Financial Accounting Insolvency Accounts – tryspring

By | January 23, 2019

Financial Accounting – Insolvency Accounts

Insolvency is a financial stringency i.e. when an individual or
an organization/company is no longer capable to pay the debts
he/it owes. 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.

When a Person / Entity can be Declared Insolvent

Before declaring an entity or a person as insolvent, a competent
court defines two conditions −

  • A person or entity should be debtor and
  • He/it should had done any act of insolvency.

Act of insolvency means, when a person (debtor) shows that
he is not able to pay his liabilities.

An order of adjudication must be passed by the court of law,
before legally declaring any person insolvent. To pass an order
of adjudication by the court of law, a petition should be filed
by any of the creditor or creditors or by the debtor himself.
Petition by the creditor may be filled only in following

  • Debt should be at least for Rs. 500/- or more

  • Within three months of petition, an act of insolvency should
    be done by debtors.

After filing the petition, the competent court will fix date of
hearing and then it may declares that the debtor is insolvent or
not. If insolvency of a person starts from an earlier date, and
not from the date of adjudication passed by the court. This is
known as Doctrine of Relation Back.

Under Presidency Towns Act, to conduct the insolvency
proceedings, an official is appointed by the court is known as
Official Assignee and in case of Provincial Insolvency
Act, known as Official Receiver. The property of the
insolvent vests in the official assignee or receiver to realize
the assets and distribute the sale proceeds of the assets in the
manner given below −

  • Secured creditors will be paid in full.

  • Remuneration and expenses of the official receiver.

  • To Preferential Creditors.

  • To unsecured creditors + partly secured creditors to the
    extent remain un-secured.

The Order of Discharge

Order of discharge is an order issued by the court of law to the
insolvent. Normally, this order releases the insolvent from all
current and provable debts and liberates him from the legal
obligations imposed on as insolvent. The order of discharge is
issued on the basis of the report submitted by the official
receiver and on the application of the insolvent.


An interest @ 6% pa will be paid to the creditors for the period,
after the order of adjudication, if, any surplus remains, after
full payment to the creditors.

Voluntary Transfer

As per the Presidency Towns Insolvency Act, any property
transferred by the insolvent without any consideration during the
two years preceding the order of adjudication shall be void.
Under the Provincial Insolvency Act, such transfer became
inoperative, if made with two years of petition of the insolvency
except followings −

  • For consideration of marriage and made before and
  • To purchase valuable consideration in good faith.

Insolvency Law

The Insolvency Act in India is based on English Bankruptcy Act
and following two acts are applicable on the Indian Territory −

  • The Presidency Towns Insolvency Act, 1909 − Applicable
    to Mumbai, Kolkata, and Chennai.

  • The Provisional Insolvency Act, 1920 − Applicable to
    the rest of India except Mumbai, Kolkata, and Chennai.

Above Insolvency Acts are applicable to any Individual,
Partnership Firm, and Hindu Undivided Family only. Companies Act,
1956 applies to Joint stock companies and the term liquidation is
used instead of Insolvency. In case of insolvency, a person is
not able to pay his liabilities but in case of liquidation,
company may be liquidated even it has the sufficient amount to
pay its liabilities.

Insolvency Accounts

Under the Presidency Towns Insolvency Act, insolvent has to
submit following documents to the court of law −

  • Statement of Affairs as on date of order and
  • Deficiency Account.

No provision, for the submission of a Statement of Affairs under
Provincial Insolvency Act. The form of Statement of Affairs as
prescribed by the rule made under Presidency Towns Act is given
below −

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

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

Less: Estimated value of Securities

Less: Amount thereof carried to List

Balance thereof contra

Partly secured creditors as per List

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.

  • Cash at Bank

  • Cash in hand

  • Cash deposited with solicitor for cost
    of petition

  • Stock in trade

  • Machinery

  • Trade Fixture, Fitting, Utensils,

  • Furniture

  • Life Insurance Policies

  • Other property

Book debts as per list F, viz.




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

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




Just like Balance sheet, the statement of affairs is divided in
to two part of Assets and Liabilities and liabilities of the
insolvent are classified as −

Unsecured Creditors as per List A

Trade creditors, stridhan ornament and personal belongings
etc. of lady) of Mrs., bills payable, bank overdraft, partly paid
shares held, uncompleted contracts guarantees given for others,
etc., wages, rent, salaries, etc.

Loan from Wife

Loan taken from wife is usually treated like any other loan taken
and makes wife creditor of the insolvent. In case, it is proved
that loan is paid by wife out of amount received from insolvent,
then be treated as the capital of insolvent.


