Who is an Undischarged Insolvent?
The phrase “undischarged insolvent” is not specifically defined in IBC. The term “undischarged insolvent” is mentioned under clause 3 of section 79, but the term ‘bankrupt’ is defined. ‘Bankrupt’ is the person who is – a debtor who has been adjudged as bankrupt by a bankruptcy order under section 126;
Each of the partners of a firm, where a bankruptcy order under section 126 has been made against the firm; is adjudged as an undischarged insolvent.
A person who is not able to pay his debts can initiate insolvency proceedings. Creditors who are not paid their dues by a company can also initiate insolvency proceedings against the firm. The Court has the power to “discharge” the debtor and release him of his debts through some financial arrangement, like attachment of his movable and non-movable assets. Till the time the insolvent is not discharged by the court, from the time the insolvency proceedings have been initiated, he remains an “undischarged insolvent“, which puts several limitations on him concerning his financial dealings, candidature for elections, etc.
Also, it might be confusing as insolvency seems to be the same as bankruptcy, but it is not. Insolvency is a condition of financial distress, whereas bankruptcy is a court order that decides how an insolvent debtor will deal with unpaid obligations. However, in both situations, the parties either approach the National Law Company Tribunal or Debt Recovery Tribunal (as the case may be) as their Adjudicating Authority. Insolvency is a situation where the liabilities of an individual or an organization exceed its asset and that entity is unable to pay the debts as they become due for payment.
Whereas, Bankruptcy is when one asks for help from the government to pay off his debts to his creditors. There are various disqualifications for an undischarged insolvent. Under Article 102 (1) (c) a person shall be disqualified for being chosen as, and for being, a member of either House of Parliament if he is an undischarged insolvent; Article 191 (1) (c) disqualifies a person for being chosen as, and for being, a member of the Legislative Assembly or Legislative Council of a State if he is an undischarged insolvent.
Under the Companies Act, 2013, a person is not eligible to be appointed as a director of a company, if he is an undischarged insolvent. Under Rule 145 of Trade Marks Rules, 2002, a person is debarred from registration of the trademark, if he is an undischarged insolvent. Under Rule 103A of The Patents Rules, 2003, it is stated that a person shall not be eligible to be included in the roll of scientific advisors if he is an undischarged insolvent. So it is clear that many provisions in India disqualify a person if he’s an undischarged insolvent. Though it has been interpreted many times in the court of law.
In the case of SBI vs. Bhushan Energy Ltd[1], NCLT stated that while a company is under Corporate Insolvency Resolution Process (CIRP), it cannot be said to be ‘undischarged insolvent’ and for the determination of who is ‘undischarged insolvent’ has been vested with a court of competent jurisdiction, which it isn’t under the IBC. However, who is the competent authority to decide this question, has not been answered. Multiple cases have discussed the term undischarged insolvent.
Section 29A of Insolvency and Bankruptcy Code talks about the conditions in which a person becomes ineligible to become a resolution applicant. Any person who is an undischarged insolvent gets ineligible to become a resolution applicant. Any person who is undischarged insolvent is debarred from filing a resolution plan. IBC has used the term ‘bankrupt’ and ‘undischarged bankrupt’ and not ‘undischarged insolvent’. Under the Provincial Insolvency Act, 1920, a person is adjudged insolvent and unless he is discharged by the Court, he remains subject to disqualifications.
Therefore, a person adjudicated as insolvent is considered as undischarged until he is discharged by a competent court. The expression undischarged insolvent has acquired a particular legal connotation and such expression cannot be used otherwise than in terms of the insolvency enactments. Insolvent and Undischarged insolvent are two different terms and often confuse people. It was clarified in the judgment of Thampanoor Ravi v. Charupara Ravi & Ors[2], the court said that the term used under article 102 and article 191 is ‘undischarged insolvent’ and not merely ‘insolvent’, and both the terms have different meanings.
The court observed that an insolvent is a person who is unable to repay his debts and as long as he remains in that position he is an undischarged insolvent, that is, as long as he has not discharged his debts he is an “undischarged insolvent“. And the person who has not been discharged may be called bankrupt.
Covid-19 is having a major economic impact on countries, companies, and businesses. The outbreak of the virus has resulted in drastic financial distress among the companies. Due to a lack of supply chains coupled with lower customer demand, many industries and businesses are on the verge of being shut down. In this type of circumstance, more insolvency and bankruptcy cases could be lined up before the courts.
A recent amendment has been made by the government by implementing and introducing section 10A in IBC, it would suspend the operation of Sections 7, 9 & 10 of the Insolvency and Bankruptcy Code, 2016 concerning defaults arising on or after 25.03.2020 for six months, extendable up to a maximum of one year from such date. Sections 7, 9, and 10 of the IBC enable a financial creditor, operational creditor, and the promoter, respectively, to initiate insolvency proceedings against a company.
The main aim of the amendment is to provide some relief to those corporate debtors who are directly affected due to the COVID-19 pandemic which has resulted in widespread disruption of business operations across the country. However, section 29A is streamlined to avoid unintended exclusions i.e., Persons ineligible u/s 29A will not benefit from this amendment in any manner. It means that the persons ineligible under section 29A would still be prohibited from proposing a resolution plan. Although, an insolvency check is a must on the target companies to prevent any kind of disruptions in the future.
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Frequently Asked Questions
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What does “undischarged insolvent” mean in India?
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An undischarged insolvent is a person declared insolvent by a court who has not yet received a formal discharge, meaning they face legal restrictions until resolved.
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How can a person become an undischarged insolvent?
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A person becomes an undischarged insolvent after insolvency proceedings are filed and adjudicated by a competent court, remaining under restrictions until discharge.
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What restrictions apply to an undischarged insolvent under Indian law?
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Undischarged insolvents cannot contest elections, act as company directors, register patents, or submit resolution plans under Section 29A of IBC until they are discharged.
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Can an undischarged insolvent submit a resolution plan under IBC?
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No. Section 29A explicitly bars undischarged insolvents from submitting resolution plans until legally discharged.
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How is an undischarged insolvent different from an insolvent person?
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Insolvency denotes inability to pay debts, while an undischarged insolvent is someone formally adjudicated by the court whose restrictions continue until discharge.
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How can I check if someone is an undischarged insolvent?
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You can verify through official court orders, public insolvency records, or databases maintained by the adjudicating authority under the Insolvency & Bankruptcy Code.
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Can an undischarged insolvent regain legal rights after discharge?
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Yes. Once discharged by the court, an undischarged insolvent is no longer subject to restrictions and can participate in corporate or public activities.
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What are the practical consequences of being an undischarged insolvent?
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Loss of eligibility for public office, inability to act as director, limited contract-making capacity, restricted access to credit, and reputational impact.
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Why is the status of undischarged insolvent important for corporate governance?
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It prevents individuals with unresolved financial obligations from managing companies or influencing corporate resolutions improperly, maintaining legal and financial integrity.
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Which laws in India govern undischarged insolvents?
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Key laws include the Insolvency & Bankruptcy Code (IBC), Companies Act, and Election Laws, which collectively define rights, restrictions, and disqualifications for undischarged insolvents.
