Bankruptcy for Individuals and Partnership firms | IBC

Topics covered in this article are as follows:

1. Background

1.1 Overview of the provisions

2. Adjudicating Authority

2.1 Powers of Adjudicating Authority (DRT)

2.2  Period of moratorium to be excluded for purpose of limitation

3. Civil court not to have jurisdiction

4. Appeal against order of DRT

5. Appeal to Supreme Court

Note: To view Amended, Updated & Annotated Insolvency and Bankruptcy Code 2016 [as amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021], refer to [14th Edition] of Taxmann's Insolvency & Bankruptcy Law Manual

1. Background

Part III of Insolvency and Bankruptcy Code, 2016 (Insolvency Code, 2016) [sections 79 to 187] deal with provisions relating to Bankruptcy for Individuals and partnership firms.

These provisions will replace Present Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.

The provisions in the Insolvency Code in respect of insolvency resolution and Bankruptcy for Individuals and partnership firms have been notified and made effective from 1-12-2019 only for personal guarantors of corporate debtors (not for other individuals and partnership firms).

These provisions have not been made applicable to other individuals and partnership firms (position as in May, 2021).

Provisions of bankruptcy was made applicable to personal guarantors of corporate debtors w.e.f. 23-11-2017 – Section 2 of Insolvency Code was amended w.e.f. 23-11-2017 to provide that the Code will apply to personal guarantors of corporate guarantors as a category different from individuals.

The intention was make the provisions relating to Insolvency Resolution and Bankruptcy for individuals and partnership firms (part III of Code) applicable to personal guarantors even if the part III was not made applicable immediately to other individuals and partnership firms.

The provisions could apply when recovery from personal guarantor was possible. However, there was no provision where the personal guarantor himself required insolvency resolution or bankruptcy process. Now, these provisions have been made w.e.f.
1-12-2019.

1.1 Overview of the provisions

Part III of Insolvency Code, 2016 deals with insolvency resolution and liquidation for individuals and firms. For individuals and firms, there are two distinct processes – fresh start and insolvency resolution. These are followed by bankruptcy order.

Debt Recovery Tribunal (DRT) will be adjudicating authority and DRAT will be appellate authority for individuals and firms.

The ‘fresh start’ will apply to individuals whose income is below
Rs. 5,000 per month and debt amount does not exceed Rs. 35,000. In their case, work of insolvency resolution will be handled mostly by ‘insolvency professional’. Appellate Authority (DRT) will have only supervisory role.

This amount is so meagre that there will be very few individuals who will be eligible and in fact, for them, even this process is beyond their means.

In case of other individuals and firms, the process is similar to that applicable to corporate persons.

The process will be handled by ‘resolution professional’ under supervision of ‘Adjudicating Authority’.

Insolvency Resolution Process will be initiated. Efforts will be made to finalise ‘repayment plan’ with concurrence of debtor and committee of creditors.

If the efforts succeed and repayment plan is successfully implemented, the individual or firm will get a discharge order.

If efforts fail, the person will be declared ‘bankrupt’. The resolution professional will take over estate of the bankrupt. He will sell or dispose it off and satisfy repayments of creditors to the extent possible.

After that, the bankrupt will get a ‘discharge order’.

The discharge order will be registered with Board (IBBI) in a register maintained under section 196 of Insolvency Code, 2016.

2. Adjudicating Authority

In relation to insolvency matters of individuals and firms, the Adjudicating Authority shall be the Debt Recovery Tribunal (DRT) having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business
or personally works for gain – section 179(2) of Insolvency Code, 2016.

“Adjudicating Authority” means the Debt Recovery Tribunal constituted under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 – section 79(1) of Insolvency Code, 2016.

However, in case of personal guarantors to corporate debtors, NCLT will be ‘adjudicating authority’ as per section 60 of Insolvency Code.

2.1 Powers of Adjudicating Authority (DRT)

The Debt Recovery Tribunal shall have overriding jurisdiction to entertain or dispose of – (a) any suit or proceeding by or against the individual debtor (b) any claim made by or against the individual debtor (c) any question of priorities or any other question whether of law or facts, arising out of or in relation to insolvency and bankruptcy of the individual debtor or firm under this Code – section 179(2) of Insolvency Code, 2016.

Firm – “Firm” means a body of individuals carrying on business in partnership whether or not registered under section 59 of the Indian Partnership Act, 1932 (9 of 1932) – section 79(16) of Insolvency Code, 2016.

Claim – “Claim” means— (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, un-matured, disputed, undisputed, secured or unsecured – section 3(6) of Insolvency Code, 2016 [definition notified and effective from 1-11-2016].

2.2  Period of moratorium to be excluded for purpose of limitation

While computing the period of limitation specified for any suit or application in the name and on behalf of a debtor, the period during which there was moratorium shall be excluded – section 179(3) of Insolvency Code, 2016.

3. Civil court not to have jurisdiction

Civil court or any authority shall not have jurisdiction to entertain any suit or proceedings in respect of any matter on which DRT or DRAT have jurisdiction under Insolvency Code, 2016 – section180(1) of Insolvency Code, 2016.

No injunction shall be granted by any court, Tribunal or authority in respect of any action taken, or to be taken, in pursuance of any power conferred on DRT or DRAT under the Insolvency Code, 2016 – section180(2) of Insolvency Code, 2016.

4. Appeal against order of DRT

Appeal against order of DRT shall be filed with DRAT (Debt Recovery Appellate Tribunal) within 30 days. This period can be extended by further 15 days by DRAT if sufficient cause is shown – section 181 of Insolvency Code, 2016.

5. Appeal to Supreme Court

An appeal from an order of DRAT can be filed before Supreme Court within 45 days only on question of law. This period can be extended by further 15 days by Supreme Court if sufficient cause is shown – section 182 of Insolvency Code, 2016.

Continue Reading: 

1. Background of the Insolvency & Bankruptcy Code
2. Insolvency Resolution of Corporate Persons
3. Conducting Corporate Insolvency Resolution Process
4. Liquidation process for Corporate Persons
5. Realisation and Distribution of Assets by Liquidator
6. Adjudicating, Appeals and Penalties for Corporate Persons