When Resolution Becomes Recovery, How the IBC Has Been Repurposed Into India’s Most Potent Debt Recovery Tool
A Collective Resolution Framework Designed to Rescue Viable Businesses Has Steadily Morphed Into an Enforcement Mechanism—With Profound Consequences for India’s Credit Markets
The Insolvency and Bankruptcy Code (IBC), 2016, promised a decisive break from India’s creditor-driven, enforcement-heavy approach to corporate distress. It was conceived as a framework for rescuing viable businesses, preserving enterprise value, and resolving financial stress collectively. Over time, however, the Code has steadily morphed into the country’s most potent debt recovery tool. The dominant narrative today is not how much stress the IBC has resolved, but how much money it has recovered.
This narrative is reinforced by official data. Central bank reports highlight that the IBC delivers the highest recoveries among all mechanisms, an average recovery rate of 37 per cent, compared to 32 per cent under Sarfaesi, 10 per cent through debt recovery tribunals (DRTs), and 2 per cent via Lok Adalats in 2024-25. The IBC alone accounted for 52 per cent of total bank recoveries in that year. Most publications foreground realisations by creditors under resolution plans. Public discourse and media coverage focus on “haircuts” as the primary metric for assessing the performance of the IBC.
This framing is deeply misleading. It glorifies recovery for what the IBC was never intended to be.
The Original Promise
The IBC was designed to address a fundamental flaw in India’s pre-existing insolvency regime: the race to the courthouse. Under the old system, creditors would compete to enforce their claims against a distressed debtor, each seeking to seize whatever assets they could before others did. The result was a destruction of enterprise value—the company’s assets were picked apart, its operations ground to a halt, and whatever value might have been preserved through a collective resolution process was lost.
The IBC replaced this chaos with a collective framework. When a company enters the corporate insolvency resolution process (CIRP), a moratorium is imposed on all recovery actions. Creditors cannot sue, cannot seize assets, cannot enforce guarantees. Instead, they must come together as a committee of creditors (CoC) to consider resolution plans that aim to keep the company as a going concern.
The statutory architecture is unambiguous. Section 65 explicitly penalises the initiation of insolvency proceedings for any purpose other than the resolution of insolvency. The Supreme Court clarified this at the inception of the Code. In Swiss Ribbons Pvt Ltd, it characterised the IBC as a beneficial legislation intended to put the company back on its feet. It reiterated in M/s HPCL Bio-Fuels Ltd (2024) that recovery in insolvency proceedings is only incidental to resolution, not the main relief.
The Gap Between Intent and Reality
Yet the gap between statutory command and operational reality has become a chasm. Two factors primarily explain this.
The first is Section 29A. Of the 8,659 cases admitted into CIRP, only about 1,300 have culminated in approved resolution plans. Meanwhile, nearly 30,000 cases, involving ₹14 trillion of debt, were withdrawn before admission. For every one case resolved through a plan, roughly 25 are withdrawn at the threshold. The ratio would be starker if cases dropped before or after the issue of notice of intent to trigger CIRP is included. There are also withdrawals after admission with the approval of the CoC.
These withdrawals do not reflect the resolution of stress. They reflect settlement outside the IBC, or in its shadow. Section 29A, which renders many promoters ineligible to submit resolution plans once CIRP commences, creates a powerful deterrent. Faced with the existential threat of insolvency admission and likely loss of control, promoters often settle. The Code thus becomes leverage, an effective stick for extraction rather than a framework for restructuring.
Though Section 29A warrants calibration, its deterrent role is undeniable. The problem lies not in its existence, but in how the ecosystem exploits it. Promoters frequently wait until CIRP admission before negotiating settlements, as acknowledged in Glas Trust Company LLC (2024), where the Supreme Court criticised attempts to bypass Section 12A through private settlements.
