Remedy Given To Corporate Debtor U/s 94 Of IBC Not Available To Proprietorship Firm: Madhya Pradesh High Court

The Madhya Pradesh High Court has held that remedy given by way of Section 94 of IBC, 2016 only applies to Corporate Debtor which by definition doesn't included a Proprietorship Firm.

The Court was considering a Writ Petition seeking direction to the Respondents to consider the representation regarding the pending petition under the Insolvency and Bankruptcy Code, 2016.

The single bench of Justice Vivek Rusia observed, "We are unable to accept the aforesaid submission. Section 94 of IBC, 2016 gives remedy to „debtor‟ only to either apply personally or through a resolution professional (RP) to the Adjudicating Authority for initiating the insolvency resolution process. Section 3(8) of IBC, 2016 defines “corporate debtor” which means a corporate person who owes a debt to any person and “corporate person” is defined in sub-section (7) of Section 3, it means a company under the Companies Act, 2013, a limited liability partnership under the Limited Liability Partnership Act, 2008 or any other person incorporated with limited liability under any law. Therefore, in this definition the proprietorship firm is not included."

The Petitioner was represented by Senior Advocate Amit Agrawal while the Respondent was represented by Government Advocate Bhuwan Gautam.

Facts of the Case

The Petitioner is the owner of the property mortgaged as a collateral security against the financial facility availed by M/s Rainbow Sales and M/s Kothari Enterprises from Respondents No.4 & 5. The Sole Proprietorship availed the financial facilities from the Axis Bank in the form of SBB overdraft facility of Rs.23,00,000/- and Rs. 49,10,680/- respectively. The Axis Bank classified the account as Non-Performing Asset and thereafter, initiated the recovery proceedings under Section 14 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The Axis Bank approached the Sub Divisional Magistrate in order to seek the assistance to secure the possession of the mortgaged property of the petitioner and the same was ordered in process of which, notices were served to the Petitioner.

The Petitioner then approached the NCLT, Indore by way of petition under Section 94 of IBC, 2016 in order to protect the possession of the secured asset, and to seek direction to the Respondents to stop the recovery of possession during the pendency of the insolvency proceedings before the DRT.

Senior Counsel for the Petitioner submitted that by virtue of Section 96(1)(b)(i) of IBC, 2016 after filing an application under Section 94 of IBC, 2016 an interim- moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application and during the interim-moratorium period any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed. He averred that the creditors of the debt shall not initiate any legal action or proceeding in respect of the debt.

He further submitted that the definition of debtor under Section 3(8) of IBC, 2016 does not explicitly define the term debtor as applicable to the individual or sole partnership firm, but by way of statutory interpretations, the definition of debtor under other law the individual and partnership firm or sole proprietorship firm can be included in it hence, the present petitioner who is a personal guarantor to sole proprietorship firm is hereby covered under the broader scope of term debtor.

Reasoning By Court

The Court rejected the submission of the Senior Counsel for the Petitioner to held that the definition of Corporate Debtor doesn't include proprietorship firm.

"The M/s Rainbow Sales and M/s Kothari Enterprises are sole partnership firms, thus, in respect of these two firms, no application under Section 94 is liable to be entertained even at the instance of the present petitioner," the Court observed.

Cause Title: Ramesh Kothari vs. The State of Madhya Pradesh And Others

Appearances

Petitioner- Senior Advocate Amit Agrawal, Advocate Utkarsh Joshi

Respondent- Government Advocate Bhuwan Gautam

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