Insolvency of Individuals and Partnership firms

The Insolvency and Bankruptcy Code 2016 recently completed its second anniversary successfully. In these two years, the harvests through the IBC process proved to be extremely satisfactory. The entire scenario of the debtor creditor relationship changed after the implementation of the Code.

After the enforcement of the Code, the creditors are not required to chase the debtor but it’s the debtor who chases the creditors. After the entry of the code, the NCLT has become a trusted forum with high credibility.

With the coming of Code into execution numerous cases commenced to be filed before NCLT due to NCLT became overcrowded and therefore seeing alarming situation the capacity of NCLT was further enhanced within due time and matter under this legislation were disposed off expeditiously in time bound manner.

The major points of difference between the insolvency proceedings of corporate persons and individuals & partnership firm is that the application by corporate persons is filed with NCLT whereas application by individuals & partnership firms is filed with DRT.

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.

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].

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.

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.

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.

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.

Debtor

The concerned debtor may by invoking Section 94 of the Code file an application for initiating insolvency proceedings in respect of himself. The application may either be submitted personally by the concerned debtor or through the resolution professional.

In the scenario where the debtor is a partner of a firm then in such a situation the concerned debtor may make an application for initiating insolvency proceedings with the approval of all or majority partners. While making application for initiating insolvency proceedings, the concerned debtor is required to comply with the perquisites thereafter he becomes eligible for making application for initiating the insolvency proceedings. The prerequisites that need to be complied prior to making an application are as follows:

• The debtor should not be an undischarged bankrupt;
• The debtor should be undergoing fresh start process in relation to his debts;
• No insolvency resolution proceedings should be in process in relation to the debts against the debtor;
• The debtor should not be undergoing bankruptcy proceedings
• No insolvency resolution proceedings should have been admitted during the preceding twelve months to be counted from the date on which a fresh application is filed for invoking insolvency resolution process.

By Creditor

A creditor for initiating insolvency resolution process in respect of individuals & partnership firm may make an application for the same either by himself, through a consortium with other creditors or through resolution professional. In the scenario where the debtor is a partnership firm then the creditor can make an application against either of the partners or the firm.

The application as made by the creditor(s) shall contain the required attachments as are prescribed in the Code. The creditor shall also furnish a copy of the application as filed to the debtor for hid reference. The creditor shall while making the application ensure that the application in the appropriate format as prescribed in the Code.

Interim Moratorium

On an application being filed by either of the aforesaid, an interim moratorium shall come into force from the date on which application for initiating insolvency proceedings is made and thereafter shall cease to have an effect on the date of admission of the application by DRT.

Appointment of Resolution Professional

The Resolution professional is the key person in the insolvency resolution process. He may be said to be the driver of the entire proceedings that fall within the ambit of the insolvency resolution process.

Pre-existing Resolution Professional

There may be scenarios where application for initiating insolvency resolution process is filed by the Resolution Professional on behalf of the debtor or creditor as the case may be. Under this state the adjudicating authority i.e. DRT shall direct the board (IBBI) to verify that as on date there is no disciplinary proceeding pending against the proposed resolution professional. The verification shall be directed to conducted by the board within a period of seven days from the date of receipt of application. The board shall on receipt of direction report its decision i.e. recommending appointment or rejection of resolution professional to the directing adjudicating authority within seven days of receipt of direction.

Fresh Appointment

In the cases where application for initiating insolvency proceedings is filed by the debtor or creditor without the involvement of resolution professional then in such situation the adjudicating authority shall direct the board to nominate a resolution professional who can drive forward the initiated insolvency resolution process. On receipt of the aforesaid direction, the board shall nominate a suitable resolution professional within a period of ten days. The board while nominating resolution professional shall verify that no disciplinary proceedings are currently pending against the proposed resolution professional.

