Insolvency Resolution of Individual and Partnership Firms – CS Professional Study Material

Chapter 13 Insolvency Resolution of Individual and Partnership Firms – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Insolvency Resolution of Individual and Partnership Firms – CS Professional Insolvency Law and Practice Study Material

Question 1.
Application for initiation of individual insolvency resolution process can be submitted by a debtor only in respect of debts which are not excluded debts. Which debts are to be treated as excluded debts? (June 2019, 6 marks)
Answer:
Section 94 of the Insolvency and Bankruptcy Code, 2016 deals with the application by debtor to initiate insolvency resolution process. A debtor who commits a default may apply, either personally or through a resolution professional, to the adjudicating Authority for initiating the insolvency resolution process, by submitting an application.[Section 94(1)]
An application under sub-section(l) shall be submitted only in respect of debts which are not excluded debts.[Section 94(3)]
Excluded Debts : Section 79(15) of the Code defines excluded debts, which means:
(a) liability to pay fine imposed by a Court or Tribunal;
(b) liability to pay damages for negligence nuisance or breach of a statutory, contractual or other legal obligation;
(c) liability to pay maintenance to any person under any law for the time being in force;
(d) liability in relation to a student loan;
(e) any other debt as may be prescribed.

Insolvency Resolution of Individual and Partnership Firms - CS Professional Study Material

Question 2.
XYZ Bank has given loan of ₹ 20 crore to AB Ltd. The loan is duly guaranteed by personal guarantee of two relatives of directors. The loan went in to default and the Bank decided to file application against personal guarantors u/s 95 of Insolvency and Bankruptcy Code, 2016 (IBC), to initiate insolvency resolution process.
The Resolution Professional (RP) has filed a report under Section 99 of the IBC recommending approval of application filed u/s 95 of the IBC by the Bank against personal guarantors to the Corporate Debtors (CD).
The CD says that the Debt Recovery Tribunal (DRT) have no right to entertain the present petition as the guarantors are resident, which falls within territorial jurisdiction of other DRT, and also the RP had not complied with the procedure as envisaged in Section 99(2) which mandates the RP to require debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing the proof of the same. Hence the RP has not followed the mandate of Section 99(2) of the IBC.
Based on the above facts answer the following questions :
(a) Whether issue of territorial jurisdiction was appropriate ?
(b) Whether objection about RP, not complying with mandate of Section 99(2) of IBC was sustainable ? (June 2022, 6 marks)

Question 3.
The Insolvency and Bankruptcy Code, 2016 (Code) aims to consolidate laws relating to liquidation and insolvency of corporate persons, partnership firms and individuals in India. Comment.
Answer:

  • The Insolvency and Bankruptcy Code, 2016 (Code) aims to consolidate laws relating to liquidation and insolvency of corporate persons, partnership firms and individuals in India
  • The provisions of the Code aim to maximize the value of assets of such persons in order to promote entrepreneurship in the country and also increase the availability of capital and credit in the economy.
  • Sections 94 to 120 in Chapter III of Part III of the Insolvency and Bankruptcy Code, 2016 deal with insolvency resolution process for Individuals and Partnership Firms.

Question 4.
Explain the process of filing application by debtor to initiate insolvency resolution process.
Answer:

  • Section 94 of the Insolvency and Bankruptcy Code, 2016 provides that the debtor who commits a default may apply to the Adjudicating Authority for initiating the insolvency resolution process by submitting an application with such fee and in such form as may be prescribed, either personally or through a Resolution Professional.
  • However where the debtor is a partner of a firm, such debtor shall not apply to the Adjudicating Authority for initiating the insolvency resolution process in respect of the firm unless all or a majority of the partners of the firm file the application jointly.
  • Application submitted for initiating the insolvency resolution process shall be submitted only in respect of debts which are not excluded debts

Question 5.
Application submitted for initiating the insolvency resolution process shall be submitted only in respect of debts which are not excluded debts. Comment
Answer:
Application submitted for initiating the insolvency resolution process shall be submitted only in respect of debts which are not excluded debts. Excluded Debt means:

  • liability to pay fine imposed by a court or tribunal:
  • liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
  • liability to pay maintenance to any person under any law for the time being in force;
  • liability in relation to a student loan;
  • any other debt as may be prescribed

Insolvency Resolution of Individual and Partnership Firms - CS Professional Study Material

Question 6.
A debtor can make application for initiating the insolvency resolution process subject to certain conditions. State those conditions.
Answer:
A debtor can make application for initiating the insolvency resolution process only if he is not:
(a) an undischarged bankrupt;
(b) undergoing a fresh start process;
(c) undergoing an insolvency resolution process; or
(d) undergoing a bankruptcy process.

