge and belief, a full and complete of my/our affairs on the date of the abovementioned order of adjudication made against me/us.
Affirmed------------------ at. ………….this……………day of Sworn Before me.
……………………
(Signature)
Commissioner
The explanation of each list is given below
This list includes all creditors who do not possess any security of the insolvent debtor. The creditors without security fall under this list.
Some of such creditors are-
a) Trade creditors without security
b) Loan creditors without security
c) Bank overdraft unsecured
d) Bills payable and promissory note
e) Bills receivable discounted likely to be dishonored
f) Salary, wage rent, etc over preferential limit.
Fully Secured Creditors as per List B:
Under this list the creditors who have sufficient securities against their claims will be included and after paying these creditors, balance amount will be shown on the asset side of the statement of affairs as available balance to distribute among other creditors.
Partly Un- secured Creditors as per List C:
This list includes certain creditors who have security for a lesser value than the amount of their claims. Unsatisfied amount of the partly secured creditors will be shown as expected to rank column as unsecured creditors, to be divided for unpaid amount.
Preferential Creditors as per List D:
Under the category of preferential creditors the following creditors comes and such creditors get preference over the un-secured creditors.
As per the law, following creditors come under category of the preferential creditors
a) Government and local authority.
b) Salary and wages for the service rendered for four months preceding the date of the presentation of the insolvency petition.
c) Under the Act, one month rent comes under the category of preferential creditors.
The following list are shown in the asset side of the statement of affairs
Property as per List E :
Under this list other than the bills receivable in hand and the assets as kept by creditors as fully and partly secured debts are included in this list. For example, cash in hand, cash at bank, machinery, etc. both book value and realization value are shown.
Property as per List F – Following are the three categories of book debts −
a) Good
b) Doubtful Debts
c) Bad
Assets as per List G – under this list bills of exchange and promissory notes are included.
Deficiency Account as per List H :
Deficiency account means the deficiency, which the insolvent debtor is not able to pay. This list shows the deficiency i.e., liabilities of the Debtors over realizable value of his assets. For this purpose a separate Deficiency Account is prepared.
Q3) Explain statement of affairs.
A3) Statement of affairs-
When a person or a firm is determined as insolvent, he or the firm has to prepare a statement showing the financial position. By preparing the balance sheet the true financial position can be shown. The only point to remember is that the “balance sheet” must show the assets at realizable value and not at book value. The purpose is to show how much money will be available for distribution among creditors. All liabilities should be recorded. This can be done by setting down assets at their realizable value and the amount payable to creditors.
Statement of Affairs
(As required by the Indian Insolvency Act)
In the Court of Justice
In insolvency
To the insolvent – you are required to fill up carefully and accurately, this sheet and the several sheets, A,B,C,D,E,F,G, and H, showing the state of your affairs on the day on which the order of adjudication was made against you viz. the …………day of …………..20…….
Such sheets, when filled up will constitute your Schedule and must be verified by Oath or Declaration.
Gross Liabilities (Rs.) | Liabilities (as stated and estimated by the debtor) | Expected To rank | Assets (as stated and estimated by the debtors) | Estimated to produce |
| Unsecured Creditors as per List A Fully Secured Creditors as per list B Less: Estimated value of Securities Less: Amount thereof carried to List C Balance thereof contra Partly secured creditors as per List C Less: Estimated value of Securities Preferential Creditors as per List D (Creditors for rent, taxes, salaries and wages, etc.) payable in full as per contra |
| Property as per List E, viz.
Book debts as per list F, viz. Good Doubtful Bad Estimated to produce Bills of exchange or other similar Securities on hand as per List G Estimated to produce Surplus from securities in the hands of creditors fully secured (per contra) Deduct: Creditors for preferential rent, rates, taxes, wages, etc. (per contra) Deficiency as per explained in list H |
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I /We ………………make oath, solemnly affirm, and say, that the above statement and the several lists hereunto annexed marked A,B,C,D,E,F,G, and H are to the best of my/our knowledge and belief, a full and complete of my/our affairs on the date of the abovementioned order of adjudication made against me/us.
Affirmed------------------ at. ………….this……………day of Sworn Before me.
