Bankruptcy Order for Individuals and Partnership Firms – CS Professional Study Material

Chapter 14 Bankruptcy Order for Individuals and Partnership Firms – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Bankruptcy Order for Individuals and Partnership Firms – CS Professional Insolvency Law and Practice Study Material

Question 1.
A Director of a Private Limited Company, which is already in Corporate Insolvency Resolution Process has approached you to file an application for Bankruptcy for himself. Explain him the present status of applicability of the Insolvency and Bankruptcy Code, 2016 (IBC 2016) and also list out the prohibitions for individuals on declaration as Bankrupt under the IBC 2016. (Dec 2020, 6 marks)
Answer:
Presently Insolvency and Bankruptcy Code, 2016 is applicable for Companies incorporated under the Companies Act, 2013 and Limited Liability Partnerships incorporated under LLP Act.
Chapter IV of Part III of the Insolvency and Bankruptcy Code, 2016 (the Code) deals with the provisions of bankruptcy order for individuals and partnershipfirms. The provisions related to insolvency resolution of individual and partnership firm have been notified under the Code.
Section 141 of the Insolvency and Bankruptcy Code, 2016 provides that a bankrupt from the bankruptcy commencement date shall:
(a) not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company:
(b) without the previous sanction of the bankruptcy trustee, be prohibited from creating any charge on his estate or taking any further debt:
(c) be required to inform his business partners that he is undergoing a bankruptcy process;
(d) prior to entering into any financial or commercial transaction of such value as may be prescribed, either individually or jointly, inform all the parties involved in such transaction that he is undergoing a bankruptcy process:
(e) without the previous sanction of the Adjudicating Authority, be incompetent to maintain any legal action or proceedings in relation to the bankruptcy debts, and
(f) not be permitted to travel overseas without the permission of the Adjudicating Authority
Any restriction to which a bankrupt may be subject under this Section shall cease to have effect if the bankruptcy order against him is modified or recalled under Section 142 of the Insolvency and Bankruptcy Code, 2016 or he is discharged under Section 138 of the Insolvency and Bankruptcy Code, 2016.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 2.
What is Bankruptcy?
Answer:

  • Bankruptcy is a legal procedure to give debt relief for people whose circumstances are unlikely to change and who have no hope of paying off their debts within a reasonable time.
  • The term bankruptcy applies only to individuals and not to the companies or other legal entities.
  • An individual may be made bankrupt only by court order following the presentation of a bankruptcy petition. An individual may present his own petition on the ground that he is insolvent, i.e. unable to pay his debts.
  • Chapter IV of Part III of the Insolvency and Bankruptcy Code, 2016 deals with the provisions of bankruptcy order for individuals and partnership firms that how and under what circumstances debtor or creditor can apply for the bankruptcy order.

Question 3.
State the circumstances under which the application for bankruptcy of any debtor can be made to the Adjudicating Authority.
Answer:
Section 121 of the Insolvency and Bankruptcy Code, 2016 provides that an application for bankruptcy of a debtor may be made by a creditor individually or jointly with other creditors or by a debtor to the Adjudicating Authority in such format and with such fees as may be prescribed in the following circumstances:

  • Where an order has been passed by an Adjudicating Authority under Section 100(4), Section 115 (2) and 118(3) of the Insolvency and Bankruptcy Code, 2016.
  • An application for bankruptcy shall be filed within a period of three months from the date of the order passed by the Adjudicating Authority.
  • Also, where the debtor is a firm, the application may be filed by any of its partners.