The second driver is the approach of financial creditors who comprise the CoC. These creditors possess sophisticated recovery machinery and a longstanding bias towards upfront cash over patient value maximisation through business turnaround. Recoveries under resolution plans are typically front-loaded; creditors rarely wait to realise value from post-resolution performance. This institutional disposition enables, and arguably legitimises, the perversion of the Code’s purpose.
The Weaponisation of Insolvency
Together, these two factors allow creditors, both financial and operational, to weaponise the IBC for recovery rather than resolution. The pattern is fairly clear. The insolvency application has become the opening salvo in negotiations: File first, negotiate later. The credible threat of CIRP admission, with its attendant reputational damage, collapse of credit lines, supply-chain disruption, and talent flight, concentrates the debtor’s mind wonderfully.
From the perspective of an individual creditor, this strategy may appear rational. Why engage in protracted restructuring negotiations when an IBC filing is so effective in extracting payment? The cost of filing is relatively low, the threat is credible, and the payoff can be substantial. A single missed payment can be grounds for initiation. A temporary liquidity crunch can trigger a full-blown insolvency proceeding.
This is, however, corrosive for the system. The IBC was designed to address collective action problems and prevent a race for enforcement that destroys going-concern value. We are witnessing the opposite: Creditors racing to the courthouse not to preserve enterprise value collectively, but to secure individual recovery.
The Data Distortion
The data that is often cited to celebrate the IBC’s success is deeply misleading. The 37 per cent recovery rate, for instance, applies only to cases that actually go through the resolution process. It does not account for the 30,000 cases withdrawn before admission. It does not account for the meagre recoveries through liquidation. It does not account for the abysmal recoveries experienced by operational creditors.
The narrative glorifies recovery for what the IBC was never intended to be. The data is often cherry-picked, while critical qualifiers are ignored—that recoveries under the IBC are over and above the rescue of companies, which remains the Code’s prime objective. The by-product of the IBC is compared with the primary output of other mechanisms; recoveries under resolution plans are highlighted, while the meagre recoveries through liquidation are overlooked; and outcomes for financial creditors dominate the narrative, masking the abysmal recoveries experienced by operational creditors.
The Unintended Consequences
The consequences of this drift are perverse. Solvent firms facing temporary liquidity stress can be dragged into CIRP for a single missed payment, while deeply insolvent firms may be ignored because there is nothing to extract. The Code that was designed to rescue viable businesses has become a tool for extracting payment from solvent ones.
The damage inflicted during the process often leaves lasting scars, even when resolution succeeds. The reputational damage of an insolvency filing can be irreparable. Credit lines are cut off. Suppliers are wary of extending credit. Key employees leave. Customers shift their business to competitors. By the time a resolution plan is approved, the company that emerges may be a shadow of what it was before the process began.
The Bankruptcy Law Reforms Committee assumed that insolvency would be triggered only after serious deliberation and exhaustion of bilateral options. That assumption has proved spectacularly wrong. The insolvency petition is no longer the end of negotiation; it is its commencement.
The Risk of Institutional Capture
This drift must be arrested before it hardens into institutional culture. Once judges, practitioners, and creditors internalise the IBC as a recovery tool, reversal will be exceedingly difficult. The ecosystem will inevitably orient itself around extraction, not rescue.
The IBC trajectory will shape India’s credit markets, investment behaviour, and economic growth for generations. Section 65 reflects Parliament’s clear intent: Insolvency proceedings are for resolution, not recovery. Whether that intent is honoured depends less on legislative tinkering and more on a fundamental change in creditor approach.
The Path Forward
What would it take to restore the IBC to its original purpose? Several measures could help.
First, the approach of financial creditors must change. They must be willing to engage in restructuring earlier, before the threat of insolvency is used as leverage. This requires a shift in institutional culture that cannot be mandated but must be cultivated.
Second, the courts must be vigilant in enforcing the purpose of the Code. The Supreme Court has already begun this work, as seen in Glas Trust, where it criticised attempts to bypass the statutory framework. This vigilance must continue.