……………………
(Signature)
Commissioner
The explanation of each list is given below
List A – Unsecured creditors
This list includes all creditors who do not possess any security of the insolvent debtor. The creditors without security fall under this list.
Some of such creditors are
a) Trade creditors without security.
b) Loan creditors without security.
c) Bank overdraft unsecured.
d) Bills payable and promissory note.
e) Bills receivable discounted likely to be dishonored.
f) Salary, wage rent, etc over preferential limit.
Fully Secured Creditors as per List B:
Under this list the creditors who have sufficient securities against their claims will be included and after paying these creditors, balance amount will be shown on the asset side of the statement of affairs as available balance to distribute among other creditors.
Partly Un- secured Creditors as per List C:
This list includes certain creditors who have security for a lesser value than the amount of their claims. Unsatisfied amount of the partly secured creditors will be shown as expected to rank column as unsecured creditors, to be divided for unpaid amount.
Preferential Creditors as per List D:
Under the category of preferential creditors the following creditors comes and such creditors get preference over the un-secured creditors.
As per the law, following creditors come under category of the preferential creditors
d) Government and local authority.
e) Salary and wages for the service rendered for four months preceding the date of the presentation of the insolvency petition.
f) Under the Act, one month rent comes under the category of preferential creditors.
The following list are shown in the asset side of the statement of affairs
Property as per List E:
Under this list other than the bills receivable in hand and the assets as kept by creditors as fully and partly secured debts are included in this list. For example, cash in hand, cash at bank, machinery, etc. both book value and realization value are shown.
Property as per List F: Following are the three categories of book debts −
d) Good
e) Doubtful Debts
f) Bad
Assets as per List G – under this list bills of exchange and promissory notes are included.
Deficiency Account as per List H:
Deficiency account means the deficiency, which the insolvent debtor is not able to pay. This list shows the deficiency i.e., liabilities of the Debtors over realizable value of his assets. For this purpose a separate Deficiency Account is prepared.
Q4) Explain difference between balance sheet and statement of affairs.
A4)
Basis of difference | Balance Sheet | Statement of Affairs |
Date of Preparation | It is often prepared at the end of the year. | It is prepared at the time of insolvency. |
Use of list | Lists are not used for writing of assets and liabilities | Lists are used for assets and liabilities. |
Records of assets | All real and fictitious assets are recorded in it. | Only real assets are recorded in it |
Value of assets | Fixed assets are shown after deduction of depreciation. | Fixed assets are shown at realizable value. |
Assets lodged as securities | Assets as a security are shown in the assets side. | The assets lodged as security are not shown in the assets side but shown in the liability side along with the concerning loan. |
Record of liabilities | Columns of gross liabilities and expected to rank are not made in it. | These columns are made in it. |
Total | Total of liabilities is equal to total of assets. | Total liabilities are more than total of assets and this excess is called deficiency |
Number | It is prepared for all the year during which business is carried on. | It is prepared only once i.e. at the time of insolvency. |
Object | It is prepared for knowing the financial position of the concern. | It is prepared to shoe the inability of the debtor to pay this debts. |
For whom prepared | It is prepared for the sake of proprietor and others. | It is prepared for the satisfaction of the Court. |
Def. a/c | Deficiency Account is not prepared along with it. | Deficiency Account is prepared along with it. |
Pref crs. | Preferential Creditors are not deducted in the assets side | Preferential Creditors are deducted in the assets side. |
Capital | Capital is shown in the liabilities side. | Capital is not shown in the liabilities side. |
Q5) Explain deficiency account.
A5) Deficiency account (list H).
The Debtor has to prepare a Deficiency Account which explains as to how the deficiency shown in the Statement of Affairs has arisen. The insolvent debtor is required to account for the loss to the amount of his capital and of his Creditors.
Specimen of Deficiency Account List H
| Amount (Rs.) |
| Amount (Rs.) |
Excess of Assets over liabilities i.e. capital on …….. Net profit arising from carrying on business after deducting usual trade expenses, income or profit from other source i.e.
Deficiency as per statement of Affairs |
| Excess of Liabilities over assets Net Loss arising from carrying on business after deduction from profit, usual trade expenses Bad debts as per list F Expenses incurred since……. Other than usual trade expenses, viz. House hold expenses (Drawings) Other Losses −
Speculation losses Losses through betting Excess of private liabilities over private assets, etc. |
|
On the left- hand side of Deficiency Account appears:
a) The amount of capital,
b) Increment to the Capital from the business i.e., profits, interest on capital, salaries, commission etc.,
c) Additional contributions and
d) Realisation profits etc.
