BANKRUPTCY TRUSTEE

[Mr. M. GOVINDARAJAN]

Part III of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) deals with the insolvency resolution and bankruptcy for individuals and partnership.  Section 79(4) of the Code defines the term ‘bankruptcy’ as the state of being bankrupt. 

For the purpose of handling bankruptcy process  ‘bankruptcy trustee’ is to be appointed under the provisions of this Code.  Section 79(9) of the Code defines the expression ‘bankruptcy trustee’ as the insolvency professional appointed as a trustee for the estate of the bankrupt under section 125.

Application for bankruptcy

Section 121, section 122 and section 123 provides the procedure for filing application for bankruptcy of a debtor by a creditor or by a debtor himself  before the Adjudicating Authority within 3 months from the date of passing order by the Adjudicating Authority under section 100 (admission or rejection of application),  section 115 (order of Adjudicating Authority on repayment plan)  or section 118 (order of Adjudicating Authority for bankruptcy).

Appointment of Bankruptcy trustee

Section 125 provides that an insolvency professional may be proposed to be appointed as the Bankruptcy trustee.  On application under section 122 and section 123 the Adjudicating Authority shall direct the Board within seven days of receiving the application for bankruptcy to confirm that there are no disciplinary proceedings pending against such professional.  If no insolvency professional is proposed by the applicants, then the Adjudicating Authority shall direct the Board within seven days of receiving the application to nominate a bankruptcy trustee.  The Board shall within ten days either confirm the appointment of the proposed insolvency professional as the bankruptcy trustee for the bankruptcy process or reject the appointment. 

The bankruptcy trustee confirmed or nominated shall be appointed as the bankruptcy trustee by the Adjudicating Authority in the bankruptcy order.  The Adjudicating Authority shall provide a copy of the application for the bankruptcy and a copy of the bankruptcy order to the bankruptcy trustee. 

Functions of bankruptcy trustee

Section 149 of the Code provides that the bankruptcy trustee shall perform the following functions-

• investigate the affairs of the bankrupt;
• realize the estate of the bankrupt; and
• distribute the estate of the bankrupt.

Rights of bankruptcy trustee

Section 151 provides that for the purpose of performing his functions the bankruptcy trustee may, by his official name-

• hold property of every description;
• make contracts;
• sue and be sued;
• enter into engagements in respect of the estate of the bankrupt;
• employ persons to assist him;
• execute any power of attorney, deed or other instrument; and
• do any other act which is necessary or expedient for the purposes of or in connection with the exercise of his rights.

Powers of bankruptcy trustee

Section 152 of the Code provides that the bankruptcy trustee may while discharging his functions-

• sell any part of the estate of the bankrupt;
• give receipts for any money received by him;
• prove, rank, claim and draw a dividend in respect of such debts due to the bankrupt as are comprised in his estate;
• where any property comprised in the estate of the bankrupt is held by any person by way of pledge or hypothecation, exercise the right of redemption in respect of any such property subject to the relevant contract by giving notice to the said person;
• where any part of the estate of the bankrupt consists of securities in a company or any other property which is transferable in the books of a person, exercise the right to transfer the property to the same extent as the bankrupt might have exercised it if he had not come become bankrupt; and
• deal with any property comprised in the estate of the bankrupt to which the bankrupt is beneficially entitled in the same manner as he might have dealt with it.

Vesting of estate

Section 154 of the Code provides that the estate of the bankrupt t shall vest in the bankruptcy trustee immediately from the date of his appointment.  The vesting shall take effect without any conveyance, assignment or transfer.     The bankrupt, his banker or agent or any other person having possession of any property, books, papers or other records which bankruptcy trustee is required to take possession for the purposes of the bankruptcy process shall deliver the said property and documents to the bankruptcy trustee.

The bankruptcy trustee shall take possession and control of all property, books, papers and other records relating to the estate of the bankrupt or affairs of the bankrupt which belong to him or are in his possession or under his control.  Where any part of the estate of the bankrupt consists of things in actionable claims, they shall be deemed to have been assigned to the bankrupt y trustee without any notice. 

Role of bankruptcy trustee in the bankruptcy process

• The bankruptcy trustee shall be entitled to claim for the estate of the bankrupt, any after-acquired property by giving notice to the bankrupt.The notice shall be given within 15 days from the day on which the acquisition or devolution or the after-acquired property comes to the knowledge of the bankruptcy trustee;
• The bankruptcy trustee may, by giving notice to the bankrupt or any person interested in the onerous property, disclaim any onerous property which forms a part of the estate of the bankrupt;
• The bankruptcy trustee shall not be entitled to disclaim any leasehold interest, unless a notice of disclaimer has been served on every interested person;
• The bankruptcy trustee may apply to the Adjudicating Authority for an order in respect of an undervalued transaction between a bankrupt and any person.The Adjudicating Authority may pass an order-

• declaring an undervalued transaction void;
• requiring any property transferred as a part of an undervalued transactions to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and
• it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the undervalued transaction.

