Ajay Sharma

VII”B”
1177
Bankruptcy for individual and Partnership Firms :- Initiation of Insolvency Resolution
Process, Interim Moratorium and its effect, Appointment of Resolution Professional,
Report of the Resolution professional, Admission/Rejection by the Adjudicating Authority.

Introduction

Part III of the Insolvency and Bankruptcy Code, 2016 (code) deala with provisions relating to
Bankruptcy for Individuals and partnership firms. These Provisions will replace Present
Presidency Towns Insolvency Act and Provincial Insolvency Act, 1920. These provisions are not
notified and not effective (as of October 2018). Part II of Insolvency Code 2016 deals with
insolvency resolution and liquidation for individuals and firms. For Individuals and firms there
are two distinct process – fresh start and insolvency resolution. These are by bankruptcy order. In
this process Debt recovery Tribunal (DRT) will be adjudicating authority and Debt Recovery
Appellate Tribunal (DRAT) will be appellate tribunal for individual and firms.

The fresh start will apply to individuals whose income is below Rs. 5000 per month and debt
amount does not exceed Rs. 35000. In their case, work of insolvency resolution will be handled
mostly by insolvency professional. Appellate authority will have supervisory role. This amount
is so meager that there will be eligible and in fact for them even this process is beyond their
means. In case of other individual and firms the proves is similar to that applicable to corporate
persons. This process will be handled by resolution professional under the super vision of
Adjudicating Authority. Insolvency Resolution Process will be initiated. Efforts will be made to
finalize repayment plan with concurrence of debtor and committee of creditor. If the efforts
succeed and repayment plan is successfully implemented the individual or firm will get a
discharge order. If the efforts succeed and repayment plan is successfully implemented, the
individual or firm will get a discharge order. If the 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 creditor to the extent possible. After that the bankrupt
will get discharge order. The discharge order will be registered with the Insolvency Bankruptcy
Board of India in a register maintained under section 196 of Insolvency Code, 2016.
Current laws which deal with individual and Partnership firm insolvency and Bankruptcy

In India there are two Acts that govern the bankruptcy for individual and partnership firm first
one is Presidency Towns Insolvency Act, 1909 (PTIA) which is applicable in Mumbai, Chennai
and Kolkata, while for the rest of the country there is another law which is Provincial Insolvency
Act, 1920 (PIA), Both the laws are more or less same except some minor changes in procedure.

The first step necessary to initiate insolvency proceeding against and individual or partnership
firm is to prove that the individual or firm had committed an “act of insolvency”. A rough idea of
this expression is that he has done an act which shows that in all probability he shall not be able
to pay his debts. This requirement is designed as a natural check upon frivolous insolvency
proceedings. The following acts are regarded as “act of insolvency”. 1 Section 11 of PTIA and
Section 8 PIA deals with the “who can be adjudged insolvent” it cover those entire person who
has committed an act of insolvency and is subject to the jurisdiction of the court.

To initiate an insolvency proceeding under the above-mentioned Acts, the petition may be
presented by the debtor or creditor if the debtor commits an act of insolvency. The Court may
make an order adjudging him an insolvent. This order is called an order of adjudication. The
presentation of a petition by the debtor himself is itself an act of insolvency and that gives
jurisdiction to the court adjudge him an insolvent. However the PTIA provides certain condition
which should have fulfilled by the debtor before filling an insolvency petition. Both the Acts
have been given procedure which shall be followed by the parties before filling a petition. If the
petition fulfilled the criteria laid down in the acts then court fix the date for hearing. Once the
petition accepted the court imposed duties on the debtor like production all books of account etc.
On the day of hearing court decide whether the petition shall be accept or dismissed depend upon
the petition presented by the party before the court. If the court accepts the petition then the court
pass the order of adjudication and shall specify in the order the period within which the debtor
should apply for his discharge. Section 17 of PTIA and Section 28 of PIA deal with the effects of
order of adjudication. In simple term it says that on passing of an order of insolvency, the
property of the insolvent, wherever situate, shall be vested in the official assignee. The property
becomes divisible among his creditors2 and order for the meeting of creditors. Acts also contain

1
S. Vasudev v. Govt. of Karnataka, AIR 1999 Kant 74
2
State of Kerala v. R.V.S. Mani, 1995 2 Ker LT 568.
provisions related to the submission of scheme of arrangement, the debtor who has been
adjudged as an insolvent has a right to submit to the court a proposal for a composition in
satisfaction of his debts, or proposal for a scheme of arrangement of his affairs. 3 If the debtor try
to escape from the proceeding after the adjudication and creditor proves that then court can pass
the order for civil imprisonment. Both the laws also cover the provisions related to the annulment
of adjudication if the court finds some reason which shows that the debtor should not have been
declared an insolvent or the court cancels the order of adjudication. Court has power to discover
the property of the debtor and acquire it and use the same property for satisfied the claims of the
creditor.

