INSOVENCY IN LAW OF TORTS

Subject - LAW OF TORTS - I

Submitted to – Ms. Ruhi Paul

Submitted by – Jasween Singh Gujral

Roll no. – 2008 - 27

B.A.LL.B (Hons.)

1st year, 1st semester

National law University, Delhi

ii

Table of contents

Page no.

List of Cases (iii)

List of Statues (iv)

List of Abbreviation (v)

Chapter I: Introduction 1-2

1.1 General description

1.2 Definition of a tort

1.3 Purposes of torts

List of Cases

iii

Page no.

Beckham v. Drake 8, 9

Defries v. Milne 8

Compania Columbiana de Seguros v. Pacific Steam Navigation Co. 8

Dawson v. Great Northern and City Railway Co. 8

Guy v. Churchill 8

Howard v. Crowther 7

Hodgon v. Sidney 7

King v. Victoria Insurance Co. Ltd. 8

Miller v. Jackson 6

Seear v. Lawson 8

Wilson v. United Counties Bank Ltd. 7, 9

List of Statues

iv

Bankruptcy Act 1914 s 30(1)

Re Wilson, ex P Vine [1878] ChD. 364, CA

Ex p Mumford [1808] 15 Ves 28, 33 ER 763.

Provisional Insolvency Act, 1920.

Presidency Towns Insolvency Act, 1908.

The Companies Act, 1956.

v

List of Abbreviations

v. Versus

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CHAPTER I

INTRODUCTION

An efficient insolvency system is an essential part of a nation’s financial architecture,

and is needed to encourage enterprise, underpin investment and economic growth and create

wealth. It helps in creating a sound climate for investment, enable market participants to more

accurately price, manage and control default risks and corporate failure, and encourage sound

credit practice. It is vital to the stability in commercial relationships and financial systems,

advance important social objectives of maintaining public confidence in the corporate and

financial sectors and promote sustainable growth in the private sector. It promotes

responsible corporate behaviour by encouraging higher standards of corporate governance,

including financial discipline, to avoid consequences of insolvency; preserve employment

through an effective system for rehabilitating financially distressed but viable enterprises,

while assuring maximum play in a fair reallocation of assets to more efficient market users

through efficient liquidation system.

With the globalisation of the economy, the issues relating to corporate insolvency

have assumed greater significance and a need has been felt for long for bringing about

reforms in this branch of law. Moreover, with the Indian economy having been opened up for

investment by foreign creditors and, internationally, the Indian corporate also making

investments in companies outside, the realm of cross-border insolvency law has multiplied

colossally.

A tort in common law is a civil wrong for which the law provides a remedy. The

origins of the modern law of torts lie in the old remedies of trespass and trespass on the case.

The term itself comes from Law French and means, literally, 'a wrong' (avoir tort = "to be

wrong" or "to have wronged [somebody]"). The equivalent body of law in civil law legal

systems is ‘delict’.

A tort is a breach of a non-contractual duty potentially owed to the entire world, imposed by

law. The majority of legal claims are brought in torts.

1.1 General description

Tort law is distinguished from the law of contract, and the criminal law. Contract law

protects expectations arising from promises, restitution prevents unjust enrichment, and

criminal law punishes wrongs that are so severe (like murder) that the sovereign

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(goverrnment of State) has a direct interest in preventing them. Note that many wrongs can

result in liability to both the state (as crimes) and to the victim (as torts).

Tort law serves to protect a person's interest in his or her bodily security, tangible

property, financial resources, or reputation. Interference with one of these interests is redress

able by an action for compensation, usually in the form of unliquidated damages. The law of

torts therefore aims to restore the injured person to the position he or she was in before the

tort was committed (the expectation or rightful position principle).

1.2 Definition of a tort

In his famous treatise, Handbook of the Law of Torts, William Prosser defined "tort" as "a

term applied to a miscellaneous and more or less unconnected group of civil wrongs other

than breach of contract for which a court of law will afford a remedy in the form of an action

for damages."