• The bankruptcy trustee may apply to the Adjudicating Authority for an order if a bankrupt has given a preference to any person.The Adjudicating Authority may pass an order-

• declaring an undervalued transaction void;
• requiring any property transferred as a part of an undervalued transactions to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and
• it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the undervalued transaction.

• The bankruptcy trustee shall give notice to each of the creditors to submit proof of debt within fourteen days of preparing the list of the creditors;
• If the creditor does not file a proof within 30 days after the date of service of the notice, the bankruptcy trustee may, with the leave of the Adjudicating Authority sell or dispose of any property that was subject to the scrutiny, free of that security;
• Where before the bankruptcy commencement date, there have been mutual dealings between the bankrupt and any creditor, the bankruptcy trustee shall-

• take an account of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other; and
• only the balance amount shall be provable as a bankruptcy debt or as the amount payable to the bankruptcy trustee as a part of the estate of bankrupt.

• Whenever the bankruptcy trustee has sufficient funds in his hand, he may declare and distribute interim dividend among the creditors in respect of the bankrupt which they have respectively proved;
• The bankruptcy trustee may, with the approval of the committee of creditors, divide in existing from amongst the creditors, according to its estimated value, any property in its existing form which from its peculiar nature or other special circumstances cannot be ready or advantageously sold;
• Where the bankruptcy trustee has realized the entire estate of the bankrupt or so much of it as could be realized in his opinion, he shall give notice-

• of his intention to declare a final dividend; or
• that no dividend or further shall be declared.

Standard of conduct

The bankruptcy trustee shall perform his functions and duties in compliance with the code of conduct provided under section 208 of the Code.

Fees

A bankruptcy trustee shall charge such fees as may be specified in proportion to the value of the estate of the bankrupt.   The fee of the bankruptcy trustee is having first priority to all other debts in the distribution of the dividend, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full.

Replacement of bankruptcy trustee

Where Committee of creditors is of the opinion that at any time during the process, a bankruptcy trustee is to be replaced, it may replace him with another bankruptcy trustee.  The Committee of creditors may, at a meeting, by a vote of 75% of voting share, propose to replace the bankruptcy trustee with another one.  Then the Committee is to apply to the Adjudicating Authority.  The Adjudicating Authority shall within seven days direct the Board to recommend for replacement of bankruptcy trustee.   The Board within 10 days shall recommend a bankruptcy trustee for replacement against whom no disciplinary proceedings are pending.    The Adjudicating Authority shall appoint the bankruptcy trustee, recommended by the Board, within 14 days of receiving such recommendations.  The earlier bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee on date of his appointment.

Resignation by bankruptcy trustee

A bankruptcy trustee may resign if-

• he intends to cease practicing as an insolvency professional; or
• there is conflict of interest or change of personal circumstances which preclude the further discharge of his duties as a bankruptcy trustee;
• The Adjudicating Authority shall within seven days of acceptance of the resignation, direct the Board for his replacement;
• The Board shall, within 10 days of the direction of the Adjudicating Authority recommend another bankruptcy trustee as a replacement;
• The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the Board within 14 days of receiving the recommendation;
• The replaced bankruptcy trustee shall deliver possession of the estate of the bankrupt to the newly appointed bankruptcy trustee;

Vacancy in office of bankruptcy trustee

If a vacancy occurs in the office of the bankruptcy trustee for any reason other than his replacement or resignation, the vacancy shall be filled in accordance with the provisions of section 147.  The Adjudicating Authority shall direct the Board for replacement of a bankruptcy trustee.  The Board shall, within 10 days of the direction, recommend a bankruptcy trustee as a replacement.  The Adjudicating Authority shall, within 14 days of the receipt of the recommendation of the Board, appoint a bankruptcy trustee.  The earlier bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed by the Adjudicating Authority.

Release of bankruptcy trustee          

Section 148 provides that a bankruptcy trustee shall be released from his office with effect from the date on which the Adjudicating Authority passes an order appointing a new bankruptcy trustee in the event of replacement, resignation or occurrence of vacancy. Such bankruptcy trustee shall share all information with the new bankruptcy trustee in respect of the bankruptcy process and co-operate with the new bankruptcy trustee in such matters as may be required.

A bankruptcy trustee who has completed the administration of the bankruptcy process shall be released of his duties with effect from the date on which the Committee of creditors approves the report of the bankruptcy trustee.

Punishment

Section 187 provides that if a bankruptcy trustee-

• has fraudulently misapplied, retained or accounted for any money or property comprised in the estate of the bankrupt; or
• has willfully acted in a manner that the estate of the bankrupt has suffered any loss in consequence of breach of any duty of the bankruptcy trustee in carrying out his functions

he shall be punishable with imprisonment for a term which may extend to three years, or with fine, which shall be not less than three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention, or with both.

If such loss or unlawful gain is not quantifiable, the total amount of fine imposed shall not exceed ₹ 5 lakhs.  The bankruptcy trustee shall not be liable if he seizes or disposes of any property which is not comprised in the estate of bankrupt and at that time had reasonable grounds to believe that he is entitled to such seize or dispose of that property.