Analysis of provisions under the Insolvency Bankruptcy Code, 2016

Initiation of Insolvency Resolution process

A creditor singly or jointly with other creditors can apply. They can apply through a resolution
professional also to the Adjudicating Authority for initiating an insolvency resolution process
against debtor – Section 95 of Insolvency Code, 2016. In relation to any partnership debt owed to
creditor, he can initiate insolvency resolution process against – (a) any one or more partners of
the firm, or (b) the firm [Section 95(2) of Insolvency Code, 2016] Application should contain
details as specified in section 95(4) of Insolvency Code, 2016. It should be in prescribed form
with fees. Copy of application should be given to debtor.4 In which the firm mentioned
application

If an application has been made against one partner in a firm any other application against
another partner in the same firm shall be presented in or transferred to the Adjudicating
Authority in which the first mentioned application is pending for adjudication. The Adjudicating
Authority may give such directions for consolidating the proceeding under the applications as it
thinks just.5

Interim Moratorium and its effect

3
Law of Insolvency, Avtar Singh, Fourth edition, Eastern Book Company.
4
Section 95(7) of Insolvency and Bankruptcy Code, 2016
5
Section 95(3) of the Insolvency and Bankruptcy Code, 2016
As soon as application is filed before Adjudicating Authority (DRT) (either by individual,
partners , creditors or insolvency professional) an interim moratorium shall commence on the
date of the application in relation to all the debts. This interim moratorium shall cease to have
effect on the date of admission of such application. During the interim moratorium period – (i)
any legal action or proceeding pending in respect of any debt shall be deemed to have been
stayed and (ii) the creditors of the debtor shall not initiate any legal action or proceedings in
respect of any debt.6

The interim – moratorium shall operate against all the partners of the firm as on the date of the
application, if application was in relation to firm – section 96(2) of the Code. The moratorium
shall not apply to such transactions as may be notified by the Central Government in consultation
with any financial section regulator.7

Appointment of Resolution Professional

Resolution professional will be appointed with approval of Board (IBBI) as per procedure
specified in Section 97 of the Code. The resolution professional shall be provided a copy of the
application for insolvency resolution process – Section 97 (6) of the Code. The resolution
professional can be replaced as per procedure prescribed in section 98 of the Code. The
resolution professional shall perform his functions and duties in compliance with the code of
conduct provided under Section 208 and 120 of the Code.

Report of resolution professional

The resolution professional shall examine the application for insolvency resolution process
within 10 days of his appointment. He will submit his report to the Adjudicating Authority
(DRT) recommending for approval or rejection of the application.8

If the application was filed by creditors under Section 95 of Code, he will ask debtor to prove by
evidence that the amount has been repaid to creditor.9 If the debt was registered with the
information utility, the debtor is not entitled to dispute the validity of such debt.10

6
Section 96(1) of the Insolvency and Bankruptcy Code, 2016
7
Section 96(3) of the Insolvency and Bankruptcy Code 2016
8
Section 99(1) of the Insolvency and Bankruptcy Code2016
9
Section 99 (2) of the Insolvency and Bankruptcy Code 2016
The resolution professional can seek such further information or explanation in connection with
the application from the debtor or the creditor or any other person. Such person from whom
information or explanation is shall furnish such information or explanation is shall furnish such
information or explanation within seven days of receipt of the request.11 The resolution
professional shall examine the application. After examination of the application for insolvency
resolution process, he will submit his report with reasons. He can also recommend that the
application may be treated as for fresh start if it was eligible under those provisions – Section
99(8) the resolution professional shall give a copy of his report to the debtor or the creditor, as
the case may be.

Admission or rejection of application by Adjudicating Authority

After submission of report by insolvency professional, the Adjudicating Authority (DRT) shall
pass an order either admitting or rejecting the application within fourteen days from the date of
submission of the report.12 If the Adjudicating Authority admits the application, he may, on the
request of the resolution professional, issue instructions for the purpose of conducting
negotiations between the debtor and creditors for arriving at a repayment plan.13 Copy of the
report of Adjudicating Authority finds that the application was made with the intention to
defraud his creditors or the resolution professional, he may record that the creditor is entitled to
file for a bankruptcy order under Chapter IV of Part III of Insolvency Code14

Conclusion

The Insolvency and Bankruptcy Code, 2016 has brought several changes in the current regime
which is a welcome step because the current regime does not provide any fixed time frame and
proper mechanism for the bankruptcy and insolvency proceedings for the individual and firms.
The code provides a proper adjudicating authority which is DRT and DRAT which are not there
in the current laws that would minimize the confusion and finish the matter early as compare to

10
Section 99(3) of the Insolvency and Bankruptcy Code 2016
11
section 99 (5) of the Insolvency and Bankruptcy Code 2016
12
Section 100(1) of Insolvency Code, 2016
13
Section 100 (2) of the Insolvency and Bankruptcy Code 2016
14
Section 100(4) of Insolvency and Bankruptcy Code 2016
the current regime. In the current laws there is no post like resolution professional but the code
provides the special role for the resolution professional. Previously there were many cases in
which either debtors or creditors have accused the receiver that he settles the debts partially and
there is no transparency but the code provides the solution of this problem. In simple term the
code provide the transparency and the adjudication of matter in the time bound manner for the
bankruptcy proceeding against the individual and firms. However the part III of the code has not
been notified yet due to several reasons.