Question 4.
What documents are required to be submitted along with the application by a debtor for the bankruptcy of a debtor?
Answer:
Section 122 of the Insolvency and Bankruptcy Code, 2016 provides that an application for bankruptcy of a debtor shall be accompanied by:
(a) the records of insolvency resolution process undertaken under Chapter III of Part III;
(b) the statement of affairs of the debtor in such form and manner as may be prescribed, on the date of the application for bankruptcy; and
(c) a copy of the order passed by the Adjudicating Authority under Chapter III of Part III permitting the debtor to apply for bankruptcy.
The debtor may propose an insolvency professional as the bankruptcy trustee in the application for bankruptcy. An application for bankruptcy by the debtor shall not be withdrawn without the leave of the Adjudicating Authority. Space to write important points for revision

Question 5.
What documents are required to be submitted along with the application by a creditor for the bankruptcy of a debtor in respect of an unsecured debt?
Answer:
Section 123 of the Insolvency and Bankruptcy Code, 2016 provides that an application for bankruptcy by a creditor shall be accompanied by:
(a) the records of insolvency resolution process undertaken under Chapter III of the Insolvency and Bankruptcy Code, 2016;
(b) a copy of the order passed by the Adjudicating Authority under Chapter III of the Insolvency and Bankruptcy Code, 2016 permitting the creditor to apply for bankruptcy;
(c) details of the debts owed by the debtor to the creditor as on the date of the application for bankruptcy; and
(d) such other information as may be prescribed.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 6.
What documents are required to be submitted along with the application by a creditor for the bankruptcy of a debtor in respect of an secured debt?
Answer:
An application made in respect of a debt which is secured shall be accompanied with:
(a) a statement by the creditor having the right to enforce the security that creditor shall in the event of a bankruptcy order being made, give up his security for the benefit of all the creditors of the bankrupt; or
(b) a statement by the creditor stating that the application for bankruptcy is only in respect of the unsecured part of the debt and an estimated value of the unsecured part of the debt.
If a secured creditor makes an application for bankruptcy and submits a statement, the secured and unsecured parts of the debt shall be treated as separate debts. The creditor may propose an insolvency professional as the bankruptcy trustee in the application for bankruptcy.
An application for bankruptcy in case of a deceased debtor, may be filed against his legal representatives.

Question 7.
What are the consequences of filing an application of bankruptcy?
Answer:
Section 124 of the Insolvency and Bankruptcy Code, 2016 provides that when an application for bankruptcy is filed under Section 122 or Section 123 of the Insolvency and Bankruptcy Code, 2016 then-
(a) interim-moratorium shall commence on the date of the making of the application on all actions against the properties of the debtor in respect of his debts and such moratorium shall cease to have effect on the bankruptcy commencement date; and
(b) during the interim-moratorium period any pending legal action or legal proceeding against any property of the debtor in respect of any of his debts shall be deemed to have been stayed and the creditors of the debtor shall not be entitled to initiate any legal action or legal proceedings against any property of the debtor in respect of any of his debts.
Where the application has been made in relation to a firm, the interim moratorium shall operate against all the partners of the firm as on the date of the making of the application. The provisions of this Section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

Question 8.
Who is a bankruptcy trustee and what are the provisions of appointment of Insolvency Professional as Bankruptcy Trustee?
Answer:

  • Section 125 of the Insolvency and Bankruptcy Code, 2016 provides that if an insolvency professional is proposed as the bankruptcy trustee in the application for bankruptcy under Section 122 or Section 123 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India within seven days of receiving the application for bankruptcy to confirm that there are no disciplinary proceedings against such professional.
  • The Insolvency and Bankruptcy Board of India(IBBI) shall within ten days from the date of the receipt of the direction shall in writing either confirm or reject his appointment. In case of rejection, it will nominate another bankruptcy trustee for the bankruptcy process.
  • Where a bankruptcy trustee is not proposed by the debtor or creditor, the Adjudicating Authority shall direct the IBBI within seven days of receiving the application to nominate a bankruptcy trustee for the bankruptcy process.
  • IBBI then shall nominate a bankruptcy trustee within ten days of receiving the direction from the Adjudicating Authority. The bankruptcy trustee confirmed or nominated under this Section shall be appointed as the bankruptcy trustee by the Adjudicating Authority in the bankruptcy order under Section 126 of the Insolvency and Bankruptcy Code, 2016.

