This article discusses in detail the meaning, functions, and role of bankruptcy trustee under the Insolvency and Bankruptcy Code (IBC). This article also discusses the duties and restrictions on a bankruptcy trustee.
Estimated Reading Time: 12 minutes

Introduction

The application for bankruptcy for individuals and partnership firms can be filed by the creditors either individually or jointly against the debtor to the adjudicating authority. Bankruptcy Trustee can be considered as the insolvency professional appointed as a trustee for the estate of the bankrupt under section 125 of the Insolvency and Bankruptcy Code (IBC). The appointment of bankruptcy trustee can be made by the adjudicating authority in consultation of Board within seven days of receiving the application for bankruptcy in order to confirm that there are no disciplinary proceedings against the professional to be appointed. The Board is empowered to reject or confirm the appointment of insolvency professional as bankruptcy trustee, this process should be completed within 10 days of the receipt of direction by adjudicating authority.

Bankruptcy order

The term bankruptcy order can be defined as the order which is to be passed by the adjudicating authority within 14 days from the appointment of bankruptcy trustee. Chapter V of Part III deals with the concept of Administration and Distribution of the Estate of the Bankrupt. It describes the powers, function, rights of the bankruptcy trustee along with the method through which the distribution of property will take place and various other provisions. This research article will be focusing on this chapter of Part III of the Code.

Functions of Bankruptcy Trustee

The bankruptcy trustee is empowered to discharge following functions under section 149 of the Code. The functions of bankruptcy trustee are as follows[1]:

  • Investigate the affairs of the bankrupt.
  • Realise the estate of the bankrupt
  • Distribute the estate of the bankrupt.

Hence, the bankruptcy trustee acts in capacity of investigation officer in order to investigate the affairs of the bankrupt, also he is empowered to realise and discharge the estate of the bankrupt as per the provisions of the code.

Duties of bankrupt towards bankruptcy trustee

Further, section 150 of the code laid down the duties of bankrupt towards the bankruptcy trustee. The bankrupt has the duty to help the bankruptcy trustee in discharging of his functions in matters related to providing information sought by the bankruptcy trustee, giving notice to the bankruptcy trustee in case any event occurred after the bankruptcy commencement date.

These events include the acquisition of any kind of property by the bankrupt or the devolution of any property by the bankrupt or increase in the income of the bankrupt or doing all other things as may be prescribed.[2] Such notice shall be given within seven days of such increase, acquisition, or devolution of the property.

Rights of Bankruptcy Trustee

Section 151 of the Code laid down the rights to be exercised by the bankruptcy trustee. The rights of the trustee are as follows:

  • Hold property of every description.
  • Make contracts.
  • Sue and be sued.
  • Enter into engagements in respect of the estate of the bankrupt.
  • Employ person to assist him.
  • Execute any power of attorney, deed, or other instrument.
  • Do any other act which is necessary or expedient for the purpose of or in connection with the exercise of his rights.

Powers of Bankruptcy Trustee

The powers of bankruptcy trustee are termed as general powers of bankruptcy trustee under section 152 of the Code. The power of bankruptcy trustee can be determined through its functions. In connection with the functions of the trustee under section 149 of the code, the power in relation to such functions are as follows[3]:

  • The trustee is empowered to sell any part of the estate of the bankrupt
  • He is also empowered to give receipts for any money received by him.
  • He is also empowered to prove, rank, claim and draw a dividend in respect of such debts due to the bankrupt as are comprised in his estate.
  • In cases 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 has not become the bankrupt.
  • Deal with anu 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.

Approval of creditors for certain acts

In order to carry out certain functions the bankruptcy trustee needs some approval from the creditors of the debtor. The bankrupt trustee after getting the approval of creditors can carry out following things[4]:

