Recently, the Government has passed the Insolvency and Bankruptcy Code, 2016 to establish the process and regulation for liquidation and insolvency resolution in India. Earlier, there was no single law to deal with insolvency and bankruptcy.

Liquidation of Companies and Individual Bankruptcy and Insolvency were handled by the Courts.

In case of any Company defaulting in repaying  Loan to Banks, payment to creditors, salary payment to employees and labor or any other creditor in excess of Rs. One Lac, the aggrieved person can initiate Insolvency proceedings against that company for recovery of his dues.

SME’s/Small Vendor can raise Demand notice to the Company in the prescribed form at the registered address of the company and can file application for insolvency of the company in case the due amount is not paid by the company.

There are a number of SMEs/small vendors who are working for companies and these companies are getting their work done on their own terms and then delaying/deducting payments from the amount due to the SME’s.

These SMEs/Small vendors can now use this code as a tool for recovery of their dues from these companies.

Apply for Working Capital Loan

On the other side, the government is also working on the insolvency and bankruptcy code for SMEs. A large number of SMEs take loans from banks and some of them are unable to repay them due to failure or unexpected losses in the  business. But the liability towards loan repayment is unlimited, since most of these businesses are proprietorship or family partnership.

See also  How Does Overhead Cost Impacts The Small Business?

Eventually, there is no easy exit for SMEs as the case to recover loan amount, which is filed by the banks, goes on for several years. Since SMEs are biggest contributors to job creation, there should be a provision of easy exit owing to the genuine failure of business, with low cost.

According to data,the SME sector accounts for more than 30% of India’s production.
There are more than 55 million SMEs in India which create more than 100 million jobs.
SMEs take loans mostly against security in the form of  personal assets and property of the owner and therefore, business failure results in the sale of the property and personal assets of the owner for repayment of outstanding loan and interest.
So, a simpler law is required to facilitate an easy exit for SME’s facing business failure, while keeping in mind the interest of banks, creditors and the owner of the business.