SECTION 94 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 IS NOT APPLICABLE TO SOLE PROPRIETORSHIP FIRM

[DR.MARIAPPAN GOVINDARAJAN]

Section 94 of Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides that a debtor may apply either by himself, or jointly with Partners, or through a Resolution Professional to the Adjudicating Authority for initiating an Insolvency Resolution Process under the Section by submitting an application.   Where the debtor is a partner of a firm, such debtor shall not apply under this Chapter to the Adjudicating Authority in respect of the firm unless all or a majority of the partners of the firm file the application jointly.  This section is not applicable to proprietorship concern.

In RAMESH KOTHARI VERSUS STATE OF MADHYA PRADESH AND OTHERS - 2025 (4) TMI 629 - MADHYA PRADESH HIGH COURT, the petitioner is owning one property at Ratlam, Madhya Pradesh.  The said property was offered as a security to the loan obtained by Rainbow Sales and Kothari Enterprises from Axis Bank.  The Rainbow Sales and Kothari Enterprises are the sole proprietorship concerns owned by Chetan Kothari and Angoorbala Kothari respectively.

The Rainbow Sales and Kothari Enterprises availed SBB over draft facility of Rs.23 lakhs and Rs.49.10 lakhs respectively from Axis bank.  Since no repayment has been made by both the parties the bank declared them as Non-Performing Assets on 30.08.2023.  The bank-initiated action under SARFAESI Act for the recovery of the said loan invoking Section 14 of the SARFAESI Act.  The bank approached the Sub Divisional Magistrate to seek the assistance of the court to secure the possession of the mortgage property of the petitioner.  The Additional Collector passed an order on 28.06.2024 for the bank to take the possession of the property with the help of Tehsildar.  The Tehsildar issued notice to the borrower, Rainbow Sales and Kothari Enterprises for taking possession of the property on 27.02.2025.

In the meanwhile, the petitioner approached the National Company Law Tribunal (‘NCLT’ for short) for initiation of insolvency resolution process under Section 94 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short).  The petitioner has also filed the present writ petition before the High Court to protect his assets.   The prayer of the petitioner before the High Court is to issue directions to stop the recovery of the possession during the pendency of the application filed under Section 94 of the Code. 

The petitioner submitted the following before the High Court-

• An interim moratorium shall commence on the date of  the filing of application under Section 94 of the Code in relation to all the debts.
• Any legal action or proceeding pending before any Court shall be deemed to have been stayed during the period of interim moratorium.
• The creditors of the debt shall not initiate any legal action for the debt.
• Section 3(8) of IBC, 2016 does not explicitly define the term debtor as applicable to the individual or s ole 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.
• The petitioner is a personal guarantor to sole proprietorship firm is hereby covered under the broader scope of term debtor.

The High Court heard the submissions of the petitioner.  The High Court analysed the provisions of Section 3(8) Section 94 of the Code.  The High Court observed that Section 94 of the Code gives remedy to ‘debtor’ only to either apply personally or through a resolution professional to the Adjudicating Authority for initiating the insolvency resolution process.  Section 3(8) of Code defines the expression ‘corporate debtor’ as 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. In the said definition the proprietorship concern is not included.  The Rainbow Sales and Kothari Enterprises are sole proprietorship concerns.  Therefore, the High Court held that Section 94 of the Code is not applicable to the petitioner.

The High Court further observed that Additional District Magistrate has already passed an order hence, become a functus officio. The Tehsildar who has issued a notice does not enjoy any adjudication power to consider the objection / representation of the petitioner.

In view of the above the High Court dismissed the petition.