Insolvency Resolution of Individual and Partnership Firms

Following the notification by the Ministry of Corporate Affairs on 15-11-2019, in a significant ruling dated 21-5-2021, in Lalit Kumar Jain v. Union of India the Supreme Court addressed the constitutionality of the provisions of the Insolvency and Bankruptcy Code that permitted the initiation of insolvency process against personal guarantors, including the promoters, of a corporate debtor that is facing insolvency.

The Supreme Court maintained the terms of the notification, ruling that the guarantor remains liable even if the corporate debtor or principal borrower is released from their obligation to the creditor through an involuntary process like insolvency. In essence, the Supreme Court opened the door for creditors to file for bankruptcy against the personal guarantors of a company debtor going through liquidation or insolvency.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(c)(ii) (Syllabus 2022).

The Supreme Court has affirmed the notification’s constitutional validity, and opened the door for banks and other financial institutions to file for the bankruptcy of personal guarantors of corporate debtors facing insolvency or liquidation proceedings before the NCLT.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(c)(iii) (Syllabus 2022).

Corporate Debtors may face increased scrutiny and pressure from creditors, as personal guarantors can now be pursued for recovery of debts. This may lead to more responsible borrowing and lending practices.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(c)(iv) (Syllabus 2022).

Implementing provisions of the Insolvency and Bankruptcy Code (IBC) relating to insolvency resolution and bankruptcy of individual and partnership firms can pose several challenges. Here are some of the key challenges:

1.Lack of infrastructure and expertise: The infrastructure required to handle insolvency and bankruptcy proceedings for individuals and partnership firms may not be as developed compared to that for corporate entities. Additionally, there may be a shortage of professionals with the necessary expertise in handling such cases.

2.Complexity of individual and partnership structures: Unlike corporate entities, individuals and partnership firms often have complex ownership structures, personal assets, and liabilities. This complexity can make it challenging to assess the financial situation accurately and devise suitable resolution plans.

3.Sensitivity and stigma: Personal bankruptcy carries significant social and emotional implications. Individuals and partners may be reluctant to admit insolvency due to fear of stigma or damage to their reputation. Overcoming this stigma and encouraging individuals to come forward and seek resolution can be a challenge.

4.Variability in assets and liabilities: Individual and partnership assets and liabilities can vary widely, making it difficult to standardize insolvency procedures. Each case may require a unique approach tailored to the specific circumstances, which can increase the complexity and time required for resolution.

5.Legal complexities: Dealing with personal insolvency involves navigating various legal frameworks, including personal property laws, family law considerations, and taxation issues. Harmonizing these legal aspects with insolvency proceedings under the IBC can be challenging and may require amendments or clarifications to existing laws.

6.Financial distress of small businesses: Partnership firms, often comprising small businesses, may lack the resources to withstand financial distress. Implementing effective resolution mechanisms for such entities requires addressing the unique challenges faced by small businesses, including access to credit, market volatility, and regulatory compliance burdens.

7.Awareness and education: Many individuals and partnership firms may not be aware of their rights and obligations under the IBC or may lack understanding of the insolvency resolution process. Promoting awareness and providing education about insolvency laws and procedures is essential for ensuring effective implementation.

8.Judicial capacity and backlog: Courts play a crucial role in the insolvency resolution process by adjudicating disputes and approving resolution plans. However, existing judicial capacity constraints and backlog of cases in Indian courts may hinder timely resolution of insolvency cases for individuals and partnership firms.

Addressing these challenges requires a concerted effort from policymakers, regulators, legal professionals, and other stakeholders to streamline processes, enhance infrastructure, and promote awareness about insolvency laws and procedures for individuals and partnership firms.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 6(B) (Syllabus 2017).

Section 1(3) of the Insolvency and Bankruptcy Code 2016 grants the Central Government the authority to implement different sections of the IBC at different times. This power was used to bring the provisions concerning personal guarantors into effect. Specifically, a notification in November 2019 made Part III applicable to personal guarantors, bringing them within the IBC’s purview.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(c)(i) (Syllabus 2022).

