Insolvency Is Not Execution: Preserving the True Spirit of the IBC

Abstract

The Insolvency and Bankruptcy Code, 2016 was introduced to provide a time-bound corporate insolvency resolution process, focused on rehabilitation financially stressed companies rather than merely enforcing the recovery of debts. However, a growing trend had seen creditors initiate insolvency proceedings as an alternative to traditional execution petitions and other recovery mechanisms. This practice raises an important question, “is the insolvency regime being misused as a shortcut for debt enforcement?” In the matter of HPCL Bio-Fuel Ltd Vs. Shahaji Bhanudas Bhad the Supreme Court, said that “insolvency proceedings under the IBC fundamentally different from proceedings for recovery of the debt such as a suit for recovery of money, execution of decree or claims for the amount due under arbitration.” This blog critically examines the distinctions between insolvency and recovery/remedy-based proceedings, explores judicial interpretation that have reinforced this principle, and argues that converting insolvency into a debt recovery tool undermines the legislative intent of the IBC. The blog argues for strict adherence to the legislative purpose, “insolvency is a process of resolution, not execution.”

Keywords: Insolvency and Bankruptcy Code, 2016, Traditional execution petitions, Insolvency proceedings, Debt enforcement, Execution of decree and Judicial interpretation.

Introduction

The Insolvency and Bankruptcy Code, 2016 aims to balance the interests of all stakeholders involved in a business. It ensures that corporate entities and other businesses continue to have access to credit, while also protecting creditors from bearing undue losses due to defaults. This framework facilitates a fair and efficient resolution process that supports both business continuity and creditor recovery. The main ambit for this Code is to consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms and individuals, to fix time periods for execution of the law in a time bound manner, to maximize the value of assets of interested persons, to promote entrepreneurship, to increase availability of credit. An increasingly visible concern in the functioning of the Insolvency and Bankruptcy Code, 2016 (IBC) is the tendency of creditors to invoke insolvency proceedings not for genuine resolution of financial distress, but as a strategic tool for debt recovery. Instead of approaching appropriate forums such as civil courts or arbitration for enforcement of claims, creditors are turning to the IBC due to its time-bound nature and the pressure it places on the debtor. This shift raises a significant legal and policy question: is the IBC being misused as a substitute for traditional debt recovery mechanisms? The Supreme Court, in HPCL Bio-Fuel Ltd v. Shahaji Bhanudas Bhad, has clearly addressed this concern by emphasizing that insolvency proceedings are fundamentally different from recovery actions. The Court observed that the objective of the IBC is not to act as a forum for enforcing payment of dues, but to resolve insolvency in a structured and collective manner. This distinction is crucial because insolvency law is designed to balance the interests of all stakeholders, rather than to serve the interests of a single creditor. In my view, treating the IBC as a recovery mechanism defeats its very purpose and undermines the legislative intent behind its enactment. Insolvency proceedings must remain a process of resolution and revival, not a shortcut for execution or coercive debt enforcement.

II. Distinction Between Insolvency and Debt Recovery Proceedings

A clear understanding of the distinction between insolvency proceedings and debt recovery mechanisms are essential to appreciate the true purpose of the Insolvency and Bankruptcy Code, 2016 (IBC). Although both processes may arise from a default in payment, their nature, objectives, and outcomes are fundamentally different.

A. Nature of Insolvency Proceedings: Insolvency proceedings under the IBC are inherently collective in nature. Unlike traditional legal remedies, they are not initiated solely for the benefit of a single creditor but are designed to address the financial distress of the debtor as a whole. Once an application is admitted, the process involves all stakeholders, including financial creditors, operational creditors, and sometimes even employees and government authorities. The primary focus of insolvency proceedings is the revival of the corporate debtor, if possible. The law emphasizes resolution over liquidation, aiming to preserve the value of the business as a going concern. However, where revival is not feasible, the process ensures an orderly liquidation, maximizing value for all stakeholders. Thus, insolvency is not about enforcing payment, but about restructuring or resolving financial distress in a systematic and time-bound manner.

B. Nature of Recovery Proceedings: In contrast, recovery proceedings are individual creditor-centric remedies. Their sole objective is to enable a creditor to recover the amount owed to them. These proceedings do not take into account the overall financial condition of the debtor or the interests of other creditors. Common examples include civil suits for recovery of money, execution of decrees, and enforcement of arbitral awards. In each of these mechanisms, the focus remains strictly on the enforcement of a specific debt. The process is adversarial in nature, where one party seeks to compel the other to fulfil a financial obligation, often through attachment or sale of assets.

