Less than two months ago, the government managed to give India a new law to deal with every kind of bankruptcy or insolvency. This new law applies to a) any company incorporated under the Companies Act, (b) any other company governed by any special Act, (c) any limited liability partnership, (d) such body incorporated…as the central government may, by notification, specify, and, (e) partnership firms and individuals. Nobody is left out, right? So, what is a pending Bill called The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015 supposed to do? Also known as the draft amendment for revival of MSMEs, it lays down mind-numbingly elaborate procedures for exits and revivals of MSMEs. Here are some provisions:
New adjudication and appellate authority: Every state government, in consultation with the high court concerned, would set up an adjudicating authority and appellate authority to decide cases of MSME exit and revival. Until such authority is decided, the civil judge shall act as the adjudicating authority for each district.
Scheme for revival: The central government will set up an apex committee of lenders in consultation with the Reserve Bank of India to implement revival schemes and the apex committee in turn will create district committees for schemes.
Start of proceedings: Any enterprise that cannot pay just Rs 1 lakh of overdue debt within 30 days after the creditor serves a notice asking for the debt to be paid, can be declared sick by the adjudicating authority on an application by that creditor.
Revival scheme: If the enterprise is declared sick, any creditor or the enterprise itself can submit a scheme of revival within 30 days. Once such a scheme is offered, the unit will be protected from winding up, recovery suits or any other action for 120 days.
Provisional trustee: The adjudicating authority shall appoint a provisional trustee from a panel maintained by the state government. The trustee will examine the scheme, meet the creditors, and submit a report within 15 days to the adjudicating authority, who will recommend either the revival scheme or winding up.
Enterprise trustee: If a revival is suggested, the provisional trustee will call a meeting of creditors, who will appoint an enterprise trustee from a panel (of chartered accountants, company secretaries, cost accountants and advocates) maintained by the state government. The appointment that will have to be ratified by the adjudicating authority.
The rest of the Bill describes the power and duties of the enterprise trustee, what the revival plan should or should not contain, sanction and modification and implementation of the revival plan, liquidation of assets, appeals, and discharge. The most striking part of the Bill is the absolute power concentrated in the hands of the adjudicating and appellate authority. No order passed under this law would be appealable, no civil court shall have any jurisdiction and no injunction shall be granted.
In short, this Bill is a nightmare for those yearning for an efficient, quick and productive resolution of bankruptcy and a delight for those who believe in deep government intervention in the smallest business sickness - exactly what has made bankruptcy resolution so messy in India. Note the perverse and pervasive power of this law. Its tentacles go into the smallest districts, and makes two parties, who have voluntarily come together to do business, completely dependent on the long-drawn resolution process initiated and supervised by a large government-monitored bureaucracy, which has to be paid for by all of us. Finally, how does this Bill square with the even more elaborate resolution process of the Insolvency and Bankruptcy Code which is now an Act? Will the government please announce that the MSME Amendment Bill for revival and exit is being dropped?
Meanwhile, remember, the government has not repealed the existing bankruptcy laws. It is tinkering with them. It has introduced The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, to amend bits and pieces of four laws: (i) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (ii) Recovery of Debts due to Banks and Financial Institutions Act (iii) Indian Stamp Act and (iv) Depositories Act. The new Bill barely addresses the problems with the existing laws.
This column cannot go into them, but insolvency experts are making a list of overlapping situations, contradictions and jurisdiction issues between the new law and the old laws. Unless they are sorted out quickly, we will have big issues when the Insolvency and Bankruptcy Code actually starts operations. Meanwhile, tucked into the Enforcement of Security Interest Bill is a plan to create a central registry of all properties registered under Companies Act, 2013, the Registration Act, the Merchant Shipping Act, the Motor Vehicles Act, the Patents Act and the Designs Act. All claims, whether by creditors or the tax department, should be routed through it. This is one more example of an impossibly ambitious idea, designed by the bureaucracy to find more work for itself, during employment and after retirement.
The writer is the editor of www.moneylife.in
editor@moneylife.in
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