Insolvency Resolution And Bankruptcy Code for Individuals And Partnerships

Introduction

The Insolvency and Bankruptcy Code (IBC) in India extends beyond corporate entities to address the financial distress of individuals and partnership firms. This crucial aspect of the IBC provides a structured approach to resolving personal and small business insolvency, offering a path to financial recovery for those burdened by overwhelming debt.

This article explores the key provisions of the IBC relating to individuals and partnership firms, shedding light on a process that impacts countless lives across the country. From defining the scope of eligible debts to outlining the steps for resolution and bankruptcy, these regulations aim to balance the interests of debtors and creditors while providing a framework for financial rehabilitation.

As we delve into the intricacies of personal insolvency and bankruptcy under the IBC, we’ll uncover the mechanisms designed to offer a fresh start to honest debtors while ensuring fair treatment of creditors. This understanding is essential not only for legal professionals but also for individuals and small business owners navigating financial challenges in today’s dynamic economic landscape.

Fresh Start Process under the Insolvency Resolution And Bankruptcy For Individual And Partnership Firm

The Insolvency and Bankruptcy Code (IBC) of India introduces a revolutionary concept known as the Fresh Start Process, designed to provide relief to low-income, low-asset debtors burdened with relatively small amounts of qualifying debt. This process aims to give eligible debtors a chance to start anew by discharging them from certain debts, effectively providing them with a clean slate.

• Eligibility Criteria

To be eligible for the Fresh Start Process, a debtor must meet several conditions

• Annual gross income not exceeding ₹60,000
• Total asset value not exceeding ₹20,000
• Qualifying debt not exceeding ₹35,000
• Not an undischarged bankrupt
• Does not own a dwelling unit
• No ongoing fresh start, insolvency resolution, or bankruptcy process
• No previous fresh start order in the preceding 12 months

• Application Process

The debtor can apply for a fresh start either personally or through a resolution professional. Upon filing the application, an interim moratorium commences, staying all legal proceedings related to the debtor’s debts.

The application must include

• A list of all debts owed
• Details of interest payable
• List of security held for any debts
• Financial information of the debtor and immediate family
• Personal details of the debtor
• Reasons for making the application
• Information about any ongoing legal proceedings.

• Role of the Resolution Professional

A resolution professional is appointed to examine the application and submit a report to the Adjudicating Authority within 10 days, recommending acceptance or rejection. The professional may request additional information from the debtor or other relevant parties.

• Admission or Rejection of Application

The Adjudicating Authority has 14 days from the submission of the resolution professional’s report to either admit or reject the application. If admitted, a moratorium period of 180 days commences, during which

• All pending legal actions against the debtor are stayed
• Creditors cannot initiate new legal proceedings
• The debtor faces certain restrictions, such as not acting as a company director or disposing of assets

• Objections and Examinations

Creditors have 10 days from receipt of the admission order to object to the inclusion of a debt as a qualifying debt or to the correctness of the debt details. The resolution professional examines these objections and may accept or reject them within 10 days.

• Discharge Order

At the end of the moratorium period, the Adjudicating Authority passes a discharge order, freeing the debtor from the qualifying debts listed in the final list prepared by the resolution professional. The discharge also covers penalties, interest, and other sums owed under contracts related to the qualifying debts from the date of application to the date of the discharge order.

• Revocation of Order

The resolution professional can apply for revocation of the admission order if the debtor’s financial circumstances change, making them ineligible, or if the debtor fails to comply with restrictions or acts in bad faith.

Insolvency Resolution Process for Individuals and Partnership Firm 

The Insolvency and Bankruptcy Code provides a structured framework for addressing financial distress among individuals and partnership firms. Let us understand the key aspects of the insolvency resolution process, including application procedures, the role of resolution professionals, and the decision-making process by the Adjudicating Authority.

Application Process

Debtors who default on their obligations may initiate the insolvency resolution process by submitting an application to the Adjudicating Authority. This can be done personally or through a resolution professional. However, certain restrictions apply:

1. The application must pertain to non-excluded debts.
2. Debtors who are undischarged bankrupts, undergoing fresh start processes, or currently involved in insolvency or bankruptcy proceedings are ineligible.
3. There’s a 12-month waiting period between applications.

For partnership firms, all or a majority of partners must file jointly.

Creditors also have the right to initiate the process, either individually or jointly with other creditors. They must provide details of the debt, evidence of the debtor’s failure to pay within 14 days of demand, and proof of default.