On its right side appear all the losses and withdrawals by which capital is decreased.
The difference between the two sides represents deficiency which must agree with the deficiency amount as disclosed by the Statement of Affairs.
Q6) Explain statement of affairs and deficiency account.
A6) Statement of affairs-
When a person or a firm is determined as insolvent, he or the firm has to prepare a statement showing the financial position. By preparing the balance sheet the true financial position can be shown. The only point to remember is that the “balance sheet” must show the assets at realizable value and not at book value. The purpose is to show how much money will be available for distribution among creditors. All liabilities should be recorded. This can be done by setting down assets at their realizable value and the amount payable to creditors.
Statement of Affairs
(As required by the Indian Insolvency Act)
In the Court of Justice
In insolvency
To the insolvent – you are required to fill up carefully and accurately, this sheet and the several sheets, A,B,C,D,E,F,G, and H, showing the state of your affairs on the day on which the order of adjudication was made against you viz. the …………day of …………..20…….
Such sheets, when filled up will constitute your Schedule and must be verified by Oath or Declaration.
Gross Liabilities (Rs.) | Liabilities (as stated and estimated by the debtor) | Expected To rank | Assets (as stated and estimated by the debtors) | Estimated to produce |
| Unsecured Creditors as per List A Fully Secured Creditors as per list B Less: Estimated value of Securities Less: Amount thereof carried to List C Balance thereof contra Partly secured creditors as per List C Less: Estimated value of Securities Preferential Creditors as per List D (Creditors for rent, taxes, salaries and wages, etc.) payable in full as per contra |
| Property as per List E, viz.
Book debts as per list F, viz. Good Doubtful Bad Estimated to produce Bills of exchange or other similar Securities on hand as per List G Estimated to produce Surplus from securities in the hands of creditors fully secured (per contra) Deduct: Creditors for preferential rent, rates, taxes, wages, etc. (per contra) Deficiency as per explained in list H |
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I /We ………………make oath, solemnly affirm, and say, that the above statement and the several lists hereunto annexed marked A,B,C,D,E,F,G, and H are to the best of my/our knowledge and belief, a full and complete of my/our affairs on the date of the abovementioned order of adjudication made against me/us.
Affirmed------------------ at. ………….this……………day of Sworn Before me.
……………………
(Signature)
Commissioner
The explanation of each list is given below
List A – Unsecured creditors
This list includes all creditors who do not possess any security of the insolvent debtor. The creditors without security fall under this list.
Some of such creditors are-
a) Trade creditors without security
b) Loan creditors without security
c) Bank overdraft unsecured
d) Bills payable and promissory note
e) Bills receivable discounted likely to be dishonored
f) Salary, wage rent, etc over preferential limit.
Fully Secured Creditors as per List B
Under this list the creditors who have sufficient securities against their claims will be included and after paying these creditors, balance amount will be shown on the asset side of the statement of affairs as available balance to distribute among other creditors.
Partly Un- secured Creditors as per List C
This list includes certain creditors who have security for a lesser value than the amount of their claims. Unsatisfied amount of the partly secured creditors will be shown as expected to rank column as unsecured creditors, to be divided for unpaid amount.
Preferential Creditors as per List D
Under the category of preferential creditors the following creditors comes and such creditors get preference over the un-secured creditors.
As per the law, following creditors come under category of the preferential creditors
a) Government and local authority.
b) Salary and wages for the service rendered for four months preceding the date of the presentation of the insolvency petition.
c) Under the Act, one month rent comes under the category of preferential creditors.
The following list are shown in the asset side of the statement of affairs.
Property as per List E –
Under this list other than the bills receivable in hand and the assets as kept by creditors as fully and partly secured debts are included in this list. For example, cash in hand, cash at bank, machinery, etc. both book value and realization value are shown.
Property as per List F – Following are the three categories of book debts −
a) Good.
b) Doubtful Debts.
c) Bad.
Assets as per List G – under this list bills of exchange and promissory notes are included.
