Expanded Summary of IBC Chapter 4: Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

Part III of the Insolvency and Bankruptcy Code, 2016 (Sections 78–187) governs insolvency resolution and bankruptcy
for individuals and partnership firms. Partially notified for personal guarantors to corporate debtors (effective December
1, 2019), it outlines three processes: Fresh Start, Insolvency Resolution, and Bankruptcy. The Debt Recovery Tribunal
(DRT) is the adjudicating authority, except for personal guarantors, where the National Company Law Tribunal (NCLT)
applies. Below is a detailed summary of all provisions, processes, regulations, and illustrations.

1. Preliminary (Sections 78–79)

Scope and Application (Section 78):

Covers Fresh Start, Insolvency Resolution, and Bankruptcy for individuals and partnership firms.
Minimum default: ₹1,000 (can be increased to ₹1 lakh via notification).
Applies to personal guarantors as a distinct category (Section 2).

Key Definitions (Section 79):

 Adjudicating Authority: DRT for individuals/firms; NCLT for personal guarantors.
 Associate: Includes immediate family (spouse, dependent children/parents), partners, relatives, employees,
trustees, or companies where debtor owns >50% shares or controls the board.
 Bankrupt: Debtor adjudged bankrupt under Section 126, partners of a bankrupt firm, or undischarged
insolvent.
 Bankruptcy Debt: Includes debts as of bankruptcy commencement, liabilities from precommencement
transactions, and interest (Section 171).
 Bankruptcy Commencement Date: Date of bankruptcy order (Section 126).
 Excluded Assets: Unencumbered tools, vehicles, furniture, personal ornaments (≤₹1 lakh), life insurance,
pension plans, and single dwelling unit (urban: ≤₹20 lakh; rural: ≤₹10 lakh).
 Excluded Debts: Fines, damages for negligence, maintenance, student loans, or prescribed debts.
 Qualifying Debt: Liquidated, unsecured debts, excluding excluded debts or debts incurred 3 months before
Fresh Start application.
 Repayment Plan: Debtor’s proposal for debt restructuring, prepared with Resolution Professional (RP).
 Partnership Debt: Debt for which all partners are jointly liable.
 Resolution Professional (RP): Insolvency professional for Fresh Start or Insolvency Resolution.
 Undischarged Bankrupt: Bankrupt without a discharge order (Section 138).

Example: A close friend is not an “associate” (Illustration 1); bankruptcy commencement is the date of the bankruptcy
order (Illustration 2).

2. Fresh Start Process (Sections 80–93)

A process for lowincome debtors to discharge qualifying debts.

Eligibility Criteria (Section 80):

 Gross annual income ≤₹60,000.
 Assets ≤₹20,000.
 Qualifying debts ≤₹35,000.
 Not an undischarged bankrupt, not undergoing other processes, no dwelling unit (Illustration 3), and no prior
Fresh Start order in the last 12 months.

Application Process (Section 81):

 Filed by debtor (personally or via RP) with affidavit detailing:
 List of debts, creditors, interest rates, and securities.
 Financial information (debtor and immediate family, 2 years prior).
 Reasons for application and pending legal proceedings.
 Confirmation of no prior Fresh Start order in 12 months.
 Interim Moratorium: Starts on filing, halts legal actions/proceedings until admission/rejection (Illustration 4: Banks
cannot file cases during this period).

Appointment of RP (Section 82):

 If RP is named: Adjudicating Authority directs IBBI within 7 days to confirm no disciplinary proceedings; IBBI
responds in 7 days.
 If no RP named: Adjudicating Authority directs IBBI to nominate RP within 7 days; IBBI nominates within 10
days.
 Adjudicating Authority appoints RP and provides application copy.

RP’s Examination (Section 83):

 Within 10 days, RP examines application, recommending acceptance/rejection based on:
 Eligibility under Section 80.
 Whether debts are qualifying.
 Absence of false representations/omissions.
 RP may request additional information (debtor/others must respond in 7 days).
 Presumes debtor’s inability to pay unless evidence suggests otherwise.