Question 9.
Who shall pass the Bankruptcy Order? When will it be passed? What is the validity of such order?
Answer:
As per Section 126 of the IBC, 2016 the Adjudicating Authority shall pass a bankruptcy order within fourteen days of receiving the confirmation or nomination of the bankruptcy trustee under Section 125 of the Insolvency and Bankruptcy Code, 2016.
The Copy of the same along with the bankruptcy application shall be provided to the bankrupt, creditors and the bankruptcy trustee within seven days of the passing of the bankruptcy order.
As per Section 127 of the IBC 2016 such order passed shall continue to have effect till the debtor is discharged under Section 138 of the Insolvency and Bankruptcy Code, 2016.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 10.
Mention the provisions of Section 128 of IBC, 2016.
Answer:
Secion 128 of the Insolvency and Bankruptcy Code, 2016 provides that on passing of the bankruptcy order under Section 126 of the Insolvency and Bankruptcy Code, 2016:
(a) the estate of the bankrupt shall vest in the bankruptcy trustee as provided under Section 154 of the IBC, 2016;
(b) the estate of the bankrupt shall be divided among his creditors;
(c) a creditor of the bankrupt indebted in respect of any debt claimed as a bankruptcy debt shall not:
(i) initiate any action against the property of the bankrupt in respect of such debt; or
(ii) commence any suit or other legal proceedings except with the leave of the Adjudicating Authority and on such terms as the Adjudicating Authority may impose.

Question 11.
Explain the Statement of financial position as per Section 129 of the IBC, 2016.
Answer:

  • The Section 129 of IBC, 2016 provides that after passing a bankruptcy order, the bankrupt shall submit his statement of financial position to the bankruptcy trustee within seven days from the bankruptcy commencement date in a prescribed form and manner.
  • If the firm is a bankrupt, its partners on the date of the order shall submit a joint statement as well as an individual statement of his financial position.
  • The bankruptcy trustee may require the bankrupt or any other person to submit in writing further information explaining or modifying any matter contained in the statement of financial position.

Question 12.
What follows the submission of statement of financial position?
Answer:
Section 130 of the IBC, 2016 provides for Public notice inviting claims from creditors

  • Send notices within ten days of the bankruptcy commencement date to the creditors mentioned in the statement of affairs submitted by the bankrupt under Section 129 of the Insolvency and Bankruptcy Code, 2016; or the application for bankruptcy submitted by the bankrupt under Section 122 of the Insolvency and Bankruptcy Code, 2016 .
  • The public notice shall include the last date up to which the claims shall be submitted and such others matters and details as may be prescribed and shall be published in leading newspapers, one in English and another in vernacular having sufficient circulation where the bankrupt resides; affixed on the premises of the Adjudicating Authority; and placed on the website of the Adjudicating Authority. The notice to the creditors shall include such matters and details as may be prescribed.

Question 13.
For what purpose the creditors meeting is conducted?
Answer:
The following business shall be conducted in the meeting of the creditors in which regard a resolution may be passed, namely:
(a) the establishment of a committee of creditors;
(b) any other business that the bankruptcy trustee thinks fit to be transacted. The bankruptcy trustee shall cause the minutes of the meeting of the creditors to be recorded, signed and retained as a part of the records of the bankruptcy process. The bankruptcy trustee shall not adjourn the meeting of the creditors for any purpose for more than seven days at a time.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 14.
State the voting rights of creditors.
Answer:

  • As per Section 135 of the Insolvency and Bankruptcy Code, 2016 every creditor mentioned in the list under Section 132 of the IBC, 2016 or his proxy shall be entitled to vote in respect of the resolutions in the meeting of the creditors in accordance with the voting share assigned to him.
  • The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Insolvency and Bankruptcy Board of India.
  • A creditor shall not be entitled to vote in respect of a debt for an unliquidated amount.
  • The following creditors shall not be entitled to vote under this Section, namely:
    (a) creditors who are not mentioned in the list of creditors under Section 132 of the IBC, 2016 and those who have not been given a notice by the bankruptcy trustee;
    (b) creditors who are associates of the bankrupt.

