Show the facts common to all parts of Q. 1
Alok is a dealer in Eyewear, Spectacles and other eye accessories in India for the last 10 years based in Gurgaon. His vision was to transform the way people see and experience the world.
He is a frequent traveller and visited many countries to expand his business. Gulshan is one of the cousins of Alok and a resident of South Africa. Alok has a very good relations with his cousin and during his visit to South Africa in 2015 he started a showroom in partnership with his cousin in South Africa.
Alok has a very big showroom in India also. He used to import spectacles and other accessories from South Africa. With the increasing demand of more and more spectacles, goggles etc., business is reaching greater heights and he made a huge profit. His business was a growing business going very well. Since there was huge demand, the business went well and profits got multiplied in 3 to 4 years. In the year 2019 some differences developed between both the cousins and Alok decided to quit from the partnership.
He was also a director of Padmavat Solutions Private Limited and its associate company. Shekhawat Solutions Private Limited where he used to get the sitting fee for attending the Board Meetings.
In India also due to entry of online selling platform and other sales promotion strategies of the competitors, there were lots of changes in the market situation in India and his business started running into losses. He raised loans worth ₹ 10 Crore in the year 2019 to finance the working capital requirement of the business. He managed for another one year (year 2020) to run the business out of the retained earnings of the business. However due to the impact of COVlD 19 and other reasons the demand declined rapidly and later on he started making defaults. He defaulted in making payment to his creditors and Insolvency proceedings commenced and a repayment plan was approved. Alok failed to follow the repayment plan and filed for bankruptcy on 1st April, 2022 which was admitted on 10th April, 2022. A Bankruptcy order was passed and Gopal Gupta, an Insolvency Professional was appointed as a Bankruptcy Trustee.
Gopal Gupta started investigation of the affairs of the Bankrupt. He observed that on 7th April, 2022, Alok Gupta sold his shop to Kapil Kalra for ₹ 50 Lakh and gifted this amount to his major son.
As per Bankruptcy Trustee, he has some doubt that this transaction is not allowed as per Insolvency and Bankruptcy Code, 2016.
The Bankruptcy Trustee further asked Alok to prepare the list of the assets and hand over to the bankruptcy trustee. As per the list of the assets, Alok informed as below :
l Alok stated that he has been entrusted by his friend Arun to look after his property in Delhi currently valued at ₹ 1 Crore as Arun is staying in UK.
l Alok has ₹ 50 Lakh in provident fund, pension fund and the gratuity fund of the employees.
l Alok has a residential flat worth ₹ 2 Crore in his name.
l He has an antique paintings and silver household utensils and other valuable items worth ₹ 50 Lakh which have not been encumbered.
l He has also unencumbered insurance policy worth of ₹ 50 Lakh.
l He has also the father’s inherited property now in his name worth ₹ 5 Crore.
While bankruptcy proceedings were going on, Alok further decided to start a new business of kids garments by forming a new company in the name of “Kids Paradise Pvt. Ltd.” and engage himself in the formation and management of Kids Paradise Pvt Ltd. (Under Incorporation).
Based on the above facts, answer the following questions :
(c)Explain the relevant provisions for the distribution of the estate of the Alok in accordance with the Insolvency and Bankruptcy Code.
According to Section 136 of Insolvency and Bankruptcy Code, 2016, the bankruptcy trustee shall conduct the administration and distribution of the estate of the bankrupt in accordance with the provisions of Chapter V, which deals with administration and distribution of estate of the bankrupt.
As per the Section 178(1) of Insolvency and Bankruptcy Code, 2016, the estate of the Bankrupt shall be distributed in the following order:
l Firstly, the cost and expenses incurred by the Bankruptcy trustee for the Bankruptcy process in full; l Secondly, the workmen’s dues for the period of 24 months preceding the bankruptcy commencement date and debts owned by secured creditors; l Thirdly, wages and any unpaid dues owned to employees, other than workmen, of the Bankrupt for the period of 12 months preceding the bankruptcy commencement date; l Fourthly, any amount due to the Central Government and the State Government including the amount to be received on account of Consolidated Fund of India and Consolidate Fund of the State, if any, in respect of the whole or any part of the period of two years preceding the bankruptcy commencement date; l Lastly, all other debts and dues owned by the bankrupt including unsecured debts.
Section 178 (2) provides that the debts in each class specified in sub-section (1) shall rank in the order mentioned in that subsection but debts of the same class shall rank equally amongst themselves, and shall be paid in full, unless the estate of the bankrupt is insufficient to meet them, in which case they shall abate in equal proportions between themselves.
Section 178(3) states that where any creditor has given any indemnity or has made any payment of moneys by virtue of which any asset of the bankrupt has been recovered, protected or preserved, the adjudicating authority may make such order as it thinks just with respect to the distribution of such asset with a view to giving that creditor an advantage over other creditors in consideration of the risks taken by him in so doing.
As per Section 178(4), unsecured creditors shall rank equally amongst themselves unless contractually agreed to the contrary by such creditors.
According to Section 178(5) any surplus remaining after the payment of the debts under sub-section (1) shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the bankruptcy commencement date.
Section 178(6) states that interest payments under sub-section (5) shall rank equally irrespective of the nature of the debt.
Section 178(7) provides that in the case of partners, the partnership property shall be applicable in the first instance in payment of the partnership debts and the separate property of each partner shall be applicable in the first instance in payment of his separate debts.
As per Section 178(8) where here there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property; and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property.
Source: ICSI Guideline Answers, June 2024, Q. 1(c) (Syllabus 2022).