Individual bankruptcy: Here is what PM Narendra Modi government is planning

By: | Updated: August 21, 2017 7:53 AM

The government is considering bringing in regulations in phases to deal with individual bankruptcy under the overarching law — the Insolvency and Bankruptcy Code (IBC) 2016.

PM Narendra Modi. (Image: PTI)

The government is considering bringing in regulations in phases to deal with individual bankruptcy under the overarching law — the Insolvency and Bankruptcy Code (IBC) 2016. Sources told FE the government will first come up with insolvency regulations for individuals who are into businesses, which could be announced in a month. Individuals giving personal guarantees for corporate loans and an overwhelming chunk of micro and small and medium enterprises (MSMEs) that are basically proprietorship and partnership firms will be covered by these regulations. The next phase of rules would be to deal with cases where individuals who are not into any business and yet go bankrupt to service personal debt for any reason, said one of the sources. Around 97% of SMEs in India are proprietorship or partnership firms, and not limited liability partnerships or companies (bodies corporate); so they are outside the ambit of the extant corporate insolvency regulations under the IBC. While the IBC provides for individual insolvency, regulations are still in the works. So far, regulations have been notified for insolvency cases involving companies (bodies corporate). These MSMEs are basically business entities formed of by individuals, and not bodies corporate in legal terms. So their promoters have unlimited liability, unlike those of companies whose liability is limited to the extent of their equity capital. Also, people running such MSMEs are often, if not always, the ones to give personal guarantee for loans to be invested in these entities.

To strengthen the insolvency eco-system, NITI Aayog has convened a meeting of key stakeholders on August 30, said the sources. Regulations on cases involving individuals who are into business will be the focal point of discussions. The deliberations will complement efforts by the Insolvency and Bankruptcy Board of India in firming up the regulations under the IBC. A strong insolvency framework for proprietorship or partnership firms is crucial, as around 36 million such SMEs exist in the country that employ more than 80 million people and account for a third of the country’s manufacturing output, according to data compiled by the MSME ministry.

It would also be key to job creation in a sustainable manner. However, creating such a robust insolvency eco-system in India is easier said than done, although the government has made a good start by coming up with such a law, according to noted insolvency lawyer Sumant Batra. “Our society is quite unforgiving to defaulters, unlike the US where even courts have propagated the concept that society should be willing to forgive an unfortunate debtor–somebody who has failed to service his debt for reasons beyond his control and is not a fraudster.”

He said there are many things that are outside the control of a debtor who has invested in a company. “So the debtor is also taking risks and he may fail at times. If we call every debtor a thief, it will strike at the very root of entrepreneurship.” Anil Bhardwaj, secretary general of the Federation of Indian Micro & Small and Medium Enterprises, said the regulations will be a great step ahead in boosting the spirit of entrepreneurship in the country. “No doubt, the insolvency regulations for individuals who are into businesses will be one of the biggest reforms by the Modi government.”

The IBC is aimed at the turnaround of stressed assets or, in case of liquidation, their quick monetisation. Secured creditors, including banks, are placed third in the preference order in case of any liquidation to receive the proceeds, after meeting the cost of resolution and workers’ dues. The IBC, which has completed a year now, was brought to focus by the government in May when, through an Ordinance to the Banking Regulation (Amendment) Ordinance, 2017, the centre authorised the RBI to direct banking companies to resolve specific cases of bad loans by initiating resolution process under the new insolvency law, where required. The central bank can now give directions on even specific cases of defaults, a practice it had generally avoided earlier.

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