Sole Proprietorship Firm is eligible to file application u/s 7 & Sec. 9 of IBC and entitled to initiate CIRP against Corporate Debtor- A detailed Analysis by M. Maharshi Viswaraj

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Sole Proprietorship Firm is eligible to file Application Under Section 7 and Section 9 of Insolvency and Bankruptcy Code, 2016 and entitled to initiate Corporate Insolvency Resolution Process against Corporate Debtor- A detailed Analysis

M. Maharshi Viswaraj,
Advocate

There are conflicting views of various NCLT Benches on the subject matter whether a sole proprietorship concern comes under the definition of Operational Creditor and Financial Creditor. Before going into Judicial Interpretations, let us have a look in to the definitions prescribed under the Code.

As per Section 5(7) Financial Creditor means any person to whom a financial debt is owed and as per Section 5(20) Operational Creditor means a person to whom an Operational debt is owed. According to Section 3(23) 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.  Bare reading of definition of Person shows that  “Sole Proprietorship” is not included, but as per clause (g) of Section 3(23) person includes entity established under a statute. There are different statutes that can be applied to a sole proprietor business and registering under them can give valid proof of existence. Such provisions are as follows:

  1. Shop and Establishment License issued under Shops & Establishments Act.
  2. GST Registration Certificate issued by the Government of India under GST Act.
  3. MSME Registration Certificate issued by the Government of India under MSME Act.
  4. Bank Account opened under the name of Proprietary Concern.
  5. PAN issued under Income Tax Act.

When the Sole Proprietary Concern is registered under any Statute, then the Firm said to have been established under a statute. The Same view is taken by the Hon’ble NCLT, Hyderabad Bench in CP (IB) No. 123/9/HDB/2018. The Hon’ble Adjudicating Authority held that the Operational Creditor filed GST Registration Certificate and the Certificate was issued under the provisions of an Act. Hence Operational Creditor has to be treated as a Person under clause (g) of Section 3(23).

According to Section 2(f) of Code,2016 the provisions of the Code shall apply to Proprietorship Firms. Further the definition of Person in Section 3(23) is inclusive definition, but not exhaustive one. When Section 2(f) and Section 3(23) are read together it can be safely said that the Sole Proprietorship Firm comes under the definition of Person. The same view has been taken by the Hon’ble NCLAT in the matter of Neeta Saha vs. Mr. Ram Niwas Gupta 191(IBC)156/2020. The Hon’ble NCLAT over ruled the Order of Hon’ble NCLT, New Delhi Bench in “R.G. Steels Vs. Berry Auto Ancillaries (P) Ltd”, where in the Adjudicating Authority rejected the petition on the ground that Sole Proprietorship concern is not included in the definition of Person. In Neeta Saha(supra) case the Hon’ble NCLAT observed that  Section 2 of IBC provides that the provisions of the Code apply, inter alia, to “proprietorship firms”. Further the definition of “person” in Section 3(23) of IBC is inclusive definition.

Hence the Applications filed by the Sole Proprietorship Firm under IBC are perfectly maintainable.

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