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I&B Code 2016 gives Distressed SMEs a Survival Lifeline The I&B Code has emerged as the much-needed shield between the small entrepreneurs and business failures

By Manoj K Singh

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Small and Medium Enterprises (SME)s troubled by looming bankruptcy now have a breather! The recently enforced Insolvency & Bankruptcy Code 2016 (I&B Code 2016) brings a ray of hope to the small entrepreneurs who are constantly threatened by economic failure. The I&B Code has emerged as the much-needed shield between the small entrepreneurs and business failures.
How the Code Helps Entrepreneurs?

The enforcement of I&B Code 2016 offers hope to the distressed SMEs since it provides for reorganization and revival of the affected business in a time bound manner. The code is like a rehabilitation scheme for the SMEs. It gives the affected businesses an opportunity for insolvency resolution. As a philosophy, it aims to promote the spirit of entrepreneurship.

The code is effective because under its provisions the lenders/creditors themselves have to work upon a resolution plan as to how to revive the business. It is important to note that it has also spelt out which creditors need to allow the business to try for its revival.

According to the code, both the financial creditors and operational creditors have to help the SMEs to reorganize themselves as submitted by the Resolution Applicant. Financial creditors are those to whom a business owes a financial debt. Operational creditors are those to whom a business owes operational debts.

The I&B Code 2016 provides that advantage to the committee of creditors, mainly constituted of the financial creditor along with a designated insolvency resolution professional, who will check the viability of the business during the Corporate Insolvency Resolution Process (CIRP).

It would be worth mentioning here that the resolution plan i.e. plan w.r.t for the revival of the business can also be prepared by the corporate debtors itself. According to the code, the resolution applicant needs to submit its resolution plan with resolution professional who will in-turn submit it to committee of creditors.

The applicant can be anybody who is interested in the business. The time period to prepare the resolution plan is 180 days. It can be further extended by the Adjudicating Authority (NCLT) by another 90 days. So, in effect, a troubled SME can avail almost nine months of time to prepare a revival plan. For a specified category of corporate debtors, as a fast track model, this time-period is only 90 days and 45 days of permissible extensions.

This specified category covers small companies as per clause 85 of section 2 of Companies Act 2013, certain notified start-ups as per the Ministry of Commerce and Industry and unlisted companies with total assets not exceeding INR 1 Crore. In the time-period, the SMEs are allowed to put their revival plan in place, they also get a chance to scrutinize their business.

How Bankruptcy Can be Avoided?

Though under the Insolvency and Bankruptcy Code 2016, everything is defined, it is difficult to avoid liquidation. However, one can look into the following to delay the process:

A: As and when a creditor has initiated a CIRP and filed an application before the NCLT, the corporate debtor should check if the procedure prescribed under the code has been followed.

B: The code permits that in case there is a settlement between the creditor and corporate debtor before admitting the application for initiation of CIRP then the application be allowed to be withdrawn.

C: In case of operational creditor, if there is any dispute between the parties then the operational creditor cannot initiate CIRP. Accordingly, if there is a genuine reason for the corporate debtor of not paying the amount then he should immediately proceed with notifying the operational creditor.

D: If the CIRP has been initiated against any corporate debtor, then he and all in his officers should co-operate with the appointed Insolvency Resolution Professional.

Manoj K Singh

Founding Partner, Singh and Associates

Manoj K Singh is the Founding Partner of Singh and Associates.
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