Legal Restrictions and Disqualifications for a Bankrupt Individual in India

The legal framework in India imposes various restrictions and disqualifications on individuals adjudged as insolvent. Insolvency applies to individuals unable to repay debts, often including those who provided personal guarantees for corporate debtors. In such case, when the debts of such an individual are not fully satisfied by the creditors, then in such circumstance, such individual may be adjudged as “bankrupt” in accordance with the laws mentioned in the Chapter IV (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016 (“Code”) and under other applicable laws from date of commencement of bankruptcy. This article examines the disqualifications of a “bankrupt” or an “undischarged insolvent” under key legislations in India, outlining specific provisions that govern such disqualifications.                                                                                                                                                                                                  

Legislation	Particulars
Insolvency and Bankruptcy Code, 2016	Whether acting solely or jointly in concert shall not be eligible to submit a resolution plan for a corporate debtor. [1] Not to be appointed or acting as a trustee or representative in respect of any trust, estate or settlement. [2] Not to be appointed or acting as a public servant.[3] Not to be elected to any public office where the appointment to such office is by election. [4] Not to be elected or sitting or voting as a member of any local authority. [5] Not to act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company. [6] Prohibited from creating any charge on his estate or taking any further debt. [7] Required to inform his business partners that he is undergoing a bankruptcy process.[8] Required to inform all parties involved in a transaction that he is undergoing a bankruptcy process prior to entering any financial or commercial transactions. [9] Not be permitted to travel overseas without the permission of the jurisdictional adjudicating authority. [10]
The Constitution of India, 2024	Not capable of being a member of either houses of the Parliament. [11]  Not capable of being a member of the legislative assembly or legislative council of a state.[12]
The Banking Regulation Act, 1949	No banking company shall employ or continue the employment of any person who is, or at any given time has been adjudicated to be an insolvent.[13]
The Real Estate (Regulation and Development) Act, 2016	Not capable of continuing as a chairperson and a member from the office and chairperson, judicial member, technical or administrative member of the appellate tribunal.[14]
The Indian Contract Act, 1872	An agency is terminated upon agent or principal being adjudicated as insolvent under the provisions of any law for time being in force. [15]
The Companies Act, 2013	Ineligible to be appointed as a director of a company and shall vacate the office of directorship upon being declared as an “undischarged insolvent”.[16]
The Limited Liability Partnership Act, 20080	Not capable of becoming a partner of a limited liability partnership and cessation of interest in partnership.[17]
The Chartered Accountants Act, 1949	Not entitled to have his name registered in the register of members. [18]
The Company Secretaries Act, 1980	Not entitled to have his name registered in the register of members. [19]
Cost and works Accountants Act, 1959	Not entitled to have his name registered in the register of members. [20]
Securities and Exchange Board of India Act, 1992	To be removed from the office of the Securities and Exchange Board of India and Securities Appellate Tribunal. [21]
Securities and Exchange Board of India (Depositories and Participants) Regulation, 2018	Not be considered a ‘fit and proper person’ under the Regulation. [22]
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018	No preference issue shall be made to a person adjudged as an insolvent. [23]
Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2018	A person (including their directors or managing partners of a company) not to be considered ‘fit and proper’ for a recognized stock exchange or clearing corporation.[24]
Securities and Exchange Board of India (Intermediaries) Regulations, 2008	Shall not be considered a ‘fit and proper person’ for acting as an applicant, a depository, a shareholder, director and key managerial personnel.[25]
Securities and Exchange Board of India (Stock-Brokers) Regulations, 1992	The license of a stockbroker, adjudged as insolvent, shall be cancelled or suspended.[26]
Securities and Exchange Board of India (Employee’s Services) Regulations, 2008	An employee must necessarily report full facts to the competent authority about any legal proceedings instituted against him regarding debt recovery or for adjudging him as an insolvent. [27]
Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999	A penalty of suspension of the certificate of registration. Suspension of the agency without an enquiry is imposed on the credit rating agency. [28]
The Insurance Regulatory and Development Authority Act, 1999	To be removed from the office of the Insurance Regulatory and Development Authority of India. [29]
Information Technology Act, 2000	The digital signature certificate may be revoked by the certifying authority. [30]
The Bhartiya Nagarik Suraksha Sanhita, 2023	Required to furnish fresh securities to Magistrate, if not furnished, then Magistrate may consider it a default.[31]
The Partnership Act, 1932	To be ceased from being a partner in a partnership firm and the partnership firm is not binding for the acts of the insolvent partner. [32]
Reserve Bank of India Act,1934	Disqualified from being the director or member of local boards. To be appointed as a member of the Monetary Policy Committee by Central Government. [33]
Notifications of the Reserve Bank of India	Not to be appointed as managing director/whole-time director in Primary (Urban) Co-operative Banks. [34] Not to be appointed/continued as a director of a company engaged in the business of payment aggregators and payment gateways. [35]
The Payment and Settlement Systems Act, 2007	Revocation of the authorization issued to operate the payment system. [36] System provider’s right to appropriate any collaterals contributed by the system participants towards its settlement, if the system participants are declared insolvent. [37]
The Deposit Insurance and Credit Guarantee Corporation Act, 1961	Not capable of being nominated as the director of Deposit Insurance Corporation.[38]
The Income Tax Act, 1961	Ineligible to represent an assessee who is entitled or required to attend before any income tax authority or the appellate tribunal in connection with any matter relating to the valuation of any asset, otherwise than when required under section 131 of the Income Tax Act, 1961.[39]
Income Tax Rules, 1962	Removal of the name of an authorized income-tax practitioner. [40]
Wealth Tax Rules, 1957	Ineligible to qualify for registration as a valuer. [41]
The Prohibition of Benami Transactions Act, 1988	To be removed from chairmanship and membership from the office of the appellate tribunal. [42]
The Competition Act, 2002	To be removed from chairmanship and membership from the office of Competition Commission of India. [43]
The Employees’ State Insurance Act, 1948	Not to be selected or to act as a member of the corporation, the standing committee or the medical benefit council.[44]
Aadhaar (Targeted Delivery Of Financial And Other Subsides, Benefits And Services) Act, 2016	To be removed from chairmanship and membership from the office of Unique Identification Authority of India.[45]
Air (Prevention and Control of Pollution) Act, 1981	Ineligible to act as a member of the state board. [46]
Arbitration and Conciliation Act, 1996	To be removed as a member from the office of Arbitration Council of India.[47]
The Indian Trust Act, 2002	Ineligible to act as a proper person.[48] Removal of name as a trustee, and the subsequent appointment of a new trustee.[49]
The National Green Tribunal Act, 2010	To be removed from the office of chairman or member of National Green Tribunal. [50]
National Tax Tribunal Act, 2005	To be removed from the office of chairman or member of National Tax Tribunal. [51]
Water (Prevention and Control of Pollution) Act, 1974	Ineligible to act as a member of the central and state boards for prevention and control of pollution. [52]
The Right to Information Act, 2005	To be removed from the office of chief information commissioner or information commissioner. [53]   To be removed from the office of the state chief information commissioner or state information commissioner. [54]
The Digital Personal Data Protection Act, 2023	To be disqualified for being appointed and to continue as the chairperson or a member of the Data Protection Board of India. [55]