Interim Moratorium

Upon filing an application, an interim moratorium commences, staying all legal proceedings related to the debtor’s debts. This protection extends to all partners in the case of a firm.

Appointment of Resolution Professional

The Adjudicating Authority appoints a resolution professional, either confirming the professional proposed in the application or requesting the Insolvency and Bankruptcy Board to nominate one. The Board must ensure no disciplinary proceedings are pending against the appointed professional.

Replacement of Resolution Professional

Both debtors and creditors can request the replacement of the resolution professional if deemed necessary. The Adjudicating Authority facilitates this process in consultation with the Board.

Examination and Reporting

The resolution professional examines the application within ten days of appointment and submits a report to the Adjudicating Authority, recommending approval or rejection. This involves verifying the application’s compliance with requirements and seeking additional information if needed.

For creditor applications, the resolution professional may require the debtor to provide evidence of repayment. Debts registered with information utilities cannot be disputed by the debtor.

If the resolution professional finds the debtor eligible for a fresh start, they may recommend treating the application under the relevant section.

Admission or Rejection of Application

The Adjudicating Authority decides on admitting or rejecting the application within 14 days of receiving the resolution professional’s report. If admitted, the Authority may issue instructions for conducting negotiations between the debtor and creditors to formulate a repayment plan.

The Authority must provide copies of its order, the resolution professional’s report, and the original application to all creditors within seven days.

Moratorium Period

Upon admission of an insolvency application, a moratorium period of 180 days commences. During this time, all legal actions against the debtor are stayed, creditors are prohibited from initiating new legal proceedings, and the debtor is restricted from transferring or disposing of assets. For partnership firms, the moratorium applies to all partners.

Public Notice and Claims

The Adjudicating Authority issues a public notice within seven days of admitting the application, inviting creditors to submit claims within 21 days. This notice is published in newspapers, displayed at the Adjudicating Authority’s premises, and posted on their website. Creditors must register their claims with the appointed resolution professional, providing necessary details and documentation.

Repayment Plan

The debtor, in consultation with the resolution professional, prepares a repayment plan proposing debt restructuring. This plan may authorise the resolution professional to manage the debtor’s business, realise assets, or administer funds. The plan must include justification for its approach and provisions for the resolution professional’s fees.

Creditors’ Meeting

The resolution professional may convene a meeting of creditors to consider the repayment plan. Creditors vote on the plan, with voting rights determined by the resolution professional. Secured creditors have the option to participate in voting, but doing so may affect their right to enforce security during the repayment period.

Approval and Implementation

The repayment plan requires approval by a majority of more than three-fourths in value of the creditors present and voting. The Adjudicating Authority then reviews the plan and may approve, reject, or request modifications. Once approved, the plan becomes binding on all mentioned creditors and the debtor.

Supervision and Completion

The resolution professional oversees the implementation of the repayment plan, seeking directions from the Adjudicating Authority if necessary. Upon completion, the resolution professional notifies all bound parties and submits a report summarising the plan’s execution.

Premature Ending and Discharge

If the repayment plan is not fully implemented within the specified period, it is deemed to have ended prematurely. In such cases, the resolution professional submits a report to the Adjudicating Authority, and affected parties may apply for a bankruptcy order.

Upon successful implementation of the repayment plan, the resolution professional applies for a discharge order from the Adjudicating Authority. This order releases the debtor from the debts mentioned in the repayment plan but does not discharge any other person from their liabilities.

Role of the Resolution Professional

The resolution professional plays a pivotal role throughout the insolvency resolution process. Their responsibilities include:

1. Preparing a list of creditors based on the debtor’s application and claims received.
2. Submitting the repayment plan along with a detailed report to the Adjudicating Authority.
3. Organising and conducting meetings of creditors.
4. Determining voting shares for creditors in accordance with Board regulations.
5. Supervising the implementation of the approved repayment plan.
6. Applying to the Adjudicating Authority for directions when necessary.
7. Reporting on the completion or premature ending of the repayment plan.

Rights of Secured Creditors

Secured creditors have specific rights within the insolvency resolution process:

1. They can participate and vote in creditors’ meetings.
2. If they choose to vote on the repayment plan, they forfeit their right to enforce security during the plan’s implementation.
3. Secured creditors who don’t forfeit their enforcement rights can still vote on the unsecured portion of their debt by submitting an affidavit.
4. Their concurrence is required if they don’t participate in voting but the repayment plan affects their security enforcement rights.

