Recourse to IBC by Sole Proprietorship Concerns: Re-Examining the Position in Light of Recent NCLAT Ruling

INTRODUCTION

Judgements of various NCLT Benches have had conflicting views on whether a Sole Proprietorship can apply to the Adjudicating Authority under the Code for initiating Insolvency Resolution Process of a Corporate Debtor for the outstanding debt which is due and payable.

However, a recent ruling by NCLAT in Neeta Saha vs. Ram Niwas Gupta[1] has brought about a precedent which is not in consonance with the legislative intent behind the Code and general principles of commerce and business. This article while revisiting the earlier judgements of various NCLT benches in this regard, also aims to throw light on the legal issues plaguing the NCLAT ruling.

PAST DECISIONS OF ADJUDICATING AUTHORITIES

In the ruling of Sai Kripa Associates vs. Kstar Naturalle Resources Private Limited[2], the NCLT Delhi had held that an application filed under Section 9 of the Code by a sole proprietorship was not maintainable. The rationale given by the Tribunal was that a proprietorship concern is not a legal entity and therefore could not sue or be sued in its own name. Being a sole proprietorship, the application should have been filed in the name of the proprietor instead.

In Kishore and Company vs. Sri Balaji Metallics (P.) Ltd[3], the NCLT Kolkata concurred with the above view. In the instant case, the tribunal held that an application filed by a Sole Proprietorship represented by its proprietor is maintainable.

In another similar ruling of Impact Event Management vs. Garodia Automobiles Private Ltd.[4], the NCLT Kolkata reiterated with its earlier view and held that a sole proprietorship can file an application being represented by its proprietor.

However, NCLT Amravati in the case of Vani Biochem v. Vaayucon Greentech Private Limited [5] had held that a Sole Proprietorship concern will fall under the definition of individual contained in Section 3(23) of the Code since it is an inclusive and not an exhaustive definition.

NCLAT RULING- POINTING THE ISSUES

The NCLAT in its ruling of Neeta Saha v. Ram Niwas Gupta[6], while reiterating the position that a sole proprietorship concern can only file an application under Section 9 of IBC through the proprietor, has also held that Section 2 of the Code applies to Sole Proprietorships and the definition of “Person” under Section 3(23) is inclusive and not exhaustive.

The above decision is not in consonance with the Code as well as the correct legal position of law. It is a fundamental principle of commerce that a sole proprietorship has not got a separate legal entity from its proprietor.

In Svapn Constructions v. IDPL Employees Cooperative Group Housing Society Ltd. and Ors[7], the Delhi High Court had held that a sole proprietorship is not entitled to file a suit under its own name as it is possess a separate legal entity from its proprietor. Hence, it ruled that the petition should be filed by the sole proprietor in his name and on behalf of his sole proprietorship firm.

In Devendra Surana v. Bank of Baroda[8], the Calcutta High Court had held that a proprietor and his sole proprietorship firm cannot be treated as separate legal entities and are the same legal entity. In the instant case, the High Court had ruled that the liability of the sole proprietorship firm is that of the natural person carrying on business under its name.

Thus, the above decisions provide an authoritative source to readily infer that a sole proprietorship firm does not have a separate legal existence from its proprietor. It is only when an entity has a separate legal existence can it have the right and privilege to sue and be sued.

Section 2 of the Code lists out the entities to whom the Code applies to. While it has applied its provisions to HUF and partnership which do not have a separate legal existence under the eyes of law, there is no explicit mention of sole proprietorship. The definition of “Person” in Section 3(23) also does not mention Sole Proprietorship while it mentions other entities which does not have a separate legal existence. Thus, it can clearly be established that the legislative intent was to exclude sole proprietorships from the scope of the Code.

The NCLAT in its ruling was right in holding that Section 3(23) is an inclusive definition and not exhaustive by virtue of clause (g). However, it is to be understood that Sole Proprietorships are not established by any Statute. For any entity to fall under this residuary provision, it must fulfil the condition of being established under a statute. Sole Proprietorships are not governed by any statute specifically, unlike companies under the Companies Act, 2013 and Partnerships under the Partnership Act. Its existence is not owed due to registration under any Statute. Does it clearly cannot avail this provision to come under the scope of Person under IBC.

CONCLUSION

The NCLAT has adopted an expansive approach in the present ruling to interpret the definition of “Person” under the Code. However, such an interpretation not only suffers from deviation from legislative intent behind the Code but also contravention of settled general principles of business.

While the legislature has consciously excluded Proprietorship firms from the applicability of the Code in Section 2 and also from the definition of “Person” in Section 3(23), it has included other entities not having the feature of separate legal existence under the eyes of law. While this is the position, it is not for the Tribunal to overstep from judicial action and indulge in judicial correction of the Code. The present ruling is violative of the golden rule of interpretation of statutes by adding into the words in a statute when there is no ambiguity in interpretation of a provision.

[1] Neeta Saha vs. Ram Niwas Gupta, Company Appeal (AT)(Insolvency) No. 321 of 2020, National Company Law Appellate Tribunal, New Delhi (2020).

[2] Sai Kripa Associates vs. Kstar Naturalle Resources Private Limited, (CP-IB-1438/ND/2018), National Company Law Tribunal, Delhi (2018).

[3] Kishore and Company vs. Sri Balaji Metallics (P.). Ltd., (CP(IB) No. 165/KB/2018), National Company Law Tribunal, Kolkata (2018).

[4] Impact Event Management vs. Garodia Automobiles Private Ltd., (CP (IB) No. 22/KB/2018), National Company Law Tribunal, Kolkata (2019).

[5] Vani Biochem vs. Vaayucon Greentech Private Limited, NCLT, Amaravati Bench on 03.09.2019.

[6] Neeta Saha vs. Ram Niwas Gupta, Company Appeal (AT)(Insolvency) No. 321 of 2020, National Company Law Appellate Tribunal, New Delhi (2020).

[7] Svapn Constructions vs. IDPL Employees Cooperative Group Housing Society Ltd. and Ors, 27 (2006) DLT 80.

[8] Devendra Surana vs. Bank of Baroda & Ors. on 12 December, 2018, W.P. No. 5521 (W) of 2017.

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