Deficiency Account as per List H
Deficiency account means the deficiency, which the insolvent debtor is not able to pay. This list shows the deficiency i.e., liabilities of the Debtors over realizable value of his assets. For this purpose a separate Deficiency Account is prepared.
Deficiency account (list H)
The Debtor has to prepare a Deficiency Account which explains as to how the deficiency shown in the Statement of Affairs has arisen. The insolvent debtor is required to account for the loss to the amount of his capital and of his Creditors.
Specimen of Deficiency Account List H
| Amount (Rs.) |
| Amount (Rs.) |
Excess of Assets over liabilities i.e. capital on …….. Net profit arising from carrying on business after deducting usual trade expenses, income or profit from other source i.e.
Deficiency as per statement of Affairs |
| Excess of Liabilities over assets Net Loss arising from carrying on business after deduction from profit, usual trade expenses Bad debts as per list F Expenses incurred since……. Other than usual trade expenses, viz. House hold expenses (Drawings) Other Losses −
Speculation losses Losses through betting Excess of private liabilities over private assets, etc. |
|
On the left- hand side of Deficiency Account appears:
a) The amount of capital,
b) Increment to the Capital from the business i.e., profits, interest on capital, salaries, commission etc.,
c) Additional contributions and
d) Realisation profits etc.
On its right side appear all the losses and withdrawals by which capital is decreased.
The difference between the two sides represents deficiency which must agree with the deficiency amount as disclosed by the Statement of Affairs.
Q7) Draw statement of affairs format
A7) Statement of Affairs
(As required by the Indian Insolvency Act)
In the Court of Justice
In insolvency
To the insolvent – you are required to fill up carefully and accurately, this sheet and the several sheets, A,B,C,D,E,F,G, and H, showing the state of your affairs on the day on which the order of adjudication was made against you viz. the …………day of …………..20…….
Such sheets, when filled up will constitute your Schedule and must be verified by Oath or Declaration.
Gross Liabilities (Rs.) | Liabilities (as stated and estimated by the debtor) | Expected To rank | Assets (as stated and estimated by the debtors) | Estimated to produce |
| Unsecured Creditors as per List A Fully Secured Creditors as per list B Less: Estimated value of Securities Less: Amount thereof carried to List C Balance thereof contra Partly secured creditors as per List C Less: Estimated value of Securities Preferential Creditors as per List D (Creditors for rent, taxes, salaries and wages, etc.) payable in full as per contra |
| Property as per List E, viz.
Book debts as per list F, viz. Good Doubtful Bad Estimated to produce Bills of exchange or other similar Securities on hand as per List G Estimated to produce Surplus from securities in the hands of creditors fully secured (per contra) Deduct: Creditors for preferential rent, rates, taxes, wages, etc. (per contra) Deficiency as per explained in list H |
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I /We ………………make oath, solemnly affirm, and say, that the above statement and the several lists hereunto annexed marked A,B,C,D,E,F,G, and H are to the best of my/our knowledge and belief, a full and complete of my/our affairs on the date of the abovementioned order of adjudication made against me/us.
Affirmed------------------ at. ………….this……………day of Sworn Before me.
……………………
(Signature)
Commissioner.
Q8) Explain the list in statement of affairs
A8)
This list includes all creditors who do not possess any security of the insolvent debtor. The creditors without security fall under this list.
Some of such creditors are-
a) Trade creditors without security
b) Loan creditors without security
c) Bank overdraft unsecured
d) Bills payable and promissory note
e) Bills receivable discounted likely to be dishonored
f) Salary, wage rent, etc over preferential limit.
Fully Secured Creditors as per List B
Under this list the creditors who have sufficient securities against their claims will be included and after paying these creditors, balance amount will be shown on the asset side of the statement of affairs as available balance to distribute among other creditors.
Partly Un- secured Creditors as per List C
This list includes certain creditors who have security for a lesser value than the amount of their claims. Unsatisfied amount of the partly secured creditors will be shown as expected to rank column as unsecured creditors, to be divided for unpaid amount.
Preferential Creditors as per List D
Under the category of preferential creditors the following creditors comes and such creditors get preference over the un-secured creditors.