Modifications to the Repayment Plan

The repayment plan may be modified during the process:

1. Creditors can suggest modifications during their meeting.
2. The debtor’s consent is required for each modification proposed by creditors.
3. The Adjudicating Authority may direct the resolution professional to reconvene a creditors’ meeting to reconsider the plan if modifications are deemed necessary.

Premature Ending of the Repayment Plan

If the repayment plan ends prematurely:

1. The resolution professional submits a report detailing receipts, payments, reasons for premature ending, and creditors whose claims remain unsatisfied.
2. The Adjudicating Authority passes an order acknowledging the incomplete implementation.
3. Affected debtors or creditors can apply for a bankruptcy order.
4. Copies of the report and order are forwarded to all parties bound by the plan.

Discharge Process

The discharge process marks the successful completion of the insolvency resolution:

1. The resolution professional applies for a discharge order based on the repayment plan.
2. The repayment plan may provide for early discharge or discharge upon complete implementation.
3. The discharge order is recorded in the register maintained by the Board.
4. It’s important to note that the discharge order only relates to the debts mentioned in the repayment plan and does not discharge any other person from their liabilities.

Transparency and Record-Keeping

To ensure transparency and maintain proper records:

1. The resolution professional must prepare and circulate reports of creditors’ meetings.
2. Copies of various orders and reports are forwarded to the Board for recording in the official register.
3. The Adjudicating Authority’s orders on repayment plan approval, rejection, or premature ending are recorded for future reference.

Appeals and Legal Recourse

While the insolvency resolution process aims to be comprehensive, there are provisions for appeals and further legal actions:

1. If the Adjudicating Authority rejects the repayment plan, both the debtor and creditors have the right to file for bankruptcy under Chapter IV of the Insolvency and Bankruptcy Code.
2. Parties dissatisfied with orders passed by the Adjudicating Authority may have the option to appeal to higher authorities, though specific appeal procedures are not detailed in the provided text.

Flexibility in the Process

The insolvency resolution process incorporates some flexibility to accommodate various situations:

1. The resolution professional can adjourn creditors’ meetings for up to seven days at a time if there’s sufficient cause.
2. The Adjudicating Authority may grant the resolution professional an extension of up to seven days to submit the completion report of the repayment plan.

Special Considerations for Partnership Firms

When the insolvency application relates to a partnership firm:

1. The moratorium operates against all partners of the firm.
2. This ensures that the insolvency process comprehensively addresses the financial situation of both the firm and its individual partners.

Exclusions and Limitations

The insolvency resolution process has certain limitations:

1. Creditors who are associates of the debtor are not entitled to vote in creditors’ meetings.
2. Creditors cannot vote in respect of debts for unliquidated amounts.
3. The Central Government, in consultation with financial sector regulators, may notify certain transactions to which the moratorium provisions do not apply.

Confidentiality and Public Disclosure

The process balances the need for confidentiality with public disclosure:

1. While creditors’ claims and meetings are not public, the initial notice inviting claims is published widely.
2. The Adjudicating Authority’s orders are made available to relevant parties and recorded with the Board.

Integration with Broader Insolvency Framework

This process for individuals and partnership firms is part of a larger insolvency resolution framework:

1. It complements corporate insolvency resolution processes outlined in other sections of the Insolvency and Bankruptcy Code.
2. The Board maintains a register of insolvency professionals and records of insolvency proceedings, integrating individual and partnership insolvencies into the broader insolvency ecosystem.

Bankruptcy Order for Individuals And Partnership Firm

Bankruptcy is a legal process that provides relief to individuals and partnerships struggling with overwhelming debt. Lets understand the key aspects of the bankruptcy process, from initiation to the effects of a bankruptcy order and more.

Initiating the Bankruptcy Process

Filing for Bankruptcy 

Bankruptcy proceedings can be initiated by either the debtor or creditors. The application must be filed within three months of certain orders passed by the Adjudicating Authority. For partnerships, any partner can file the application.

Debtor’s Application

When debtors file for bankruptcy, they must submit:

1. Records of the insolvency resolution process
2. A statement of affairs detailing their financial situation
3. The Adjudicating Authority’s order permitting the bankruptcy application

Debtors may propose an insolvency professional as the bankruptcy trustee. The application must follow prescribed forms and include the required fee. Once filed, it cannot be withdrawn without the Adjudicating Authority’s permission.