Question 15.
What is a Discharge Order?
Answer:

  • Section 138 of the Insolvency and Bankruptcy Code, 2016 provides that the bankruptcy trustee shall apply to the Adjudicating Authority for a discharge order on the expiry of one year from the bankruptcy commencement date or within seven days of the approval of the committee of creditors of the completion of administration of the estates of the bankrupt under Section 137 of the Insolvency and Bankruptcy Code, 2016.
  • The Adjudicating Authority shall pass a discharge order on an application by the bankruptcy trustee.
  • A copy of the same shall be provided to the IBBI, for the purpose of recording an entry in the register referred to in Section 196 of the IBC, 2016.

Question 16.
What are the effects of the discharge order?
Answer:
Section 139 of the IBC, 2016 provides that the discharge order made under Section 138 of the IBC, 2016 shall release the bankrupt from all the bankruptcy debts but it will not affect
(a) The functions of the bankruptcy trustee;
(b) The operation of the provisions of Chapter IV and V of Part III of the IBC, 2016.
(c) The release of the bankrupt from any debt incurred by means of fraud or breach of trust to which he was a party; or
(d) Discharge the bankrupt from any excluded debt.

Question 17.
What are the disqualifications of a bankrupt post commencement of bankruptcy?
Answer:
The bankrupt shall from the bankruptcy commencement date, be subject to the disqualifications mentioned in Section 140. In addition to any disqualification under any other law for the time being in force, a he/she shall be disqualified from:
(a) being appointed or acting as a trustee or representative in respect of any trust, estate or settlement;
(b) being appointed or acting as a public servant;
(c) being elected to any public office where the appointment to such office is by election; and
(d) being elected or sitting or voting as a member of any local authority.

Question 18.
What restrictions are put on a bankrupt post-bankruptcy commencement?
Answer:
Section 141 of the Insolvency and Bankruptcy Code, 2016 provides that a bankrupt from the bankruptcy commencement date shall:
(a) not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company;
(b) without the previous sanction of the bankruptcy trustee, be prohibited from creating any charge on his estate or taking any further debt;
(c) be required to inform his business partners that he is undergoing a bankruptcy process;
(d) prior to entering into any financial or commercial transaction of such value as may be prescribed, either individually or jointly, inform all the parties involved in such transaction that he is undergoing a bankruptcy process;
(e) without the previous sanction of the Adjudicating Authority, be incompetent to maintain any legal action or proceedings in relation to the bankruptcy debts; and
(f) not be permitted to travel overseas without the permission of the Adjudicating Authority.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 19.
State the provisions of modification or recall of bankruptcy order.
Answer:
Under Section 142 of the Insolvency and Bankruptcy Code, 2016 the Adjudicating Authority may on an application or suo moto, modify or recall a bankruptcy order, if it is satisfied that:
(a) there exists an error apparent on the face of such order; or
(b) both the bankruptcy debts and the expenses of the bankruptcy have, afterthe making of the bankruptcy order, either been paid for or secured to the satisfaction of the Adjudicating Authority.
Any modification or recall of the bankruptcy order shall be valid except that the property of the bankrupt shall vest in such person as the Adjudicating Authority may appoint or, in default of any such appointment, revert to the bankrupt on such terms as the Adjudicating Authority may direct.
A copy of the such order shall be provided to the IBBI, for the purpose of recording an entry in the register referred to in Section 191 of the Insolvency and Bankruptcy Code, 2016.
The modified or recalled order shall be binding on all creditors so far as it relates to any debts due to them which form a part of the bankruptcy.

Question 20.
Is there any provision for the fees of bankruptcy trustee?
Answer:
Section 144 of the IBC, 2016 provides that fees shall be paid to a bankruptcy trustee appointed for conducting the bankruptcy process in proportion to the value of the estate of the bankrupt. The same shall be paid to the bankruptcy trustee from the distribution of the estate of the bankrupt in the manner provided in Section 178 of the IBC, 2016.

