Editorial

IBC Rules: Resolution for individuals

| Updated on: Dec 06, 2021
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IBC rules for individual debtors need to kick in, so that their capital is freed for other uses

There’s a mismatch at the heart of the IBC (Insolvency and Bankruptcy Code) process: individual creditors are broadly recognised as ‘operational creditors’, but individual debtors are not part of the system. With the onset of Covid, this contradiction has come into relief. Operational creditors which includes MSMEs have their own grievances, in that they do not have much of a voice in the Committee of Creditors. But bonafide operational debtors who want to liquidate their struggling businesses under the aegis of a fair and efficient process, and move on — without carrying any stigma — have been blanked out. In the wake of the Covid-induced shake-out, these individuals, partnerships and sole proprietorships, particularly in contact-intensive sectors, deserve a smooth exit. For example, while the travel and hospitality sector as a whole has been hit by the Covid storm, the impact on individual travel operators and small hotels has been far worse. In macroeconomic terms, a reformed IBC will liberate such locked-up capital for better uses — more so where institutional credit is involved. It ties in with changes in the regulatory framework for credit institutions.

At present, small units can move Debt Recovery Tribunals (DRTs), which take an eternity to resolve bankruptcies. Section 179(1) in Part III of the Code says the adjudicating authority with regard to insolvency matters of individuals and partnership firms shall be the DRTs. Likewise, Section 179(2) provides that the DRT shall have jurisdiction to entertain or dispose of any suit or proceeding by or against the individual debtor. DRTs are at the bottom of the table in terms of recovery rates as well, at 4 per cent, compared to over 25 per cent in the case of SARFAESI and IBC (excluding the top nine or 10 accounts). They are ill-equipped to distinguish between fraudulent activity and genuine business failure. Small debtors are stigmatised through newspaper notices and such like, irrespective of whether they are wilful defaulters or not. It does not help that banks too lack the project appraisal skills to be able to rescue a debtor at the right time, or take a call on whether the business has a future. In fact, this failing explains the mountain of cases before the NCLT.

The IBC rules, rather Part III of the IBC, need to be operationalised to include sole proprietorships, partnerships and individuals. In November 2019, the Government notified rules that introduced personal guarantors to corporate debtors in the ambit of insolvency resolution. The NCLT will handle these cases. But sole proprietorships, partnerships and individuals identified under Section 2(f) and 2(g) of the IBC are out in the cold. Former Union Minister and BJP MP Suresh Prabhu has rightly underscored the need for rectifying this anomaly and frame clear rules. For a government that is keen on promoting small-scale job creators (who dominate the enterprise landscape), this must surely be a priority.

Published on December 07, 2021

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