Insolvency and Bankruptcy Code, 2016 | Part III
Section 171: Proof of Debt in Bankruptcy Proceedings
Section 171 governs how creditors prove their debts in individual bankruptcy proceedings, including the information required in a claim, treatment of security and interest, and the bankruptcy trustee's role in valuing debts.
Section 171 - Statutory provision
The following reproduces the eight subsections in the uploaded source, with paragraph formatting for readability.
Sub-section 1. (1) The bankruptcy trustee shall give notice to each of the creditors to submit proof of debt within fourteen days of preparing the list of creditors under section 132.
Sub-section 2. (2) The proof of debt shall- (a) require the creditor to give full particulars of debt, including the date on which the debt was contracted and the value at which that person assesses it; (b) require the creditor to give full particulars of the security, including the date on which the security was given and the value at which that person assesses it; (c) be in such form and manner as may be prescribed.
Sub-section 3. (3) In case the creditor is a decree holder against the bankrupt, a copy of the decree shall be a valid proof of debt.
Sub-section 4. (4) Where a debt bears interest, that interest shall be provable as part of the debt except in so far as it is owed in respect of any period after the bankruptcy commencement date.
Sub-section 5. (5) The bankruptcy trustee shall estimate the value of any bankruptcy debt which does not have a specific value.
Sub-section 6. (6) The value assigned by the bankruptcy trustee under sub-section (5) shall be the amount provable by the concerned creditor.
Sub-section 7. (7) A creditor may prove for a debt where payment would have become due at a date later than the bankruptcy commencement date as if it were owed presently and may receive dividends in a manner as may be prescribed.
Sub-section 8. (8) Where the bankruptcy trustee serves a notice under sub-section (1) and the person on whom the notice is served does not file a proof of security within thirty days after the date of service of the notice, the bankruptcy trustee may, with leave of the Adjudicating Authority, sell or dispose of any property that was subject to the security, free of that security.
Meaning and purpose of proof of debt
Proof of debt is the information and supporting material a creditor submits to establish the existence and amount of a claim against the bankrupt. It helps the bankruptcy trustee verify claims and determine amounts that may participate in distribution from the bankruptcy estate, subject to the Code and applicable rules and regulations.
What must a creditor provide?
Under Section 171(2), proof must state the debt's full particulars, including when it arose and the creditor's assessment of its value. Where security exists, the creditor must also provide full particulars of that security, the date it was given and its assessed value. The prescribed form and procedure must be followed.
A creditor holding a decree against the bankrupt can submit a copy of the decree as valid proof of debt under Section 171(3). The trustee may still need to consider the claim in accordance with other applicable bankruptcy provisions.
Key statutory periods
| Provision | Requirement | Period or effect |
|---|---|---|
| Section 171(1) | Trustee gives notice to creditors to submit proof of debt | Within 14 days of preparing the Section 132 list |
| Section 171(8) | Person served with notice does not file proof of security | After 30 days from service, trustee may seek the Adjudicating Authority's leave to dispose of secured property free of that security |
These periods serve different purposes. The thirty-day provision is not a general extension of the period for all proofs of debt.
Interest, unliquidated debt and future debts
Interest on a debt
Section 171(4) allows interest to be proved as part of the debt, except interest owed for a period after the bankruptcy commencement date.
Debts without a fixed amount
Under subsections (5) and (6), the trustee estimates a bankruptcy debt without a specific value, and the trustee's assigned value is the amount provable by the creditor.
Debts payable in the future
Under subsection (7), a creditor may prove a debt that would otherwise become payable after the bankruptcy commencement date as though presently owed, with dividends payable in the prescribed manner.
Secured creditors and failure to prove security
If a person served with the notice under subsection (1) does not file proof of security within thirty days of service, subsection (8) permits the trustee, with leave of the Adjudicating Authority, to sell or otherwise dispose of property subject to the security free of that security. The trustee does not obtain an automatic right to sell merely because the thirty days have passed.
Illustrative example
Suppose a creditor lent money to an individual who later enters bankruptcy. The creditor's proof ordinarily identifies the loan, its date and amount, and any collateral with its date and estimated value. If the creditor also holds a court decree, a copy of that decree is valid proof under subsection (3). The trustee evaluates the claim and security according to the applicable statutory framework.
Frequently asked questions
Who issues the notice to submit proof of debt?
The bankruptcy trustee issues notice to each creditor under Section 171(1).
Can a decree holder prove a debt using the decree?
Yes. Section 171(3) expressly provides that a copy of the decree is valid proof of debt.
Can post-bankruptcy commencement interest be claimed as part of proof?
Section 171(4) excludes interest owed for a period after the bankruptcy commencement date from the interest provable as part of the debt.
Can a trustee sell secured property without permission?
Not under the power described in Section 171(8). That subsection requires leave of the Adjudicating Authority, in addition to the specified failure to file proof of security within thirty days after service of notice.
Related law and official resources
Read the Insolvency and Bankruptcy Code, 2016 overview, and consult the India Code official legislation portal and the Insolvency and Bankruptcy Board of India for the Code, rules, regulations and notifications. Relevant connected provisions include Section 132 (list of creditors) and Section 178 (priority of payments).
This article is general legal information. Application of the Code depends on the relevant commencement notifications, applicable rules and the facts of the proceeding.