Recovery over revival: The changing face of India’s insolvency regime

The financial services sector, with advances exceeding Rs 150 lakh crore, has been central to India’s economic growth. However, prior to the Insolvency and Bankruptcy Code, 2016 (IBC), rising NPAs, fragmented recovery mechanisms, and prolonged enforcement timelines had eroded confidence in the recovery system.

The earlier regime, comprising BIFR, CDR, DRTs and civil proceedings, was marked by delays and sub-optimal recoveries, with average recovery rates around 26.4% (2015–2017). The IBC marked a shift to a time-bound, creditor-driven framework focussed on value maximisation.

Nearly a decade on, the IBC presents a mixed picture. While it has improved credit discipline and recovery behaviour, structural challenges persist. As of December 2025, nearly 78% of CIRPs have ended in liquidation, often after prolonged delays, with timelines stretching to 800-900 days, far beyond the statutory limit.

Although resolution plans have addressed claims of around Rs 3.89 lakh crore, liquidation outcomes continue to reflect significant value erosion.

The experience suggests that while the Code has influenced borrower behaviour and recoveries, it continues to grapple with delays, value loss, and capacity constraints, issues that the recent amendments seek to address.

At the same time, the experience under the Code also highlights structural limitations that continue to impede effective value realisation. A substantial portion of bank exposure, particularly working capital dues, remains locked in receivables, which by the time of resolution often turn non-recoverable and attract little value in resolution plans.

Similarly, despite identification of significant amounts in avoidance and related-party transactions, recoveries remain limited due to prolonged litigation, exposing a gap between value identification and realisation.

While headline recovery figures indicate improvement, the effective recovery, once adjusted for time delays and discounting and compared to their realisable value, is considerably lower. More importantly, the process remains liquidation-heavy, with a large proportion of cases culminating in asset sales rather than business revival.

The pre-packaged insolvency framework for MSMEs, though conceptually promising, has largely remained underutilised, with negligible uptake and limited commercial attractiveness compared to conventional restructuring mechanisms.

Taken together, these trends show that despite improvements in recovery behaviour, the system continues to face delays and procedural rigidity, which dilutes its core objective of timely resolution and preservation of enterprise value.

The effectiveness of the IBC is also closely linked to the asset profile of units. The framework delivers better outcomes in asset-backed businesses, but in asset-light or service sector entities, the process often culminates in liquidation.

The Code’s one-size-fits-all design is particularly evident in sectors where value resides in intangibles such as brand, licences, contracts, and human capital. Insolvencies such as Jet Airways and Go First demonstrate that delays and operational disruption can quickly erode value, leaving little scope for revival.

Unlike manufacturing, where tangible assets provide a recovery base, service sector cases often result in limited realisation without meaningful business continuity.

This highlights that the IBC alone cannot address all forms of distress, especially where value is time-sensitive and intangible.

Further, it is also increasingly being used as a recovery and pressure tool as nearly 46% of cases are initiated by operational creditors, often for modest dues, and a significant number are withdrawn under Section 12A after post-admission settlements. This reflects positioning the Code as a substitute for conventional enforcement rather than a tool for value preservation.

The Insolvency and Bankruptcy Code (Amendment) Bill, 2025, seeks to address certain gaps, with measures such as clarification on security interest, limited checks on interim moratorium misuse in personal insolvency, and recognition of group and cross-border insolvency being welcome. It also responds to judicial uncertainties arising from decisions such as Vidarbha and Rainbow Papers.

However, the amendments remain incremental rather than transformative, with a clear tilt towards strengthening creditor enforcement over enabling resolution. While the amendments attempt a limited clarification in respect of the interim moratorium under personal insolvency, they fail to address the structural issue at the bankruptcy stage, where the look-back period runs from the commencement of bankruptcy, by which time most suspect transactions fall outside the statutory window, significantly diluting recovery prospects.

The proposed Creditor-Initiated Insolvency Resolution Process (CIIRP), though aimed at speeding up timelines, risks adding another procedural layer requiring repeated NCLT intervention, thereby increasing litigation rather than reducing delays, much like earlier pre-pack experiments.

Equally, the amendments do not address the misuse of the Code as a recovery tool or provide breathing space to MSMEs. Despite judicial recognition of the binding nature of Reserve Bank of India MSME restructuring directions, the IBC continues to operate on a default-trigger model, treating even temporary or technical defaults as insolvency, without distinguishing genuine business stress from structural failure.

This approach effectively equates business difficulty with insolvency, exposing otherwise viable enterprises to the insolvency process. In practice, the first casualty of an IBC trigger is enterprise value; customer relationships weaken, costs rise, and viability deteriorates even before resolution.

In sum, while the 2025 amendments offer some useful clarifications, they largely tinker at the margins and do not address core issues of delay, litigation, sectoral limitations, and misuse. There is a need to strengthen NCLT capacity, enabling MSME-focussed reforms, and developing a credible pre-insolvency framework.

The real challenge is not to add processes, but to rebalance recovery with resolution, ensuring the Code preserves value and enables revival, not just enforcement.

(The author of is Senior Counsel at Economic Laws Practice. Views are personal.)