(a)Section 105(2) of the Insolvency and Bankruptcy Code, 2016 provides that the repayment plan may authorize or require the Resolution Professional to:

(a)carry on the debtor’s business or trade on his behalf or in his name; or

(b)realize the assets of the debtor; or

(c)administer or dispose of any funds of the debtor.

Accordingly, continuing of business operations of HG & Co by the Resolution Professional in his name is not correct and Resolution Professional can carry on the business of the debtor only on behalf of the Debtor and not in his name. Sale of Stocks for the repayment to the Creditors is allowed as the stock is an asset which can be realized.

(b)According to section 109 of the Code a creditor shall not be entitled to vote in respect of a debt for an unliquidated amount. A credit Insolvency and Bankruptcy Code, 2016 or 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 Code, or creditor is an associate of the debtor.

In the given case:

–‘K’ cannot vote as his name not mentioned in the list of creditors.

–GH Works Private Limited cannot vote as they are an ‘Associate’ of the debtor.

(c)Section 110 of the Insolvency and Bankruptcy Code, 2016 provides that the secured creditors shall be entitled to participate and vote in the meetings of the creditors. 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. Where a secured creditor does not forfeit his right to enforce security, such secured creditor shall submit an affidavit to the resolution professional at the meeting of the creditors stating:

(a)that the right to vote exercised by the secured creditor is only in respect of the unsecured part of the debt; and

(b)the estimated value of the unsecured part of the debt.

If UIB Bank does not forfeit its right to enforce security, it can vote only for Unsecured Overdraft of Rs. 5 Lacs.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(a) (Syllabus 2017).

Section 128 of the Indian Contract Act,1872 though not part of the Insolvency and Bankruptcy Code had a profound bearing and relevance in the judgment, as it deals with the liability of the surety (personal guarantor).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(c)(v) (Syllabus 2022).

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 (1) 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.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 5(a) (Syllabus 2017).

The above facts relates to Keb Hana Bank (Petitioner) vs. Rohit Nath (CD) (IBC SR.NO 2643/2020) decided on 22nd October, 2020 at Debt Recovery Tribunal-II, Chennai.

(a)The contention of the applicant is that as per section 60 of the IBC, the insolvency resolution has to be initiated before adjudicating authority having territorial jurisdiction over the place where the registered office of the corporate person is located. However, this contention was unfounded as section 60 deals with proceedings initiated against the corporate debtor whereas have separate forum is clothed with the power to adjudicate. The present proceedings are against guarantor to the corporate debtor alone. As far as the proceedings before this Tribunal is concerned, under section 60 of IBC code have no application.

The present application is filed by the applicant showing the address of the respondent where they have been served with the communications and the same falls within the territorial of the jurisdiction of this Tribunal. Hence, this Tribunal is of the view that there is no force in contention of the respondent that this Tribunal lacks territorial jurisdiction to entertain this matter

(b)As per section 99 of IBC, the resolution professional shall examine the application referred to in section 94 or section 95, as the case may be, within ten days of his appointment, and submit a report to the Adjudicating Authority recommending for approval or rejection of the application.

Section 99(2) provides that 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.

As per section 99(2), it is crystal clear that the resolution professional may require the debtor to furnish the details about the repayment and there is nothing to suggest that it is made mandatory to the RP to call for from the debtor the details of repayment. The word used "may" cannot be construed as mandatory one and it gives only discretionary however to the RP. In view of section 99(2), which does not create a mandatory obligation on the RP, the contention of the respondent is that non-compliance of section 99(2)

vitiates the proceedings is unfounded.

Having entered into the above findings, it is viewed that the application filed by the applicant under section 95 of the Act can be admitted and accordingly the same is admitted.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 5(a) (Syllabus 2017).