As per Section 9 of Insolvency and Bankruptcy Code, 2016 ('IBC'/ 'the Code'), an operational creditor can file an application for initiation of the Corporate Insolvency Resolution Process ('CIRP'). Section 5(20) of IBC defines an operational creditor as a 'person' to whom an operational debt is owed and includes 'any person' to whom such debt has been legally assigned or transferred. Correspondingly, Section 3(23) of IBC states that a 'person' includes an individual, a Hindu Undivided Family, a company, a trust, a partnership, a limited liability partnership and any other entity established by a statute and includes a person resident outside India.
Since, there is no explicit mention of sole proprietorships in the definition of operational creditor, there is no clear understanding on whether sole proprietorship can be considered as operational creditors and accordingly file an application under Section 9 of the Code, unless the same has been filed by its proprietor representing the entity. Section 2 of IBC enumerates the entities to which the provisions of the Code apply. The Insolvency and Bankruptcy (Amendment) Act, 2018 as notified on 18 January, 2018 added proprietorship firms to this list of entities. One assumption for this move could be to prevent instances of sole proprietorship being excluded from seeking redressal for their grievances under the Code.
In 2018, National Company Law Tribunal ('NCLT'), New Delhi Bench in the case of Sai Kripa Associates v. Kstar Naturalle Resources Private Limited 1 dismissed a petition filed by a sole proprietorship concern under Section 9 of IBC stating that such an application was not maintainable by law and that a proprietorship concern is not a legal entity and thus could not sue or be sued in its own name. It was held that the operational creditor being a sole proprietorship concern should have filed the petition in the name of the sole proprietor rather than the name of the proprietorship concern.
Following this approach, NCLT, Kolkata Bench in the case of Kishore and Company v. Sri Balaji Metallics (P.)Ltd 2, in 2018 held that an application filed under Section 9 of IBC by a sole proprietorship, represented by its sole proprietor is perfectly legal and is maintainable.
Similarly, in the case of Impact Event Management v. Garodia Automobiles Private Ltd. 3, NCLT, Kolkata Bench in January, 2019 held that the filing of an application under Section 9 of IBC by the operational creditor who is a sole proprietary firm through its proprietor was maintainable as it is settled law that the proprietary firm cannot sue and be sued in its own name but can sue and be sued through its proprietor.
On the contrary, in the case of Vani Biochem v. Vaayucon Greentech Private Limited, NCLT, Amaravati Bench on 03.09.2019 held that a 'person' as defined under Section 3(23) of IBC includes inter alia an individual, a company and any other entity established under a statute.
The Hon'ble Tribunal further elaborated, "The petitioner is a proprietary company and thus would fall within the definition of a person. An Operational Creditor means a person to whom an operational debt is owed/due. From the above, for the limited purpose of the present lis, it is clear that the petitioner is an operational creditor of the respondent." Accordingly, the petition filed by a proprietary concern under Section 9 of the Code was held to be maintainable.
Interestingly, akin to NCLT Kolkata Bench's judgment, NCLT, New Delhi Bench on 23.09.2019 in the case of R.G. Steels v. Berrys Auto Ancilliaries (P) Ltd. 4 noted that a sole proprietary concern is not entitled to approach NCLT under Section 9 of IBC on its own when taking into consideration, the definition of 'person' as under Section 3(23) of the Code, which even though includes an individual, does not specifically include a sole proprietary concern within its ambit.
In the report, Bankruptcy Law Reforms Committee Volume I: Rationale and Design published in November 2015, it was acknowledged that the task of the Committee in the second phase of their mandate was to create a uniform framework that would cover matters of insolvency and bankruptcy of all legal entities and individuals, except those with a dominantly financial function. This required a shift in the mandate to include micro, small and medium enterprises, sole proprietorships and individuals specifically. Furthermore, when discussing the legal entities that are subject to the legal provisions of IBC, the Committee specified sole proprietorships where the legal personality of the proprietorship is not different from the individual who owns it, among other entities.
Keeping in mind the views of various NCLT benches as stated supra, there exists uncertainty in the mind of operational creditors who are sole proprietors. The Hon'ble National Company Appellate Tribunal ('NCLAT') in the case of Neeta Saha v. Ram Niwas Gupta 5 on 25.02.2020 addressed the issue of the maintainability of an application filed under Section 9 by a sole proprietorship.
In the instant case before NCLT, New Delhi, the corporate debtor challenged the maintainability of the petition filed under Section 9 of IBC on the standpoint that the same had been filed by a sole proprietorship, which is not a legal entity and is not covered under the definition of 'person' under Section 3(23) of the Code. The operational creditor then cured the said defect by filing an amended memo of parties in the personal name of the proprietor and when the said question was raised again before the Hon'ble NCLAT by the corporate debtor, the Appellate Tribunal simply stated that since the defects were cured, the objection that the petition was not maintainable does not survive.
The Appellate Tribunal further clarified that Section 2 of IBC amongst other entities, applies to proprietorship firms. Moreover, it also noted that the definition of 'person' in Section 3(23) of IBC is an inclusive definition.
The above decision of Hon'ble NCLAT leaves significant room for interpretation of the aforementioned statutes. While, the Appellate Tribunal reiterated the position that a sole proprietorship concern can file an application under Section 9 of IBC only through the proprietor personally, by acknowledging that the defects had been cured, the Appellate Tribunal also stated that the definition in Section 3(23) of the code was an inclusive definition. It can only be assumed that NCLAT intended to accommodate sole proprietorship concerns by extending the definition in Section 3(23) to include sole proprietorship concerns when read with Section 2 and Section 5(20) of the Code. Yet, the Hon'ble NCLAT has not elaborated much on the issue.
Although, Section 3(23) of the Code is to be interpreted with a wide and inclusive approach as opposed to a restrictive interpretation, it is advisable that an operational creditor, who is sole proprietary concern, file an application under Section 9 of IBC through its proprietor.
1 Sai Kripa Associates v. Kstar Naturalle Resources Private Limited (CP-IB-1438/ND/2018), National Company Law Tribunal, Delhi (2018)
2 Kishore and Company v. Sri Balaji Metallics (P.)Ltd, (CP(IB) No. 165/KB/2018), National Company Law Tribunal, Kolkata (2018)
3 Impact Event Management v. Garodia Automobiles Private Ltd. (CP (IB) No. 22/KB/2018), National Company Law Tribunal, Kolkata (2019)
4 R.G. Steels v. Berrys Auto Ancilliaries (P) Ltd., (IB-722/ND/2019), National Company Law Tribunal, New Delhi (2019)
5 Neeta Saha v. Ram Niwas Gupta, Company Appeal(AT)(Insolvency) No. 321 of 2020, National Company Law Appellate Tribunal, New Delhi (2020)
This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.