Sole Proprietorship Allowed to Initiate Insolvency Process Against Corporate Debtor

The National Company Law Tribunal, New Delhi, found the application filed by a sole proprietorship firm under Section 9 of the Insolvency and Bankruptcy Code, 2016 to be maintainable against the Corporate Debtor. The Tribunal dismissed the Corporate Debtor's objection, stating that a sole proprietorship concern can initiate the insolvency process. The Tribunal also appointed an Interim Resolution Professional, Mr. Arun Chadha, and directed the Applicant to deposit funds for expenses, imposing a moratorium period on the Corporate Debtor in accordance with Section 14 of the Code.

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Issues:
1. Maintainability of the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 by a sole proprietorship firm.
2. Dispute regarding non-payment of invoices by the corporate debtor.
3. Appointment of Interim Resolution Professional and deposit of funds.

Issue 1: Maintainability of the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 by a sole proprietorship firm:

The application was filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 by the sole proprietor of a firm, seeking to initiate the Corporate Insolvency process against the Corporate Debtor. The Corporate Debtor raised an objection to the maintainability of the application, arguing that a sole proprietorship firm is not an entity established under law and, therefore, not eligible to initiate the insolvency process. The Corporate Debtor cited a judgment by NCLT New Delhi Bench in support of this argument. In response, the Applicant cited various cases supporting the contention that a sole proprietorship concern can file an application under Section 9 of the Code. The Applicant also mentioned the judgment of NCLT, New Delhi Bench, stating that steps can be taken to amend the memo of parties when the application is filed by a proprietorship concern, addressing the technical objection raised by the Corporate Debtor.

Issue 2: Dispute regarding non-payment of invoices by the corporate debtor:

The Applicant alleged that despite supplying goods to the Corporate Debtor as per purchase orders, payments were not made for the invoices raised from March 2018 to October 2018. The Applicant issued a demand notice under Section 8 of the Code, calling upon the Corporate Debtor to pay the outstanding amount, including interest. The Corporate Debtor objected to the application, claiming that the supply under the first purchase order was incomplete and raised issues regarding the quality of goods and rejection of certain items. The Corporate Debtor also disputed the rate of interest charged by the Applicant. However, the Corporate Debtor failed to provide any supporting documents for these contentions. The Tribunal found that the Corporate Debtor's objections did not establish a pre-existing dispute between the parties, as required by law, and deemed the objections as unsubstantiated.

Issue 3: Appointment of Interim Resolution Professional and deposit of funds:

The Tribunal admitted the application, finding that the Applicant had established the default in payment by the Corporate Debtor. Consequently, Mr. Arun Chadha was appointed as the Interim Resolution Professional, subject to certain conditions. The Applicant was directed to deposit a sum of Rs. 2 lakhs with the Interim Resolution Professional to cover expenses. This amount would be subject to adjustment by the Committee of Creditors and refunded to the Applicant. The moratorium period, as per Section 14 of the Code, was imposed on the Corporate Debtor, and the necessary communication and compliance steps were outlined by the Tribunal.

This detailed analysis covers the key issues addressed in the judgment by the National Company Law Tribunal, New Delhi, regarding the application under the Insolvency and Bankruptcy Code, 2016.

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