Towards Establishing Modern Insolvency and Bankruptcy Codes for SMEs

Temporary financial stresses, sickness and terminal failures are unavoidable facts in the life of an enterprise.  There are times also when an entrepreneur voluntarily wants to exit.  However, an enterprise is an entity intertwined with external world and its closure has repercussions. Besides the entrepreneur, an enterprise has several stakeholders: lenders, employees, customers- consumers, suppliers (of goods and services), all tiers of governments and society among others. If an enterprise fails, all the stake holders are adversely affected: some are affected monetarily while some psychologically, socially and thus personally too.

Therefore, a balance needs to be found between the seemingly opposite interests of the entrepreneur and of other stake holders, keeping in mind societal value of enterprise and citizens’ (lenders, suppliers etc) right to property.

It is in the context that a legal mechanism of insolvency and bankruptcy becomes indispensable to deal with the situations above mentioned to ensure: payment of unpaid dues to creditors, sharing of debtor’ assets fairly and an honourable exit to the debtor. 

The insolvency mechanism in India, provided through Presidency Town Insolvency Act, 1909 or Provincial Town Insolvency Act, 1920, is archaic and largely dysfunctional.  Provisions of winding up and of limited liability under Companies Act are also not applicable on MSMEs as 97% of them are either Proprietorship or Partnership firms.

Because of absence of these mechanism, whenever there is financial stress (voluntary or forced; temporary or terminal), there is no method  for MSMEs to deal with commercio-legal requirements of multi-agency creditors (involving  statutory dues, debts of banks and FIs)- as any of these creditors could stall the restructuring exercise, force closure on enterprise and secure imprisonment sentence for entrepreneur. There is no bankruptcy mechanism – neither law nor specialized body.  There is no BIFR equivalent for MSMEs which could protect the entrepreneur from recovery proceedings of various statutory agencies even during the process of restructuring.

In FISME we assume a progressive set of insolvency and bankruptcy laws will let an entrepreneur to come out clean from all the tangles of the failed enterprise at a cost that the laws can lay down. Thereafter he will be free to begin life once again as a bona fide citizen-start another enterprise or work for someone else. There will be no debtors’ prison anymore in India as in the US. An approach of this nature will attract bright young persons to entrepreneurship which in turn will lead to national prosperity       

In year 2009-10, FISME Executive Committee, under dynamic leadership of its then President Mr. Dinesh Singhal, embarked upon reform programme in insolvency and bankruptcy.  Here is trail of the journey….

Important Milestones

Year Important Milestones
1999 FISME Executive takes up the issue under Presidentship of
Mr. Dinesh Singhal.
2000 In association with FISME, Rajiv Gandhi Foundation initiates
study of practices of recovery of dues in five States
( UP, West Bengal, Tamil Nadu, M.P. and Gujrat)
2001 Rajiv Gandhi Foundation, Indicus Analytics and FISME jointly take up
detailed study of Exit issues of Small Scale Industries in India.
Study sponsored by FNSt (German Foundation)

Mr. Dinesh Singhal (FISME President) in talks with Dr. Isher Judge
Ahluwalia on Insolvency issues on ‘Talk-Back’ at Doordarshan [2001]

2002 Seminar at Rajiv Gandhi Foundation, New Delhi and release of study
(6th Sept 2002)

Seminar on Need for Modern Code of Insolvency and Bankruptcy
for SMEs (in association with SIDBI) with legal and economic
experts including representatives of lending institutions
to discuss and to develop reform agenda.
(2nd July 2008, New Delhi)

2009 FISME Policy Paper:“Towards establishing Modern Code
for Insolvency and Bankruptcy” released by Dy. Chairman Planning
Commission in ET- MSME Summit, New Delhi (13th Feb 2008)

Prime Minister sets up Task Force for MSMEs with specific sub-group
on ‘Exit and Insolvency’. FISME is nominated to the subgroup
and makes submission. [See FISME’s submission]

Final Report of Subgroup upholds FISME’s stance.

PM’s Task Force concurs and mandates for initiation of new
Model Insolvency Act to address MSME issues

2010 On behest of Ministry of MSME, FISME kick-starts the process
for developing the draft legislation by organizing Meet
with economic and legal experts on Insolvency.
[See minutes of the meeting] (5th April 2010, New Delhi)



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Insolvency and Bankruptcy