A debtor shall not be eligible to apply for insolvency resolution process if an application regarding insolvency resolution process has already been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this Section

Question 7.
Explain the process of filing application by creditor to initiate insolvency resolution process.
Answer:

  • Section 95 of the Insolvency and Bankruptcy Code, 2016 provides that a creditor may apply to the Adjudicating Authority for initiating the insolvency resolution process by submitting an application with such fee and in such form as may be prescribed, either by himself or jointly with other creditors or through a Resolution Professional.
  • However, a creditor may apply under this Section in relation to any partnership debt owed to him for initiating an insolvency resolution process against any one or more partners of the firm or the firm.
  • Where 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 and such Adjudicating Authority may give such directions for consolidating the proceedings under the applications as it thinks just.
  • Application under Section 95 shall be accompanied with such details and documents relating to
    (a) the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application;
    (b) the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and
    (c) relevant evidence of such default or non-repayment of debt.
  • The creditor shall also provide a copy of the application made under this Section to the debtor

Question 8.
Explain the concept of interim Moratorium as per Section 96 of the Insolvency and Bankruptcy Code, 2016.
Answer:

  • Section 96 of the Insolvency and Bankruptcy Code, 2016 provides that when an application for initiating the insolvency resolution process is filed under Section 94 or Section 95 of the Insolvency and Bankruptcy Code, 2016 then an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application.
  • During the interim-moratorium period any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed and the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.
  • Where the application for initiating the insolvency resolution process 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 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 9.
Write a note on appointment of Resolution Professional in relation to liquidation and insolvency of partnership firms and individuals as per Insolvency and Bankruptcy Code, 2016.
Answer:

  • Section 97 of the Insolvency and Bankruptcy Code, 2016 provides that if an application under Section 94 or 95 is filed through a Resolution Professional, the Adjudicating Authority shall direct the Insolvency and
    Bankruptcy Board of India within seven days of the date of the application to confirm that there are no disciplinary proceedings pending against the Resolution Professional.
  • The Insolvency and Bankruptcy Board of India shall within seven days from the date of receipt of directions from Adjudicating Authority; communicate to the Adjudicating Authority in writing either confirming the appointment of the Resolution Professional or rejecting the appointment of the Resolution Professional and nominating another Resolution Professional for the insolvency resolution process.
  • Where an application for initiating the insolvency resolution process under Section 94 or 95 of the Insolvency and Bankruptcy Code, 2016 is filed by the debtor or the creditor himself (as the case may be) and not through the Resolution Professional, the Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India within seven days of the filing of such application, to nominate a Resolution Professional for the insolvency resolution process.
  • The Insolvency and Bankruptcy Board of India shall nominate a Resolution Professional within ten days of receiving the direction from the Adjudicating Authority.
  • The Adjudicating Authority shall by an order appoint the Resolution Professional recommended or as nominated by the Insolvency and Bankruptcy Board of India.
  • The Resolution Professional appointed by the Adjudicating Authority shall be provided a copy of the application for insolvency resolution process.
    Replacement of Resolution Professional
  • Section 98 of the Insolvency and Bankruptcy Code, 2016 provides that where the debtor or the creditor is of the opinion that the Resolution Professional appointed under Section 97 of the Insolvency and Bankruptcy Code, 2016 is required to be replaced, the debtor or creditor (as the case may be) may apply to the Adjudicating Authority for the replacement of the such Resolution Professional.
  • The Adjudicating Authority shall within seven days from the date of receipt of the application with regard to the replacement of Resolution Professional shall make a reference to the Insolvency and Bankruptcy Board of India for replacement of the Resolution Professional.
  • The Insolvency and Bankruptcy Board of India shall within ten days from the date of receipt of the reference from the Adjudicating Authority, shall recommend the name of the Resolution Professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.
  • The creditors may apply to the Adjudicating Authority for replacement of the Resolution Professional where it has been decided in the meeting of the creditors to replace the Resolution Professional with a new Resolution Professional for implementation of the repayment plan.

