Governmental Stimulus in Mitigating the Impact of COVID-19 on Small and Medium Enterprises (SMEs) and the Case for Insolvency Law Reforms in India

The COVID-19 pandemic crisis has resulted in an unprecedented governmental response globally to downplay the side effects of the COVID -19 pandemic, with major thrust being given to small and medium enterprises (SMEs). Governments throughout the globe have implemented economic measures in the form of direct benefit transfers/ subsidies/tax holidays or government-guaranteed loans, and legislated to also provide mandatory relief from contractual obligations. In addition, an increasing recognition of the limitations of the insolvency regime in addressing the crisis for SMEs prompted many jurisdictions to change their laws. However, consistent with its free market principles, India has only adopted economic measures and has provided limited contractual relief in favor of SME tenants. There has been no SME-specific insolvency law nor is the Indian government currently considering any such law reform. This paper reviews the need for a temporary insolvency regime to cater to distressed but economically viable SMEs restructure their debts. Drawing on a set of interviews with Indian SME owners, I find that they are often unaware of how insolvency law operates ,their unsecured creditors are apathetic, and bankruptcy stigmatism is high. Based on a review oft he frameworks in the major other advanced common law jurisdictions such as the United States, Australia and Singapore, a recommendation for a simplified restructuring and liquidation framework is developed. The process is designed to be simplified and expedited and it incentivizes early negotiations with creditors.