C. Key Differences: The distinction between the two processes becomes clearer when examined through their core features. The objective of insolvency proceedings is resolution and value maximization, whereas recovery proceedings aim purely at repayment of debt. The scope of insolvency is collective, involving all creditors and stakeholders, while recovery is limited to the individual creditor initiating the action. Further, the outcome of insolvency proceedings may result in revival or liquidation of the debtor, whereas recovery proceedings typically end in repayment or enforcement against specific assets. Lastly, the legal framework governing insolvency, particularly under the IBC, is structured to balance competing interests and ensure economic efficiency, unlike recovery laws which prioritize individual enforcement rights. Therefore, equating insolvency with debt recovery undermines the broader purpose of the IBC and risks distorting its role in the financial system.

III. Judicial Interpretation Reinforcing the Distinction

The judiciary has played a crucial role in clarifying that the Insolvency and Bankruptcy Code, 2016 (IBC) is not intended to function as a substitute for traditional debt recovery mechanisms. Through various judgments, courts have consistently reinforced the idea that insolvency proceedings must remain focused on resolution rather than enforcement.

A. HPCL Bio-Fuel Ltd v. Shahaji Bhanudas Bhad: A significant development in this regard can be seen in HPCL Bio-Fuel Ltd v. Shahaji Bhanudas Bhad, where the Supreme Court explicitly addressed the misuse of insolvency proceedings. The Court clearly held that insolvency proceedings cannot be equated with recovery actions such as civil suits, execution proceedings, or arbitration claims. In other words, the IBC is not a shortcut for creditors seeking to recover their dues. The reasoning of the Court was grounded in the fundamental difference in the purpose of these proceedings. While recovery mechanisms are aimed at enforcing payment of a specific debt to an individual creditor, insolvency proceedings under the IBC are collective in nature and seek to resolve the financial distress of the corporate debtor as a whole. The Court emphasized that allowing IBC to be used as a recovery tool would distort its legislative intent and undermine its effectiveness as a resolution framework.

B. Other Important Judgments: Apart from this case, several other judicial decisions have strengthened this distinction. Courts have repeatedly stressed the importance of the “existence of dispute” principle, especially in cases involving operational creditors. If there is a genuine dispute regarding the debt, the application under the IBC must be rejected at the threshold. This ensures that the insolvency process is not triggered in cases where the liability itself is contested. Additionally, courts have taken a strict stance against applications filed with malicious or coercive intent. Where it is evident that a creditor is using the threat of insolvency merely to
pressure the debtor into payment, such applications are dismissed. This acts as a safeguard
against the abuse of the IBC framework.

C. Judicial Trend: Overall, the judicial trend reflects a clear effort to prevent the misuse of insolvency proceedings. Courts are increasingly cautious in admitting cases and are emphasizing the need for bona fide insolvency. The focus remains on genuine financial distress rather than tactical filings. Importantly, the judiciary has discouraged the use of IBC as a pressure tactic. By doing so, it seeks to preserve the integrity of the insolvency regime and ensure that it continues to serve its primary purpose resolution of stressed assets rather than mere debt enforcement.

IV. Misuse of IBC as a Debt Recovery Tool

A significant concern that has emerged in recent years is that the growing tendency of creditors to invoke the Insolvency and Bankruptcy Code (IBC) not for genuine insolvency resolution, but as a strategic tool for debt recovery. In practice, many creditors initiate insolvency proceedings primarily to exert pressure on debtors. The mere threat of admission into the Corporate Insolvency Resolution Process (CIRP), which can lead to loss of management control and reputational damage, often compels debtors to settle dues quickly. This effectively transforms the IBC into a coercive mechanism rather than a resolution framework. Additionally, creditors increasingly prefer this route to bypass the delays associated with traditional recovery mechanisms such as civil suits, arbitration enforcement, or execution proceedings.
The reasons behind this misuse are not difficult to identify. One of the main attractions of the IBC is its time-bound nature, which promises a relatively swift outcome compared to conventional legal processes that are often prolonged and cumbersome. Further, the structure of the IBC significantly increases the likelihood of settlement. Once insolvency proceedings are initiated, debtors are under immense pressure to resolve the matter before losing control of their company. This creates a strong incentive for repayment, even in cases where disputes may exist. In contrast, traditional recovery forums are often criticized for inefficiency, procedural delays, and backlog of cases, making them less appealing to creditors seeking timely relief. However, this trend has serious consequences for the insolvency framework. The National
Company Law Tribunal (NCLT), which is already burdened with a high volume of cases, faces additional strain due to such filings. This leads to delays in the resolution of genuine insolvency matters, defeating the very objective of a time-bound process. Moreover, the misuse of the IBC distorts its fundamental purpose. Instead of serving as a mechanism for revival and restructuring of financially distressed companies, it risks becoming an alternative to debt enforcement. Perhaps most concerning is the impact on solvent companies, which may be dragged into insolvency proceedings despite having the capacity to pay, merely due to disputes or strategic pressure tactics. Such misuse not only undermines the legislative intent of the IBC but also threatens the credibility and effectiveness of the insolvency regime as a whole.

