India has a strong reason to rejoice amidst the gloom pervading for the past eighteen months in the business environment. As per the recent global ranking on Ease of Doing Business, India climbed 14 rungs in the World Bank’s Ease of Doing Business 2020 survey to stand at 63, among 190 countries, making it one of the world’s top 10 most improved countries for the third consecutive time. The World Bank has particularly picked India in its praise of large economies to have achieved such a significant improvement and is now ranked 1st among South Asian countries compared to 6th rank in 2014.
Among the top 10 parameters where ranking was based, under Resolving Insolvency, India’s position improved commendably to the seventies. The government of India has to be commended for introducing several corrective measures like new companies Act, Insolvency and Bankruptcy Code, faster resolution under NCLT, etc. In the last one week, even NBFCs have been brought into the ambit of IBC. Liquidation timelines reduced from 2 years to one year.
While any creditor can initiate the insolvency process against any corporate, the recent development about quashing the legality of the proprietary firm has wide counter discussion on this matter. Recently, Hon’ble NCLT New Delhi Bench in the matter of “RG Steels Vs. M/s Berrys Auto Ancillaries (P) Ltd. held that Sole Proprietary Concern is not entitled to approach the tribunal on its own due to not being covered under the definition of Person as given under section 3(23) of IBC. Several cases have been quashed on the argument that proprietary concern does not have a legal entity like a registered entity.
In the case of Miraj Marketing Corporation vs Vishaka Engineering, 2014, a Delhi court has ruled that “….. A proprietorship firm has no legal entity like a registered firm. A suit cannot be instituted in the name of an unregistered proprietorship firm and the said suit is to be instituted in the name of the proprietor. ….. A sole proprietorship firm is not a legal entity that can sue or be sued in its own name. Such suit relating to or against the affairs or claims of a proprietorship concern has to be brought or made against the person who is the sole proprietor of the firm…..”
If the sole proprietorship firm is not a legal entity, the petition should have been filed by the sole proprietor in his name on behalf of his sole proprietorship firm and not in the name of sole proprietorship firm. Considering it from any point, the inevitable inference is that a petition in the name of a sole proprietorship firm which is not a legal entity is not maintainable.” But in the case of Devendra Surana vs Bank Of Baroda & Ors on 12 December 2018, the court ruled that Individual and sole proprietor are the same legal entity.
Taking cue of the ambiguity surrounding these issues and also the fact that proprietary firms cannot approach NCLT against debtors, regulatory authorities could address this issue. Since there is no difference between the Individual and sole proprietorship concern, even sole proprietorship concern could be allowed to file the application in its name. Summarising aforesaid we can say that for any amount of debt due by the Sole Proprietors (even if the debt arises during supply by the Sole proprietorship concern), application/ suit should be initiated in the name of the individual who is the owner of a sole proprietorship firm. It would be a big relief to several lakhs of MSMEs who conduct business as a sole proprietor and are an important backbone for the country.
Source: Financial Express, November 28, 2019