Business
The IBC Loophole: When Insolvency Becomes a Corporate Exit Strategy
India’s Insolvency and Bankruptcy Code was meant to be a recovery mechanism — not an escape hatch. But growing misuse of the resolution process has raised questions about whether IBC is being exploited to shed liabilities without real accountability.
When India introduced the Insolvency and Bankruptcy Code (IBC) in 2016, it was hailed as a landmark reform to resolve corporate distress and clean up the country’s balance sheets. For the first time, lenders had a structured timeline and legal muscle to recover dues from defaulting borrowers. It was a turning point for financial discipline in India Inc.
But less than a decade later, cracks are showing.
Across industries — from media and infrastructure to real estate and retail — a growing number of promoters are voluntarily entering insolvency not just to restructure, but to wash away liabilities and walk away. In many of these cases, operational assets are stripped, employees are left unpaid, and dues to small creditors remain unresolved — even as promoters, through proxies or affiliates, circle back to reclaim assets at discounted rates.
The Strategy Behind the Exit
Legal experts and insolvency professionals point to a pattern:
- Deliberate default or over-leveraging
- Minimal recovery for creditors, often through resolution plans with massive haircuts (sometimes over 90%)
- Promoter-linked entities bidding to buy back assets at a fraction of the original cost
- Employees and vendors left unpaid, with no recourse
- Business resumes under a new name — often with the same ecosystem, client base, and leadership
High-Profile Examples Under Scrutiny
- Infrastructure and real estate firms where large creditors took deep haircuts and promoters retained influence behind new shell entities
- Media companies where broadcast licenses and content libraries were transferred or re-acquired post-resolution, with liabilities to employees, vendors, and content creators left behind
- Retail chains where store networks were rebranded or transferred, while operational creditors got pennies on the rupee
In some instances, the Committee of Creditors (CoC), driven by banks looking to recover whatever they can, approved plans that effectively amounted to settlements of convenience — often raising eyebrows within the insolvency ecosystem.
Why It’s a Problem
- Erosion of trust in the resolution system
- Small vendors and employees suffer, while large lenders settle for low recoveries
- Ethical concerns around backdoor promoter returns
- Potential rise in “strategic defaults” — where insolvency is planned, not forced
What Experts Say
Regulators and insolvency professionals have begun sounding the alarm. There’s growing demand for:
- Stricter scrutiny of resolution applicants to avoid promoter re-entry via proxies
- Tighter timelines and disclosures in the IBC process
- Safeguards for employees and operational creditors, who often remain unsecured
- Public interest audits in high-profile resolutions
The IBC was envisioned as a tool for revival, not a roadmap for reinvention without responsibility. As misuse grows, the line between genuine insolvency and strategic liability dumping continues to blur. If left unchecked, India risks losing the very credibility IBC was meant to create — and with it, the hope of building a cleaner, more accountable corporate culture.