The Insolvency and Bankruptcy Code (IBC), 2016, was envisioned as a mechanism for resolution of stressed assets, not merely recovery of dues. In this context, critically examine how the evolving implementation of the IBC reflects a shift from resolution to recovery. Discuss the implications of this shift for credit markets, business continuity, and economic efficiency in India

Question

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Introduction

The Insolvency and Bankruptcy Code (IBC), 2016 aimed at time-bound resolution of stressed assets to maximise value and ensure business continuity.
However, its evolving practice increasingly reflects a tilt towards debt recovery rather than genuine resolution.

Shift from Resolution to Recovery

Dominance of Liquidation Outcomes

Rising proportion of cases ending in liquidation instead of revival
Indicates failure to find viable resolution plans

Haircuts and Recovery-Centric Approach

Creditors accepting steep haircuts prioritising quick recovery
Focus on maximising immediate recovery over long-term value

Delays and Procedural Bottlenecks

Frequent litigation and missed timelines
Erodes asset value, making liquidation more likely

Creditor-Driven Process

Committee of Creditors (CoC) prioritises financial recovery
Limited consideration for operational continuity and stakeholder interests

Implications for Credit Markets

Improved Credit Discipline

Fear of insolvency proceedings encourages timely repayment
Strengthens creditor confidence

Risk Aversion Among Lenders

High haircuts and uncertainty increase cautious lending
Potential tightening of credit flow, especially to MSMEs

Implications for Business Continuity

Loss of Going-Concern Value

Liquidation leads to closure of viable firms
Job losses and disruption of supply chains

Reduced Entrepreneurial Confidence

Perception of harsh outcomes discourages risk-taking
Promoters wary of losing control even in temporary distress

Implications for Economic Efficiency

Suboptimal Resource Allocation

Premature liquidation leads to loss of productive assets
Inefficient reallocation of capital and labour

Value Erosion

Delays and recovery focus reduce overall asset value
Lower returns compared to timely resolution

Way Forward

Strengthening Institutional Capacity

Increase NCLT benches and reduce case backlogs
Improve efficiency of insolvency professionals

Promoting Resolution over Liquidation

Incentivise revival plans and pre-packaged insolvency
Encourage sector-specific restructuring frameworks

Balancing Stakeholder Interests

Greater weight to operational creditors and employees
Holistic approach beyond financial recovery

Reducing Delays and Litigation

Strict adherence to timelines
Streamline legal processes

Conclusion

While IBC has strengthened credit discipline, the shift towards recovery undermines its core objective of value-maximising resolution.
Recalibrating the framework to prioritise timely and viable resolutions is essential for sustaining credit growth and economic efficiency.

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