1920 Act needs redoing to sort out bankruptcy rules

The government will have to repeal some sections of the Provincial Insolvency Act, 1920, to frame rules for bankruptcy, including those for corporate guarantors.

“For the bankruptcy provisions, there is one hurdle. We are working on the sections of the Provincial Insolvency Act that need to be repealed before the bankruptcy provisions are notified,” said an official.

The Provincial Act already has sections pertaining to corporate guarantors. "Once they are repealed, we can notify the rules,” he said.

In fact, some sections of the Act also need to be done away with for rules for individual bankruptcy, said officials.

While rules for insolvency under Insolvency and Bankruptcy Code (IBC) have been framed, those for bankruptcy are yet to come.

Bankruptcy rules include those for corporate guarantors, proprietorship firms and individual insolvency.

Once rules for corporate guarantors are released, bankers dealing with companies going insolvent under the IBC will soon be able to get better valuation for insolvent companies. This would be so because the corporate guarantor’s assets would be added to the company’s concerned.

The rules will be so framed that if creditors want a better valuation, they can add the value of the guarantor’s assets as well.

The current insolvency rules allow creditors to only take into consideration the company’s assets and not the corporate guarantors.

After corporate guarantors, the government will also make rules for proprietorship firms and individuals.

Meanwhile, the government is working on strengthening Debt Recovery Tribunals in the country so that these cases can go there. The IBC is in force since 2016 for corporate entities.

Officials say bankruptcy is still seen in India in a derogatory sense that could affect families. Hence a caution is exercised in finalising rules for individual insolvency.