India's legal framework, with its restrictions and disqualifications on individuals declared insolvent, safeguards the interests of creditors and other stakeholders which promotes good corporate governance and economic stability. Several legislations treat bankruptcy and insolvency of an individual as a serious issue, barring such individual from holding and taking over office or managing organizations.

[1] Refer to Section 29A(a) in Chapter – II (Corporate Insolvency Resolution Process) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[2] Refer to Section 140(2)(a) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[3] Refer to Section 140(2)(b) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[4] Refer to Section 140(2)(c) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[5] Refer to Section 140(2)(d) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[6] Refer to Section 141(1)(a) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[7] Refer to Section 141(1)(b) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[8] Refer to Section 141(1)(c) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[9] Refer to Section 141(1)(d) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[10] Refer to Section 141(1)(e) in Chapter – III (Bankruptcy Order for Individuals and Partnership Firms) of the Insolvency and Bankruptcy Code, 2016. Accessible at Insolvency and Bankruptcy Code, 2016.

[11] Refer to Article 102(1)(c) in Part- V (The Union) of the Constitution of India. Accessible at The Constitution of India.

[12] Refer to Article 191(1)(c) in Part- VI (The States of the Constitution of India. Accessible at The Constitution of India.

[13] Refer to Section 10(1)(b)(i) of the Banking Regulation Act, 1949. Accessible at Banking Regulation Act, 1949.

[14] Refer to Section 26 and Section 49 of the Real Estate (Regulation and Development) Act, 2016. Accessible at The Real Estate (Regulation and Development) Act, 2016.

[15] Refer to Section 201 of the Indian Contract Act, 1872. Accessible at The Indian Contract Act, 1872.

[16] Refer to Section 164(1)(b) and Section 167(1)(a) of the Companies Act, 2013. Accessible at The Companies Act, 2013.

[17] Refer to Section 5 and Section 24(2)(b) of the Limited Liability Partnership Act, 2008. Accessible at the The LLP Act.

[18] Refer to Section 8 of the Chartered Accountants Act, 1949. Accessible at The Chartered Accountants Act,1949.

[19] Refer to Section 8 of the Companies Secretaries Act, 1980. Accessible at The Companies Secretaries Act, 1980.

[20] Refer to Section 8 of Cost and works Accountants Act, 1959. Accessible at Cost and works Accountants Act,1959.

[21] Refer to Section 6(a) and 15Q(2)(a) of the Securities and Exchange Board of India. Accessible at Securities and Exchange Board of India Act, 1992.

[22] Refer to Regulation 23(2)(b)(iii) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018. Accessible at the SEBI (Depositories and Participants) Regulations,2018.

[23] Refer to Regulation 164A (3)(a)(i) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. Accessible at the SEBI (Issue of Capital and ) Regulations,2018.

