Insolvency and Bankruptcy Code – Revival Over Recovery Focus

The Insolvency and Bankruptcy Code (IBC) in India, now over a decade old, continues to shape the legal and economic landscape of business failure. Initially designed as a market-driven, time-bound mechanism to revive viable firms, the Code aimed to transform insolvency into an opportunity for renewal. However, recent trends reveal a shift from enterprise revival to creditor recovery. This change has altered the original intent, turning the process into asset auctions rather than value-creating restructurings.

Core Purpose of the Insolvency and Bankruptcy Code

The IBC was introduced to replace slow, bureaucratic insolvency procedures with a clear, structured process. It envisages insolvency resolution as a chance to revive firms through new management, capital, and innovative strategies. The Code empowers resolution applicants to design flexible plans focused on restoring long-term viability. The Supreme Court has supported this vision, emphasising revival over mere debt recovery.

Distinct Stages – Resolution and Liquidation

The Code defines two stages – resolution and liquidation. Resolution tests if revival is possible through restructuring. Liquidation is the fallback, converting assets into cash when revival fails. These stages are meant to be distinct. Yet, in practice, viable firms are often liquidated prematurely, while some obsolete firms are sold for salvage value. This undermines the regenerative intent and favours immediate asset sales over future value creation.

Role of Creditors and Their Changing Behaviour

Control of the insolvency process lies with the Committee of Creditors, mainly financial creditors. They are expected to prioritise rehabilitation over quick recovery. The Code excludes operational creditors from decision-making to avoid premature liquidation pressure. However, financial creditors increasingly seek closure and immediate returns, behaving like operational creditors. This shift reduces the willingness to restructure debt, which is crucial for firm revival.

Restructuring – Key to Firm Revival

Restructuring involves extending repayment terms, reducing interest, converting debt to equity, or modifying loan covenants. These measures ensure creditors share the risk and rewards of revival. The Code’s philosophy is that recovery follows successful revival, not the other way around. This approach aligns creditors’ interests with the firm’s long-term health, encouraging support for credible revival plans.

Market Realities and Short-Term Focus

Despite the Code’s intent, many creditors focus on immediate recoveries and haircut percentages. Public discourse often marks upfront payouts rather than the quality of revival strategies. This favours financial buyers and asset reconstruction companies over strategic investors who can restore operations. The result is modest recoveries, rising liquidations, and a market that values quick exits over sustainable growth.

Need for Recalibrating Creditor Choices

Creditors must view resolution plans as investment decisions, not charity. Supporting credible revival plans can increase the firm’s value over time. Selling off assets at steep haircuts to achieve closure often destroys national wealth. A balanced approach requires risk appetite and patience. Institutional habits favouring exit over revival indicate market failure within the insolvency ecosystem.

Future Challenges for the Insolvency Ecosystem

The IBC’s procedural efficiency is established. The next challenge is restoring its founding purpose – continuity over closure, regeneration over recovery. Law can enforce claims, but policy and practice must focus on rebuilding firms. The Code’s promise lies in turning distress into opportunity, prioritising future value creation rather than immediate creditor gains.

Questions for UPSC:

1. Point out the role of financial creditors in the insolvency resolution process under the Insolvency and Bankruptcy Code and critically analyse how their behaviour impacts firm revival.
2. Estimate the economic consequences of premature liquidation of viable firms and how it affects national wealth and productive potential.
3. With suitable examples, underline the differences between insolvency resolution and liquidation stages and explain why maintaining this distinction is crucial for economic regeneration.
4. Critically analyse the challenges faced by the Insolvency and Bankruptcy Code in balancing speedy resolution with sustainable enterprise revival in the Indian context.

Answer Hints:

1. Point out the role of financial creditors in the insolvency resolution process under the Insolvency and Bankruptcy Code and critically analyse how their behaviour impacts firm revival.

1. Financial creditors form the Committee of Creditors (CoC) and control decision-making during insolvency resolution.
2. They are expected to prioritise restructuring and rehabilitation over immediate recovery, enabling revival.
3. The IBC excludes operational creditors from CoC to prevent premature liquidation pressure.
4. Restructuring tools include extending repayment, reducing interest, debt-to-equity conversion, and covenant modifications.
5. In practice, financial creditors increasingly seek quick closure and upfront recovery, behaving like operational creditors.
6. This shift leads to asset auctions rather than value-creating revivals, undermining the Code’s original intent.

2. Estimate the economic consequences of premature liquidation of viable firms and how it affects national wealth and productive potential.

1. Premature liquidation destroys ongoing business value and future earnings potential of viable firms.
2. It converts productive assets into cash at salvage value, often much lower than intrinsic worth.
3. Leads to loss of jobs, disruption of supply chains, and reduced economic output.
4. National wealth erodes as firms capable of revival are closed unnecessarily.
5. Creditors crystallise losses rather than recovering higher value through restructuring.
6. Overall, premature liquidation reduces productive capacity and long-term economic growth.

3. With suitable examples, underline the differences between insolvency resolution and liquidation stages and explain why maintaining this distinction is crucial for economic regeneration.

1. Resolution is a forward-looking process aiming to revive the firm via new management, capital, and restructuring.
2. Liquidation is a terminal process converting assets into cash when revival is impossible.
3. Resolution preserves enterprise value and jobs; liquidation often destroys value and leads to asset fire sales.
4. Example – A viable firm successfully restructured under IBC vs. a firm liquidated despite potential revival.
5. Maintaining distinction prevents premature closure and encourages regeneration of distressed assets.
6. Blurring these stages leads to distributive outcomes favoring highest bidders, not sustainable economic growth.

4. Critically analyse the challenges faced by the Insolvency and Bankruptcy Code in balancing speedy resolution with sustainable enterprise revival in the Indian context.

1. IBC mandates time-bound resolution but speed often prioritised over quality of revival plans.
2. Creditors’ preference for quick recovery leads to undervaluation of long-term enterprise viability.
3. Market dominated by financial buyers focusing on asset liquidation rather than strategic revival.
4. Operational creditors’ exclusion aims to prevent premature liquidation but limits broader stakeholder input.
5. Public discourse and media focus on recovery percentages reinforce short-term ledger mentality.
6. Ensuring patience, risk appetite, and a venture-capital mindset among creditors remains a key challenge.