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The provincial Insolvency Act, 1920, deals with the matters pertaining to insolvency in areas outside the presidency towns. As per this Act, the District courts have jurisdiction in matters pertaining to insolvency.

A debtor is said to have committed an act of insolvency in the following cases:

a. If he makes a transfer of all or substantially all his property to a third person, for the benefit of his creditors generally;

b. If he makes a transfer of his property to defeat or delay his creditors.

c. If he makes any transfer of his property, which would be void as fraudulent if he were adjudged as an insolvent.

d. If he departs or remains out of India with an intent to defeat or delay his creditors.

e. If he departs from his dwelling house or usual place of business or otherwise absents himself with intent to defeat or delay his creditors.

f. If he secludes himself so as to deprive his creditors of the means of communicating with him with intent to defeat or delay his creditors.

g. If any of his property has been sold in execution of the decree of any court for the payment of money.

h. If he petitions to be adjudged as an insolvent.

i. If he gives notice to any of his creditors that he has suspended payment of his debts.

j. If he is imprisoned in execution of the decree of any court for the payment of money.

k) If a creditor who has obtained a decree or order against a debtor for the payment of money, has served on him a notice, and the debtor has not complied with that notice within the period specified therein.

If a debtor commits an act of insolvency, an insolvency petition may be presented either by the creditor or by the debtor and the court may adjudge the debtor to be an insolvent.

A debtor is entitled to present an insolvency petition only if he satisfies the following conditions:
a. He should be unable to pay his debts and
b. His debts amounts to minimum five hundred rupees or
c. He is under arrest or imprisonment in execution of the decree of any court for the payment of any money or
d. an order of attachment in execution of such a decree has been made and is subsisting against his property.

After filing and admission of an insolvency petition, the court will issue notice to the respondents. The court while admitting an insolvency petition has the power to appoint an interim receiver for the property of the debtor or any part thereof and the interim receiver may take immediate possession of the property or part of the same.
 
The Court has the power to make interim proceedings against a debtor at the time of admitting an insolvency petition. These include:-
1) Ordering the debtor to give security for this appearance.
2) Order attachment of property in possession or under control of debtor.
3) Order a warrant for the arrest of debtor.

     The debtor shall on the admission of petition produce all books of  accounts, inventories of his property, list of creditors and debtors as may be required by the court.

In case of an insolvency petition presented either by the Creditor or the debtor, the court may dismiss the petition, if it finds suitable grounds for the same.If the court does not dismiss the petition, it shall make an order of adjudication and also shall specify in such order, the period within which the debtor shall apply for his discharge.

On the making of order of adjudication, the insolvent shall help in the realization of his property & distribution of proceeds among his creditors. The whole of the property of insolvent shall become divisible among creditors. An order of adjudication will be effective from the date of presentation of petition on which it is made.

DISADVANTAGES OF INSOLVENCY:
a.Social stigma to an insolvent.
b.Cannot become partner of a firm or director of a company.
c.Cannot enter into legal contracts.
d.The insolvent may not get credit until he is discharged.
e.Cannot contest elections or hold public offices.

In recent years many financial establishments not covered by the RBI Act 1934, have cropped up in various parts of India and especially Karnataka. Many of them received deposits from the public on the promise of high rates of interest and easy gains. Most of them have defaulted to return the deposits on maturity and thus cheated the public. Against this background the state of Karnataka enacted this piece of legislation.As per this act the government or the district Magistrate are empowered to attach properties of financial establishments on default of return of deposits. The district magistrate suo moto or on receipt of any complaint may cause investigation on fraudulent transaction done by a financial establishment.

The government may attach money or property acquired by a financial establishment or personnel assets of the promoters, partners, directors, managers etc of the said financial establishment if the government is satisfied that
a. the financial establishment has failed to return the deposit after maturity or on demand by depositors or
b.to pay interest or other assured benefits or
c. if the government is satisfied that such financial establishment is not likely to return deposits or to pay interest to the depositors.

After the attachment, such properties shall vest in the competent authority appointed by the government, who shall be an officer not below the rank of an assistant commissioner, pending further order from the special court. The competent authority shall within 30 days from the date of receipt of order apply to the special court for further order of attachment to make it absolute. The competent authority has vast powers in dealing with the assets under its custody.The Competent authority can even sell the movable and immovable properties of the Financial Establishment by Public auction or with the prior approval of the Special Court by private arrangements. Within 30 days from the date of its appointment, the Competent Authority shall assess the deposit liabilities and assets of the Financial Establishment and submit a report thereof to the special Court. It shall also issue notice to secured creditors and depositors to submit their claims with proper proof. The secured creditors and depositors shall submit their claim before the Competent Authority within 30 days from the date of notice. The Competent Authority shall thereafter make an application to the Special Court seeking permission to make payments to the depositors from out of the money realized.

If any Financial establishment fraudulently defaults any repayment of deposit on maturity along with any benefit, or fails to render service assured, every person responsible for the management of the business of such Financial establishment, shall on conviction be punished with imprisonment for a term which may extend to 6 years and with fine which may extend to one lakh of rupees and such Financial Establishment is also liable for a fine.For the purposes of this Act, the government may constitute one or more special courts. The Special court has vast powers regarding realization of assets and payment to the depositors. The acts of the competent authority are supervised and guided by the Special court. The special court has the powers to attach property malafidely transferred by the Financial Establishment.Any person, including the competent authority, if aggrieved by an order of the Special court may appeal to the high court within 30 days form the date of the order.