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.
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.