As per the law, following creditors come under category of the preferential creditors
d) Government and local authority.
e) Salary and wages for the service rendered for four months preceding the date of the presentation of the insolvency petition.
f) Under the Act, one month rent comes under the category of preferential creditors.
The following list are shown in the asset side of the statement of affairs
Property as per List E –
Under this list other than the bills receivable in hand and the assets as kept by creditors as fully and partly secured debts are included in this list. For example, cash in hand, cash at bank, machinery, etc. both book value and realization value are shown.
Property as per List F – Following are the three categories of book debts −
a) Good.
b) Doubtful Debts.
c) Bad.
Assets as per List G – under this list bills of exchange and promissory notes are included.
Deficiency Account as per List H
Deficiency account means the deficiency, which the insolvent debtor is not able to pay. This list shows the deficiency i.e., liabilities of the Debtors over realizable value of his assets. For this purpose a separate Deficiency Account is prepared.
Q9) Draw deficiency account format.
A9) Deficiency account (list H)
The Debtor has to prepare a Deficiency Account which explains as to how the deficiency shown in the Statement of Affairs has arisen. The insolvent debtor is required to account for the loss to the amount of his capital and of his Creditors.
Specimen of Deficiency Account List H
| Amount (Rs.) |
| Amount (Rs.) |
Excess of Assets over liabilities i.e. capital on …….. Net profit arising from carrying on business after deducting usual trade expenses, income or profit from other source i.e.
Deficiency as per statement of Affairs |
| Excess of Liabilities over assets Net Loss arising from carrying on business after deduction from profit, usual trade expenses Bad debts as per list F Expenses incurred since……. Other than usual trade expenses, viz. House hold expenses (Drawings) Other Losses −
Speculation losses Losses through betting Excess of private liabilities over private assets, etc. |
|
Q10) Draw format of deficiency and statement of affairs.
A10) Deficiency account (list H).
The Debtor has to prepare a Deficiency Account which explains as to how the deficiency shown in the Statement of Affairs has arisen. The insolvent debtor is required to account for the loss to the amount of his capital and of his Creditors.
Specimen of Deficiency Account List H
| Amount (Rs.) |
| Amount (Rs.) |
Excess of Assets over liabilities i.e. capital on …….. Net profit arising from carrying on business after deducting usual trade expenses, income or profit from other source i.e.
Deficiency as per statement of Affairs |
| Excess of Liabilities over assets Net Loss arising from carrying on business after deduction from profit, usual trade expenses Bad debts as per list F Expenses incurred since……. Other than usual trade expenses, viz. House hold expenses (Drawings) Other Losses −
Speculation losses Losses through betting Excess of private liabilities over private assets, etc. |
|
Statement of Affairs
(As required by the Indian Insolvency Act)
In the Court of Justice
In insolvency
To the insolvent – you are required to fill up carefully and accurately, this sheet and the several sheets, A,B,C,D,E,F,G, and H, showing the state of your affairs on the day on which the order of adjudication was made against you viz. the …………day of …………..20…….
Such sheets, when filled up will constitute your Schedule and must be verified by Oath or Declaration.
Gross Liabilities (Rs.) | Liabilities (as stated and estimated by the debtor) | Expected To rank | Assets (as stated and estimated by the debtors) | Estimated to produce |
| Unsecured Creditors as per List A Fully Secured Creditors as per list B Less: Estimated value of Securities Less: Amount thereof carried to List C Balance thereof contra Partly secured creditors as per List C Less: Estimated value of Securities Preferential Creditors as per List D (Creditors for rent, taxes, salaries and wages, etc.) payable in full as per contra |
| Property as per List E, viz.
Book debts as per list F, viz. Good Doubtful Bad Estimated to produce Bills of exchange or other similar Securities on hand as per List G Estimated to produce Surplus from securities in the hands of creditors fully secured (per contra) Deduct: Creditors for preferential rent, rates, taxes, wages, etc. (per contra) Deficiency as per explained in list H |
|
I /We ………………make oath, solemnly affirm, and say, that the above statement and the several lists hereunto annexed marked A,B,C,D,E,F,G, and H are to the best of my/our knowledge and belief, a full and complete of my/our affairs on the date of the abovementioned order of adjudication made against me/us.
Affirmed------------------ at. ………….this……………day of Sworn Before me.
……………………
(Signature)
Commissioner
