This article is written by Yash Dhawan, pursuing Certificate Course in Insolvency and Bankruptcy Code from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Zigishu Singh (Associate, LawSikho).

Introduction

The bankruptcy process under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’) needs to be handled properly for the purpose of which a “bankruptcy trustee” needs to be appointed in accordance with the provisions of the Code. The term “Bankruptcy Trustee” has been defined under Section 79(9) of the Code. It refers to the insolvency professional who is appointed as a trustee for the entire holdings or estate of the company under insolvency or the corporate debtor. The same is appointed in accordance with Section 125 of the Code. 

Once a company is declared insolvent, an application for bankruptcy has to be filed before the adjudicating authority. Such an application for bankruptcy can be filed by the creditors of the debtor or the corporate debtor himself. The procedure for filing an application for insolvency has been provided under Section 121, 122 and 123 of the Code according to which the application needs to be filed within a period of three 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 a bankruptcy trustee

Insolvency professionals can be appointed as bankruptcy trustees as well, according to Section 125 of the Insolvency and Bankruptcy Code, 2016. It is mandatory there are no disciplinary proceedings against the proposed trustee and an application can be submitted under Sections 122 and 123 of the said Act wherein the authority generally directs the board to cross-check if there is any disciplinary action taken against the proposed trustee. The board after confirmation then may accept the proposed trustees’ application or clearly reject it. The Adjudicating Authority appoints the proposed trustee as a trustee. 

Section 149 specifically states the functions that the bankruptcy trustee has to do in order to make the insolvency proceedings smooth–

1.) To check the assets and the liabilities of the said bankrupt. 

2.) To check assets of the bankrupt which includes the estate specifically. 

3.) Distribution of the assets in order to facilitate the smooth operation of the insolvency process. 

Section 151 of the Insolvency and Bankruptcy Code, 2016 gives certain rights to the trustee of the bankruptcy trustee to perform the above-mentioned functions effectively. The rights of trustees include the right to hold property under any designated description, formulate contracts, engage himself or herself in any activities related to the properties of the bankrupt, call for the assistance of the employed people, perform any court-related activities including appointing power of attorney, or perform any such activities which are necessary for exercising of his rights. 

Another very important aspect that can be enclosed in the Insolvency and Bankruptcy Code, 2016 is the aspect that the properties of a bankrupt person and the rights of the properties of the bankrupt person shall be transferred to the trustee on the date of his or her appointment according to Section 154 of the Code. Such transfer is done to make the procedure of insolvency smoother. When having all of these documents and properties in possession of the trustee, the trustee can use such properties or documents in the bankruptcy procedure. Where such property is attached to any actionable claim then such property shall be transferred without any prior notice. 

The role of a bankruptcy trustee in the bankruptcy process

When taking over the property of the bankrupt, a notice of 15 days must be given to the bankrupt. The 15 days shall begin from the day the property is acquired or valued. The trustee shall give the notice to the bankrupt or any other person having similar interests in the property to have no claims in the property which is part of the bankrupt’s property. Sometimes a transaction by the bankrupt person is an undervalued transaction. The trustee would ideally apply for the same to adjudicating authority wherein the authority shall either declare the transaction void, vest the property back to the bankruptcy trustee as part of the insolvency transaction, or restore the property in such a manner that the property is restored to its original as if it was not sold by the bankrupt at all as an undervalued transaction. The Trustee performs a very important function which comprises a major part of the proceeding. The trustee shall send a notice to the creditor asking for proof of the debt that the bankrupt owns within fourteen days after preparing an elaborate and careful list of creditors. The creditors, after receiving the notice, shall submit the proofs within thirty days and if they fail to do so then the trustee, after the leave of the adjudicating authority, shall dispose of the property without securing it. Where there have been any mutual agreements between the parties i.e. bankrupt and creditor, bankruptcy trustees shall take into account anything that is due between the parties in reference to the mutual contracts between them and shall set off from one another. If any money is left or any balance amount is left then that amount can be recoverable. The bankruptcy trustee after acquiring adequate funds shall distribute the funds among the creditors who had submitted their claims with enough proof and this can be done with the approval of the committee of creditors. The bankrupt trustee can further declare if a dividend is to be distributed or if no dividend is to be declared. 