The adjudicating authority shall via order appoint the resolution professional as recommended or nominated above to drive forward the insolvency proceedings. The appointed resolution professional shall be provided a copy of the insolvency resolution process application as received by the adjudicating authority from the debtor or creditor.

Submission of Report by Resolution Professional

On receipt of the application as filed initiating for insolvency resolution process, the appointed resolution professional shall examine the application as submitted by the debtor or creditor within a span of ten days to be counted from the date of his appointment. Once the submitted application has been examined the resolution professional shall then prepare a report thereby recommending his decision as to whether the submitted application should be admitted or rejected.

The resolutions professional may for arriving at decision ask the debtor to prove repayment of the debts that are being claimed to be unpaid by the creditors. The report as compiled by the resolution professional shall clearly highlight the reasons based on which the decision related to admission or rejection of submitted application is undertaken. The resolution professional shall furnish a copy of his report to the concerned debtor or creditor as well.

Decision of Adjudicating Authority

Once the adjudicating authority receives the report as submitted by the resolution profession, it shall thereafter within a period of fourteen days pass an order either admitting the application or rejecting the same as, as it feels appropriate. In the scenario where application, as submitted for initiating insolvency resolution process, is admitted by the adjudicating authority, then the adjudicating authority may vide instructions conduct negotiations between the debtor and creditors to finalize a repayment plan.

The adjudicating authority shall furnish a copy of its order admitting or rejecting the application; report of resolution professional as submitted to the adjudicating authority and application as initially submitted for initiating insolvency resolution process to the creditor within a period of seven days from the date of passing the aforesaid order.

Moratorium Period

On the application for insolvency resolution process being admitted by the adjudicating authority, a moratorium period shall come into force and thereafter it shall terminate at the end of one hundred and eighty day commencing from the date on which application for insolvency resolution process is admitted by the adjudicating authority or the date on which order is passed by adjudicating authority on repayment plan. The similar situation as that of interim moratorium shall prevail during the moratorium period in relation to the debtor as well as his pending legal actions and debts.

Public Notice and Inviting Claim from Creditors

The adjudicating authority shall after admitting the application for initiating the insolvency resolution process issue a general public notice within a period of seven days from the date of passing order for the sake of inviting claims form all the creditors’ within a period of twenty-one days from the date of public notice.

The aforesaid notice shall be published in one English and one vernacular language newspaper. The notice shall also be affixed in the premises of adjudicating authority and shall also be displayed on the website of the adjudicating authority.

Registration of Claims of Creditors

The resolution professional is the sole authority where the claims are required to be registered by the creditors. Forgetting the claim registered the creditors may use of the following medium of communication: electronic communication; courier; speed post or registered post. 

Preparation of List of Creditors

After the invitation and registration of claims received from creditors, the resolution professional shall collate a list of creditors based on the information received from application as filed by debtor for initiating fresh start process and claims received from creditors. The resolution professional shall make best efforts to draft the said list within thirty days from the date of notice.

Repayment Plan

The debtor shall in collaboration with the resolution professional draft a layout of repayment plan which shall contain a proposal to creditors to restructure their debts. The repayment plan shall also authorize or grant the resolution professional various powers like: carrying on business off debtor on his behalf; realization of assets of debtor and administration or disposal of assets of the debtor.

Resolution Professional’s Report on Repayment Plan

The resolution professional shall after successfully draft of repayment plan submit the same along with report to the adjudicating authority within a period of twenty one days to be counted from the last date of submission of the claims.

The report as drafted by the resolution professional shall also highlight the date; time and place of the meeting if there appears need to summon meeting of creditors. While fixing date of meeting it should be note that date of meeting should not be less that fourteen days and at the same time not more than twenty eight days to be counted from the date of submission of report. Also while booking calendar for convening meeting the convenience and availability of creditors shall also be taken into consideration.

Calling Meeting of Committee of Creditors

The resolution professional shall after preparation of his report on repayment plan call meeting of committee of creditors by issuing a prior notice in this regard atleast fourteen days in advance to the finalized date of meeting.