[24] Refer to Regulation 20(2)(b)(iii) of the Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2018. Accessible at Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2018.

[25] Refer to Schedule II Regulation 3(b)(vii) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. Accessible at the SEBI (Intermediaries) Regulations,   2008.

[26] Refer to Regulation 27 (v) of the Securities and Exchange Board of India (Stockbrokers) Regulations, 1992. Accessible at the SEBI(Stock Brokers) Regulations, 1992.

[27] Refer to Regulation 73 of the Securities and Exchange Board of India (Employee’s Services) Regulations, 2008. Accessible at SEBI(Employee's Services) Regulations, 2008.

[28] Refer to Regulation 36 and 37 of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations,1999. Accessible at SEBI(CRA). Accessible at SEBI (Credit Rating Agencies Regulations,1999.

[29] Refer to Section 6(1)(a) of the Insurance and Regulatory and Development Authority Act, 1999. Accessible at The Insurance Regulatory and Development Authority Act, 1999.

[30] Refer to Section 38(2)(d) of the Information Technology Act, 2000. Accessible at Information Technology Act, 2000.

[31] Refer to Section 495 of the Bhartiya Nagarik Suraksha Sanhita, 2023. Accessible at The Bhartiya Nagarik Suraksha Sanhita, 2023.

[32] Refer to Section 34 of Partnership Act, 1932. Accessible at The Partnership Act, 1932.

[33] Refer to Section 10, 45ZC and 45ZE of the Reserve Bank of India Act, 1934. Accessible at Reserve Bank of India Act, 1932. 

[34] Refer to direction 3.5.1(viii) of RBI Notification, bearing reference number: RBI/2021-22/60 DOR.GOV.REC.25/12.10.000/2021-22 dated June 25, 2021. Accessible at Here.

[35] Refer to Para 3.5.1(viii) of Reserve Bank of India notification on appointment of Managing Director / Whole-Time Director in Primary (Urban) Co-operative Banks. Accessible on Notification dated 25.06.2021

[36] Refer to Section 8(4)(a) of The Payment and Settlement Systems Act, 2007. Accessible at The Payment and Settlement Systems Act, 2007.

[37] Refer to Section 23(4)(a) of The Payment and Settlement Systems Act, 2007. Accessible at The Payment and Settlement Systems Act, 2007.

[38] Refer to Section 6(3)(b) of the Deposit Insurance and Credit Guarantee Corporation Act, 1961. Accessible at The Deposit Insurance and Credit Guarantee Corporation Act, 1961.

[39] Refer to Section 288(4)(c) of the Income Tax Act, 1961. Accessible at The Income Tax Act, 1961.

[40] Refer to Rule 58 of the Income Tax Rules, 1962. Accessible at Income Tax Rules, 1962.

[41] Refer to Rule 8A of Wealth Tax Rules, 1957. Accessible at Wealth Tax Rules, 1957.

[42] Refer to Section 35 of the Prohibition of Benami Transactions Act, 1988. Accessible at The Prohibition of Benami Transactions Act, 1988.

[43] Refer to Section 11(2)(a) of the Competition Act, 2002. Accessible at The Competition Act, 2002.

[44] Refer to Section 13(a) of the Employees’ State Insurance Act, 1948. Accessible at Employees’ State Insurance Act, 1948.

[45] Refer to Section 15(1)(a) of the Aadhaar (Targeted Delivery of Financial and Other Subsides, Benefits and Services) Act, 2016. Accessible at Aadhaar (Targeted Delivery Of Financial And Other Subsides, Benefits And Services) Act, 2016.

[46] Refer to Section 8(1)(a) of The Air (Prevention and Control of Pollution) Act, 1981. Accessible at Air (Prevention and Control of Pollution) Act, 1981.

[47] Refer to Section 43G(1)(a) of the Arbitration and Conciliation Act, 1996. Accessible at the  Arbitration and Conciliation Act, 1996.

[48] Refer to Section 60 of the Indian Trust Act, 2002. Accessible at Indian Trusts Act, 1882.

[49] Refer to Section 73 of the Indian Trust Act, 2002. Accessible at Indian Trusts Act, 1882.

[50] Refer to Section 10(1)(a) of National Green Tribunal Act, 2010. Accessible at National Green Tribunal Act, 2010.

[51] Refer to Section 11(1)(a) of National Tax Tribunal Act, 2010. Accessible at National Tax Tribunal Act, 2010.

[52] Refer to Section 6(1)(a) of Water (Prevention and Control of Pollution) Act, 1974. Accessible at Water (Prevention and Control of Pollution) Act, 1974.

[53] Refer to Section 14(3)(a) of The Right to Information Act, 2005. Accessible at The Right to Information Act, 2005.

[54] Refer to Section 17(3)(a) of The Right to Information Act, 2005. Accessible at The Right to Information Act, 2005.

[55] Refer to Section 21(1)(a) of The Digital Personal Data Protection Act, 2023. Accessible at the Digital Personal Data Protection Act, 2023.