Creditor’s Application

Creditors filing for a debtor’s bankruptcy must provide:

1. Records of the insolvency resolution process
2. The Adjudicating Authority’s order allowing the bankruptcy application
3. Details of the debts owed
4. Any other prescribed information

Secured creditors have two options:

1. Give up their security for the benefit of all creditors
2. Apply only for the unsecured portion of the debt, estimating its value

Creditors may propose a bankruptcy trustee and cannot withdraw the application without permission.

Immediate Effects of Filing

Upon filing, an interim-moratorium begins, staying all legal actions against the debtor’s property. This protects the debtor’s assets until the bankruptcy process formally starts.

The Bankruptcy Order

Appointing a Bankruptcy Trustee

If a trustee is proposed in the application, the Adjudicating Authority asks the Board to confirm the professional’s eligibility within seven days. The Board has ten days to confirm or reject the proposed trustee. If rejected or if no trustee is proposed, the Board nominates one within ten days.

Issuing the Bankruptcy Order

The Adjudicating Authority must issue a bankruptcy order within 14 days of receiving the trustee confirmation or nomination. Within seven days of the order, the Authority provides copies of the bankruptcy application and order to the bankrupt, creditors, and trustee.

Validity and Effects of the Order

The bankruptcy order remains in effect until the debtor is discharged. Its key effects include:

1. The bankrupt’s estate vests in the trustee
2. The estate is divided among creditors
3. Creditors generally cannot take legal action against the bankrupt’s property without permission
4. Secured creditors retain the right to realise their security, but must act within 30 days to claim interest
5. For partnerships, the order applies to all partners individually

Financial Assessment and Creditor Claims

Preparing the Statement of Financial Position

When a bankruptcy order is issued, the bankrupt must submit a statement of financial position to the bankruptcy trustee within seven days. This statement details the bankrupt’s assets, liabilities, income, and expenses. For partnerships, each partner must submit an individual statement, and a joint statement for the firm is required.

Notifying Creditors

The Adjudicating Authority must notify creditors of the bankruptcy within ten days. This involves sending notices to known creditors and publishing a public notice inviting claims. The public notice is published in newspapers and displayed on the Authority’s premises and website.

Registering and Listing Claims 

Creditors have seven days from the public notice to register their claims with the bankruptcy trustee. The trustee then prepares a list of creditors within 14 days of the bankruptcy commencement date, based on the bankrupt’s disclosures and the received claims.

Creditors’ Meeting and Voting

Organising the Creditors’ Meeting

The bankruptcy trustee must call a meeting of creditors within 21 days of the bankruptcy commencement date. Notices for the meeting are sent to all listed creditors, including proxy voting forms.

Conducting the Meeting

The bankruptcy trustee convenes and conducts the creditors’ meeting. The meeting’s primary purposes are to establish a committee of creditors and address any other relevant business. The trustee records and retains minutes of the meeting.

Voting Rights of Creditors

Each creditor or their proxy can vote on resolutions presented at the meeting. The resolution professional assigns voting shares to creditors. Certain creditors, such as those with unliquidated claims or associates of the bankrupt, are not entitled to vote.

Managing the Bankruptcy Estate

Administration and Distribution of Assets 

The bankruptcy trustee administers and distributes the bankrupt’s estate according to legal provisions. This involves collecting and selling assets, then distributing the proceeds to creditors.

Completing the Administration Process 

Upon completing the administration, the trustee convenes a meeting with the creditors’ committee. The trustee presents a report on the estate’s administration, which the committee must approve within seven days.

Discharge from Bankruptcy

The Discharge Order: The bankruptcy trustee applies for a discharge order either one year after the bankruptcy commencement date or within seven days of the creditors’ committee approving the administration’s completion. The Adjudicating Authority then issues the discharge order.

Effects of Discharge

The discharge order releases the bankrupt from most bankruptcy debts. However, it doesn’t affect the trustee’s functions, release the bankrupt from debts incurred through fraud or breach of trust, or discharge excluded debts.

Restrictions and Responsibilities of the Bankrupt

Disqualifications

From the bankruptcy commencement date, the bankrupt faces several disqualifications. These include being barred from acting as a trustee, serving as a public servant, or being elected to public office or local authorities.

Behavioural Restrictions

The bankrupt must follow certain restrictions, such as not acting as a company director, creating charges on their estate, or taking on further debt without the trustee’s permission. They must inform business partners of their bankruptcy and seek permission for significant financial transactions or overseas travel.