Insolvency Resolution of Individual and Partnership Firms - CS Professional Study Material

Question 10.
Write a note on submission of report by Resolution Professional in relation to liquidation and insolvency of partnership firms and individuals as per Insolvency and Bankruptcy Code, 2016.
Answer:

  • Section 99 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall examine the application under Section 94 or Section 95 (as the case may be) within ten days from the date of the appointment and submit a report to the Adjudicating Authority recommending for approval or rejection of the application with regard to the initiation of insolvency resolution process.
  • Where the application has been filed under Section 95, the Resolution Professional may require the debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing:
    (a) evidence of electronic transfer of the unpaid amount from the bank account of the debtor;
    (b) evidence of encashment of a cheque issued by the debtor; or
    (c) a signed acknowledgment by the creditor accepting receipt of dues
  • For the purposes of examining the application with regard to the initiation of insolvency resolution process, the Resolution Professional may seek such further information or explanation in connection with the application as may be required frorti the debtor or the creditor or any other person who in the opinion of the Resolution Professional may provide such information.
  • The person from whom such information or explanation is sought shall furnish such information or explanation within seven days from the date of receipt of the request from Resolution Professional.
  • After examination of the application, Resolution Professional may recommend the acceptance or rejection of the application in his report.
  • Where the Resolution Professional finds that the debtor is eligible for a fresh start Process (Sections 81 to 93 of the Insolvency and Bankruptcy Code, 2016, the Resolution Professional shall submit a report recommending that the application by the debtor under Section 94 of the Insolvency and Bankruptcy Code, 2016 be treated as an application under Section 81 of the Insolvency and Bankruptcy Code, 2016 by the Adjudicating Authority.
  • The Resolution Professional shall record the reasons for recommending the acceptance or rejection of the application in the report and shall give a copy of the report to the debtor or the creditor (as the case may be).

Insolvency Resolution of Individual and Partnership Firms - CS Professional Study Material

Question 11.
Write a note on provisions related to “rights of creditors” and “insolvency procedure” in relation to liquidation and insolvency of partnership firms and individuals as per Insolvency and Bankruptcy Code, 2016.
Answer:
A. Registering of claims by creditors

