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CS Professional · Insolvency and Bankruptcy - Law and Practice

Bankruptcy Order for Individuals and Partnership Firms

Bankruptcy under Part III of the IBC is the process by which an Adjudicating Authority, the Debt Recovery Tribunal, declares an individual or partnership firm bankrupt, vests the estate in a bankruptcy trustee, shares it among creditors and later discharges the debtor. Solve questions by applying the provision to the facts, step by step.

What this chapter covers

This chapter covers the last stage of Part III of the Code: bankruptcy of individuals and partnership firms. You study who can apply (the debtor or a creditor), what the Adjudicating Authority does on the application, what a bankruptcy order and interim moratorium do, how the estate is administered and shared among creditors, and how the debtor is finally discharged. It also covers offences by a bankrupt.

The Code applies to personal guarantors to corporate debtors, partnership and proprietorship firms, and other individuals (section 2). Part III applies where the amount of default is at least ₹1,000, unless the Central Government notifies a higher minimum, which cannot exceed ₹1 lakh (section 78). For individuals and firms, the Adjudicating Authority is the Debt Recovery Tribunal with territorial jurisdiction (section 179). Keep this in mind: it differs from the NCLT for companies.

In the paper, this chapter sits with the other personal insolvency topics, such as the fresh start process and the insolvency resolution process for individuals. Bankruptcy is the outcome when resolution does not work or is not chosen. If you understand how the earlier processes end, the bankruptcy sequence becomes easy to follow. Questions are case-based, so you must apply the rules to facts and draw a conclusion.

This chapter follows a clear sequence of events with fixed conditions, time limits and consequences, which suits case-based questions. A single fact pattern can ask who may apply, what the order does, what creditors can still do, and when the debtor is discharged. If you know the sequence and the exact conditions, you can write a structured answer of provision, analysis and conclusion, and avoid losing marks on small details such as who the Adjudicating Authority is or what a secured creditor may do.

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

  1. 1Bankruptcy Process for Individuals and Firms: OverviewStart here to see the whole sequence, the persons covered, the minimum default and the Adjudicating Authority before learning each step.
  2. 2Application for Bankruptcy by DebtorThe debtor's route is the first way into bankruptcy, so learn the conditions and documents for it first.
  3. 3Application for Bankruptcy by CreditorStudy it after the debtor's route so you can compare who applies, on what ground and with what supporting material.
  4. 4Bankruptcy Order and Interim MoratoriumBoth applications lead to the Adjudicating Authority's order, so learn what it decides and the protection that applies meanwhile.
  5. 5Effects of Bankruptcy and Estate AdministrationThis is the heaviest part. It needs the order first, since the estate vests in the bankruptcy trustee only after it is passed.
  6. 6Discharge and Offences by BankruptThis closes the process: learn how and when the debtor is discharged, then the offences that apply to a bankrupt.

How to prepare Bankruptcy Order for Individuals and Partnership Firms

Prepare this chapter as a timeline with rules attached to each stage. Read the sections from the Code itself, because the wording of conditions matters in written answers.

  1. Read the overview first and draw a one-page flow from application to discharge, noting who acts at each stage.
  2. Learn the definitions in section 79 in plain words: bankrupt, bankruptcy commencement date, bankruptcy debt, excluded assets, immediate family, undischarged bankrupt.
  3. Compare the debtor's and creditor's applications in two columns: who may apply, when, what to attach and what the Adjudicating Authority does.
  4. Write out the effects of the bankruptcy order from section 128, including what creditors cannot do, the position of secured creditors and the effect on partners of a firm.
  5. Learn administration of the estate: vesting in the trustee, excluded assets, distribution to creditors, and the treatment of a deceased bankrupt's estate.
  6. Learn discharge: when the trustee applies, the time limit, and what follows the order. Then revise the offences.
  7. Practise two or three short case problems. For each, state the provision, apply it to the facts and give a clear conclusion.

Common mistakes in Bankruptcy Order for Individuals and Partnership Firms

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

    Fix: Remember that Part III matters go to the Debt Recovery Tribunal with territorial jurisdiction over where the debtor resides, carries on business or works for gain.

  • Saying a bankruptcy order stops secured creditors completely.

    Fix: State that a secured creditor may still realise its security, but loses interest after the commencement date if it does not act within thirty days.

  • Treating the discharge date as fixed at one year.

    Fix: Write both limbs: one year from commencement, or within seven days of creditors' approval if obtained earlier.

  • Ignoring partners when the bankrupt is a firm.

    Fix: State that an order against a firm operates as an order against each partner on the date of the order, and that each partner is a bankrupt.

  • Confusing bankruptcy debt with qualifying debt.

    Fix: Link qualifying debt to the fresh start process and bankruptcy debt to the bankruptcy process, and quote each definition from section 79.

  • Writing general theory without applying it to the facts.

    Fix: Use the provision, analysis, conclusion format. Name the person, the date and the amount from the case, then apply the rule to them.

Last-day revision: Bankruptcy Order for Individuals and Partnership Firms

  • The Code applies to personal guarantors to corporate debtors, partnership and proprietorship firms, and other individuals (section 2).
  • Part III applies where default is at least ₹1,000; the Central Government may notify a higher minimum, not above ₹1 lakh (section 78).
  • The Adjudicating Authority for individuals and firms is the Debt Recovery Tribunal with territorial jurisdiction (section 179).
  • The bankruptcy commencement date is the date the bankruptcy order is passed.
  • On a bankruptcy order, the estate vests in the bankruptcy trustee and is divided among creditors (section 128).
  • After the order, a creditor cannot act against the bankrupt's property or start proceedings without the Adjudicating Authority's leave.
  • A secured creditor may still realise its security; it loses post-commencement interest if it takes no action within thirty days of the commencement date.
  • A bankruptcy order against a firm operates as an order against each partner on the date of the order.
  • Excluded assets include necessary tools and household items, a single dwelling unit of prescribed value, and unencumbered life insurance or pension plans.
  • The trustee applies for discharge after one year from commencement, or within seven days of creditors' approval of completed administration if that comes earlier (section 138).
  • The Adjudicating Authority passes the discharge order on the trustee's application; a copy goes to the Board for the register.
  • The estate of a deceased bankrupt is administered under the same rules; funeral and testamentary expenses rank equally with secured creditors, and any surplus goes to legal representatives (section 170).

Bankruptcy Order for Individuals and Partnership Firms practice questions

Bankruptcy Order 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 Order for Individuals and Partnership Firms: frequently asked questions

Which authority decides bankruptcy of individuals and partnership firms?

The Debt Recovery Tribunal with territorial jurisdiction is the Adjudicating Authority. It covers the place where the debtor actually and voluntarily resides, carries on business or personally works for gain. It can also decide suits, claims and questions of priority linked to the insolvency.

What is the minimum default for Part III of the IBC?

Part III applies where the default is at least ₹1,000. The Central Government may notify a higher minimum by notification, but not more than ₹1 lakh. Check the amount in any case study before applying the Part.

What happens to the estate once a bankruptcy order is passed?

The estate of the bankrupt vests in the bankruptcy trustee and is divided among the creditors. Creditors cannot act against the bankrupt's property or begin legal proceedings without leave of the Adjudicating Authority. Secured creditors keep the right to realise their security.

When is a bankrupt discharged?

The bankruptcy trustee applies for a discharge order on expiry of one year from the bankruptcy commencement date. The trustee may apply earlier, within seven days of the creditors' committee approving completion of administration. The Adjudicating Authority then passes the discharge order.