Whether a Sole Proprietorship Firm is eligible to file Application Under Section 7 and Section 9 of Insolvency and Bankruptcy Code, 2016 ("I&B Code") and entitled to initiate Corporate Insolvency Resolution Process ("CIRP") against Corporate Debtor?

An Analysis:

There have been contradictory views of various National Company Law Tribunal ("NCLT/ Adjudicating Authorities") Benches on the subject matter "Whether a sole proprietorship Firm comes under the classification of Operational Creditor and Financial Creditor."

First and foremost, it is relevant to look into the important definitions prescribed under the I&B Code.

According to Section 5(7) of the I&B Code, the term "Financial Creditor" means any person to whom a financial debt is owed and according to Section 5 (20) of the I&B Code, the term "Operational Creditor" means a person to whom an operational debt is owed.

According to Section 3 (23) of the I&B Code, the term "Person" Includes:

  1. an individual
  2. a Hindu Undivided Family
  3. a Company
  4. a trust
  5. a partnership
  6. a limited liability partnership and
  7. any other entity established under a statute.

Consequently, on a plain reading of the above definition of "Person," it is evident that "Sole Proprietorship Firm" is not included. Be that as it may, be, according to clause (g) of Section 3(23) of the I&B Code, the term person includes any other entity established under a statute.

An entity established under a Statute can be considered as Person for Section 3(23) of the I&B Code. There are various statutes under Indian Law, that can be applied to a sole proprietorship business. Having registration under those statutes can be a binding proof of the existence of such an entity. Some examples of the lawful registrations under the statutes are as follows:

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

Therefore, in view of the definition of "Person" under the I&B Code and lawful endorsements of a sole proprietor under various statutes, it can be construed that, if a Sole Proprietary firm is registered under any Statute, then such proprietor Firm can be said to have been recognized under a statute.

The Hon'ble NCLT took the above view, Hyderabad Bench in Shruti Impex vs. Jeevan Polymers Pvt. Ltd. [CP (IB) No. 123/9/HDB/2018], wherein it was held that since the Operational Creditor has filed a copy of provisional 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).

In another finding by Hon'ble NCLT, Kolkata Bench in Kishore and Company v. Sri Balaji Metallics (P.) Ltd. [CP (IB) No. 165/KB/2018], the corporate debtor objected to the fact that the petition had been filed by a sole proprietorship concern. In response to this, the NCLT noted that the application filed by M/s. Kishore and Company, being represented by its sole proprietor, is legal and is maintainable. The objection regarding the maintainability raised on the side of the corporate debtor was found to be unsustainable.

Thus, on construing of Section 2(f) and Section 3(23) together, it can be safely understood that the Sole Proprietorship Firm comes under the definition of Person. The equivalent interpretation has been taken by the Hon'ble NCLAT vide its order dated 25th February 2020 in the matter of Neeta Saha vs. Mr. Ram Niwas Gupta [191(IBC)156/2020].

The Hon'ble NCLAT in the above order overruled the decision of Hon'ble Adjudicating Authority, New Delhi Bench, in "RG Steels Vs. Berry Auto Ancillaries (P) Ltd IB-722/ND/2019", wherein the Adjudicating Authority rejected the petition on the ground that Sole Proprietorship concern is not included in the definition of Person. Further Hon'ble Appellate Authority in Neeta Saha (supra) case 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."

Henceforth, the Applications filed by the Sole Proprietorship Firm under the provisions of Section 7 and Section 9 of the I&B Code to initiate CIRP against the Corporate Debtor are flawlessly maintainable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.