Individual businesses to soon be under ambit of bankruptcy code

Bankruptcy

The government Tuesday widened the scope of insolvency rules to bring individual businesses under its ambit. The existing Insolvency and Bankruptcy Code only applies to corporate defaulters.

The Insolvency and Bankruptcy Board of India (IBBI) released draft norms pertaining to the insolvency resolution process for individuals and firms. The norms can be viewed on IBBI’s website (www.ibbi.gov.in) and public comments can be submitted till October 31.

Once these new norms are notified, even sole proprietorships and partnership firms will come under the bankruptcy code. This will enable smooth resolution of bankruptcy under the ambit of a rules-based regime.

“These rules shall apply to matters relating to the insolvency resolution process for individuals and firms under Part III of the code,” said the draft norms released by IBBI. Part III of the Insolvency and Bankruptcy Code, 2016, pertains to insolvency and bankruptcy of proprietorship and partnership firms.

“It is a positive step towards consolidating the bankruptcy regime for individuals, for whom there was no systematic approach previously. For companies, at least there was recourse to the Companies Act, whereas for individuals there were only some archaic laws from the early 1900s, which were hardly relied upon in practice,” Harsh Pais, partner at law firm Trilegal, told Mint.

Small and medium-sized enterprises (SMEs) are typically registered as proprietorship or partnership firms. Although the size of loans given to these firms is relatively small, they far outnumber large companies and therefore, their collective borrowing play a big part in determining the stability of the financial sector.