The bankruptcy trustee can resign if he gives up practice as an insolvency professional, there is a conflict of interest or the trustee has some change of opinion due to some personal reason. After understanding the reason and accepting the resignation the adjudicating authority shall, within seven days of acceptance of the same, direct the board for his replacement. The bankruptcy trustee must be appointed within fourteen days. The initial trustee will have to transfer the properties or the estates to the new bankruptcy trustee.

If there is a vacancy at the office of bankruptcy trustee due to his replacement or resignation, the vacancy shall be filled under Section 147 of the Insolvency and Bankruptcy, 2016. The board shall within ten days recommend a new bank trustee after which within fourteen days the Adjudicating Authority shall fill up the vacancy within fourteen days. Section 148 elaborates upon whether the bankruptcy trustee can be released from his or her office. Before being officially released from the office the former bankruptcy trustee shall share all of the details of the estate and properties with the newly appointed bankruptcy trustee which would give him greater clarity regarding how the bankrupt’s property is to be dealt with.

Powers of the bankruptcy trustee

A Bankruptcy Trustee has been empowered to do the following under Section 152 of the Code for the purpose of carrying out his duties towards the corporate debtor:

• He is authorized to sell any part of the holdings of the corporate debtor, that is, the bankrupt company.
• He is empowered to give receipts to creditors for any amount received by him.
• He may also claim and accept a dividend relating to the debts that are owed by the corporate debtor with respect to his entire holdings.
• The Code has also empowered him to deal with any holdings or property belonging to the entire estate of the corporate debtor to which he is rightfully entitled. The Trustee can deal with the property “in the same manner as he might have dealt with his own property.”
• In case one of the properties belonging to the estate of the bankrupt company is under the possession of another person under a pledge or hypothecation, the bankruptcy trustee is empowered to exercise the “right of redemption” in relation to the property held by another person by way of serving a notice on the said person subject to the terms and conditions mentioned in the contract by which the said person got possession.
• In case one of the properties belonging to the estate of the bankrupt company or any part thereof “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 become bankrupt.”

Replacement of bankruptcy trustee

The appointment of a bankruptcy trustee is a bit flexible in the sense that at any given point or situation if the committee of creditors feels that the appointed bankruptcy trustee is not carrying out his duties or performing his functions efficiently, they may replace that trustee with another bankruptcy trustee for the purpose of handling the bankruptcy of the corporate debtor. This can be done by calling a meeting of the committee of creditors where, by a vote of 75% of the voting share, the committee of creditors may pass a resolution for replacement of the current bankruptcy trustee with another one. The committee needs to file an application before the Adjudicating Authority for this purpose. Thereafter, the Adjudicating Authority is required to direct the Board to give a recommendation for replacement of the bankruptcy trustee within seven days of receiving an application, after which the Board has to mandatorily recommend for replacement of the bankruptcy trustee by giving another person’s name as a recommendation to act as the bankruptcy trustee within 10 days. The recommended person shall be someone against whom no disciplinary proceedings are pending before any court of law. 

The Adjudicating Authority may, then finally, appoint that recommended person as the new bankruptcy trustee within 14 days of such recommendation. Once the bankruptcy trustee is replaced by another person, the one being replaced is required to give the possession of the entire holdings and estate of the bankrupt company or the corporate debtor to the newly appointed bankruptcy trustee, who shall then take over the charge connected to his position and title.

Conclusion

One of the key people in most bankruptcies is the bankruptcy trustee. The trustee’s duty is to manage the process and distribute the property of the person or business in bankruptcy. This article looks at the role and duties of the trustee during the bankruptcy process, depending on the bankruptcy type. A trustee is someone who has administrative control of property (like business assets) in trust. The trustee has a fiduciary duty to administer the property impartially for a person or business. A bankruptcy trustee is a special kind of trustee who oversees a bankruptcy case. 

References

1. https://debtsolutions.bdo.ca/bankruptcy/the-bankruptcy-process/
2. https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
3. https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=7565#:~:text=For%20the%20purpose%20of%20 handling,the%20 bankrupt%20under%20 section%20125.
4. https://ibclaw.in/section-79-definitions-of-part-iii/
5. https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=7565

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/joinchat/L9vr7LmS9pJjYTQ9

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.