Modifying or Recalling the Bankruptcy Order

The Adjudicating Authority can modify or recall a bankruptcy order if there’s an apparent error or if all debts and expenses have been paid or secured. This modification affects the bankrupt’s property disposition and is binding on all creditors regarding the bankruptcy debts.

The Role of the Bankruptcy Trustee

The bankruptcy trustee is appointed to oversee the bankruptcy process, manage the debtor’s assets, and ensure that creditors are treated fairly. Their responsibilities include:

1. Collecting and selling the bankrupt’s assets
2. Investigating the bankrupt’s financial affairs
3. Distributing proceeds to creditors
4. Reporting to the court and creditors

Standards of Conduct

Bankruptcy trustees must adhere to a strict code of conduct as outlined in section 208 of the bankruptcy code. This ensures that they perform their duties with integrity, impartiality, and professionalism. The code of conduct likely includes provisions on:

1. Maintaining confidentiality
2. Avoiding conflicts of interest
3. Acting in the best interests of all parties involved
4. Complying with legal and ethical standards

Fees and Compensation

Bankruptcy trustees are compensated for their services through fees charged to the bankruptcy estate. The fee structure is regulated and typically based on the value of the bankrupt’s estate. Key points about trustee fees include:

1. Fees are specified in proportion to the estate’s value
2. Payment comes from the distribution of the bankrupt’s estate
3. Fees are paid according to the priority order established in section 178 of the bankruptcy code

Replacement, Resignation, and Vacancy

The bankruptcy process allows for the replacement of trustees under certain circumstances:

Replacement:

1. The creditors’ committee can propose replacing the trustee with a 75% voting share
2. The court (Adjudicating Authority) directs the Board to recommend a replacement
3. The Board recommends a new trustee within 10 days
4. The court appoints the new trustee within 14 days of receiving the recommendation

Resignation:

1. Trustees may resign if they intend to cease practising as insolvency professionals or due to conflicts of interest
2. The court directs the Board to recommend a replacement within 7 days of accepting the resignation
3. The replacement process follows similar timelines as in the case of replacement

Vacancy:

1. If a vacancy occurs for reasons other than replacement or resignation, the court directs the Board to recommend a replacement
2. The replacement process follows similar timelines as in other cases

In all cases of trustee changes:

1. The outgoing trustee must transfer possession of the bankrupt’s estate to the new trustee
2. The outgoing trustee must share all relevant information and cooperate with the new trustee
3. The new trustee must notify the creditors’ committee and the bankrupt of their appointment within 7 days

Release from Duties

A bankruptcy trustee is released from their duties in the following circumstances:

1. When a new trustee is appointed due to replacement, resignation, or vacancy
2. Upon completion of the bankruptcy administration, after the creditors’ committee approves the trustee’s final report

Even after release, the outgoing trustee must continue to share information and cooperate with the new trustee as needed.

Administration and Distribution of the Estate of the Bankrupt

The bankruptcy process involves careful management and distribution of the bankrupt’s estate. This section of the article explores the roles, powers, and duties of key parties involved, as well as the handling of the bankrupt’s property.

Role and Powers of the Bankruptcy Trustee

The bankruptcy trustee plays a central role in managing the bankrupt’s estate. Their key functions include:

1. Investigating the bankrupt’s affairs
2. Realising the bankrupt’s estate
3. Distributing the bankrupt’s estate

The trustee has several general powers to fulfil these functions:

• Selling parts of the bankrupt’s estate
• Receiving money and providing receipts
• Claiming and drawing dividends for debts due to the bankrupt
• Redeeming pledged or hypothecated property
• Transferring securities or other transferable property
• Dealing with property to which the bankrupt is beneficially entitled

The trustee also has specific rights, including:

• Holding property of any description
• Making contracts
• Suing and being sued
• Entering into engagements regarding the bankrupt’s estate
• Employing assistants
• Executing power of attorney, deeds, or other instruments

For certain actions, the trustee must obtain approval from the creditors’ committee. These include:

• Continuing the bankrupt’s business for winding-up purposes
• Initiating or defending legal actions related to the estate
• Accepting future payments as consideration for property sales
• Mortgaging or pledging property to raise funds for debt payments
• Making payments to obtain property subject to the bankrupt’s rights or options
• Referring disputes to arbitration or compromising with debtors
• Appointing the bankrupt to supervise estate management, carry on business, or assist in administration

Duties and Restrictions of the Bankrupt

The bankrupt has several duties towards the trustee:

1. Providing information about their affairs
2. Attending meetings with the trustee as required
3. Notifying the trustee of certain events after bankruptcy commencement:
   • Acquiring new property
   • Property devolving upon the bankrupt
   • Income increases
4. Performing other prescribed duties

The bankrupt must report increases in income or property acquisition within seven days. These duties, except for reporting new acquisitions, continue even after discharge.