Besides damages, in a limited range of cases, tort law will tolerate self-help, for example,

using reasonable force to expel a trespasser. Further, in the case of a continuing tort, or even

where harm is merely threatened, the courts will sometimes grant an injunction to restrain the

continuance or threat of harm.

1.3 Purposes of torts

The main purposes of law of torts is

1. Indemnification of losses.

2. Protection of Rights.

3. Deterrence

4. Loss distribution.

The law of torts determines whether a loss that befalls one person should or should not be

shifted to another person. Some of the consequences of injury or death, such as medical

expenses incurred, can be made good by payment of damages. Damages may also be paid, for

want of a better means of compensation, for non-pecuniary consequences, such as pain.

In "The Aims of the Law of Tort" (1951) Glanville Williams saw four possible bases on

which different torts rested: appeasement, justice, deterrence and compensation. The law

tends to emphasise different aims in relation to intentional torts from those in relation to

negligence or strict liability. After Williams' article, there grew up a school of economic

analysts of law who emphasized incentives and deterrence.

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CHAPTER II

Capacity

Under the Common law, a convicted person, in spite of his imprisonment, retains all civil

rights which cannot be taken away expressly or by necessary implication.1 In the law of torts,

every person has a capacity to sue and to be sued in tort. There are some variations to this

rule in case of certain persons and their position has, therefore, been specifically discussed in

the following cases:

1. Act of State – how far is state vicariously liable for the torts of its servant.

2. Corporations.

3. Minor

4. Independent and joint tortfeasor (Composite Tortfeasor)

5. Insolvency

3.1 Act of State:

The rudimentary principle of Common law is that King cannot do wrong. As we all know

that we have inherited the principles of Common law in our legal system, therefore, it can be

construed that the act of state done within the sovereign power in relation to another State or

subjects of another State is an Act of State and cannot be questioned.2

3.2 Corporations

A company or corporation is a separate person, created in the eyes of law and has its own

distinct entity from those incorporating it. It acts through its agents or servants and as such its

liability is always vicarious for the acts done by other persons. A corporation could,

therefore, be held liable, not only for trespass, libel, trover, conversion or negligence, but also

for prosecution or fraudulent misrepresentation or deceit.

3.3 Minor

A minor, under the law of torts, has a right to sue like an adult with the only procedural

difference that he cannot himself sue but has to bring an action through his next friend

(Paremts, guardians). A next friend is a person who acts on behalf of a minor or a disabled

person.

1 Ratanlal and Dhirajlal, THE LAW OF TORTS, p 33; Raymond v. Honey (1982) 1 All ER, p.7592 R K Bangia, LAW OF TORTS, Allahabad publication.

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3.4 Independent and joint tortfeasor

In cases when two or more persons commit some tort against the same plaintiff, they can be

sued as either independent tortfeasors or joint tortfeasors. When two or more persons, acting

independently, concur to cause single damage, they are known as independent tortfeasors.

And when a tort is jointly committed, they become joint tortfeasors. In India, the

distinction between joint and independent tortfeasors is not as it is recognised in England.

When two or more persons commit a tort, they have been termed as Composite tortfeasors.

The rule in England was considered as devoid of the basic principle of equality that there

should be an equality of burden and benefit.

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CHAPTER III

INSOLVENCY

While studying the concept of insolvency, one must first understand the meaning of the word

‘insolvent’ and ‘receiver’ or ‘official assignee’.

Insolvency in general terms can be defined as 1) the condition of having more debts

(liabilities) than total assets which might be available to pay them, even if the assets were

mortgaged or sold. 2) a determination by a bankruptcy court that a person or business cannot

raise the funds to pay all of his/her debts. The court will then "discharge" (forgive) some or

all of the debts, leaving those creditors holding the bag and not getting what is owed them.

The supposedly insolvent individual debtor, even though found to be bankrupt, is allowed

certain exemptions, which permit him/her to retain a car, business equipment, personal

property and often a home as long as he/she continues to make payments on a loan secured

by the property.