Question 21.
Is there any provision of replacing the bankruptcy trustee? If yes, then what is the procedure?
Answer:

  • If the Committee of creditors is of the opinion that at any time during the bankruptcy process, a bankruptcy trustee appointed under Section 125 of the Insolvency and Bankruptcy Code, 2016 is required to be replaced, then as per Section 145 it may replace him with another bankruptcy trustee in the manner provided under this Section.
  • 75 % of the Committee of creditors must vote to replace the bankruptcy trustee.
  • The Adjudicating Authority shall within seven days of the receipt of the application direct the IBBI to recommend for replacement of bankruptcy trustee.
  • The IBBI shall within ten days of such order by the Adjudicating Authority recommend a bankruptcy trustee for replacement against whom no disciplinary proceedings are pending.
  • After recommendation the new trustee shall be appointed within fourteen days.
  • The earlier bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed on the date of his appointment.
  • The Adjudicating Authority may give the following directions to the earlier bankruptcy trustee:
    (a) to share all information with the new bankruptcy trustee in respect of the bankruptcy process; and
    (b) to co-operate with the new bankruptcy trustee in such matters as may be required.
  • The earlier bankruptcy trustee replaced under this Section shall be released in accordance with the provisions of Section 148 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
  • The bankruptcy trustee appointed under this Section shall give a notice of his appointment to the bankrupt within seven days of his appointment.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 22.
If a bankruptcy trustee intends to cease practicing as an insolvency professional, he may do so. Comment.
Answer:
A bankruptcy trustee may resign if he intends to cease practicing as an insolvency professional or there is conflict of interest or change of personal circumstances which preclude the further discharge of his duties as a bankruptcy trustee.
The resignation shall be accepted by the Adjudicating Authority within seven days and direct the Insolvency and Bankruptcy Board of India for his replacement.
The IBBI shall within ten days of the direction of the Adjudicating Authority recommend another bankruptcy trustee ais a replacement.
The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the IBBI within fourteen days of receiving the recommendation.
The replaced bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed on the date of his appointment. He/she shall share all information with the new bankruptcy trustee and co-operate whenever required.
The bankruptcy trustee appointed shall give a notice of his appointment to the committee of creditors and the bankrupt within seven days of his appointment. The bankruptcy trustee replaced under this Section shall be released in accordance with the provisions of Section 148 of the Insolvency and Bankruptcy Code, 2016.

Question 23.
What steps will be taken by the Adjudicating Authority in case of vacancy caused due to resignation or replacement caused in the office of the bankruptcy trustee?
Answer:

  • The Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India for replacement of a bankruptcy trustee.
  • The IBBI shall within ten days of the direction of the Adjudicating Authority recommend another bankruptcy trustee as a replacement.
  • The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the IBBI within fourteen days of receiving the recommendation.
  • The replaced bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed on the date of his appointment. He/she shall share all information with the new bankruptcy trustee and co-operate whenever required.
  • The bankruptcy trustee appointed shall give a notice of his appointment to the committee of creditors and the bankrupt within seven days of his appointment. The bankruptcy trustee replaced under this Section shall be released in accordance with the provisions of Section 148 of the Insolvency and Bankruptcy Code, 2016.
  • The IBBI shall within ten days of the direction of the Adjudicating Authority recommend a bankruptcy trustee as a replacement.
  • The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the Insolvency and Bankruptcy Board within fourteen days of receiving the recommendation.
  • The earlier bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed, on the date of his appointment.

Question 24.
Under which Chapter of IBC 2016, provisions of bankruptcy order are given?
Answer:
Chapter IV of Part III of the Insolvency and Bankruptcy Code, 2016 deals with the provisions of bankruptcy order for individuals and partnership firms that how and under what circumstances debtor or creditor can apply for the bankruptcy order.

Bankruptcy Order for Individuals and Partnership Firms - CS Professional Study Material

Question 25.
Name the Adjudicating and Appellate Authority under IBC, 2016 in case of individuals and partnership firms.
Answer:
The Adjudicating Authority for dealing with insolvency and bankruptcy of individual and partnership firm is Debt Recovery Tribunal and Appellate Authority for the same is Debt Recovery Appellate Tribunal.

Question 26.
Who prepares the list of creditors in case of bankruptcy?
Answer:
As per Section 132 of the IBC, 2016 the bankruptcy trustee has to prepare within fourteen days from the bankruptcy commencement date, a list of creditors on the basis of the disclosed information.

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