India’s Insolvency and Bankruptcy Code, 2016 (IBC) was designed around a fundamental idea: insolvency law should rescue viable businesses, maximise value and provide a structured process for dealing with financial distress.

Yet, a different use of the Code has increasingly come into focus. Creditors, particularly operational creditors, sometimes invoke insolvency proceedings not because a company is genuinely insolvent, but because the threat of insolvency can be an effective way to secure payment.

That raises an uncomfortable question: has the IBC, intended as a framework for insolvency resolution, become one of India’s most effective debt recovery tools?

Recent observations of the Supreme Court cautioning against using insolvency proceedings as a mechanism for pure debt recovery bring this question back into sharp focus. The issue is not whether creditors should have strong remedies. They should. The issue is whether insolvency should be used as leverage where the underlying dispute is essentially about recovering a debt.

When insolvency becomes a pressure tactic

The commercial appeal of an insolvency notice is easy to understand.

A conventional recovery action can take considerable time. Litigation may involve multiple stages, procedural delays and uncertainty over when a creditor will actually recover its money. Insolvency proceedings create a very different kind of pressure.

The possibility of a company entering the corporate insolvency resolution process can have immediate consequences for its management, reputation, financing arrangements and relationships with customers and investors. For a creditor facing delayed payment, this can make an insolvency notice appear far more effective than an ordinary recovery proceeding.

Operational creditors, in particular, may therefore find the IBC attractive as a means of compelling payment.

But there is an important distinction between using insolvency law to address genuine financial distress and using the threat of insolvency to force payment of an otherwise recoverable debt.

The former serves the purpose of the Code. The latter risks distorting it.

The problem with weaponising insolvency notices

An insolvency proceeding is not merely another lawsuit for money.

Once a company enters the insolvency process, the consequences extend beyond the creditor and debtor. Employees, lenders, shareholders, suppliers, customers and other stakeholders can all be affected.

This is precisely why the threshold for initiating insolvency proceedings matters.

If every unpaid invoice becomes a potential insolvency proceeding, the commercial consequences can become disproportionate to the original dispute. A disagreement over the quality of goods, contractual performance, delayed delivery or an adjustment in accounts could potentially acquire the character of an insolvency dispute.

The danger is particularly significant where the debtor is a fundamentally viable business facing a temporary cash-flow problem or a genuine commercial disagreement.

In such circumstances, insolvency proceedings may destroy value rather than preserve it.

A business that could have continued operating and eventually paid its creditors may instead find itself dealing with reputational damage, loss of confidence and disruption to its operations.

The very mechanism intended to preserve enterprise value can, if misused, contribute to its erosion.

The Supreme Court’s warning matters

The Supreme Court’s recent observations reiterating that the IBC is not a debt recovery mechanism are significant because they reinforce a principle that sits at the heart of insolvency law.

The existence of an unpaid debt does not, by itself, make a company insolvent.

There is a difference between inability to pay and unwillingness to pay. There is also a difference between insolvency and an ordinary contractual dispute.

The judicial approach increasingly reflects the need to examine what a creditor is actually seeking to achieve through insolvency proceedings.

If the real objective is simply to recover an amount due, ordinary legal remedies may be more appropriate. If, however, the circumstances indicate genuine insolvency and the statutory requirements are satisfied, the IBC can perform its intended role as a collective resolution mechanism.

This distinction is more than a matter of legal procedure. It protects the conceptual integrity of the insolvency framework.

Creditor rights cannot become secondary

At the same time, criticism of misuse should not become an argument for weakening creditor rights.

India’s insolvency regime emerged partly because traditional approaches to distressed debt often resulted in prolonged recovery battles and erosion of asset value. The IBC fundamentally changed that equation by placing time-bound resolution and creditor participation at the centre of the process.

Creditors need meaningful remedies. A debtor should not be permitted to indefinitely delay payment merely by raising an artificial dispute or exploiting procedural protections.

The challenge, therefore, is not to make the IBC less accessible to creditors. It is to ensure that the remedy remains proportionate to the problem it is intended to solve.

An operational creditor who is genuinely owed money must have an effective route to recovery. But the existence of that route should not turn every commercial disagreement into an insolvency trigger.

Business continuity is part of the equation

One of the most important policy questions in this debate is what happens to viable businesses caught in insolvency proceedings primarily because of creditor pressure.

Insolvency law has never been concerned solely with collecting money. Its broader objective is to deal with financial distress in a manner that protects value and, where possible, preserves the underlying enterprise.

That means business continuity matters.

A company may have substantial assets, a viable business model, hundreds of employees and long-term contracts, yet experience a temporary liquidity problem. For such a company, an insolvency proceeding can have consequences far beyond the amount claimed by the initiating creditor.

This creates a delicate balance.

Creditors must be protected from defaulting debtors, but businesses must also be protected from insolvency processes being deployed prematurely or strategically.

The real test is whether the insolvency framework is being used to resolve financial distress or merely to create bargaining power.

Judicial scrutiny is likely to become more important

The courts have an important role in maintaining this balance.

As insolvency litigation develops, judicial scrutiny of the circumstances surrounding a demand, the existence of genuine disputes and the actual purpose behind proceedings becomes increasingly important.

This does not mean courts should routinely second-guess legitimate creditor action. It means that the IBC should not be reduced to a shortcut where the commercial objective is simply, “Pay now or face insolvency.”

That approach would gradually change the character of the Code.

It could also create an unintended incentive for creditors to pursue insolvency proceedings even where conventional contractual or recovery remedies would be more appropriate.

Over time, that could increase litigation around the initiation stage itself, defeating one of the principal advantages of an efficient insolvency system.

The larger policy question

The misuse debate ultimately points towards a larger question about what India wants its insolvency framework to become.

The success of the IBC should not be measured simply by how quickly creditors can initiate proceedings. Nor should it be measured only by the number of debts that eventually get recovered.

A stronger measure would be whether the framework can distinguish effectively between genuine insolvency, temporary financial stress, contractual disputes and strategic defaults.

That distinction is essential for the credibility of the system.

If insolvency becomes synonymous with debt recovery, the Code risks losing its specialised character. If, on the other hand, concerns about misuse make creditors reluctant to invoke the Code against genuinely distressed debtors, the original problem returns from another direction.

The answer lies somewhere between these two extremes.

Preserving the purpose of the IBC

The IBC’s strength lies in the fact that it is more than a recovery statute. It provides a collective process for dealing with financial distress where individual enforcement may not adequately protect the interests of all stakeholders.

That distinction must remain meaningful.

For creditors, the lesson is equally important: insolvency proceedings should be used as a resolution tool, not simply as a stronger version of a recovery notice.

For businesses, the message is not that an insolvency notice can be ignored. It is that genuine disputes, payment issues and financial distress need to be addressed early, before the situation escalates into formal proceedings.

And for the legal system, the challenge is to ensure that the considerable leverage created by the IBC does not become an end in itself.

India’s insolvency regime has matured considerably since 2016. Its next stage of development may depend less on expanding the power of the Code and more on ensuring that those powers are used for the purpose for which they were created.

The IBC should remain a mechanism for resolving insolvency, not merely the fastest route to recovering a debt. Protecting that distinction is essential to preserving confidence in the framework itself.