Receiver:

1) is a neutral person (often a professional trustee) appointed by a judge to take charge of the

property and business of one of the parties to a lawsuit and receive his/her rents and profits

while the right to the moneys has not been finally decided. Appointment of a receiver must be

requested by petition of the other party to the suit, and will only be authorized if there is a

strong showing that the moneys would not be available when a decision is made. The funds

are held for the prevailing party. 2) a person appointed to receive rents and profits coming to

a debtor either while a bankruptcy is being processed or while an arrangement is being

worked out to pay creditors, so that funds will be paid for debts and possibly available for

distribution to creditors.

The receiver is appointed by the process of receivership, performed by the court to

take custody of the property, business, rents and profits of a party to a lawsuit pending a final

decision on disbursement or an agreement that a receiver control the financial receipts of a

person who is deeply in debt (insolvent) for the benefit of creditors. Thus, the term "the

business is in receivership."

As regard torts committed against an insolvent, a distinction is to be drawn between

tort committed against the person and tort committed against property. A right of action

passes to the official assignee or receiver if the action is exclusively in respect of a tort,

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resulting in injury to an insolvent’s property. A right of action in respect of a tort exclusively

to a person, reputation or feelings of the insolvent, such as an assault or defamation3 and

seduction of a servant4, remains with the insolvent and the official assignee or receiver cannot

intercept the proceeds so far as they are required for the maintenance of the insolvent or his

family. Where a tort causes injury to both the person and property of the insolvent, the right

of action will be split, and will pass, so far as it relates to the property, to the official assignee

to receiver , and will remain in the insolvent so far as it relates to his person5. In such a case,

either the cause of action is divided between him and the trustee or mat be joined in one

action, in which case damages will be assessed under two separate heads.6.

A right to sue in tort is not generally assignable7. The law is interested in preventing

rights of action in tort from being a marketable commodity. An assignment of property is

valid, even though that property is incapable of being of being recovered without litigation. 8

It has been held that a trustee in bankruptcy can assign causes of action arising out of contract

or equity relating to interests in land.9

The damages to be recovered in an action in tort, as distinct from the cause of action itself,

may be assigned, and the plaintiff mat transfer the right to any damages recovered in a

pending action to another, but of course must continue to bring the action to another, but of

plaintiff’s insurers have paid a claim made u him in respect of circumstances which afford

him a cause of action in tort against another, and in consideration of the settlement of that

claim on the insurance policy, the consideration the insurers have taken an assignment of the

right to sue in tort, they may maintain that suit.10This concession to commercial convenience

did not in fact have a valid claim on the policy, provided that the settlement by the insurers of

his claim was a bona fide transaction.11

Liability

The Bankruptcy Act 191412 provides that demands for unliquidated damages

otherwise than by reason of contract, promise or breach of trust are not provable against the

3 Howard v. Crowther (1841) 8 M& W 601, 151 ER 1179. 4 Hodgon v. Sidney (1866) LR 1 Exch313.5 Bekham v. Drake (1849) 2 HL Cas 579 at 632, 9 ER 1213.6 Wilson v. United Counties Bank Ltd. (1920) AC 102, HL.7 Defries v. Milne [1913] 1 Ch 98 at 109, CA, per Farwell IJ.8 Dawson v. Great Northern and City Railway Co. [1905] 1 KB 260 at 271, CA, per Striling LJ.9 Seear v. Lawson [1880] 15 ChD 426, CA; Guy v. Churchill [1884] 40 ChD 48110 King v. Victoria Insurance Co. Ltd. [1896] AC 250, PC; Compania Columbiana de Seguros v. Pacific Steam Navigation Co.11 King v. Victoria Insurance Co. Ltd. [1896] AC 250, PC12 Bankruptcy Act 1914 s 30(1)

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trustee13. The bankrupt remains liable to be sued for his tort, even after his discharge, so the

facts give rise to a claim for unliquidated damages in both tort and contract, the claim is

provable against the trustee as a claim contract.14

Power to sue

Where the tort protects only a purely personal interest, for example, assault or

slander15 the bankrupt retains the right to sue, and the claim does not pass to the trustee for

the benefit of creditors. Where the purpose of the tort is to preserve property, for example

with an action of recovery of land, the cause of action passes to the trustee.

