How will the Revised Bankruptcy Code Benefit SMEs

The introduction of these changes will allow SMEs to fail faster just to subsequently grow faster
How will the Revised Bankruptcy Code Benefit SMEs
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Entrepreneur Staff
Senior Correspondent, Entrepreneur India
3 min read

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The growing sector of Small and Medium Enterprises in India has been at the receiving end of many beneficial steps taken by the government of India. Creating a space for free flow of funds has been one of the important aspects that the government has been looking into.

The Insolvency and Bankruptcy Code that was implemented last year targeted mainly large corporations, but now reports suggest that the government is looking at revising the code to make it more SME-efficient. The introduction of these changes will allow SMEs to fail faster, just to subsequently grow faster. The creation of a low-cost insolvency code will further promote the quick but stable growth of SMEs.

The 2015 report of the Bankruptcy Law Reforms Committee focuses in two aspects:

(a) An insolvency resolution process, which involves a process of negotiation between the company and the creditors; and

 (b) A fresh start/second chance process

According to Shashank Bijapur, Founder and CEO, Spotdraft, “Currently these are applicable only to individuals, partnerships or sole-proprietorships. These two should also be made available to SMEs.”

Quicker Turnaround for Growth

A simpler insolvency process will allow SMEs to restart their businesses. This will help SMEs assess their business plans and go-to market strategies, also giving them time and the opportunity to have a second chance at their business. This will have to be coupled with advice from experts. “The insolvency proceedings should have a fresh start process to help promising SMEs start afresh by restructuring their business,” said Bijapur.

Better Flow of Funds

The presence of the large number of SMEs also means that there is a larger need for funds. With the insolvency process, it will help banks or lenders better evaluate an enterprise. As Bijapur explained, “The recently notified Insolvency Regulations make room for a more dynamic assessment of the financial data of an entity. This means the financial information can also be accessed by the creditors, thereby helping them make informed decisions. Some start-ups may want to give these “Information Utility Services”, aimed at insolvency proceedings to access data.”

Make Way for Out-of-court Settlements

When the word bankruptcy is heard, it is often discussed in a bad light. Once a settlement issue is dragged to court, it further deteriorates the name of the company. But understanding that for SMEs, the declaration of bankruptcy will often result in a second chance, an unnecessary court settlement will make it even more difficult for them to gain access to funds. “Professionals (lawyers etc) should be allowed to give advice relating to out-of-court-settlements, restructuring of the business as opposed to having a long-drawn court observed proceedings,” he said.

Talking about how lack of funds is the major cause of bankruptcy, Bijapur suggested an alternative. “The government should consider allowing trading of SME shares for such extreme circumstances to allow them to raise equity capital to pay their debts,” he said.

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