Admission/Rejection (Section 84):

Adjudicating Authority decides within 14 days, specifying qualifying debts for discharge.
Copy of order sent to creditors within 7 days.

Effect of Admission (Section 85):

Moratorium: Starts on admission, lasts 180 days (e.g., March 5 to August 31).
Stays legal actions; creditors cannot initiate proceedings.
Debtor restrictions:
 Cannot act as a company director or manage a company.
 Cannot dispose/alienate assets.
 Must inform business partners of Fresh Start.
 Must disclose process for significant transactions and business name.
 Cannot travel abroad without Adjudicating Authority’s permission.

Creditor Objections (Section 86):

Creditors can object within 10 days on debt inclusion/details.
RP examines objections within 10 days, preparing an amended debt list or seeking Adjudicating Authority’s
directions.

Appeals Against RP’s Decision (Section 87):

Debtor/creditor can challenge RP’s decision within 10 days for lack of representation, collusion, or noncompliance.
Adjudicating Authority decides within 14 days; may refer to IBBI for action against RP.

Debtor’s Duties (Section 88):

Provide all information, attend meetings, comply with RP’s requests, and report errors/changes in financial
circumstances.

RP Replacement (Section 89):

Debtor/creditor can apply for replacement; Adjudicating Authority refers to IBBI, which nominates a new RP within
10 days.
Replaced RP must share information and cooperate.

Compliance Directions (Section 90):

RP can seek Adjudicating Authority’s directions for debtor’s noncompliance with restrictions or duties.

Revocation of Order (Section 91):

RP can apply for revocation due to changed circumstances, noncompliance, or mala fide actions.
Adjudicating Authority decides within 14 days; moratorium and process cease if revoked.

Discharge Order (Section 92):

 RP submits final qualifying debt list 7 days before moratorium ends.
Adjudicating Authority issues discharge order, releasing debtor from:
Qualifying debts.
Penalties/interest from application date.
Contractual sums related to qualifying debts.
Nonqualifying debts and thirdparty liabilities remain unaffected.
Order recorded with IBBI (Section 196).
Logical sequence: Application → Fresh Start Order → Debt List → Discharge (Illustration 5).

RP Conduct (Section 93):

Must adhere to code of conduct (Section 208).

3. Insolvency Resolution Process (Sections 94–120)

A process to restructure debts via a repayment plan.

Initiation:
By Debtor (Section 94):
Filed personally or via RP for nonexcluded debts.
Partners of a firm need all/majority partners to apply jointly (Illustration 6).
Ineligible if bankrupt, undergoing other processes, or had an application admitted in the last 12 months.
Form A, ₹2,000 fee; copies to creditors/corporate debtor (Rule 6, 2019).
By Creditor (Section 95):
Filed individually/jointly or via RP for partnership debts.
Requires demand notice (Form B) and evidence of default (14day nonpayment).
Applications against partners of the same firm are consolidated (e.g., transferred to same Adjudicating Authority).
Form C, ₹2,000 fee; copies to guarantor/corporate debtor (Rule 7, 2019).

Interim Moratorium (Section 96):

Starts on application, stays legal actions, applies to all partners of a firm, except for notified transactions.

RP Appointment (Section 97):

If RP named: Adjudicating Authority directs IBBI to confirm within 7 days; IBBI responds in 7 days.
If no RP: Adjudicating Authority directs IBBI to nominate within 7 days; IBBI nominates in 10 days.
Adjudicating Authority appoints RP and provides application copy.

RP Replacement (Section 98):

Debtor/creditor or creditors’ meeting (for repayment plan) can request replacement.
Adjudicating Authority refers to IBBI; new RP nominated within 10 days.
Replaced RP must share information and cooperate.

RP’s Report (Section 99):

Examines application within 10 days, verifying:
Compliance with Section 94/95.
Debt repayment proof (e.g., bank transfers, cheque encashment, creditor acknowledgment).
Debts registered with information utility cannot be disputed.
RP may seek additional information (response within 7 days).
Recommends approval/rejection; if eligible for Fresh Start, suggests treating as Section 81 application.
Copy of report to debtor/creditor.

