IBC Section 159: Notice to disclaim onerous property of bankrupt

Section 159 of Insolvency and Bankruptcy Code, 2016: Notice to disclaim onerous property of bankrupt

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) The bankruptcy trustee shall be entitled to claim for the estate of the bankrupt, any after-acquired property by giving a notice to the bankrupt.

(2) A notice under sub-section (1) shall not be served in respect of-

(a) excluded assets; or

(b) any property which is acquired by or devolves upon the bankrupt after a discharge order is passed under section 138.

(3) The notice under sub-section (2) shall be given within fifteen days from the day on which the acquisition or devolution of the after-acquired property comes to the knowledge of the bankruptcy trustee.

(4) For the purposes of sub-section(3).

(a) anything which comes to the knowledge of the bankruptcy trustee shall be deemed to have come to the knowledge of the successor of the bankruptcy trustee at the same time; and

(b) anything which comes to the knowledge of a person before he is appointed as a bankruptcy trustee shall be deemed to have come to his knowledge on the date of his appointment as bankruptcy trustee.

(5) The bankruptcy trustee shall not be entitled, by virtue of this section, to claim from any person who has acquired any right over after-acquired property, in good faith, for value and without notice of the bankruptcy.

(6) A notice may be served after the expiry of the period under sub-section (3) only with the approval of the Adjudicating Authority.

Explanation.-For the purposes of this section, the term "after-acquired property" means any property which has been acquired by or has devolved upon the bankrupt after the bankruptcy commencement date.

Legal Commentary & Landmark Judgments: Section 159

Section 159 empowers the Bankruptcy Trustee to disclaim onerous property of the bankrupt, relieving the estate from burdensome covenants, liabilities, and ongoing expenses.

Onerous Property Category: Includes unprofitable contracts, unsaleable land burdened with onerous covenants, shares carrying calls, and property that gives rise to an endless liability to pay money.
Notice of Disclaimer: The trustee must give a formal written notice of disclaimer signed by him within twenty-eight days of becoming aware of the onerous property.
Extinguishment of Rights and Liabilities: The disclaimer operates to determine the rights, interests, and liabilities of the bankrupt and his estate in the disclaimed property from the date of notice.

Key Landmark Precedents:

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: The Supreme Court observed that the power of disclaimer is designed to prevent insolvency estates from being depleted by toxic or unviable contractual commitments.
Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209: Recognized that the management of insolvent estates requires terminating contracts that drag down collective recoveries.

Courtroom Practice & Strategic Litigation Guidance:

Trustees must conduct an immediate asset-liability review of leases and contracts upon taking charge; failure to disclaim within the 28-day window may lock the estate into continuing rent or maintenance obligations.