Restrictions are placed on the bankrupt’s property disposition. Any disposition made between filing for bankruptcy and the bankruptcy commencement date is void. This doesn’t create rights against persons who received property in good faith, for value, and without notice of the bankruptcy filing.

Estate Management and Property Handling

The bankrupt’s estate vests in the trustee immediately upon appointment, without need for formal conveyance or transfer. The estate includes:

1. All property belonging to the bankrupt at the bankruptcy commencement date
2. Powers over property that the bankrupt could have exercised for their benefit
3. Property comprised in the estate by virtue of bankruptcy provisions

Excluded from the estate are:

• Excluded assets
• Property held in trust for others
• Workers’ provident fund, pension fund, and gratuity fund sums
• Assets notified by the Central Government in consultation with financial sector regulators

The bankrupt, their banker, agent, or any person possessing relevant property, books, papers, or records must deliver these to the trustee. The trustee takes control of all property and records relating to the bankrupt’s estate or affairs.

After-acquired property can be claimed by the trustee for the estate by giving notice to the bankrupt within 15 days of becoming aware of the acquisition. This doesn’t apply to excluded assets or property acquired after discharge. The trustee can’t claim after-acquired property from someone who obtained rights over it in good faith, for value, and without notice of the bankruptcy.

Onerous Property

1. Onerous property of bankrupt (Section 160):

Onerous property refers to unprofitable contracts or assets that are difficult to sell or may lead to claims. The bankruptcy trustee can disclaim such property by giving notice to the bankrupt or interested parties. This disclaimer frees the trustee from liability related to the property and terminates the bankrupt’s rights and interests in it. However, this action doesn’t affect the rights of other parties, who may be considered creditors if they suffer losses due to the disclaimer.

2. Notice to disclaim onerous property (Section 161):

In some cases, the trustee doesn’t need to give a formal notice to disclaim onerous property. This occurs when an interested party has already asked the trustee in writing to decide on disclaiming the property, and the trustee hasn’t responded within seven days. If the property can’t be disclaimed under these circumstances, it becomes part of the bankrupt’s estate.

3. Disclaimer of leaseholds (Section 162):

For leasehold interests, the trustee must serve a notice on all interested persons before disclaiming. The disclaimer takes effect if no objections are filed within 14 days, or if the Adjudicating Authority approves the disclaimer despite objections. The Authority may also make orders regarding fixtures and improvements related to the lease.

4. Challenge against disclaimed property (Section 163):

Interested parties, including those with claims on the property or liabilities related to it, can challenge the disclaimer. The Adjudicating Authority may order the vesting or delivery of the disclaimed property to these parties. Such orders are considered when assessing losses due to the disclaimer.

Transactions and Contracts

1. Undervalued transactions (Section 164):

The trustee can apply to void transactions where the bankrupt sold assets for significantly less than their worth within two years before the bankruptcy application. Transactions with associates during this period are automatically considered undervalued. The Adjudicating Authority can void these transactions and restore the property to the bankrupt’s estate.

2. Preference transactions (Section 165):

These are transactions that put a creditor in a better position than others in case of bankruptcy. The trustee can apply to void preference transactions made with associates within two years before bankruptcy, or with others within six months. The Adjudicating Authority can declare such transactions void and restore the property to the estate.

3. Effect of order (Section 166):

Orders voiding undervalued or preference transactions don’t affect the rights of those who acquired interests in good faith, for value, and without notice of the bankruptcy proceedings. Any sums recovered are added to the bankrupt’s estate.

4. Extortionate credit transactions (Section 167):

The trustee can apply to address credit transactions with exorbitant terms entered into within two years before bankruptcy. The Adjudicating Authority can modify or set aside debts from these transactions and require the return of payments or property to the bankrupt’s estate.

5. Obligations under contracts (Section 168):

Parties to contracts with the bankrupt can apply to be discharged from their obligations or for damages for non-performance. Any damages payable by the bankrupt are treated as bankruptcy debt.