Admission/Rejection (Section 100):

Adjudicating Authority decides within 14 days; may instruct RP to negotiate repayment plan.
Rejection for fraudulent intent allows creditors to file for bankruptcy.
Order and report sent to creditors within 7 days.

Moratorium (Section 101):

 Starts on admission, lasts 180 days or until repayment plan order, staying legal actions and restricting asset disposal.
Applies to all partners of a firm.

Public Notice (Section 102):

Issued within 7 days of admission, inviting claims within 21 days via newspapers, Adjudicating Authority premises,
and website.

Claim Registration (Section 103):

Creditors submit claims in Form B with proof via electronic/postal means (Regulation 7, 2019).

Creditor List (Section 104):

RP prepares within 30 days, including claim amounts and security interests (Regulation 9, 2019).
Shared with guarantor, debtors, and filed with Adjudicating Authority.

Repayment Plan (Section 105):

Prepared by debtor with RP, proposing debt restructuring (Illustration 6).
Includes:
Justification for plan and creditor approval.
RP fees.
Implementation schedule, funding sources, and minimum budget (≥10% income for debt repayment).
Asset sales, business management, or debt term modifications (Regulation 17, 2019).
RP may manage debtor’s business, realize assets, or administer funds.

RP’s Report on Plan (Section 106):

Submitted within 21 days of claim submission, assessing:
Compliance with laws.
Feasibility of approval/implementation.
Need for creditor meeting (with reasons if not required).
Specifies meeting details if needed.

4. Bankruptcy Process (Sections 121–183)

Initiated when insolvency resolution fails or creditors seek liquidation.

Initiation:
By Debtor (Section 122): Filed for inability to pay or anticipated inability; partners need majority/all.
By Creditor (Section 123): For unpaid debts with demand notice; joint applications allowed.

Interim Moratorium (Section 124):

Starts on application, stays legal actions until admission/rejection.

Bankruptcy Order (Section 126):

Adjudicating Authority passes within 14 days of RP’s report, commencing bankruptcy.

Bankruptcy Trustee (BT) (Section 125):

Appointed to manage bankrupt’s estate, realize assets, and distribute proceeds.

Moratorium (Section 128):

Starts on bankruptcy commencement, stays legal actions, and restricts asset disposal.

Public Notice (Section 130):

Invites claims within 21 days via newspapers and Adjudicating Authority’s website.

Creditor Committee (Section 134):

Formed by BT within 3 days of creditor meeting; includes creditors with ≥33% voting share.
BT can convene meetings as needed or on request by creditors with ≥33% voting share.
 Discharge Order (Section 138):
Issued after 1 year or estate realization, discharging bankrupt from qualifying debts, except excluded debts.

BT Duties (Section 149):

Realize assets via auction (Schedule II, Part A) or private sale for perishable/highvalue assets (Part B).
Distribute proceeds, investigate affairs, maintain records, and appoint valuers/professionals.
Open bank account in bankrupt’s name for funds (Illustration 8: Excludes investing surplus funds).

BT Rights (Section 151):

Hold property, make contracts, sue/be sued, employ professionals, and execute instruments.

BT Powers (Section 152):

Sell assets, redeem pledged property, transfer securities, and manage beneficial property.

Creditor Approval (Section 153):

Required for business continuation, legal actions, compromises, or appointing bankrupt to manage estate
(Illustration 10: Selling estate doesn’t need approval).

Estate Vesting (Section 154):

Vests in BT immediately without transfer; includes all property except excluded assets, trust property, or employee
funds (Section 155).

Property Delivery (Section 156):

Bankrupt, bankers, or others must deliver property/documents to BT.

Actionable Claims (Section 157):

Deemed assigned to BT without notice (Illustration 9).

Property Disposition (Section 158):

Void if made between application and bankruptcy commencement, even if in good faith (Illustration 11).

AfterAcquired Property (Section 159):

BT can claim property acquired postcommencement (except excluded assets) with 15day notice; requires
Adjudicating Authority’s approval post15 days.

Onerous Property (Section 160):

BT can disclaim unprofitable contracts or unsaleable property with notice (creditor approval needed for claimed
estate property).
Disclaimer discharges BT’s liability; affected parties are creditors for losses (Sections 161–163).

