A creditor cannot have a debtor adjudged insolvent simply because a debt is unpaid. Section 21 of the Insolvency Act (Chapter 253) requires an act of insolvency.
Section 21(1) — the acts of insolvency
(a) the debtor, in the country or elsewhere, has (i) transferred his property to a trustee for the benefit of his creditors generally; or (ii) made a fraudulent conveyance, gift, delivery or transfer of his property or any part of it;
(g) the debtor has given or executed a fraudulent warrant of attorney or cognovit actionem, or done any equivalent act;
(l) the debtor has given or made any preference to a creditor that, if he were adjudicated insolvent, would be a fraudulent preference.
(b) the debtor has (i) departed the country; (ii) being out of the country, remained out of it; (iii) departed from his dwelling-house or otherwise absented himself; or (iv) begun to keep house.
(c) the debtor has filed in the prescribed manner a declaration admitting his inability to pay his debts;
(d) the debtor has presented a petition for adjudication against himself;
(j) the debtor consented at a meeting of his creditors to present a petition and has not presented it within 48 hours (or such further time as illness, distance or other sufficient cause requires);
(k) the debtor admits at a meeting of his creditors that he is unable to meet his engagements, or offers a composition of less than 100% in cash, and having been requested by a majority of the creditors present to present a petition, has not done so within 48 hours.
(e) an execution issued against the debtor for payment of not less than K100.00 has been levied by seizure, and the debtor has not bona fide satisfied the process within four days after the seizure;
(i) the debtor, having a sentence, judgement or decree of any court against him and being required by it to do so, has failed to satisfy it, or failed to point out to the officer charged with execution sufficient disposable property to satisfy it;
(h) the creditor presenting the petition has served a debtor’s summons for a sum of not less than K100.00, and the debtor has neglected to pay, secure or compound for it within the time specified in the summons, to the creditor’s satisfaction.
(f) after presentation of a petition against him, the debtor has paid, given or delivered to the petitioning creditor money or satisfaction or security so that the petitioning creditor may receive a greater percentage than other creditors;
(m) the debtor has been adjudged or declared bankrupt or insolvent in any court outside Papua New Guinea having jurisdiction in bankruptcy or insolvency, or has presented a petition to such a court praying adjudication against himself.
Under section 21(2), a debtor who has committed an act of insolvency is liable to be adjudicated insolvent on the petition of any creditor competent to present the petition.
Section 22 — the six-month rule
A person shall not be adjudged an insolvent on an act of insolvency that occurred more than six months before the presentation of the petition.
The same period governs relation back under section 45(1)(b): where several acts of insolvency are proved, the insolvency commences at the first of them committed within six months preceding the presentation of the petition.
So the six months does double duty. It limits which act may found the petition, and it fixes how far back the insolvency is deemed to reach — which in turn determines what the trustee’s title catches and which dealings are exposed under sections 75 to 79.
A creditor who learns of an old act of insolvency and delays loses it. The practical response is to serve a fresh debtor’s summons, since non-compliance with it is itself an act of insolvency under paragraph (h) and creates a new starting point.
Compared with the corporate test
| Insolvency Act — s 21 | Companies Act — s 335 |
|---|---|
| (h) neglect of a debtor’s summons for K100 or more | (a) failure to comply with a statutory demand |
| (e) execution for K100 or more levied by seizure and not satisfied within four days; (i) failure to satisfy a judgment or point out disposable property | (b) execution on a judgment debt returned unsatisfied |
| (k) offering a composition of less than 100% and failing to petition when asked | (d) a compromise put to a vote and not approved |
| (a), (b), (g), (l) — conduct defeating creditors | No equivalent — but see section 423 and section 321 |
| Nature — a list of acts, each of which must be proved | Nature — rebuttable presumptions of inability to pay debts |
The corporate test asks a single question — can the company pay its debts as they fall due? The personal test asks whether the debtor has done one of a defined list of things. A debtor who is hopelessly insolvent but has committed no act of insolvency cannot be petitioned against by a creditor; a debtor who is solvent but has absconded to defeat creditors can be.
Note also the low thresholds: K100 for paragraphs (e) and (h). And note that under section 350(3) of the Companies Act, an order for payment of money made against a director in a company liquidation is deemed to be an act of insolvency within the meaning of section 21(1) — a direct bridge between the two Acts.
Sources
- Insolvency Act (Chapter 253) — ss 21, 22, 23, 45, 75–79
- Companies Act 1997 — ss 321, 335, 350, 423
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.