Section 128: Effect of Bankruptcy Order under the Insolvency and Bankruptcy Code, 2016
Section 128 of the Insolvency and Bankruptcy Code, 2016 sets out the principal legal consequences that follow when the Adjudicating Authority passes a bankruptcy order under Section 126. It deals with vesting and distribution of the bankrupt's estate, restrictions on creditor proceedings, the position of secured creditors and the effect of an order against a partnership firm.
Text and meaning of Section 128
Section 128(1): On the passing of a bankruptcy order under Section 126, the estate of the bankrupt vests in the bankruptcy trustee as provided by Section 154 and is to be divided among the creditors. Subject to subsection (2), a creditor in respect of a bankruptcy debt cannot initiate action against the bankrupt's property or commence a suit or other legal proceeding concerning that debt except with leave of the Adjudicating Authority and on the terms it may impose.
Section 128(2): Subject to Section 123, the bankruptcy order does not take away a secured creditor's right to realise or otherwise deal with the security interest as if the bankruptcy order had not been passed. However, a secured creditor who does not take action to realise the security within thirty days from the bankruptcy commencement date is not entitled to interest on the debt after that date.
Section 128(3): If a bankruptcy order under Section 126 is passed against a firm, it operates as a bankruptcy order against every individual who is a partner in that firm on the date of the order.
Section 128(4): The consequences in subsection (1) do not apply to transactions that may be notified by the Central Government in consultation with a financial sector regulator.
Key legal effects of a bankruptcy order
1. Estate vests in the bankruptcy trustee
The bankruptcy order changes control over the bankrupt's estate. Section 128(1)(a) expressly links this consequence to Section 154, which governs vesting of the estate of the bankrupt in the bankruptcy trustee. The trustee thereafter administers the estate in accordance with the Code.
2. Estate is available for distribution among creditors
Section 128(1)(b) provides that the estate is to be divided among creditors. This consequence forms part of the statutory bankruptcy administration and distribution framework in Part III of the Code.
3. Individual creditor enforcement is restricted
Under Section 128(1)(c), a creditor holding a bankruptcy debt is generally prevented from separately proceeding against the bankrupt's property or commencing a suit or other legal proceeding concerning that debt. A proceeding may be commenced only with leave of the Adjudicating Authority and subject to the terms imposed by it.
4. Secured creditors retain important enforcement rights
Section 128(2) preserves, subject to Section 123, the right of a secured creditor to realise or otherwise deal with its security interest. The thirty-day proviso is important: if the secured creditor does not take action to realise the security within thirty days from the bankruptcy commencement date, interest on that debt is not available after the commencement date.
5. Bankruptcy order against a firm extends to its partners
Section 128(3) treats an order against a firm as an order against each person who is a partner on the date of the bankruptcy order. This provision should be read with the other provisions in Part III governing bankruptcy of individuals and partnership firms.
Connected provisions
Section 128 operates as part of Chapter IV of Part III of the Code. Important connected provisions include Section 123 - Application by creditor, Section 126 - Bankruptcy order, Section 127 - Validity of bankruptcy order, Section 129 - Statement of financial position and Section 154 concerning vesting of the estate in the bankruptcy trustee.
Practical point: The effect of Section 128 depends on the nature of the debt, whether the creditor is secured, the property or security involved, and the procedural stage of the bankruptcy. The provision should therefore be read with the applicable provisions of the Code and relevant rules and regulations.
Updated: 30 September 2026. The statutory text should be checked against the latest official legislation and notifications before relying on it in a proceeding.