Tuesday, 5 May 2009

When business fails to bloom!

By RK Rishikesh Sinha, New Delhi

This is what an entrepreneur Biswajit Sinha has to say when his venture Eastern Television went bankrupt in the mid 80's:

I was perplexed for quite some time. I was not sure whether it was a right decision to start a venture at Silchar, Assam, after leaving a job in Delhi. As it was not possible to start any venture in Delhi without having a financial base, I opted for my home town. But eventually I was bankrupt.

Though I did assure my bankers that I would return the money in due course of time, the bank had no option but going to court; there I expressed my desire to return the money. The bank, of course, negotiated and asked me to pay the principal amount in installments within a span of 1 year, which was made after I joined for the same job I had left.

Below are the excerpts from the book: Towards Establishing Modern Insolvency and Bankruptcy Codes for Small Enterprises in India

The record-breaking entropy in the financial market has had its cascading effect on the economy: the n number of small and medium enterprises had to vanish in ignominy, of no fault of their own. In this context, the economic gyration which left closure of enterprises prompts re-examination, even change, of the bankruptcy and insolvency laws governing the sector which lies at the fag-end of the economy.

To begin with, unfortunately, the two terms “Bankruptcy” and “Insolvency” are generally misconstrued, and are taken as synonyms. Bankruptcy is a legally declared ‘status’ of an organization or of an individual which fails to pay to its creditors. And Insolvency is the ‘state’ where a company or a person is unable to pay their creditors. It is a financial condition when its assets no longer exceed its liabilities.

To this critical issue which is impeccably intertwined with the spirit of entrepreneurship and enterprise creation, one question – are the Indian laws identify this lesion or are still archaic to its approach – is obvious and natural. India does not have a comprehensive policy or law on bankruptcy. Individuals are declared ‘insolvent’ in the event of the individual inability to meet his/ her total liability. There are two Insolvency Acts, one for the presidency towns and the other for the rest of the country: The Presidency-Towns Act, 1909 and The Provincial Insolvency Act, 1920 respectively.

Though the need for bankruptcy laws have been increasingly felt in the country, as is evident from several important committees and groups set up by the Reserve Bank of India and the Government during the last decade, the discussion has been limited to ‘corporates’ and it excluded ‘firms’ and individuals. The J.J Irani Committee which was set up to suggest amendments in the Companies Act also overlooks the personal liability aspect of directors of small companies.

The discussions in India have so far been influenced by the need for restructuring or liquidation from the standpoint of financial institutions only. Not much attention has been paid to liabilities arising out of statutory dues (such as central and state taxes, dues of labour, of utilities such as electricity, water, finance by state institutions etc.) and the rehabilitation of the debtor.

The major pieces of legislation born during this period, substantiate this claim: The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (DRT Act) and The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFESI Act), which enshrine the contractual right of the secured creditor to take possession of securities in the event of default and sell them for realization of the loan.

Presently, the entrepreneur which enterprise has fallen in the domain of sickness (a term having very India specific connotations) has to fight the battle on several fronts: brave the actions born out of default on statutory dues on the one hand, pacify the bankers and financial institutions for not pressing for repayment or initiating legal course and mollify the buyers, suppliers and employees on the other hand.

However, at this critical juncture, the role of bank is pivotal and urgent. If at that moment the account is seized and credit limits revoked, even a ‘potentially’ viable unit skids into sickness. The first priority becomes restructuring. If that fails or is delayed, the next is OTS (One-Time Settlement). When that too fails or delayed, the ‘domino effect’ gets into motion irreversibly: pressures of creditors keep mounting day by day and vicious cycle of threats, show-causes, legal notices and fines eventually leading to arrests and imprisonment.

The set of agendas required to set a benign economic failure should encompass the following points: (i) Having a credible and effective insolvency and bankruptcy regime and instilling a benign, nuanced attitude towards economic failure in society. (ii) Adoption of international best practices including the time taken in completing the insolvency and bankruptcy exercise.

However, specific intervention is required in the following areas: (i) Need for substantive amendments in Insolvency Acts or replacement by new (single and comprehensive) law (ii) Enactment of comprehensive Bankruptcy Law mechanism covering non-corporate entities (iii) Suitable revisits to other central and state statutes affecting current recovery procedures and clauses of imprisonment (iv) Constitution of Authority/ Registrar/ Central Registry System where all the orders declaring a person as insolvent may be filed (v) Instituting a time bound restructuring mechanism for small scale sector (vi) Need to institute specialized bankruptcy and insolvency courts and a cadre of specialists providing a ‘single window’ to address all related issues: restructuring, liquidation, bankruptcy and insolvency.

Biswajit Sinha is Director of New Delhi-based broadcasting engineering consultancy and trading company, Transs TechnoConsultant Pvt Ltd. His company Eastern Tronix manufactured television sets 'Eastern Television' in the mid 80's from Silchar, Cachar, Assam.

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