The notice of the aforesaid meeting shall be provided to all the creditors mentioned in the list of creditors as chalked out by resolution professional. The notice of the meeting shall incorporate within it the address of adjudicating authority to whom the repayment plan along with the report of resolution professional on repayment plan was served supported by required annexures.

Convening Meeting of Committee of Creditors

The meeting once called shall be conducted in accordance with the procedures and provisions as are highlighted in the Code. During the course of the convened meeting the creditors may vide their decision approve, modify or reject the repayment plan as drafted by the resolution professional.

In the convened meetings creditors shall be eligible to vote in proportion to the voting share as assigned to them. The proportion of voting share shall be determined by the resolution professional. The secured creditors shall also be eligible to participate and vote in the convened meeting.

Seeking Approval of Creditors on Repayment Plan

The approval of creditors is a must requirement for carrying on any business on behalf of the debtor. In this regard approval of majority of creditors representing three fourth in value of the creditors that were present in person or via proxy at the convened meeting of committee of creditors is a mandatory requirement for seeking approval of repayment plan or any subsequent modification in the repayment plan therein.

Report of Convened Meeting of Creditors 

Once the meeting of creditors has been duly convened for seeking approval of the creditors, it shall the duty of the resolution professional to compile a report of the duly convened meeting of the creditors. The report as compiled above shall include the minute-to-minute details of all decisions and discussion that were made during the convened meeting.

Decision of Adjudicating Authority on Repayment Plan

On receipt of the report of the duly convened meeting of creditors, the adjudicating authority shall thereafter vide its decision either approve or reject the repayment plan. The adjudicating authority shall form its decision on the basis of the report of the convened meeting of creditors as received by it from the resolution professional.

The decision of the adjudicating authority as passed shall also contain the directions for implementing the approved resolution plan. In the scenario where the repayment plan is approved by the adjudicating authority then the approved repayment plan shall be in effect as if it was proposed by the debtor and thereafter the plan shall be binding on the creditors as mentioned in the repayment plan and also on the debtor.

Implementation of Repayment Plan

The repayment plan once approved by the committee of creditors and adjudicating authority shall come into force and thereafter commence to be in implementation. On coming of the repayment plan into execution it shall be the sole responsibility of the resolution professional to monitor the implementation and execution of the approved repayment plan.

If any hindrances arise in the smooth execution of the repayment plan then the resolution professional is free to approach the adjudicating authority for seeking the required directions that will enable the smooth execution of the approved repayment plan. On being satisfied by the plea as raised by the resolution professional the adjudicating authority shall pass the necessary directions in this regard.

Completion of Repayment Plan

The resolution professional shall make his best endeavours to complete the execution of repayment plan within the prescribed time limits in time bound manner. In this connection the resolution professional shall after the successful completion of repayment plan furnish the prescribed documents to the persons who are covered under the horizon of repayment plan and to the adjudicating authority as well.

The resolution professional shall ensure that the documents are furnished within duration of fourteen days from the completion of the repayment plan. If the resolution professional is unable to furnish the same within due time then in such a scenario he may approach the adjudicating authority for seeking extension in the time limit for furnishing the same. Once the adjudicating authority is satisfied then it shall grant an extension of not more than seven days to comply with the requirement.

Discharge Order

On time-bound and successful implementation of the approved repayment plan the resolution professional shall approach the concerned adjudicating authority for seeking a discharge order for debts as are mentioned in the repayment plan.

The resolution professional may approach the adjudicating authority for seeking discharge order only if the approved repayment plan provides for early discharge or discharge on completion of repayment plan. The, discharge order as granted by the adjudicating authority shall also be furnished to the board for its record.

The insolvency resolution process is the initial step that can be taken against the defaulting individual & partnership firms. On successful completion of insolvency resolution process or during the course of the insolvency resolution process an application can be made for a bankruptcy order.