  • Section 103 of the Insolvency and Bankruptcy Code, 2016 provides that the creditors shall register claims with the Resolution Professional by sending details of the claims by way of electronic communications or through courier, speed post or registered letter.
    B. Preparation of list of creditors
  • Section 104 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall prepare a list of creditors on the basis of the:
    (a) information disclosed in the application filed by the debtor under Section 94 or 95 of the Insolvency and Bankruptcy Code
    (b) claims received by the Resolution Professional under Section 102 of the Insolvency and Bankruptcy Code, 2016.
  • The Resolution Professional shall prepare the list of creditors within thirty days from the date of the issue of the notice by Adjudicating Authority
    C. Repayment Plan :
  • Section 105 of the Insolvency and Bankruptcy Code, 2016 provides that the debtor shall in consultation with the Resolution Professional shall prepare a repayment plan containing a proposal to the creditors for restructuring of the debts or affairs of the concerned debtor.
  • The repayment plan may authorise or require the Resolution Professional to:
    (a) carry on the debtor’s business or trade on his behalf or in his name; or
    (b) realise the assets of the debtor; or
    (c) administer or dispose of any funds of the debtor.
  • The repayment plan shall include the justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan; provision for payment of fee to the Resolution Professional and such other matters as may be specified.
  • The Resolution Professional shall submit the repayment plan along with the report on such plan to the Adjudicating Authority within a period of twenty-one days from the last date of submission of claims under Section 102 of the Insolvency and Bankruptcy Code, 2016.
  • The report of the Resolution Professional on repayment plan shall include that:
    (a) the repayment plan is in compliance with the provisions of any law for the time being in force;
    (b) the repayment plan has a reasonable prospect of being approved and implemented; and
    (c) there is a necessity of summoning a meeting of the creditors, if required, to consider the repayment plan.
    D. Summoning of meeting of creditors:
  • Section 107 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall issue a notice calling the meeting of the creditors at least fourteen days before the date fixed for such meeting.
  • The Resolution Professional shall send the notice of the meeting to the list of creditors prepared under Section 104 of the Insolvency and Bankruptcy Code, 2016.
  • In the meeting of the creditors, the creditors may decide to approve, modify or reject the repayment plan.
  • The Resolution Professional shall ensure that if modifications are suggested by the creditors, consent of the debtor shall be obtained for each modification.
    E. Voting rights in meeting of creditors:
  • Section 109 of the Insolvency and Bankruptcy Code, 2016 provides that a creditor shall be entitled to vote at every meeting of the creditors in respect of the repayment plan in accordance with voting share assigned to him.
  • The Resolution Professional shall determine voting share to be assigned to each creditor in the manners 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.
  • A creditor shall not be entitled to vote in a meeting of the creditors if the name of creditor is not mentioned in the list of creditors prepared under Section 104 of the Insolvency and Bankruptcy Code, 2016 or creditor is an associate of the debtor.
  • A secured creditor participating in the meetings of the creditors and voting in relation to the repayment plan shall forfeit his right to enforce the security during the period of the repayment plan in accordance with the terms of the repayment plan.
    F. Approval of repayment plan by creditors:
  • Section 111 of the Insolvency and Bankruptcy Code, 2016 provides that the repayment plan or any modification to the repayment plan shall be approved by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting on the resolution in a meeting of the creditors.
  • The Resolution Professional shall provide a copy of the report of the meeting of creditors prepared under Section 99 of the Insolvency and Bankruptcy Code, 2016 to the debtor, creditor (including those who were not present at the meeting) and to the Adjudicating Authority.
    G. Order of Adjudicating Authority on repayment plan:
  • Section 114 of the Insolvency and Bankruptcy Code, 2016 provides that the Adjudicating Authority shall by an order approve or reject the repayment plan on the basis of the report of the meeting of the creditors submitted by the Resolution Professional under Section 112 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
  • The order of the Adjudicating Authority approving the repayment plan may also provide for directions for implementing the repayment plan
    H. Effect of order of Adjudicating Authority on repayment plan
  • Section 115 of the Insolvency and Bankruptcy Code, 2016 provides that where the Adjudicating Authority has approved the repayment plan under Section 114 of the Insolvency and Bankruptcy Code, 2016, the repayment plan shall take effect as if proposed by the debtor in the meeting; and shall be binding on creditors mentioned in the repayment plan and on the debtor.
  • Where the Adjudicating Authority rejects the repayment plan under Section 114 of the Insolvency and Bankruptcy Code, 2016, the debtor and the creditors shall be entitled to file an application for bankruptcy under Section 121 to 148 of the of the Insolvency and Bankruptcy Code, 2016.
  • A copy of the order passed by the Adjudicating Authority shall be provided to the Insolvency and Bankruptcy Board of India
    I. Implementation and supervision of repayment plan
  • Section 116 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional appointed under Section 97 or Section 98 of the Insolvency and Bankruptcy Code, 2016 shall supervise the implementation of the repayment plan.
  • The resolution professional may apply to the Adjudicating Authority for directions, if necessary, in relation to any particular matter arising under the repayment plan and the Adjudicating Authority may issue directions as may be necessary in this regard.
    J. Completion of repayment plan
  • Section 117 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall within fourteen days from the date of the completion of the repayment plan, forward to the persons who are bound by the repayment plan under Section 115 of the Insolvency and Bankruptcy Code, 2016 and the Adjudicating Authority, the following documents:
    (a) a notice that the repayment plan has been fully implemented; and
    (b) a copy of a report by the resolution professional summarising all receipts and payments made in pursuance of the repayment plan and extent of the implementation of such plan as compared with the repayment plan approved by the meeting of the creditors.
    K. Discharge order
  • Section 119 of the Insolvency and Bankruptcy Code, 2016 provides that on the basis of the repayment plan, the Resolution Professional shall apply to the Adjudicating Authority for a discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating Authority may pass such discharge order.
  • The discharge order shall be forwarded to the Insolvency and Bankruptcy Board of India, for the purpose of recording entries in the register.

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