IBC at crossroads: Stagnant recovery rates signal need for structural overhaul

Nine years after its inception, India’s Insolvency and Bankruptcy Code (IBC) continues to deliver a sobering reality check for creditors: recovery rates remain stubbornly anchored around 32 per cent, meaning lenders face an average haircut of approximately 68 per cent on admitted claims. The latest data from Q3FY26 reveals a marginal decline in recovery rate to 31.63 per cent from 32.44 per cent in the previous quarter, underscoring that despite procedural refinements and judicial interventions, the fundamental challenge of value erosion remains unresolved.

This rangebound performance raises uncomfortable questions about whether the IBC framework, despite being a transformative reform, has plateaued in its effectiveness. More critically, it highlights a structural tension at the heart of the insolvency ecosystem: the longer cases take to resolve, the more value they destroy, creating a vicious cycle that the current framework seems unable to break.

The Liquidation Trap: A Death Sentence for Value Recovery

Perhaps the most troubling trend in the Q3FY26 data is the continued dominance of liquidation as the primary closure mechanism. Over 2,950 cases - representing 33.4 per cent of all admitted cases - have concluded in liquidation, marking a 32.2 per cent increase from March 2025. In stark contrast, only 15.6 per cent of cases have resulted in approved resolution plans. This inversion of outcomes fundamentally undermines the IBC’s original promise: to maximize value through going-concern sales rather than asset liquidation.

The data reveals an even grimmer reality within liquidation proceedings themselves. Nearly 68 per cent of ongoing liquidation cases have been pending for more than two years, up dramatically from 55 per cent in December 2023. This translates into a systematic destruction of enterprise value as businesses lie dormant, assets deteriorate, working capital evaporates, and skilled workforce disperses. The recovery realization of personal guarantors - at a mere 2.16 per cent of admitted claims - further illustrates how liquidation effectively becomes a dead end for creditor recovery.

What emerges is not just a statistical problem but an economic one: viable businesses that could potentially be restructured are instead being pushed into liquidation due to procedural delays, lack of viable bidders, or inadequate resolution frameworks. Each liquidation represents not just a financial write-off but also job losses, supplier disruption, and broader economic value destruction that extends far beyond creditor balance sheets.

Timeline Inflation: The Silent Killer

As of December 2025, 76 per cent of ongoing Corporate Insolvency Resolution Process (CIRP) cases have exceeded 270 days, where the data over the medium term indicates a progressive accumulation of cases in the more than 270 days bucket. Average resolution timelines have reached 739 days for financial creditor cases - more than double the intended duration. This temporal erosion matters enormously: every additional day typically translates into declining asset values, higher insolvency costs, and reduced bidder interest.

Appellate delays compound the problem. While the proposed IBC Amendment Bill, 2025 seeks time-bound disposal of NCLAT appeals, existing backlogs continue accumulating damage. Cases that might have fetched reasonable recoveries two years ago now return pennies after prolonged litigation has extracted remaining value.

Sectoral Concentration

Manufacturing accounts for 37 per cent of cases, followed by real estate (22 per cent) and construction (12 per cent). This concentration is significant given the capital-intensive nature and longer gestation periods involved. Real estate and construction collectively represent 34 per cent of cases, reflecting the twin balance sheet crisis legacy. Many involve stalled projects where asset realization becomes extremely challenging due to incomplete inventory, regulatory complications, and homebuyer litigation.

The Amendment Bill: Promise vs. Reality

The IBC (Amendment) Bill, 2025 represents the most significant overhaul since 2016, but whether reforms prove transformative depends on implementation.

Extending creditor primacy into liquidation through enhanced CoC control over liquidators is conceptually sound, but assumes creditors have both expertise and incentive to actively manage liquidation - questionable for smaller creditors.

Separating resolution and liquidation roles addresses perverse incentives where professionals favor liquidation due to lower complexity. Success depends on creating a robust pool of qualified liquidators with appropriate oversight.

Time-bound appellate disposal is perhaps most critical, as appellate delays drive timeline inflation. However, merely prescribing limits without judicial capacity enhancement may prove futile.

Reducing Pre-Packaged Insolvency Resolution Process (PPIRP)voting threshold from 66 per cent to 51 per cent could democratize access, but the framework itself has seen limited adoption, suggesting threshold reduction alone won’t drive uptake.

Decriminalization of technical lapses reflects maturation toward commercial resolution over punishment, encouraging professional participation while maintaining deterrence for willful violations.

Hidden Failures

Beyond headline numbers, qualitative challenges persist. Many approved plans involve deferred payments that inflate reported recovery rates - actual cash recovery falls short. Limited bidder pools result in single-bid scenarios depressing valuations. Professional capacity constraints remain significant despite strengthened credentialing.

Personal guarantee resolution has almost completely failed. With only 44 cases yielding approved plans realizing 2.16 per cent of claims, this deterrent against willful default remains ornamental.

Resolution professionals have filed avoidance transaction applications worth Rs 4.28 lakh crore — 33 per cent of total admitted claims. Yet the gap between applications and actual recovery remains enormous, reflecting difficulty proving fraudulent intent and reversing pre-insolvency transactions.

The Road Ahead

Recovery rates in the 30-35 per cent range may represent realistic equilibrium for a developing economy with structural inefficiencies, judicial constraints, and information asymmetries. The key question isn’t whether the IBC can deliver 60-70 per cent recovery - it almost certainly cannot near-term - but whether it can prevent further erosion through sustained reform.

Transformative change requires: specialized insolvency benches with domain experts; distressed asset funds and secondary markets; professional training and performance benchmarks; digital platforms for asset marketing and e-auctions; and operationalizing cross-border insolvency provisions to tap global capital.

Conclusion: The Paradox

The IBC has been simultaneously transformative and disappointing. It fundamentally altered credit culture and established creditor rights where none existed. Yet its core promise - maximizing recovery through swift resolution - remains unfulfilled.

The rangebound 32 per cent rate is not a statistical artifact but a symptom of deeper structural challenges. Liquidation dominance, timeline inflation, and limited professional capacity systematically erode value. The amendment bill offers hope, but implementation determines whether the IBC evolves from a framework that formalizes haircuts to one that genuinely maximizes recovery.

For India’s financial sector, stakes could not be higher. With stressed assets continuing to emerge and credit growth dependent on effective recovery, the IBC’s performance directly impacts banking health and credit availability. The next few years will reveal whether reforms can break the 32 per cent recovery ceiling or whether creditors must accept persistent haircuts as the price of doing business in India’s insolvency ecosystem.

(The author is with Cholleti BlackRobe Chambers, Hyderabad)