V. Impact on the Insolvency Framework

The increasing tendency to use the Insolvency and Bankruptcy Code, 2016 (IBC) as a debt recovery mechanism has serious implications for the overall insolvency framework. One of the most significant consequences is the weakening of the resolution ecosystem. The IBC was designed to facilitate the revival of financially distressed companies through a collective process, but when it is frequently invoked merely to recover dues, it diverts attention away from genuine cases of insolvency. This leads to congestion before adjudicating authorities and delays in resolving truly distressed entities. Another major impact is the reduction in investor confidence. The effectiveness of an insolvency regime depends heavily on predictability and fairness. If the IBC is seen as a coercive tool in the hands of creditors rather than a structured resolution mechanism, potential investors may become hesitant to participate in the process. This uncertainty can discourage resolution applicants and negatively affect the value maximization objective of the Code.

REFERENCES

1. Neeraj Kushawah, Creditor-Initiated Insolvency in India: Promise and Pitfalls of the 2025 Amendment, IRCCL (Oct. 23, 2025), https://www.irccl.in/post/creditor-initiated-insolvency-in-india-promise-and-pitfalls-of-the- 2025-amendment
2. ABP News Bureau, Insolvency and Bankruptcy Code Could Be a Double-Edged Sword for Corporate Restructuring, Recovery. Here’s How, ABP Live (Jan. 30, 2025), https://news.abplive.com/business/insolvency- and-bankruptcy-code-could-be-a-for-corporate-restructuring-recovery-here-s-how-1747772
3. Supreme Court [IBC]: Insolvency proceedings are fundamentally different from proceedings for recovery of debt such as a suit for recovery of money, execution of decree or claims for amount due under arbitration, IBC Laws (Nov. 7, 2024), https://ibclaw.in/supreme-court-ibc-insolvency-proceedings-are-fundamentally-different- from-proceedings-for-recovery-of-debt-such-as-a-suit-for-recovery-of-money-execution-of-decree-or-claims- for-amount-due-under-a/ (summarising Supreme Court decision in HPCL Bio-Fuels Ltd. v. Shahaji Bhanudas Bhad, (2024) ibclaw.in 288 SC).
4. The Institute of Chartered Accountants of India, Insolvency and Bankruptcy Code (IBC) – Virtual Coaching Class Material (June 27, 2023), https://boslive.icai.org/pdf/20230608_53_IBC_1687855977.pdf
5. Devna Arora & Didon Misri, The Intersection Between Arbitration and Insolvency Proceedings: An Indian Perspective, SCC Times (Jan. 1, 2023), https://www.scconline.com/blog/post/2023/01/01/the-intersection- between-arbitration-and-insolvency-proceedings-an-indian-perspective/
6. M/s HPCL Bio-Fuels Ltd. v. M/s Shahaji Bhanudas Bhad, (2024) 12 S.C.R. 133 (India).
7. M/S HPCL BIO-FUELS LTD. vs. M/S SHAHAJI BHANUDAS BHAD | LawFoyer
8. HPCL Bio-Fuels Ltd. v. Shahaji Bhanudas Bhad, (2024) ibclaw.in 288 (S.C.), summary available at IBC Laws, https://ibclaw.in/supreme-court-ibc-insolvency-proceedings-are-fundamentally-different-from-proceedings-for- recovery-of-debt-such-as-a-suit-for-recovery-of-money-execution-of-decree-or-claims-for-amount-due-under-a/
9. Shashank Kothiyal, A Complete Guide to IBC: Claims, Creditors, RPs & Insolvency Timeline, TaxGuru (Nov. 29, 2025), https://taxguru.in/corporate-law/complete-guide-ibc-claims-creditors-rps-insolvency-timeline.html
10. NCLAT Set Aside the Order of NCLT: Priority of Corporate Debtor Revival Over Liquidation is the Objective, REEDLAW,https://www.reedlaw.in/post/nclat-set-aside-the-order-of-nclt-priority-of-corporate-debtor-revival- over-liquidation-is-the-object
11. Insolvency and Bankruptcy Code – Revival Over Recovery Focus, IASPOINT (Nov. 15, 2025), https://iaspoint.com/insolvency-and-bankruptcy-code-revival-over-recovery-focus/
