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The government’s move to extend the suspension of fresh insolvency proceedings till the end of this fiscal might appear to be bowing to the inevitable. However, two qualifications are in order. One, giving a troubled company more time to turn around makes sense if the intervening period holds out any possibility of a turnaround, and that depends on growth momentum in the economy.
Growth is not a matter of luck or seasonality, but of policy and policy-induced investment. If the government moves on a large stimulus, it would make sense to put off recognising that a company is in terminal difficulty and that its resources should swiftly be redeployed. If not, why delay? The second qualification is the bar on voluntary insolvency filing.
The bar should be lifted to make the exit route easy for a company that cannot be run as a going concern. The resolution process is faster under the Insolvency and Bankruptcy Code, which mandates completion in a maximum of 330 days — against about five to seven years that it would typically take under the Companies Law.
The Supreme Court has held that the right to carry on any business also provides the inherent right to close the business as no person can be compelled to carry on the business in case of losses or other circumstances. The IBC provides the legal route. It mandates the debtor to prove that her business is unviable, and has suffered losses in the previous financial years. Rightly, it has built-in checks to prevent any misuse.
The suspension of voluntary insolvency is likely to lead to further impairment of assets that could otherwise have been restructured and push the company into liquidation. This is wholly avoidable. Australia and France allow voluntary insolvency proceedings.
This piece appeared as an editorial opinion in the print edition of The Economic Times.