  • In order to carry out the functions necessary for winding up of the bankrupt, the bankruptcy trustee can carry out the business of the bankrupt after getting the approval of the creditors.
  • Bring, institute, or defend any legal action or proceedings relating to the property comprised in the estate of the bankrupt.
  • Accept as consideration for the sale of any property a sum of money due at a future time subject to certain stipulates such as security.
  • Mortgage or pledge any property for the purpose of raising money for the payment of the debts of the bankrupt.
  • Where aby right, option or other powers forms part of estate of the bankrupt, make payments or incur liabilities with a view to obtaining for the benefit of the creditors any property which his subject of such right, option or power.
  • Refer to arbitration or compromise on such terms as may be agreed any debts subsisting or supposed to subsist between the bankrupt and any person who may have incurred any liability to the bankrupt.
  • Make compromise or other arrangements as may be considered expedient with the creditors.
  • Make compromise or other arrangements as he may deem expedient with respect to any claim arising out of or incidental to the bankrupt’s estate.
  • Appoint the bankrupt to:
  • Supervise the management of the estate of the bankrupt or any part of it.
  • Carry on his business for the benefit of the creditors.
  • Assist the bankruptcy trustee in administering the estate of the bankrupt.
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Hence, all the above-mentioned functions can be discharged by the bankruptcy trustee only after taking prior approval of the creditors of the bankrupt. If the functions related to this provision are being carried out without the knowledge of the creditors then in that case, such act of the bankruptcy trustee will be considered as null and void. Strict adherence of the provisions of the code should be there.

Estate of Bankruptcy

The concept of the estate of bankruptcy is given under section 155 of the code. As per the provision the estate of bankrupt will include the following things:

  • The property which is vested or belong to the bankrupt at the time of commencement of bankruptcy.
  • Capacity to exercise or to initiate the proceedings for the exercising all powers with respect to the property as the same has been exercised by the bankrupt for his own benefit at the time of commencement of the bankruptcy or before the passing of the discharge order under the provision of the code.
  • All other property which is being declared as property under this chapter.

However, the code excludes certain category of property from the ambit of the definition of estate of bankruptcy. Following will not be included under the scope of estate of bankrupt[5]:

  • Excluded Assets.

The term excluded assets is defined under section 79(14) of the Code. It includes unencumbered tools, books vehicles etc., and such things which can be used for the personal use of the bankrupt. It also includes unencumbered furniture, household etc., such things which will be used for the basic domestic needs of the bankrupt and his family members. Further, it includes unencumbered personal ornaments which can be used for the religious purpose, unencumbered life insurance policy or pension plan taken in name of the debtor or his immediate family members and lastly it includes unencumbered single dwelling unit owed by the debtor of such value as prescribed.

  • Property held by the bankrupt on trust for any other person.
  • All sums which are due to any workman or employee from the provident fund, pension fund and the gratuity fund.
  • Such assets as may be notified by the central government in consultation with any financial sector regulator.

Restriction on disposition of property

Certain restrictions have been imposed on the debtor in order to dispose of the property involved in the bankruptcy process. Section 158 of the Code specifies the area in which the restrictions are to be made on the debtor. The debtor is not eligible to dispose any of his property. If the debtor disposes of any part of his property during the period between the filing of the application of bankruptcy and the bankruptcy commencement date, then in that case such disposal will be considered as void.

Further, such disposal of property which is strictly prohibited under the provision of the Act, will not give any kind of rights to the person to whom such property is being disposed of, even if such person has received the property before the commencement date of bankruptcy in capacity of good faith, value or without notice of the filing of the application for bankruptcy. In other words, even if the person to whom such property is sold which is involved in the process of bankruptcy, has accepted, or received the property in good faith without having knowledge of such application, the same shall not make him eligible to claim his rights over the property.

The code makes it very clear that the debtor is barred to do anything with the property involved in the process of bankruptcy which will violate the purpose of the Act. However, an exemption has been granted to this section. The clause (3) of the section states that, the property of the debtor will not include such property which is held by debtor in trust of any other person. Apart from this all the property of debtor whether or not comprised in estate of bankruptcy shall be strictly prohibited for use of personal gain by the debtor.

Onerous Property of Bankrupt

The concept of onerous property of bankrupt is given under section 161 of the Code. Onerous property is defined as any unprofitable contract and any other property which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act.[6]

As per the provision of the code, the bankruptcy trustee after giving notice to the bankrupt or any other person who is interested in onerous property, can disclaim any such property which forms a part of the estate of the bankrupt. He may also give the notice irrespective of the fact that such person is in possession of the onerous property, endeavoured to sell it or has exercised rights of ownership in relation to it. The notice shall determine the rights, interest, and liabilities of the bankrupt with respect to the onerous property, it should also mention the discharge of the bankruptcy trustee from all personal liability with respect of the onerous property from the date of appointment of bankruptcy trustee.

