Agricultural shadow on bankruptcy reform

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NEW DELHI : The ongoing protest by farmers against three newly enacted laws appears to have made the government cautious about amending the Insolvency and Bankruptcy Code (IBC).

The government has amended its plan to rapidly roll out two separate programs – one for the amicable preparation of business bailouts and the other for a special regime for small businesses – in light of the Unexpected agricultural protests, a person familiar with the development said, adding that these will be incorporated into a major IBC revision likely later in the year.

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Reality check

The move reflects greater insistence at all levels of government for extreme caution while legislating changes affecting key sectors of the economy. Small businesses, for example, contribute over 28% of gross domestic product (GDP), 45% of manufacturing output and over 40% of exports, according to official estimates.

No formal response to an email sent to a Foreign Ministry spokesperson was available at the time of publication.

The farmers’ protest showed that even reform ideas debated in public can upset stakeholders once they become law.

After further consultation, the government will make an amendment to the IBC, either during the monsoon or during the winter session of Parliament, which will include elements of a pre-pack (out-of-court) insolvency resolution system and a system for MSMEs. Even aspects of these plans, on which the government had previously taken a position, are being revised based on new comments, the person quoted above said on condition of anonymity.

The pre-package plan involves creditors and investors drafting a bailout out of court to save time and seek the blessing of justice for the final plan. In the case of a simpler scheme proposal for MSMEs, the idea is to adapt the business regime to the informal nature of small businesses. A key consideration would be to let the failing small business retain operational control, unlike a bankrupt business, which is run by a director. Small businesses are generally sole proprietorships or partnerships.

“Legislative changes must be made with care, prudence and consultation,” the person said, explaining that further changes cannot be made in a hurry.

Sumant Batra, managing partner at law firm Kesar Dass B. and Associates, said the current proposals for a prepackage program require further deliberations with stakeholders before they go to parliament.

One factor that has encouraged the government not to rush amendments to the IBC is the fact that already the default threshold for creditors to initiate bankruptcy proceedings against 1 lakh to 1 crore. This will protect MSMEs from the threat of being taken to court once the current IBC suspension expires on March 24, said a second person who also spoke on condition of anonymity.

Batra said that since many companies have gone into liquidation in the past four years, there is a need for political attention to make the liquidation faster and more efficient. “In addition, the concept of mediation and conciliation should be considered to be incorporated into the IBC architecture, as sophisticated economies have already made great strides in this area,” Batra said.

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