Individual Insolvency explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 2 of the Insolvency and Bankruptcy Code applies Part III to three categories of non-corporate debtor — personal guarantors to corporate debtors, partnership and proprietorship firms, and other individuals. The minimum amount of default is one thousand rupees, and the Central Government may notify a higher figure that cannot exceed one lakh rupees.
The three categories under Section 2
Individual insolvency was not a single regime from the start. An amendment of 23 November 2017 sub-categorised non-corporate debtors into three distinct groups, and the category decides the forum, the procedure and the date from which the law actually operates.
| Clause | Category | Position |
|---|---|---|
| Section 2(e) | Personal guarantors to corporate debtors (PG to CD) | Categorised with effect from 1 December 2019; insolvency proceedings apply specifically to guarantors of a corporate debtor |
| Section 2(f) | Partnership firms and proprietorship firms | Both are subject to the Code for insolvency or bankruptcy proceedings |
| Section 2(g) | Individuals other than personal guarantors | The residual class created by the 23 November 2017 sub-categorisation |
The minimum amount of default
Section 2 fixes the threshold at which individual insolvency can be triggered at all. The minimum amount of default must not be less than one thousand rupees. The Central Government holds the power to notify a higher minimum, but that power is capped: the notified figure cannot exceed one lakh rupees.
Contrast this with the corporate side, where the section 4 threshold stands at one crore rupees. The gap is deliberate. A corporate default of a few lakh rupees is a commercial dispute; a personal default of a few thousand can be ruin, and Part III is built to reach it.
This is the single most misread point in individual insolvency. Part III of the Code was brought into force with effect from 1 December 2019 only so far as it relates to personal guarantors to corporate debtors.
The fresh start process and the insolvency resolution and bankruptcy provisions for other individuals and for partnership and proprietorship firms remain unnotified and require a separate commencement notification. The provisions are studied, examined and answered on — but they cannot yet be invoked for a debtor who is not a personal guarantor.
Which forum hears which case
- Personal guarantor to a corporate debtor — the National Company Law Tribunal, so that the guarantee and the principal debt sit before the same bench.
- Other individuals and firms — the Debt Recovery Tribunal, established under the Recovery of Debts and Bankruptcy Act, 1993.
The split is not administrative housekeeping. It is what allows a resolution plan for the corporate debtor and the guarantor's own process to be seen together, which is where most of the contested law in this area has been made.
Firms are treated as their partners
A partnership firm has no separate legal personality under the Code in the way a company does. That has consequences that run through the whole of Part III:
- An application in respect of a firm is a joint application by all or a majority of the partners.
- The interim moratorium on filing operates in relation to all the partners as on the date of the application.
- The moratorium on admission likewise applies to all the partners of the firm.
A proprietorship firm is, in substance, the proprietor. Section 2(f) brings it in expressly so that no argument arises about whether the business or the person is the debtor.
Why the category decides everything
Once the category is fixed, individual insolvency runs on rails: the forum, the applicable rules and regulations, the forms and the very question of whether the provision is in force all follow from it. Three practical consequences:
- An application filed in the wrong forum is not a curable irregularity — it is a jurisdictional defect.
- The Personal Guarantors to Corporate Debtors Rules and Regulations, 2019 govern a section 2(e) debtor; the individual insolvency rules govern the rest.
- Advice given on the fresh start process to a debtor who is not a personal guarantor is advice on a provision that cannot presently be used.
Common mistakes
- Treating the one crore section 4 threshold as applying to individual insolvency. It does not — the figure is one thousand rupees.
- Reading the Central Government's power to raise the threshold as unlimited. It is capped at one lakh rupees.
- Assuming Part III is fully operational because it appears in the bare Act.
- Filing a firm's application in the name of the firm alone rather than jointly by the partners.