Laws & Legal Procedure for a Sole Proprietorship Firm go ahead with Voluntary Filing of Application for Insolvency and Bankruptcy: Lawyers Advice

The Insolvency and Bankruptcy Code, 2016 has been revolutionary for consolidating and bringing forth a single law that governs insolvency and bankruptcy matters. It is segmented differently for the two categories, namely corporates, and individuals and firms. As regards filing of an application by a Sole Proprietorship for its insolvency and bankruptcy is concerned, it can do so by following the provisions laid down in Chapter III of Part III of the Code. It will come under ‘individuals’ since a sole proprietorship is not considered to have a separate legal entity. The same was emphasised in Miraj Marketing Corporation V. Visakha Engineering & Ors.(R.F.A. No. 349 of 2003).

Section 94 of the Code allows any debtor who commits a default to initiate the insolvency resolution process. The debtor being the sole proprietor can do so personally or through a resolution professional, by submitting an application to the Adjudicating Authority. One remarkable difference from the Corporate resolution insolvency process lies in the fact that here, the Adjudicating Authority is the Debt Recovery Tribunal (DRT).

The Sole proprietorship firms who are in debt can file for insolvency proceedings by themselves. However, clause (4) of this section puts a bar on some debtors who cannot file an application herewith :
● If the person is an undischarged debtor that is when the court has already declared you bankrupt.
● Anyone who goes through the fresh start process.
● Anyone who is already undergoing an insolvency resolution process.
● Anyone who has moved to the bankruptcy proceedings.
● Anyone who has been admitted to this chapter as a debtor within the last 12 months preceding the date of this application.

Since the foremost step is to show default, the minimum default being Rs 1,00,00,000, there still is a list of debts that cannot be included here. The excluded debts are:
● Any liability to pay a fine imposed by the court or tribunal, in case of any criminal law.
● Any liability to pay maintenance to your partner.
● Any liability to pay damages for negligence, breach of statutory or contractual or any other legal obligation, in case of any civil law.

Proceeding in Detail:
● The day when the application is filed, begins the Interim moratorium. It continues till the application is accepted or rejected and a moratorium starts. During this period, no legal action can be commenced or continued.
● Next, a Resolution Professional is appointed. In case of filing an application by oneself, the DRT directs the Insolvency and Bankruptcy Board of India(IBBI) to appoint a Resolution Professional. This entire work is done within 7+7 days. Similarly, when the debtor feels that the resolution professional should be replaced the same procedure is followed again with the time period being 7+10 days this time as per section 98.
● Now, the Submission Report is to be submitted by the resolution professional and he recommends whether the applications should be accepted or not. This has to be done within 10 days citing relevant reasons.
● Considering the report and reasons placed, the DRT decides and passes an order regarding acceptance or rejection within 14 days of submission of the report. And a copy of the order has to be sent to the creditors within 7 days.
● Thereafter, if the application is accepted, a Moratorium starts and during this time no legal proceedings can be carried out nor can any assets be alienated.
● From 7 days a Public Notice is issued by the DRT and claims from the creditors are to be invited within 21 days and a list is made subsequently.
● Now the Repayment Plan is made by the debtor in consultation with the resolution professional. It includes justification for the preparation of this plan and reasons why creditors may agree with this.
● Consequently, a Meeting of Creditors is called where they suggest for any modifications. This is approved by voting which should be more than three-fourth in value of creditors to be. The details of this meeting is formulated in a report by the resolution professional.
● This Report is submitted to the DRT where it can accept or reject the repayment plan. If the plan is accepted, it becomes binding on all creditors. Whereas, in case of a rejection order, the debtor or the creditors can file for bankruptcy. There is also this concept of Premature end of the repayment plan incorporated here. This refers to a situation when the repayment plan doesn’t get implemented in its entirety. Then, the resolution professional prepares a report and submits to the DRT. Subsequently, the creditors who are not repaid within the said time, get the right to file for bankruptcy as directed by the DRT.

It must be noted that the IBC is not in effect in its entirety, particularly some of the ones contained in Part III. However, in one of the recent amendments, the insolvency and bankruptcy of individuals and partnership firms only to the extent applicable to personal guarantors were brought under the purview of the Code, with effect from December 01, 2019. In Omkaram Venkata Ramana V. Nitin Grains And Mills Pvt. Ltd. (CP(IB) No. 217/94 of IBC/AMR/2019), the petitioner had acted as a guarantor for five firms and was later struggling to repay the amount. Thus, a petition was filed under section 94(1) of the Code, which was admitted.

Conclusively, the integration of individuals and partnership firms in the Code is advantageous. Although the enforcement of these laws is still awaited. By allowing the debtor to have a say in the repayment plan and it being a time-bound process, gives a chance to the debtor that is the sole proprietor in this case, to come out of the liabilities hasslefree. And if the aforementioned legalities are complied with, a sole proprietorship can process through these matters of insolvency and bankruptcy solemnly.
Authored By: Adv. Anant Sharma & Ayushi Shrivastava