Bankruptcy Trustee Not Automatically Discharged Upon Filing Of Section 138 Application: NCLT Delhi

The New Delhi Bench of the National Company Law Tribunal (NCLT) on 18 February, held that a Bankruptcy Trustee does not automatically stand discharged merely upon filing an application under Section 138 of the Insolvency and Bankruptcy Code (IBC). Discharge occurs only upon the adjudicating authority passing an appropriate order.

A Bench comprising Judicial Member Ashok Kumar Bhardwaj and Technical Member Reena Sinha Puri clarified that mere filing under Section 138(1) does not effectuate discharge, and the tribunal must actively consider the application before granting it.

The NCLT held:

“This Tribunal/AA cannot be expected to act as mute's spectator of the Bankruptcy Process and need to pass all such orders which are necessary to prevent the abuse to process under IBC. In the circumstances we order discharge of the Bankrupt from liability under Section 139, disqualification under Section 140(2) and restrictions under Section 141(1) of the Code…”

The ruling arose from an application filed by Bankruptcy Trustee Viram Vishal Minhas, seeking directions under Section 138(2) of the IBC and an extension of six months to file the final report in the bankruptcy proceedings of personal guarantor Hulas Rahul Gupta.

The Bench observed that while Section 138(1) mandates that a trustee should apply for a discharge order upon expiry of one year from the bankruptcy commencement date, such filing does not automatically discharge the trustee. The Tribunal noted that a conjoint reading of Sections 138(1) and 138(2) makes it clear that the adjudicating authority must examine the application and pass an appropriate order. The process is therefore not automatic, and the Tribunal must ensure that the objectives of the IBC are fulfilled and that the bankruptcy process is not misused. The Bench emphasised that the adjudicating authority cannot act as a “mere stamping authority” and must actively supervise the bankruptcy process to prevent abuse of the statutory framework.

The Tribunal further observed that the discharge order primarily has limited consequences under the Code, such as releasing the bankrupt from certain liabilities under Section 139 and removing specific disqualifications under Sections 140 and 141, while not affecting the ongoing functions of the Bankruptcy Trustee or the administration of the bankruptcy estate.

During proceedings, the Tribunal found that certain aspects of the bankrupt's financial affairs required further investigation, noting unusual fluctuations in net worth and transactions involving the transfer of a farmhouse to family members.