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However, such notice should not be given with respect of the property claimed under section 155 without the approval of the creditors. However, the notice shall not affect the rights or liabilities of any other person. The explanation of the section, defines the term onerous property means[7]:

  • Any unprofitable contract
  • Any other property comprised in the estate of the bankrupt which is unsaleable or not readily saleable or is such that it may give rise to a claim. 

However, no need of giving of the notice will arise when a person interested in such property has applied in writing to the bankruptcy trustee requiring them to decide whether such property can be disclaimed or not. Such decision shall take place within seven days of receipt of the application. Any onerous property which is not claimed shall be considered as the part of estate of bankrupt, as per the provision of the Code.

Undervalued Transactions

The bankruptcy trustee can apply to the adjudicating authority for the order with respect to the undervalued transactions between a bankrupt or any person. The term undervalued transactions will include those transactions which has been entered into during the period of two years ending on the filing of the application for the bankruptcy and has caused the bankruptcy process to be triggered. The transactions between a bankrupt and his associate entered into during the period of two years preceding the date of making of application for the bankruptcy shall be deemed to be an undervalued transaction under this provision.[8]

The adjudicating authority is empowered to pass an order either declaring the undervalued transaction as void or pass such order which require the property transferred as part of undervalued transaction to be vested with the bankruptcy trustee as part of the estate of the bankrupt.

However, such order shall not be passed if it is proved that the transactions has taken place during the ordinary course of business.

Preference Transactions

The bankruptcy trustee can apply to the adjudicating authority to pass and order if the bankrupt has given preference to any other person. Section 165 of the Code deals with the concept of preference transactions. If any preference is given to the associate of the bankrupt the same should be entered during the period of two years ending in the date of the application of the bankruptcy. If any transaction has been entered the same should be entered during the period of six months ending the date of application of the bankruptcy.

The adjudicating authority can pass an order declaring a transaction as preference void, order requiring any property transferred with respect to the preference to be vested with the bankruptcy trustee as part of the estate of the bankrupt.

Effect of order

“The order passed by the adjudicating authority with regard to undervalued and preference transactions, the same shall not give rise to a right against a person interested in the property which was acquired in an undervalued transaction or a transaction giving preference whether or not he is person with whom the bankrupt entered into such transactions. It will not require any person to pay sum to the bankruptcy trustee with respect of the benefit received from the undervalued transactions or preference transactions whether or not he is the person with whom the bankrupt entered into such transactions.”[9]

Distribution of interim dividend

The distribution of interim dividend can be done by the bankruptcy trustee if he has sufficient funds in his hands at that time. Where such dividend is to be distributed than in that case the bankruptcy trustee should give notice specifying the manner in which such distribution will take place. For calculation and distribution of the interim dividend he should make provision for such debts which is due to person by reason of the distance of their place of residence and may not have sufficient time to tender or establish their debts[10], where the subject of claims cannot be determined, where disputed proofs and claims are there.

Priority of Payment of Debt

Section 178 covers the provision of priority of payment of debt. The priority of payment of all debts are as follows:

  1. Cost and expenses incurred by the bankruptcy trustee for the bankruptcy process.
  2. The workmen dues for the period of 24 months preceding the bankruptcy commencement date.
  3. Debts owed to secured creditors
  4. Wages and any unpaid dues owed to the employees for the period of 12months preceding the bankruptcy commencement date.
  5. Amount due to central government and state government including amount received on account of consolidated fund.
  6. All other debts and dues which are owed by the bankrupt including unsecured debts.

Jurisdiction of Civil Court and Appeal

The civil court will not have jurisdiction to entertain any suit or proceeding in matters on which DRT and DRAT has jurisdiction under the code. No injunction shall be granted by such civil court where power is granted to DRT or DRAT.

The appeal from the order of DRT shall lie to DRAT within thirty days. Further appeal from DRAT will lie with the Supreme Court which is to be filed within 45 days.

Conclusion

The bankruptcy trustee is empowered to discharge its functions with respect to the property of the bankrupt. The way in which the property and the amount should be distributed is clearly mentioned under the given chapter.


[1] Section 149 of IBC 2016

[2] Section 150(1) of IBC 2016

[3] Section 152 of IBC 2016

[4] Section 153 of IBC 2016

[5] Section 155(2) of IBC 2016

[6] www.chasecambria.com/site/journal/article.php?id=814

[7] Explanation of Section 161 of IBC 2016

[8] Section 164 (3) of IBC 2016

[9] Section 166 of IBC 2016

[10] Section 174(3)(a) of IBC 2016

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