Application U/S 94 Of IBC Cannot Be Entertained Against Sole Proprietorship Firms: Madhya Pradesh High Court

The Madhya Pradesh High Court bench of Justice Vivek Rusia and Justice Prem Narayan Singh has held that since sole proprietorship firms are not included in the definition of the corporate person under section 3(7) of the Insolvency and Bankruptcy Code, 2016 (Code), an application under section 94 of the Code cannot be entertained. Brief Facts: The petitioner is an owner of the property situated at House No.437-B, Katju Nagar, Ratlam, M.P. The aforesaid property was mortgaged as a collateral security against the financial facility availed by M/s Rainbow Sales and M/s Kothari Enterprises from respondents No.4 & 5. Axis Bank granted Overdraft facilities to M/s Rainbow Sales and M/s Kothari Enterprises and later classified the account as an Non Performing Assets (NPA) on 30 August 2023. The bank also initiated recovery proceedings under section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred as “SARFAESI Act”). It also approached the Sub Divisional Magistrate to secure the mortgaged property of the petitioner. On 28 June 2024, the Additional Collector ordered the possession of the property with the help of Tehsildar. Thereafter, the Tehsildar issued a notice to the borrower as well as the petitioners for taking possession. Before the said date, the petitioner filed a petition under section 94 of the Code before the National Company Law Tribunal (NCLT). This petition has been filed seeking to restrain the respondent from recovering the possession of the secured assets during the pendency of insolvency proceedings before the Debt Recovery Tribunal (DRT). Contentions: The Petitioner submitted that the moment an application under section 94 of the code is filed, an interim moratorium under section 96 of the code comes into operation which stays all legal proceedings related to debt until the application is finally admitted. Creditors are prohibited to initiate any legal proceedings during this period. It was further argued that while Section 3(8) of the Code does not explicitly define "debtor" to include individuals or sole proprietorship firms, statutory interpretation of the term under other laws allows for their inclusion. Observations: The court observed that section 94 of the code allows the debtor to file an insolvency application personally or through Resolution Professional. Section 3(8) of the code defines a corporate debtor as a corporate person who owes a debt and section 3(7) defines a corporate person as a company under the Companies Act, 2013, a Limited Liability Partnership under the Limited Liability Partnership Act, 2008 (LLP) or any other incorporated entity with limited liability. Based on the above, the court held that since proprietorship firms are not included in this definition, applications under section 94 of the code are not maintainable against these firms even at the instance of the petitioners. Accordingly, the present petition was dismissed. Case Title: RAMESH KOTHARI Versus THE STATE OF MADHYA PRADESH AND OTHERS Case Number: WRIT PETITION No. 7687 of 2025 Judgment Date: 03/03/2025Citation: 2025 LiveLaw (MP) 69 Shri Amit Agrawal - Senior Advocate alongwith Shri Utkarsh Joshi - Advocate for the petitioner. Shri Bhuwan Gautam - Govt. Advocate for the respondent / State. Click Here To Read/Download The Order

Application U/S 94 Of IBC Cannot Be Entertained Against Sole Proprietorship Firms: Madhya Pradesh High Court

Mohd Malik Chauhan

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