Sole Proprietorship and Insolvency and Bankruptcy Code, 2016
Chandan Goswami 11 Nov 2019

A sole proprietorship firm cannot initiate insolvency proceedings

The NCLT, New Delhi has recently held in R.G Steels v. Berrys Auto Ancillaries (P) Ltd. IB-722/ND/2019 that a sole proprietorship form cannot initiate insolvency proceedings against another company.  

It is a trite law that a sole proprietorship firm cannot sue or be sued in its own name. A proprietorship firm has no legal entity like a registered firm. Neither can an insolvency proceeding cannot be instituted in the name of an unregistered proprietorship firm nor can the sole proprietorship initiate insolvency application in its own name as observed by the Delhi High Court in Miraj Marketing Corporation v. Vishaka Engineering and Ors.MANU/DE/1193/2004.

A proprietor is the person who does business but for trading convenience, business is done in the name of proprietary concern. Thus, proprietary concern is not an independent, legal and juristic entity having legal recognition in the eye of law and it can neither initiate proceedings nor proceedings be initialed against it.

However, the Insolvency and Bankruptcy Code, 2016 provides a mechanism to a Corporate Applicant to initiate a case against a sole proprietorship in order to recover its dues. Section 2 (e) which has recently been notified provides the applicability of the IBC in cases against individual proprietorship concerns.

Even an individual proprietorship concern can initiate insolvency proceedings against any company in order to recover its dues provided that the same is being filed through the sole proprietor. Since a proprietorship concern does not have a legal status of its own, it is imperative that a petition/application/suit is filed through either of its partners or if no partner exists then the individual itself.

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  11 Nov 2019 2:39pm
Correction: Para 4: Section 2 (e) has been notified partly. However Part 3 of the Act which provides the mechanism to recover dues from individuals is read more

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