Third, the ecosystem of insolvency professionals must be oriented towards resolution rather than recovery. This requires training, incentives, and a professional culture that values enterprise preservation over immediate realisation.
Fourth, Section 29A may need recalibration. While it serves a legitimate purpose in preventing unscrupulous promoters from regaining control, its deterrent effect has gone beyond that purpose. A more nuanced approach could distinguish between promoters who have genuinely acted in bad faith and those who have simply been unable to meet their obligations.
Conclusion: The Window Is Closing
The choice is stark: A genuine resolution regime or a highly efficient recovery machine masquerading as insolvency law. The window is closing.
If the IBC continues on its current trajectory, it will become a recovery law in practice if not in name. That would be a tragedy, because it would mean losing the opportunity that the Code represented—a chance to build a system that preserves enterprise value, rescues viable businesses, and addresses financial distress collectively rather than competitively.
The IBC is still young. It can still be redirected towards its original purpose. But that will require a fundamental change in creditor approach, judicial vigilance, and a professional culture oriented towards resolution rather than recovery. If that change does not come soon, the opportunity for course correction may be irretrievably lost.
Q&A: Unpacking the IBC’s Transformation from Resolution to Recovery
Q1: What was the original purpose of the Insolvency and Bankruptcy Code, 2016?
A: The IBC was designed to replace India’s pre-existing creditor-driven, enforcement-heavy approach to corporate distress. It was conceived as a collective framework for rescuing viable businesses, preserving enterprise value, and resolving financial stress through a moratorium on recovery actions. The Bankruptcy Law Reforms Committee assumed insolvency would be triggered only after serious deliberation and exhaustion of bilateral options. The Supreme Court, in Swiss Ribbons, characterised it as beneficial legislation intended to put companies back on their feet.
Q2: How has the IBC’s purpose been distorted in practice?
A: The IBC has steadily morphed into India’s most potent debt recovery tool. While official data shows the IBC delivers 37% average recoveries (compared to 32% under Sarfaesi, 10% under DRTs), this framing is misleading. The data cherry-picks recoveries under resolution plans while ignoring that of 8,659 cases admitted, only about 1,300 culminated in approved plans. Nearly 30,000 cases involving ₹14 trillion of debt were withdrawn before admission. The insolvency application has become an opening salvo in negotiations, weaponised to extract payment rather than rescue businesses.
Q3: What role does Section 29A play in this distortion?
A: Section 29A renders many promoters ineligible to submit resolution plans once CIRP commences. This creates a powerful deterrent—faced with loss of control and reputational damage, promoters often settle. The Code thus becomes leverage for extraction rather than a restructuring framework. For every one case resolved through a plan, roughly 25 are withdrawn at the threshold. Promoters frequently wait until CIRP admission before negotiating settlements, as the Supreme Court criticised in Glas Trust Company LLC (2024).
Q4: How do financial creditors contribute to the IBC’s transformation?
A: Financial creditors who comprise the Committee of Creditors possess sophisticated recovery machinery and a longstanding bias towards upfront cash over patient value maximisation. Recoveries under resolution plans are typically front-loaded; creditors rarely wait to realise value from post-resolution performance. This institutional disposition enables the perversion of the Code’s purpose. The result is a race to the courthouse not to preserve enterprise value collectively, but to secure individual recovery.
Q5: What is needed to restore the IBC to its original purpose?
A: Several measures could help: a fundamental change in creditor approach, with willingness to engage in restructuring earlier; judicial vigilance in enforcing the Code’s purpose, as the Supreme Court has begun; orienting the insolvency professional ecosystem towards resolution rather than recovery through training and incentives; and recalibrating Section 29A to distinguish between genuinely bad-faith promoters and those facing temporary distress. The window for course correction is closing; without change, the IBC will become a highly efficient recovery machine masquerading as insolvency law.
