Small businesses are seeking an extension of the protection given to them from bankruptcy proceedings for defaults during the pandemic beyond the nine-month period, which expires this month. But experts are divided over the demand, while the government weighs its options.
The ministry of corporate affairs and the Insolvency and Bankruptcy Board of India (IBBI) will decide on extending the current suspension of fresh bankruptcy proceedings a few days prior to its expiry on 24 December, said two people with direct knowledge of the matter.
The Centre is keen to roll out the mini bankruptcy code for small firms before fresh bankruptcy proceedings for defaults during the pandemic are allowed under the Insolvency and Bankruptcy Code (IBC). This would spare small businesses the complexities of the sophisticated regime designed for large corporations.
IBC suspension should be continued for at least six months, else small businesses will find it hard to sustain in the current economic environment, said Chandrakant Salunkhe, founder and president of the SME Chamber of India.
Under the IBC (Second Amendment) Act, 2020, fresh cases were barred initially for six months from 25 March. It was later extended by another three months till 24 December but the law allows a maximum of one-year suspension of new cases during the pandemic till the end of March 2021. Salunkhe said the industry body will press for an extension.
Experts said a holistic solution to deal with the stress in micro, small and medium enterprises was needed. “Given the sluggish demand for stressed assets in the current economic environment, it may not be wise to push more firms into bankruptcy proceedings, which could only lead to liquidation, rather than resolution,” said Manoj Kumar, partner and head, M&A, transactions and insolvency at Corporate Professionals, an advisory firm.
It, therefore, makes sense to extend the suspension of new cases under IBC by another three months so that a comprehensive solution could be brought out, he added.
However, keeping companies alive artificially could come at a cost. The nine-month suspension of fresh cases has led to a loss of momentum in bankruptcy resolution which has set the clock back on this important economic function, said Sumant Batra, managing partner, Kesar Dass B. and Associates. “Extending it for another three months could prove disastrous for the nascent distress asset market and the corporate turnaround ecosystem in the country.”
The need of the hour is to inject fresh energy into IBC by providing for pre-pack resolution schemes and a special framework for MSMEs with ‘debtor in possession’ feature, which need to be brought out without delay, added Batra.
Pre-pack schemes are corporate turnaround plans struck out of court to save time. These are placed before the bankruptcy tribunal for its approval. The ‘debtor in possession’ feature would allow the promoter of the failing firm to remain in control which is vital for small businesses as they depend on the capabilities of the promoter and investor interest in them may be limited.