Special Circumstances

1. Continuance of proceedings on death of bankrupt (Section 169):

If a bankrupt dies, the bankruptcy proceedings continue as if they were still alive.

2. Administration of estate of deceased bankrupt (Section 170):

The regular rules for administering a bankrupt’s estate apply to deceased bankruptcies. However, the trustee must consider claims for funeral and testamentary expenses, which rank equally with secured creditors in priority. Any surplus after paying all debts and costs goes to the deceased bankrupt’s legal representatives.

Creditor Claims and Debt Management

Proof of Debt 

The bankruptcy trustee initiates the process by notifying creditors to submit proof of their debts within 14 days. Creditors must provide full details of their claims, including dates and values. For secured debts, creditors must also describe the security and its value. Decree holders can submit a copy of the decree as valid proof. The trustee may estimate the value of debts without specific amounts and can sell property if a secured creditor fails to respond within 30 days.

Proof of Debt by Secured Creditors 

Secured creditors have two options. They can either realize their security and claim the remaining balance, or surrender their security to the trustee for the benefit of all creditors and claim their entire debt.

Mutual Credit and Set-off 

The trustee must account for any mutual dealings between the bankrupt and creditors before the bankruptcy. They calculate the balance due after setting off amounts owed by each party. Only this final balance is considered for claims. However, amounts due from the bankrupt are excluded if the other party knew of a pending bankruptcy application.

Claims of Creditors 

Creditors who prove their debts late can still receive missed dividends from available funds before further distributions occur. While creditors cannot sue the trustee for dividends, the court may order payment if the trustee wrongfully refuses.

Distribution of Assets

Distribution of Interim Dividend 

When sufficient funds are available, the trustee may declare and distribute interim dividends to creditors who have proven their debts. The trustee must provide notice of the dividend and distribution method. They must also account for potential late claims, disputed amounts, and administrative expenses.

Distribution of Property 

With creditor committee approval, the trustee may distribute hard-to-sell assets directly to creditors based on estimated value. The committee can ratify urgent actions taken without prior approval, allowing the trustee to cover expenses from the estate.

Final Dividend 

Once the estate is fully realized, the trustee announces either a final dividend or that no further dividends will be paid. They set a deadline for final claims. After this date, the trustee pays outstanding bankruptcy expenses and distributes the final dividend among proven creditors. Any surplus goes to the bankrupt. In partnerships, separate creditors receive priority over joint creditors for individual partner assets.

Priority of Payment of Debts 

The law establishes a clear order for paying debts:

1. Bankruptcy process costs and expenses
2. Workers’ dues (for 24 months prior) and secured creditor debts
3. Other employees’ wages and dues (for 12 months prior)
4. Government debts (for 2 years prior)
5. All other debts, including unsecured claims

Debts in each class rank equally and are paid in full if possible, or proportionally reduced if funds are insufficient. Unsecured creditors rank equally unless otherwise agreed. Any remaining surplus pays interest on debts since the bankruptcy date.

Special considerations apply to partnerships, where partnership property first pays partnership debts, and individual property pays personal debts. Surpluses are then applied to the other category as needed.

Adjudicating Authority for Individuals and Partnership Firms

The Insolvency and Bankruptcy Code establishes a clear framework for handling insolvency matters related to individuals and partnership firms. This article explores the adjudicating authorities, their jurisdiction, and the appeal process in such cases.

1. Primary Adjudicating Authority

The Debt Recovery Tribunal (DRT) serves as the primary adjudicating authority for insolvency matters involving individuals and partnership firms. The DRT with territorial jurisdiction over the place where the individual debtor resides, conducts business, or works for gain has the authority to entertain applications under the Code.

1. Jurisdiction of the Debt Recovery Tribunal

The DRT has comprehensive jurisdiction in insolvency and bankruptcy matters for individuals and firms. This includes:

1. a) Entertaining or disposing of suits or proceedings by or against the individual debtor 
2. b) Handling claims made by or against the individual debtor 
3. c) Addressing questions of priority or any other legal or factual issues arising from the insolvency and bankruptcy proceedings

1. Exclusion of Civil Court Jurisdiction

Civil courts do not have jurisdiction over matters that fall under the purview of the DRT or the Debt Recovery Appellate Tribunal (DRAT) as per this Code. Additionally, no court, tribunal, or authority can grant injunctions regarding actions taken or to be taken under the powers conferred to the DRT or DRAT by the Code.