12. An Analysis of Corporate Insolvency Resolution Process Under the Insolvency and Bankruptcy Code, 2016, Indian J. Integrated Rsch. L. Vol. III, Issue IV (2023), https://ijirl.com/wp-content/uploads/2023/07/AN- ANALYSIS-OF-CORPORATE-INSOLVENCY-RESOLUTION-PROCESS-UNDER-THE-INSOLVENCY- AND-BANKRUPTCY-CODE-2016.pdf
13. Supreme Court [IBC]: Insolvency proceedings are fundamentally different from proceedings for recovery of debt such as a suit for recovery of money, execution of decree or claims for amount due under arbitration, IBC Laws, https://ibclaw.in/supreme-court-ibc-insolvency-proceedings-are-fundamentally-different-from-proceedings-for-recovery-of-debt-such-as-a-suit-for-recovery-of-money-execution-of-decree-or-claims-for- amount-due-under-a/
14. Abhishek Gandhi, Key Stakeholders Under the IBC: Roles & Responsibilities Explained, Advocate Gandhi (Sept. 3, 2025), https://advocategandhi.com/key-stakeholders-under-the-ibc-roles-responsibilities-explained/
15. Understanding the Insolvency and Bankruptcy Code (IBC): Key Legal Issues and Challenges, FREE LAW (July 4, 2025), https://www.freelaw.in/legalarticles/Understanding-the-Insolvency-and Bankruptcy-Code-IBC- Key-Legal-Issues-and-Challenges
16. 16 Indian Inst. of Insolvency Prof’ls of ICAI, IBC Case Law Capsule, Vol. 7, No. 51 (Dec. 16, 2024), IBC-Case- Law-Capsules-Volume-07-Number-51-December-16-2024.pdf
17. To Reject Application under Sec. 9 IBC, a Genuine Pre-Existing Dispute Must Exist: NCLAT, SCC Online
    Blog (Apr. 18, 2023), https://www.scconline.com/blog/post/2023/04/18/nclt-admitted-section-9-ibc-application-nclat- objection-pre-existing-dispute-appeal-dismissed-scc-blog-legal-research-news/
18. R. Sruthi, Fraudulent or Malicious Initiation of Insolvency Proceedings under the Insolvency and Bankruptcy
    Code, 2016 – Jurisprudence of Section 65 of the Code, IBC Laws, https://ibclaw.in/fraudulent-or-malicious- initiation-of-insolvency-proceedings-under-the-insolvency-and-bankruptcy-code-2016-jurisprudence-of-section- 65-of-the-code-by-adv-r-sruthi/
19. Avichal Kumar, IBC 2.0: Has the 2025 Amendment Fixed the Cracks in India’s Insolvency Regime?, LIVE LAW (Aug. 23, 2025, 2:00 PM), https://www.livelaw.in/articles/ibc-20-has-the-2025-amendment-fixed-the- cracks-in-indias-insolvency-regime-301741
20. Neeraj Kushawah, Creditor-Initiated Insolvency in India: Promise and Pitfalls of the 2025 Amendment, INSOLVENCY & RESTRUCTURING & COMMERCIAL LAW (IRCCL) (Oct. 23, 2025), https://www.irccl.in/post/creditor-initiated-insolvency-in-india-promise-and-pitfalls-of-the-2025-amendment
21. Alvia Hejab, A Critical Analysis of the Amendments Regarding the Initiation of Insolvency under IBC (Amendment) Bill, 2025, IBC Laws (Oct. 8, 2025), https://ibclaw.in/a-critical-analysis-of-the-amendments- regarding-the-initiation-of-insolvency-under-ibc-amendment-bill-2025-by-alvia-hejab/
22. Bhatt & Joshi Associates, Consequences of Insolvency in India: Legal Framework, Regulatory Mechanisms, and Judicial Interpretations, BHATT & JOSHI ASSOCS., https://bhattandjoshiassociates.com/consequences-of- insolvency-in-india/
23. Bharat Vasani, Maharshi Shah & Lokesh Soni, NCLT: Has the Tribunalisation Experiment Failed?, India Corp. L. (Feb. 11, 2026), https://corporate.cyrilamarchandblogs.com/2026/02/nclt-has-the-tribunalisation-experiment- failed/
24. Vibhav Mishra, IBC: A Double-Edged Sword for Corporate Restructuring and Recovery, ETBFSI (Jan. 26, 2025, 8:00 AM IST), https://bfsi.economictimes.indiatimes.com/news/blog/ibc-a-double-edged-sword-for- corporate-restructuring-and-recovery/117568732
25.  Bank for Int’l Settlements, Swaminathan J: Resolution of stressed assets and IBC – the future road map (Jan. 17, 2024), https://www.bis.org/review/r240117g.htm 26 Ayush Dutta, The Times They Are A-Changing’ for the Insolvency Paradigm: Unpacking the IBC (Amendment) Bill, 2025, IBC Laws https://ibclaw.in/the-times-they-are-a-changing-for-the-insolvency- (Oct. 7, 2025), paradigm-unpacking-the-ibc-amendment-bill-2025-by-ayush-dutta/