If there are two separate causes of action in the sense that two different actions may

be brought in respect of them16, one of which personal, for example, in respect of damage to

business interests, the personal right remains with the bankrupt and the proprietary one vests

in the trustee.17 Those rights of action are given in respect of the immediate and present

violation of the possession of the bankrupt, independent og his rights to property, and are an

extension of the protection given to his person; further, the primary personnel injury to the

bankrupt is the principal and essential cause of action.18

13 If the claim have been liquidated before the bankruptcy, the plaintiff can prove it in the bankruptcy: Ex p Mumford [1808] 15 Ves 28, 33 ER 763.14 Re Great Orme Tramways Co [1934] 50 TLR 450. See also [205] limitation of actions. 15 Re Wilson, ex P Vine [1878] ChD 364, CA16 Re Wilson, ex P Vine [1878] ChD 364, CA17 Wilson v. United Countries Bank Ltd. [1920] AC 102 at 131, HL, per Lord Atinkson; cf Re Kavanagh (a bankrupt) [1950] WN 15, CA (the fullest report)18 Beckham v. Drake (1849) 2 HL Cas 579 at 612, 9 ER 1213 Cresswell J.

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CHAPTER IV

CORPORATE INSOLVENCY LAWS IN INDIA

The stream of insolvency laws may be segregated chiefly under two heads: personal

insolvency, which deals with individuals and partnership firms governed by Provisional

Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908 and corporate insolvency,

whose consequence is winding up of the company under the Companies Act, 1956.

In the process of liberalisation, deregulation and adopting market economy, India is

experiencing a massive growth of retail loans to individuals, housing loans and credit card

users. On account of phenomenal rise in retail lending it will be necessary in the near future

to give a re-look at the personal insolvency laws to ensure that any insolvency proceedings

against individuals are also expeditiously decided.

However, the basic tenets of corporate insolvency may be classified as:

Restoring the debtor company to profitable trading where it is practicable;

To maximise the return to creditors as a whole where the company itself may not be

saved;

To establish a fair and equitable system for the ranking of claims and then distribution

of assets among creditors, involving a redistribution of rights;

To provide a mechanism by which the causes of failure may be identified and those

guilty of mismanagement brought to book;

Placement of the assets of the company under external control;

Substitution of collective action for individual pursuits;

Avoidance of certain transactions and fraudulent conveyances, dissolution and

winding up etc.

In context of corporate laws, the word ‘insolvency’ has neither been used nor defined.

However, s. 433 (e) covers a company, which is ‘unable to pay its debts’, and thus constitutes

a ground for winding up of the company. Inability to pay its debts would be a case where, a

company’s entire capital is lost in heavy losses and no accounts are prepared and filed and no

business is done for one year. In such circumstances, the registrar of companies makes out a

case of inability to pay debts. These debts however, would only include debts, incurred after

the legal. Incorporation of the company. Inability to pay debts has even been amplified in s.

434 wherein, a creditor with a due of Rs. 500 or more serves a demand by registered post and

the company neglects to pay, secure or compound the same in three weeks, in cases where the

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execution of a decree returned unsatisfied and also where the court is otherwise satisfied that

the company is unable to pay its debts.

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Bibliography

Books –

R K Bangia, LAW OF TORTS, 21st ed.(2008), Allahabad law agency

Halsbury, LAWS IN INDIA, 29(1) torts, Butterworths publications.

Justice G P Singh, THE LAW OF TORTS, 25th ed.(2008), Wadhwa &Company Nagpur

Sumant Batra,1st ed., (2002). AN OVERVIEW OF THE NEW INDIAN INSOLVENCY

BILL.

Reports -

V.B. Balakrishna Eradi. J., Committee Report.

Stewart, UNCITRAL Model Law and Cross-Border Insolvency, conference on

Legal Aspects of Cross-Border Insolvency.

Internet-

http://en.wikipedia.org/wiki/Tort#Liability.2C_defenses.2C_and_remedies – As on 19th

Nov’08

www.lawguru.com As on 19th Nov’08

http://dictionary.law.com/default2.asp?

searched=insolvent&type=1&submit1.x=&submit1.y=&submit1=Look+up As on 30th

Nov’08