Skip to content

CS Professional · Insolvency and Bankruptcy - Law and Practice

Bankruptcy for Individuals and Partnership Firms under IBC

Part III of the Insolvency and Bankruptcy Code, 2016 deals with insolvency of individuals and partnership firms. It has three routes: fresh start for very small debtors, an insolvency resolution process through a repayment plan, and bankruptcy with sale of assets. Solve questions by finding the route, checking eligibility, then applying the process and effects.

What this chapter covers

This chapter covers Part III of the Code, which applies to individuals and partnership firms. Section 78 says the Part applies where the amount of default is not less than one thousand rupees. The Central Government may notify a higher minimum, but not more than one lakh rupees. Section 2 of the Code also brings personal guarantors to corporate debtors, partnership and proprietorship firms, and other individuals within its scope.

The chapter follows the life of a personal insolvency case. A debtor may begin with a fresh start (Chapter II), or an insolvency resolution process (Chapter III) built around a repayment plan agreed with creditors. If that fails, the case moves to bankruptcy (Chapters IV and V): a bankruptcy order, a bankruptcy trustee, administration and distribution of the estate, and finally discharge. Section 79 holds the key definitions, such as qualifying debt, excluded debt, excluded assets and immediate family.

This chapter links to the corporate side of the paper through the shared ideas of moratorium, insolvency professionals, committee of creditors and distribution of assets. The differences matter more in the exam. The Adjudicating Authority here is the Debt Recovery Tribunal (section 179 and section 79(1)), not the NCLT. Learn the corporate process first, then study this chapter by contrast.

Personal insolvency is a rule-heavy area where answers are built from definitions, eligibility conditions and time limits. These are easy to learn and easy to write in a case-based answer. Questions often give a debtor's income, assets or debts and ask whether he can apply for a fresh start or for resolution. If you know the exact conditions, you can reach a clear conclusion quickly. Many students skip this chapter because the corporate process feels more important. That leaves marks available for those who prepare it well.

Bankruptcy for Individuals and Partnership Firms: topics in the order to study them

  1. 1Overview of Part III of IBC for Individuals and FirmsStart here to learn the scope, the minimum default under section 78, and the key definitions in section 79 that every later topic uses.
  2. 2Adjudicating Authority and Insolvency ProfessionalsNext, learn who decides and who runs the process: the Debt Recovery Tribunal under section 179 and the insolvency professional's functions and code of conduct under section 208.
  3. 3Fresh Start ProcessThis is the simplest route, with fixed monetary limits in section 80, so it is a good first process to master.
  4. 4Insolvency Resolution Process for IndividualsStudy it after fresh start because it has wider eligibility but more steps, including the repayment plan and creditor approval.
  5. 5Bankruptcy Order and Its EffectsThis follows because bankruptcy is the stage reached when resolution does not work, and its effects on the debtor need the earlier processes as context.
  6. 6Administration and Distribution of the Bankruptcy EstateOnce you know what a bankruptcy order does, learn how the bankruptcy trustee deals with the estate and pays creditors under section 136.
  7. 7Discharge and Offences by DebtorsFinish with the end of the process and the penalties for debtor misconduct, which tie the whole chapter together.

How to prepare Bankruptcy for Individuals and Partnership Firms

Treat this chapter as a set of three processes with conditions, steps and outcomes. Build a comparison first, then add detail.

  1. Read sections 78, 79 and 2 first and write the definitions in your own words: qualifying debt, excluded debt, excluded assets, immediate family, associate.
  2. Make a one-page table for the three routes: who can apply, conditions, who acts, what the Adjudicating Authority does, and the result.
  3. Memorise the section 80 limits for fresh start: gross annual income up to ₹60,000, assets up to ₹20,000, qualifying debts up to ₹35,000, no dwelling unit owned, and no fresh start order in the preceding twelve months.
  4. Learn the section 94 bars on a debtor applying for resolution, including undischarged bankrupt, ongoing process, and an admitted application in the preceding twelve months.
  5. Practise short case questions in the pattern of provision, facts, conclusion. For each, check eligibility before describing the process.
  6. Write two or three model answers on drafting points such as the application contents and the order of the Adjudicating Authority, then revise the sections you missed.