@ 6% interest will be paid to the creditors after the date of
adjudication, if there is a sufficient balance left after the
payments to creditors.

Fully Secured Creditors as per List B

The creditors who have sufficient securities against their claims
will be included in this list 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

Partly Un- secured Creditors as per List C

Un-paid or 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

Following creditors comes under the category of preferential
creditors and such creditors get preference over the un-secured

As per the law, following creditors come under category of the
preferential creditors −

  • Government and local authority.

  • Salary and wages for the service rendered for four months
    preceding the date of the presentation of the insolvency

  • Under Presidency Town Insolvency Act, one month rent comes
    under the category of preferential creditors, but rent is not
    at all comes under the preferential creditors category as per
    the Provincial Insolvency Act.

The assets as shown in the statement of affairs of insolvent are
classified into the four categories as follows −

  • Property as per List E − Other than the bills
    receivable in hand and the assets as kept by creditors as
    fully and partly secured debts are comes under this list.

  • Property as per List F − Following are the three
    categories of book debts −

    • Good

    • Doubtful Debts

    • Bad

  • Assets as per List G − Bills of exchange and other
    similar securities comes under this list.

  • Deficiency Account as per List H − As name suggests,
    deficiency account means the deficiency, which the insolvent
    debtor is not able to pay.

Important Points in Preparation of Statement of Affairs

  • In case of an individual insolvent, no distinction will be
    made between the private assets and the business assets while
    preparing a Statement of Affairs. Personal assets are
    included in the Statement of Affairs to pay the business
    liabilities. In case of partnership firm, after paying
    personal liabilities from the personal assets of the partner,
    surplus if any, may be included in the statement of affairs
    of Partnership firm to pay the business liabilities.

  • Value exceeding Rs. 300/- of tools, wearing apparel, bedding,
    cooking utensils, etc. will be included in the statement of
    affairs under the Presidency Towns Insolvency Act. Assets, as
    pledged against secured and partly secured creditors, may be
    shown in the statement of affairs only, if, became surplus
    after paying the fully and partly secured creditors.

  • Fully secured assets are not shown in the ‘expected to rank’

  • Partly secured assets after paying partly secured debts will
    be shown in the column of ‘expected to rank.’

  • The bills discounted to be dishonored are included in the
    un-secured creditors as per the list A.

Difference between Balance Sheet and Statement of Affairs

Following are the main differences between Balance Sheet and
Statement of Affairs −

  • The value of assets is shown as books value as well as
    releasable value in the statement of affairs; however, it is
    shown as only book value as in the case of Balance sheet.

  • In the Statement of Affairs, prepaid expenses and goodwill
    are not included, whereas all fictitious assets are included
    in the Balance sheet.

  • Statement of Affairs does not include capital, drawings,
    profit, or loss, interest on capital, whereas Balance sheet
    includes all such items.

  • Balance sheet does not show the amount of deficiency as shown
    in the Statement of Affairs.

  • Balance sheet is prepared at the end of accounting period,
    whereas Statement of Affairs is prepared on the date on which
    order of adjudication is passed.

  • Statement of affairs is prepared as per the rule of
    Insolvency Act, whereas Balance sheet is a routine work to
    maintain the accounting record.

  • Balance sheet of a firm does not include personal assets and
    liabilities, whereas Statement of Affairs includes the same
    as discussed above in this chapter.

  • Statement of Affairs includes contingent liabilities, whereas
    in the Balance sheet, contingent liabilities are shown as
    footnote only.

Deficiency Account (List H)

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.

  • Interest on capital

  • Excess of private assets over private

  • Profit on realization of any

Deficiency as per statement of

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,

House hold expenses (Drawings)

Other Losses −

  • Loss on realization of Assets

  • Loss through dishonor of discounted

Speculation losses

Losses through betting

Excess of private liabilities over private
assets, etc.

From the above, it is clear that debit side of the deficiency
account shows capital account and credit side of the deficiency
accounts shows losses and drawing and the difference of two sides
is a deficiency as shown in the Statement of affairs Account.

Insolvency of Partnership Firm

Insolvency of the partnership firm differs from the insolvency of
any individual or HUF (Hindu undivided family). The assets of an
individual are used to pay the business liabilities, but in case
of partnership firm, assets of the partners are used to pay his
personal liabilities first, and then balance, if any, may be
utilized to pay the business debts. After paying the personal
debts of a partner, surplus assets will appear in the Statement
of Affairs and will be shown as “Property as per List E.”

In case, if personal asset of a partner is in possession of any
creditor as security, still such creditor will get his dues first
as unsecured creditor from the firm and then for the balance
amount, he may sell the property, owned by him to recover his

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