Government is working on a simpler Insolvency and Bankruptcy Code for SMEs

Context:

The framework for a simpler insolvency and bankruptcy code is expected to be drawn up by the Insolvency and Bankruptcy Board of India (IBBI) by the end of this month

Introduction:

• After dealing firmly with large corporate loan defaulters, the government has started drawing up a simpler version of the insolvency and bankruptcy code for partnership and proprietorship firms, the legal form that most small and medium enterprises (SMEs) take.
• The Insolvency and Bankruptcy Board of India (IBBI) has started working on a blueprint for the SMEs bankruptcy code, the framework of which is expected to be drawn up .by the end of this month

Why government is widening the net?

• The government initiative to develop an efficient and low-cost insolvency code for the SME sector is due to its ability to create jobs with low capital and the need for quick redeployment of capital in the event of an enterprise’s failure.
• According to data compiled by the Ministry of the Micro, small and medium enterprise, the sector accounts for 33% of India’s manufacturing output. There are as many as 36 million such enterprises in the country, half of them in rural areas, employing more than 80 million people.
• Though the value of loans borrowed by SME is small, they far outnumber companies, exercising a significant influence on the financial sector’s stability.

Meaning of Bankruptcy:

Bankruptcy is a legal status usually imposed by a Court, on a firm or individual unable to meet debt obligations. India’s new Bankruptcy Bill attempts to create a formal insolvency resolution process (IPR) for business, either by coming up with a viable survival mechanism or by ensuring their speedy liquidation.

What is Insolvency and Bankruptcy Code?

• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015.
• The Code received the assent of the President of India on 28 May 2016.
• The Bankruptcy law provides for even suppliers to initiate insolvency proceeding. If no resolution is arrived at within 180 to 270 days, the assets have to be auctioned off to recover dues.
• IBBI, which is implementing the Insolvency and Bankruptcy Code (IBC), has notified the regulations for inspection and investigation of service providers registered with it.
• Insolvency professional agencies, professionals, entities and information utilities are considered as service providers under the Code.
• The Code, which provides for a market-determined and time-bound resolution of insolvency proceedings, became operational in December 2016.

Key features of Insolvency and Bankruptcy Code: 1. Insolvency Resolution:

• The code outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors.
• A maximum time limit, for completion of the insolvency resolution process, has been set for corporate and individuals.
• For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree.
• For startups (other than partnership firms), small companies and other companies(with asset less than Rs 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.

2. Insolvency regulator:

• The code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it.
• The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India.

3. Insolvency professionals:

• The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.

4. Bankruptcy and Insolvency Adjudicator:

• The code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies (i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal for individuals and partnerships

Why there is need for Bankruptcy bill?

• Bankruptcy proceedings in India are governed by multiple laws like the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and many more. The entire process of winding up is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process.
• The new Code streamlines and consolidates all above laws to make the process simpler.
• The passage of this bill will enable quick and prompt action to be taken in the early stages of debt default by a firm, maximising the recovery amount. The creditors will not be stymied by red-tape and promoters will directly become accountable for any financial lapses
• At present, there are multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India. The current legal and institutional framework does not aid lenders in effective and timely recovery or restructuring of defaulted assets and causes undue strain on the Indian credit system
• It will help in tackle the problem of insolvency and bankruptcy of corporate entities and natural persons in India

Loopholes of present Bankruptcy bill:

• The insolvency and bankruptcy code that is currently in place deals only with companies, not other forms of organized economic activity.

Conclusion:

India currently ranks 136 out of 189 countries in the World Bank’s index on the ease of resolving insolvencies. India’s weak insolvency regime, its significant inefficiencies and systematic abuse are some of the reasons for the distressed state of credit markets in India today. The Code promises to bring about far-reaching reforms with a thrust on credit driven insolvency resolution. The codes also have provisions to address cross border insolvency through bilateral agreements and reciprocal arrangements with other countries. The unified regime envisages a structured and time-bound process for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revitalize the ailing Indian corporate bond markets.