Part III IBC: Insolvency of Individuals and Firms

The Code was designed as a single law for the insolvency of companies, firms and individuals. Part II, for corporate persons, came into force in 2016 and has been used in thousands of cases. Part III, for individuals and partnership firms, has had a very different history: it has been brought into force only for personal guarantors to corporate debtors. This note explains whom Part III covers, the processes it provides, who decides cases, and how far it is actually in operation.

1. Who Part III Covers

• Section 2(e) to (g). The Code applies to personal guarantors to corporate debtors, partnership firms and proprietorship firms, and individuals other than personal guarantors, in relation to their insolvency and bankruptcy.
• Section 78. Part III applies where the amount of default is not less than one thousand rupees; the Central Government may raise the threshold up to one lakh rupees by notification.
• Personal guarantor. Under section 5(22), an individual who is a surety in a contract of guarantee to a corporate debtor (Topic 66)
• Excluded. Limited liability partnerships are corporate persons and fall under Part II, not Part III.

Figure 1: Key provisions defining the scope of Part III

2. The Three Processes

Figure 2: Processes under Part III

• Fresh start, sections 80 to 93. A process for very small debtors whose income, assets and qualifying debts are below thresholds and who do not own a dwelling unit; on completion, qualifying debts are discharged, giving the debtor a fresh start.
• Insolvency resolution, sections 94 to 120. The debtor or a creditor applies through a resolution professional; after admission, the debtor proposes a repayment plan, which needs approval of creditors holding more than three-fourths in value and of the adjudicating authority.
• Bankruptcy, sections 121 to 148. Where the resolution process fails or is not possible, a bankruptcy order vests the debtor's estate in a bankruptcy trustee, who realises and distributes it under section 178, and the bankrupt is later discharged (Topic 70)

3. Adjudicating Authorities

• Section 179. The Debts Recovery Tribunal is the adjudicating authority for insolvency resolution and bankruptcy of individuals and partnership firms, with appeals to the Debts Recovery Appellate Tribunal.
• Section 60(1) and (2). For personal guarantors to corporate debtors, the NCLT is the adjudicating authority; where a CIRP or liquidation of the corporate debtor is pending, an application against its personal guarantor must be filed before the NCLT dealing with that process.
• Rationale. Hearing the guarantor's case alongside the corporate debtor's avoids conflicting decisions and lets the same tribunal consider both.

4. Phased Notification

Figure 3: Coverage and status of Part III

• Personal guarantors. By a notification of 15 November 2019, the Central Government brought Part III into force, from 1 December 2019, only for personal guarantors to corporate debtors; the Supreme Court upheld this selective notification in Lalit Kumar Jain v Union of India (2021) (Topic 66)
• Other individuals and firms. Part III has not been brought into force for partnership and proprietorship firms or for other individuals, so their insolvency continues to be governed by the old laws.
• Old laws. The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 continue to apply to individuals and firms, since their repeal by section 243 takes effect only when notified.
• Reasons for delay. The Debts Recovery Tribunals face heavy pendency, and personal insolvency raises social concerns, such as protecting the debtor's home and livelihood, that need careful implementation.

5. The 2026 Amendments to Part III

• Personal guarantors. No interim moratorium under section 96 or section 124 applies to applications against personal guarantors to corporate debtors (sections 96(4) and 124(4)) (Topic 66)
• Process changes. The resolution professional has 21 days instead of 10 to submit the report under section 99; if no repayment plan is submitted in time, the process is terminated and the debtor or creditors may seek bankruptcy (sections 106(1A) and 121(d))
• Fraud on creditors. A new section 164A allows the adjudicating authority to reverse undervalued transactions deliberately entered into to defeat creditors, mirroring section 49.
• Government dues and penalties. An Explanation to section 178(1)(d) ranks two years of government dues whether or not secured, and section 183A provides a penalty of one lakh to two crore rupees for frivolous or vexatious proceedings under Part III.

6. Frequently Asked Questions

Can a bank start insolvency proceedings under the Code against a sole proprietor who defaulted on a business loan?

Not yet. Part III has not been brought into force for proprietorship firms or for individuals other than personal guarantors to corporate debtors. The bank must use other remedies, such as the SARFAESI Act or the Recovery of Debts and Bankruptcy Act.

Which tribunal hears the insolvency of a personal guarantor whose company is in CIRP?

The NCLT before which the company's CIRP is pending, under section 60(2).

Is a limited liability partnership dealt with under Part III?

No. An LLP is a corporate person under section 3(7), so its insolvency falls under Part II, like a company's.

What is the minimum default for Part III?

One thousand rupees under section 78, which the Central Government may raise up to one lakh rupees by notification.

Which law governs the insolvency of an individual trader in Mumbai today?

The Presidency Towns Insolvency Act, 1909, since Part III of the Code has not been brought into force for individuals other than personal guarantors to corporate debtors. Outside the presidency towns, the Provincial Insolvency Act, 1920 applies.

Can the Central Government bring Part III into force for some categories only?

Yes. Section 1(3) allows different dates for different provisions, and Lalit Kumar Jain (2021) upheld bringing Part III into force for personal guarantors alone.

7. Related Topics

• Topic 66: Personal Guarantors. The part of Part III in force.
• Topic 67: Fresh Start. Debt relief for small debtors.
• Topic 70: Bankruptcy Order and Trustee. When resolution fails.