Sole proprietary concerns cannot file insolvency petitions

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The National Company Law Tribunal (NCLT), Delhi in a recent judgment held that insolvency proceedings cannot be initiated by sole proprietary concern as the “sole proprietary concern” is not a person within the meaning of section 3(23) of the Insolvency and Bankruptcy Code (IBC), 2016.

In RG Steels v Berrys Auto Ancillaries (P) Ltd, a sole proprietorship concern, namely RG Steels (operational creditor), filed a section 9 application under the IBC, before the NCLT, against M/s Berrys Auto Ancillaries (corporate debtor) seeking initiation of Corporate Insolvency Resolution Process (CIRP) as the corporate debtor defaulted in making a payment of more than ₹1.5 million (US$21,000). The operational creditor furnished documents, ledger accounts and copies of pending invoices in support of its claim. It also furnished a demand notice that was sent in reply by the corporate debtor disputing the claim amount.

The NCLT dismissed the petition, holding that the petition filed by the operational creditor, which was a sole proprietorship concern, is not included in the definition of a person under section 3(23) of the IBC, as the same provides the definition of a “person” and includes an individual, a Hindu undivided family, a company, a trust, a partnership, a limited liability partnership, any other entity established under a statute, and also includes a person residing outside India. However, the same could not be stretched to refer to a sole proprietary concern.

The NCLT also found that there was a pre-existing dispute between the parties with respect to the rates charged and the total claim amount, which was shown in the detailed reply sent by the corporate debtor with computational charts. Thus, in the view of the definition of person not including a “sole proprietary concern”, as well as a pre-existing dispute, the NCLT dismissed the petition filed by the operational creditor, stating that the said petition was not maintainable.

The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at [email protected]. Readers should not act on the basis of this information without seeking professional legal advice.