1. Moratorium Period and Limitation

When computing the period of limitation for suits or applications filed on behalf of a debtor under moratorium, the duration of the moratorium is excluded. This provision overrides the Limitation Act, 1963, and any other applicable laws.

1. Appeal Process

1. a) First Appeal: Appeals against DRT orders must be filed before the DRAT within 30 days. The DRAT may allow a 15-day extension if sufficient cause for delay is shown.
2. b) Supreme Court Appeal: Appeals from DRAT orders on questions of law must be filed before the Supreme Court within 45 days. The Supreme Court may grant a 15-day extension if sufficient cause for delay is demonstrated.

1. Timely Disposal of Applications

The Code emphasizes expeditious handling of cases. If an application is not disposed of or an order is not passed within the specified period, the DRT or DRAT must record the reasons for the delay. The Chairperson of the DRAT can then extend the period by up to 10 days after considering these reasons.

Offences and Penalties in Insolvency Resolution for Individuals and Partnerships

The law outlines several offences and corresponding penalties to deter fraudulent activities and maintain the integrity of the process. Let’s examine the key offences and their consequences:

1. False Information by Debtors or Creditors

Providing false information to the resolution professional is a serious offence. If a debtor or creditor submits materially false details, they face:

• Imprisonment up to one year
• Fine up to five lakh rupees
• Or both

1. Dishonest Voting Promises by Creditors

Creditors who promise to vote in favor of a repayment plan in exchange for money, property, or security from the debtor are subject to:

• Imprisonment up to two years
• Fine up to three times the value received
• Or both
• If the value can’t be quantified, the fine may extend to five lakh rupees

1. Contravention by Insolvency Professionals

Insolvency professionals who deliberately violate the provisions of this part of the law face:

• Imprisonment up to six months
• Fine between one lakh and five lakh rupees
• Or both

1. Offences by Bankrupts

Bankrupts can be penalized for various actions:

1. a) False representation or concealment:

• Imprisonment up to six months
• Fine up to five lakh rupees
• Or both

1. b) Failure to provide, withholding, destroying, or altering financial records:

• Imprisonment up to one year
• Fine up to five lakh rupees
• Or both

1. c) Violating restrictions or provisions under sections 140 or 141:

• Imprisonment up to six months
• Fine up to five lakh rupees
• Or both

1. d) Failing to deliver property to the estate:

• Imprisonment up to six months
• Fine up to five lakh rupees
• Or both

1. e) Unexplained loss of substantial property:

• Imprisonment up to two years
• Fine up to three times the value lost (or up to five lakh rupees if not quantifiable)
• Or both

1. f) Absconding after bankruptcy commencement:

• Imprisonment up to one year
• Fine up to five lakh rupees
• Or both

1. Offences by Bankruptcy Trustees

Bankruptcy trustees can be held liable for:

1. a) Fraudulent misapplication of the bankrupt’s estate 
2. b) Willful actions causing loss to the estate

Penalties for these offences include:

• Imprisonment up to three years
• Fine of at least three times the loss caused (or up to five lakh rupees if not quantifiable)
• Or both

Conclusion

The Insolvency and Bankruptcy Code’s provisions for individuals and partnership firms represent a compassionate approach to financial distress. This framework recognizes that behind every debt, there’s a human story – often one of struggle, misfortune, or honest missteps. By offering structured pathways like the Fresh Start Process, the code provides hope and a second chance to those burdened by overwhelming debt.

This system isn’t just about numbers and legal procedures; it’s about rebuilding lives and preserving dignity. For many individuals and small business owners, insolvency can be a deeply personal and emotionally challenging experience. The IBC’s balanced approach acknowledges this human element, striving to create a supportive environment for financial recovery while maintaining fairness for all parties involved.

Moreover, the code’s emphasis on rehabilitation over punishment reflects a progressive understanding of economic realities. It recognizes that offering individuals and small firms a path to financial redemption not only benefits them but also contributes to a healthier, more resilient economy as a whole.

However, the true measure of this system’s success lies not just in its legal framework, but in its implementation. It calls for empathy, understanding, and fairness from all stakeholders – creditors, resolution professionals, and the judicial system. By approaching each case with compassion while upholding the integrity of the process, we can ensure that this legislation truly serves its purpose: offering a lifeline to those in financial distress and fostering a more inclusive economic environment.