11 Dec 2025

🪶 Wisdom Drop–57

⚖️⏳ When Time Kills Value: Why India’s Insolvency Code Is Struggling to Deliver

(KD-57 | 11 December 2025)

GS Mains Mapping

• GS Paper III: Economy, Banking & Financial Sector Reforms, Ease of Doing Business

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Introduction

In insolvency law, time is not neutral. Every day of delay quietly erodes asset value, weakens businesses, and deepens distrust in institutions. India’s Insolvency and Bankruptcy Code (IBC), once hailed as a transformational reform, was designed precisely to defeat this tyranny of delay. Yet, nearly a decade after its enactment, a sobering assessment by the Parliamentary Standing Committee on Finance suggests that time has turned into the Code’s greatest adversary.

The Committee’s report, “Review of Working of the Insolvency and Bankruptcy Code and Emerging Issues”, warns that persistent procedural, institutional, and behavioural challenges are diluting the very objectives the IBC set out to achieve. The result is a paradox: a strong law on paper, struggling in practice.

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The IBC: A Structural Break from the Past

The Insolvency and Bankruptcy Code, 2016 was enacted against the backdrop of a banking system paralysed by rising Non-Performing Assets and fragmented recovery mechanisms. Earlier tools such as SARFAESI, Debt Recovery Tribunals, and Lok Adalats operated in silos, enabling debtors to delay endlessly while asset values collapsed.

The IBC introduced a decisive structural shift. It replaced the debtor-in-possession model, which had allowed defaulting promoters to retain control, with a creditor-in-control framework. Financial creditors, through the Committee of Creditors, were empowered to drive resolution decisions. The logic was simple but powerful: discipline flows from certainty and speed.

The Code’s objectives were unambiguous. Insolvency resolution was to be time-bound, asset value was to be maximised, viable businesses revived, and credit discipline restored across the economy.

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What the IBC Has Achieved

Measured against the chaos that preceded it, the IBC has delivered tangible gains. Over a thousand companies have been resolved through the Corporate Insolvency Resolution Process. Creditors have, on average, recovered significantly more than liquidation value and close to fair value in resolved cases.

The introduction of the Pre-Pack Insolvency Resolution Process in 2021 for MSMEs reflected policy learning. By allowing debtors to retain control under creditor supervision, pre-packs aimed to reduce litigation, preserve value, and speed up outcomes for smaller firms.

Yet, these successes coexist with mounting systemic stress.

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When Delay Becomes Destruction

The most damaging problem flagged by the Parliamentary Committee is delay. While the IBC prescribes a statutory limit of 330 days, the average Corporate Insolvency Resolution Process now stretches beyond 700 days. This gap is not merely procedural; it is economically fatal.

Assets deteriorate, employees leave, customers drift away, and enterprise value evaporates. By the time resolution occurs, what remains is often a shell, forcing creditors to accept steep haircuts. Time, rather than insolvency itself, becomes the primary destroyer of value.

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Institutional Bottlenecks at the Core

Much of the delay originates in institutional capacity constraints. The National Company Law Tribunal, the backbone of the insolvency ecosystem, remains overstretched. Vacancies among judicial and technical members, limited benches, and inadequate administrative staff have turned time-bound resolution into an aspirational ideal rather than a practical reality.

A law designed for speed cannot function through institutions built for scarcity.

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Litigation: The Achilles’ Heel

The IBC also suffers from excessive and often strategic litigation. Promoters, unsuccessful bidders, and other stakeholders frequently challenge admissions, resolutions, and approvals. Each appeal, even when ultimately dismissed, extracts time and value.

This legal overload reflects deeper behavioural resistance to creditor control. While judicial scrutiny is essential, frivolous and repetitive litigation has converted insolvency from an economic resolution process into a prolonged legal contest.

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The Puzzle of Falling Recoveries

Despite early gains, recovery rates have declined sharply in recent years. Overall recovery now hovers around one-third of admitted claims, far below earlier levels. High-profile cases involving haircuts exceeding eighty or even ninety percent have raised concerns about fairness and efficiency.

This is not always a failure of the Code itself. Many firms enter the insolvency process too late, when assets are already impaired beyond repair. Valuations are often anchored to liquidation potential rather than enterprise value, and the pool of quality resolution applicants remains limited.

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Committee’s Diagnosis and Prescription

The Parliamentary Committee’s recommendations recognise that legal reform must be matched by institutional and process reform. Strengthening tribunal capacity, filling vacancies, and expanding benches are immediate imperatives.

On process, mandatory time-bound admission of cases and the rollout of an integrated digital insolvency platform aim to eliminate procedural drift. To curb misuse, the Committee suggests financial disincentives for frivolous appeals and stricter penalties for vexatious litigation.

Expanding the pre-pack framework beyond MSMEs reflects an understanding that flexibility, not rigidity, preserves value. Data-driven oversight, tracking delays and outcomes in real time, is essential to move from anecdotal critique to systemic correction.

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Why This Matters for India’s Economy

The IBC is not merely a bankruptcy law. It is the fulcrum of banking sector health, credit flow, investor confidence, and ease of doing business. When insolvency resolution fails, banks hesitate to lend, capital becomes risk-averse, and entrepreneurship suffers.

In a growing economy, efficient exit mechanisms are as important as easy entry. Without them, creative destruction turns into destructive stagnation.

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Conclusion

The Insolvency and Bankruptcy Code was conceived as a weapon against delay. Today, delay threatens to defeat the Code itself. This is not a failure of intent, but of execution and capacity. Laws alone cannot revive value; institutions must enforce them with speed, certainty, and credibility.

If India succeeds in restoring time discipline to insolvency resolution, the IBC can still fulfil its transformative promise. If not, the greatest casualty will be trust — the most fragile yet essential asset of any financial system.

— IAS Monk

🪶 Philosophical Whisper

“A law that defeats delay can revive capital;
a law defeated by delay revives only distrust.”