Undervalued Transactions (Section 164):

Within 2 years (associates) or causing bankruptcy; voidable unless in ordinary business.
Includes gifts, no/low consideration, or marriagerelated transactions.

Preference Transactions (Section 165):

2 years for associates (Illustration 12), 6 months for others (Illustration 13); voidable if bankruptcy triggered and
intent to favor exists.

Extortionate Credit (Section 167):

Transactions with exorbitant/unconscionable terms within 2 years; voidable unless regulated financial services.

Contract Obligations (Section 168):

Parties can seek discharge or damages for precommencement contracts; damages provable as bankruptcy debt.

Deceased Bankrupt (Section 170):

Bankruptcy continues; funeral/testamentary expenses rank with secured creditors.
Debt Proof (Section 171):
Creditors submit proof within 14 days, detailing debt, security, and interest (except postcommencement).
Decree holders use decrees; BT estimates unvalued debts.

Secured Creditors (Section 172):

Prove balance after realizing security or full claim if security surrendered.

Mutual Credit/SetOff (Section 173):

BT offsets mutual dealings precommencement, excluding sums with notice of bankruptcy application.

Dividend Distribution:
Interim Dividend (Section 174): Declared when funds sufficient (Illustration 14).
Final Dividend (Section 176): After estate realization; surplus to bankrupt.
Creditors missing dividends can claim later without disturbing prior distributions (Section 177).

Priority of Payments (Section 178):

1st: Bankruptcy costs.
2nd: Workmen dues (24 months) and secured creditors.
3rd: Employee wages (12 months).
4th: Government dues (2 years).
5th: Other debts, including unsecured.
Surplus pays interest; partnership/separate debts prioritized accordingly (Regulation 34, 2019).

5. Adjudicating Authority (Sections 179–183)

DRT Jurisdiction (Section 179):

Handles insolvency/bankruptcy for individuals/firms (except personal guarantors, under NCLT).
Covers suits, claims, and priority questions; excludes civil court jurisdiction (Section 180).
Moratorium period excluded from limitation calculations (Illustration 15).

Appeals:
DRAT: Within 30 days (extendable by 15 days) (Section 181).
Supreme Court: On questions of law, within 45 days (extendable by 15 days) (Section 182).

Expeditious Disposal (Section 183):

Delays require recorded reasons; DRAT can extend by ≤10 days.

6. Offences and Penalties (Sections 184–187)

False Information (Section 184):

Debtor/creditor: Up to 1 year imprisonment, ₹5 lakh fine, or both.
Creditor accepting bribes: Up to 2 years, fine up to 3x benefit (or ₹5 lakh if unquantifiable), or both.

Insolvency Professional (Section 185):

Deliberate contravention: Up to 6 months, ₹1–5 lakh fine, or both.

Bankrupt’s Offences (Section 186):

False representation/concealment: Up to 6 months, ₹5 lakh fine, or both.
Fraudulent record withholding: Up to 1 year, ₹5 lakh fine, or both.
Restriction violations (Sections 140/141): Up to 6 months, ₹5 lakh fine, or both.
Nondelivery of property: Up to 6 months, ₹5 lakh fine, or both.
Unexplained loss (12 months prior): Up to 2 years, fine up to 3x loss (or ₹5 lakh), or both.
Absconding: Up to 1 year, ₹5 lakh fine, or both.
 BT Misconduct (Section 187):
Fraudulent misapplication: Up to 3 years, fine ≥3x loss (or ₹5 lakh), or both.
No liability for seizing nonestate property with reasonable belief (Illustration 16).

7. Regulations and Rules (2019)

IBBI Regulations:
Insolvency Resolution for Personal Guarantors: Specify claim submission (Form B), creditor list, and repayment plan
contents (e.g., implementation schedule, minimum budget).
Bankruptcy for Personal Guarantors: Detail asset sales, BT duties, and dividend distribution.
Rules:
Insolvency Resolution: Form A (debtor), Form C (creditor), ₹2,000 fee.
Bankruptcy: Application procedures for personal guarantors.