Bankruptcy of Individuals under IBC: Order and Trustee

Under Part III, bankruptcy is not the first step but the last. An individual or firm reaches it only when the insolvency resolution process has failed: the application is rejected, the repayment plan is rejected or not submitted, or the plan collapses midway. A bankruptcy order then transfers the debtor's estate to a trustee, who realises and distributes it, and the bankrupt is discharged after about a year. This note explains how bankruptcy begins, what the order does and how the trustee works.

1. The Gateway to Bankruptcy, Section 121

• Grounds. A creditor, creditors jointly, or the debtor may apply for bankruptcy where an order has been passed rejecting the insolvency resolution application under section 100(4), rejecting the repayment plan under section 115(2), or recording premature termination of the plan under section 118(3); the 2026 Amendment added termination for failure to submit a plan under section 106(1A)
• Time limit. The application must be filed within three months of the relevant order.
• Firms. For a partnership debt, the application may be filed by any of the partners.
• Design. Unlike the old insolvency Acts, which allowed adjudication on acts of insolvency, the Code allows bankruptcy only after an attempt at resolution.

Figure 1: Stages of the bankruptcy process

2. Applications and Interim Moratorium

• Debtor, section 122. The debtor's application includes the records of the insolvency resolution process, a statement of affairs and the order permitting the application, and may propose a trustee; it cannot be withdrawn without leave.
• Creditor, section 123. A creditor's application includes details of the debt and the process records; a secured creditor must either relinquish its security for the benefit of all creditors or apply only for the unsecured part of its debt.
• Interim moratorium, section 124. On filing, an interim moratorium stays pending legal actions against the debtor's property and bars new ones until the bankruptcy commencement date, and extends to all partners of a firm; under section 124(4), inserted in 2026, it does not apply to applications against personal guarantors to corporate debtors.
• Trustee, section 125. The IBBI confirms the trustee proposed in the application or nominates one.

3. The Bankruptcy Order and Its Effect

• Section 126. The authority passes the bankruptcy order within 14 days of receiving the IBBI's confirmation or nomination of the trustee; copies go to the bankrupt, the creditors and the trustee.
• Section 127. The order remains in force until the debtor is discharged under section 138.
• Section 128. The estate of the bankrupt vests in the trustee and is to be divided among creditors; no creditor may initiate action against the estate or proceed with any suit without the authority's leave.
• Secured creditors. A secured creditor may still realise its security, but if it does not act within 30 days of the bankruptcy commencement date, it is not entitled to interest on its debt after that date.
• Next steps. The bankrupt submits a statement of financial position within 7 days if the application was by a creditor; the trustee notifies creditors and invites claims, prepares a list of creditors and convenes a meeting, which may form a committee of creditors (sections 129 to 135)

4. Consequences for the Bankrupt

Figure 2: Disqualifications and restrictions on a bankrupt

• Disqualifications, section 140. The bankrupt cannot be a trustee or representative of any trust, estate or settlement, cannot be appointed a public servant, and cannot be elected to public office or be a member of a local authority.
• Restrictions, section 141. The bankrupt cannot act as a director of a company or take part in its management, cannot borrow or create a charge beyond prescribed limits without the trustee's approval, must disclose the bankruptcy to business counterparties, cannot sue on bankruptcy debts without leave, and needs permission to travel abroad.
• Duration. The disqualifications and restrictions end on discharge or on recall of the bankruptcy order.
• Recall, section 142. The authority may modify or recall the order if there was an error apparent on the face of the record, or if the debts and expenses have been paid or secured to its satisfaction.

5. The Bankruptcy Trustee

Figure 3: Functions of the bankruptcy trustee

• Functions, section 149. To investigate the affairs of the bankrupt, realise the estate and distribute it in accordance with section 178.
• Powers, sections 151 to 153. To hold property, make contracts, sue and be sued, sell property, give receipts and compromise claims, some of which need the approval of the committee of creditors.
• Vesting, section 154. The estate vests in the trustee immediately on appointment, without any conveyance or transfer.
• Fees and replacement. The trustee's fee is fixed in proportion to the value of the estate; the committee of creditors may seek the trustee's replacement by a vote of 75 per cent of voting share.
• Discharge, section 138. The trustee applies for the bankrupt's discharge on the expiry of one year from the bankruptcy commencement date, or within 7 days of the committee approving completion of administration, whichever is earlier (Topic 71)

6. Frequently Asked Questions

Can a creditor apply directly for an individual's bankruptcy without an insolvency resolution process?

No. Section 121 permits an application only after an order in the insolvency resolution process, such as rejection of the application or the repayment plan, or premature termination of the plan.

Can a bankrupt be a director of a company?

No. Section 141 prohibits a bankrupt from acting as a director or taking part in the management of a company until discharge or recall of the order.

What happens to a secured creditor's security in bankruptcy?

The secured creditor may still realise it, but if it does not do so within 30 days of the bankruptcy commencement date, it loses interest on its debt after that date (section 128).

When is a bankrupt discharged?

On the trustee's application, ordinarily one year from the bankruptcy commencement date, or earlier if administration is completed and approved by the committee of creditors (section 138).

7. Related Topics

• Topic 69: Insolvency Resolution of Individuals. The process that comes first.
• Topic 71: Bankruptcy Estate, Distribution and Discharge. What follows the order.
• Topic 89: RP vs Liquidator vs Bankruptcy Trustee. The three professionals compared.