The Insolvency and Bankruptcy Code, 2016 (IBC) – Position of Sole Proprietorship is still up in the air

A. Introduction

1. Section 5 (20) of IBC, ‘an operational creditor’ means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred or transferred.

2. Question pop up, who is a person under IBC, as per Section 3(23) of the code, “person” includes— (a) an individual; (b) a Hindu Undivided Family; (c) a company; (d) a trust; (e) a partnership; (f) a limited liability partnership; and (g) any other entity established under a statute, and includes a person resident outside India;

3. From the above definition, one cannot infer that the Sole Proprietorship is considered as the operation creditor under the code. Let us take deep dive into the above sections, before inferring any plain answer.

B. The Vital  NCLT and NCLAT judicial String

4. Proprietorship concern is not a legal entity, could not sue or be sued in its name. 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. “Sai Kripa Associates v. Kstar Naturalle Resources Private Limited, NCLT”.

5. Section 3(23) of the Code, which even though includes an individual, does not specifically include a sole proprietary concern within its ambit,” G. Steels v. Berrys Auto Ancillaries (P) Ltd, NCLT”.

6. An application filed under Section 9 of IBC by a sole proprietorship, represented by its sole proprietor is legal and is maintainable, “Kishore and Company v. Sri Balaji Metallics (P.)Ltd, NCLT

7. The sole proprietorship is an unregistered entity and cannot sue or be sued, it cannot file an application under Section 9 and the same must be filed by the proprietor himself, Impact Event Management v. Garodia Automobiles Private Ltd, NCLT”

8. The term “persons” under Section 3(23) of the Code includes proprietary concern. The Tribunal while referring to the definition of “persons” said that the term includes an individual, company and any entity established by the statute and in the present case the proprietary concern would fall within the definition of the person, “Vani Biochem v. Vaayucon Greentech Pvt. Ltd., NCLT”.

9. Section 2 of IBC provides that the provisions of the Code apply, inter alia, to “proprietorship firms”. Even the judgment shows the name of Respondent No. 1 as the Operational Creditor in his name. The Adjudicating Authority in effect has allowed the defects to be cured. The objection on this count does not survive. Further, the definition of “person” in Section 3(23) of IBC is inclusive, “Neeta Saha v. Ram Niwas Gupta”, NCLAT

C. Jurisprudence based on facts

10. Code impetus

To straighten the credit system in the country and augment the growth of the growing country

11. Vantage, an indication to bring sole proprietorships under the Code.

a. In the report, Bankruptcy Law Reforms Committee Volume I: Rationale and Design, one of the core task, to create a uniform framework that would cover matters of insolvency and bankruptcy of all legal entities and individuals.

b. Section 2 of the code provides for the applicability; vide the Insolvency and Bankruptcy (Amendment) Act, 2018[1], “Proprietorship Firm “has been added to the list of entities.

c. Insolvency Law Committee, under the chapter, “Recommendation regarding Personal Insolvency Resolution and Bankruptcy Process”, the definition of the term “proprietorship firms” under Section 2(e) of the Code, said that ‘proprietorship firms’ have also not been statutorily defined in many other jurisdictions. The term ‘sole proprietorship ’or‘ proprietorship firm is often used in common parlance, is a well-recognized form of business, and therefore, concluded that it is not necessary to define ‘proprietorship firms’ in the Code.

12. Recognition to Sole proprietorship

a. A natural person and his sole proprietorship firm do not enjoy the benefit of being treated as separate legal entities and are the same legal entity,“Devendra Surana v. Bank of Baroda, DHC”. 

b. A sole proprietorship is not a legal entity, which can sue or be sued in its name.  Such suit relating to or against the affairs or claims of a proprietorship concern has to be brought or made against the person who is the sole proprietor of the firm,“Miraj Marketing Corporation v. Vishakha Engineering ”

13. Still up in the air

In the light of above judicial strings and Jurisprudence, the Position of Sole Proprietorship is still up in the air, 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 its proprietor has filed the same.

Conclusion

We are halfway through, yet to cover the path to reach any conclusive inference about the Position of Sole Proprietorship. Hon’ble NCLAT, not portrait plain view about the sole proprietorship. Also, a sole proprietorship is not a legal entity, which can sue or be sued in its name, following this general rule of law, cannot file the application before adjudicating authority in its name. The legislature may bring this controversy down, as an exception to the generality of law, appraising the object of the code or we have to wait for unequivocal judicial interpretation. Accordingly advisable, that an operational creditor (sole proprietorship), shall file an application under Section 9 of IBC through its proprietor, to fuel resolution process.

[1] https://taxguru.in/corporate-law/insolvency-bankruptcy-code-amendment-act-2017.html

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