Common mistakes in Bankruptcy for Individuals and Partnership Firms

  • Naming the NCLT as the Adjudicating Authority for individuals and firms.

    Fix: Write Debt Recovery Tribunal with territorial jurisdiction for every Part III matter, citing section 179.

  • Mixing up the fresh start limits or forgetting one condition.

    Fix: List all seven in a fixed order and recite them. Check each against the facts in the question.

  • Counting all debts as qualifying debts.

    Fix: Remove excluded debts such as fines, maintenance and student loans, the secured part, and debt incurred in the last three months before applying.

  • Treating fresh start, resolution and bankruptcy as one process.

    Fix: Keep your comparison table and open each answer by naming the process and its chapter.

  • Ignoring the special rule for partners of a firm.

    Fix: State that a partner cannot apply for the firm alone, and that all or a majority of the partners must file jointly.

  • Writing a conclusion without applying the facts.

    Fix: Use the order: provision, analysis of the figures and dates, conclusion in one clear line.

Last-day revision: Bankruptcy for Individuals and Partnership Firms

  • Part III applies to individuals and partnership firms where default is at least ₹1,000; a notified higher minimum cannot exceed ₹1 lakh (section 78).
  • The Adjudicating Authority is the Debt Recovery Tribunal with territorial jurisdiction (section 179 and section 79(1)).
  • The DRT can decide suits, claims and questions of priority or law and fact related to the debtor's insolvency (section 179(2)).
  • Moratorium time is excluded when computing limitation for suits by the debtor (section 179(3)).
  • Immediate family means spouse, dependent children and dependent parents.
  • Qualifying debt excludes excluded debt, the secured portion of a debt, and debt incurred within three months before the fresh start application.
  • Fresh start limits: income ₹60,000, assets ₹20,000, qualifying debts ₹35,000; debtor must not own a dwelling unit, secured or not.
  • A fresh start applicant must not have had a fresh start order in the preceding twelve months.
  • For resolution, a firm's partners must apply jointly: all or a majority of them (section 94(2)).
  • An undischarged bankrupt, or a debtor in fresh start, resolution or bankruptcy, cannot apply for resolution (section 94(4)).
  • The DRT has fourteen days from the resolution professional's report to admit or reject a fresh start application, and creditors get a copy of the order within seven days (section 84).
  • The bankruptcy trustee administers and distributes the estate under Chapter V (section 136).

Bankruptcy for Individuals and Partnership Firms practice questions

Bankruptcy for Individuals and Partnership Firms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bankruptcy for Individuals and Partnership Firms: frequently asked questions

Which tribunal hears insolvency cases of individuals and partnership firms?

The Debt Recovery Tribunal with territorial jurisdiction is the Adjudicating Authority. Under section 179, that is the tribunal over the place where the debtor resides, carries on business or personally works for gain.

Who can apply for a fresh start under the IBC?

A debtor who cannot pay his debts and meets all the conditions in section 80(2). These include income up to ₹60,000, assets up to ₹20,000, qualifying debts up to ₹35,000, and not owning a dwelling unit. He must also have no subsisting process and no fresh start order in the last twelve months.

Can one partner file for insolvency resolution of a firm?

No. Under section 94(2), a partner cannot apply in respect of the firm unless all or a majority of the partners file the application jointly.

Is this chapter open book in the exam?

Paper 7.5 is an elective, and electives are open book examinations. Even so, you need to know the structure and conditions well, because case-based answers need quick application, not searching.

What is the minimum default for Part III to apply?

Section 78 sets the minimum default at not less than ₹1,000. The Central Government may notify a higher minimum, which cannot be more than ₹1 lakh.