The government plans to introduce a separate legislation to speed up insolvency proceedings and help distressed firms wind up operations quickly. The new law will shorten the legal processes involving insolvency operations of small and medium entities. The government is keen to make bankruptcy proceedings a time-bound procedure.
“Speedy winding up of sick enterprises, particularly small and medium ones, is an area we need to improve,” said a senior official in the ministry of corporate affairs.
Liquidation process in India is fairly protracted, taking on an average 7-10 years, against 1-6 years in other countries, according to a recent survey. It often yields very little in terms of recoveries and leads to substantial waste of resources and funds.
While the proposed company law has incorporated specific provisions relating to speedy corporate insolvency, the government may go in for an independent insolvency law to make the process more effective, the official added, requesting anonymity.
The idea is to set up a single legislation that will cater to insolvency provisions for all types of business operations like a company, partnership, sole proprietorship firms and limited liability partnerships (LLPs).
Under the present framework, winding up of a corporate entity is guided by provisions of the Companies Act, whereas personal insolvency is guided by other laws. The new companies bill, which is presently pending with a parliamentary standing committee, deal with only corporate insolvency.
With a large chunk of small entities in the country falling under the sole-proprietorship business form, the need for a comprehensive insolvency legislation becomes more important as the proposed bankruptcy code can not easily be made applicable in such cases.
On account of phenomenal rise in retail lending, experts feel that it is necessary to re-look at the personal insolvency laws to ensure that any insolvency proceedings against individuals are also expeditiously decided.
“What is required is a need for comprehensive assessment in cases of small and medium enterprises. I think a standalone insolvency law will be required in the years ahead,” said leading insolvency lawyer Sumant Batra, who is also the president of the UK-based International Association of Restructuring and Insolvency Professionals (INSOL).
He said that while the proposed bankruptcy code as part of the companies bill was a huge improvement in the insolvency reform process, a comprehensive legislation would be the next generation reform to make winding up process expeditious and more effective.
While the new companies bill proposes substantial insolvency reforms, there are certain aspects which still needs to be addressed, one of them being cross-border insolvency, said Mr Batra.
The Irani committee, set up by the government to suggest reform measures to improve the business environment in the country, had emphasised the need to expedite proceedings and has suggested a two-year timeframe for completion of liquidation proceedings.