When insolvency becomes a strategy: Where does IBC draw the line?

The Insolvency and Bankruptcy Code, 2016 was enacted to provide a time bound framework for resolving insolvency and preserving the value of viable businesses. However, over time, the consequences of entering the insolvency process have acquired significance beyond the immediate resolution of financial distress.

These consequences inevitably make insolvency proceedings relevant to commercial strategy. Strategic restructuring, by itself, is neither unusual nor inconsistent with the IBC. The more difficult question arises when the insolvency process is itself invoked as a strategic instrument particularly where the underlying objective is recovery, leverage or pressure rather than resolution of genuine financial distress. This raises a larger question: When does the strategic use of the insolvency framework cross the line into its misuse?

Strategic restructuring is not, by itself, inconsistent with the objectives of the IBC. The code expressly contemplates the preservation and revival of a corporate debtor as a growing concern as stated in section 20. It requires the interim resolution professional to protect and preserve the value of the corporate debtor and manage its operations. The resolution process may ultimately result in a change in management or ownership of its liabilities.

At the same time, the commencement of CIRP (Corporate Insolvency Resolution Process) has consequences which extend beyond just restructuring. Section 14 imposes a moratorium, including restrictions on the institution or continuation of proceedings and enforcement of judgments against the corporate debtor. These protections are integral to the collective insolvency process, but they also make admission into CIRP commercially significant.

The distinction therefore lies in whether the process is being used for the resolution of insolvency or primarily to obtain the consequences and leverage that CIRP provides rather than relying on the strategic consequences of insolvency proceedings.

The distinction between insolvency resolution and debt recovery was highlighted in Anjani Technoplast Ltd. v. Shubh Gautam decided by the Supreme Court in April 2026. The respondent, a money lender had obtained a money decree against Anjani Technoplast. Instead of pursuing execution of the decree he subsequently invoked section 7 of the IBC to commence the Corporate Insolvency Resolution Process (CIRP). The NCLT rejected the application noting that Anjani Technoplast was a solvent and functioning enterprise and that IBC cannot be used as a recovery mechanism. The NCLAT subsequently reversed the decision but the supreme court later restored the NCLT’s order.

The Supreme Court’s reasoning behind this went beyond the existence of a debt and examined the purpose for which insolvency jurisdiction was being invoked. It held that where the creditor already had a decree and an ordinary remedy of execution, the IBC cannot be used as a substitute for enforcement of that decree. The court also observed that insolvency proceedings carry far-reaching consequences and must be reserved for cases involving genuine insolvency or financial distress. In these circumstances, initiating CIRP was held to amount to an abuse of the process.

The judgment reinforces the broader principle that the IBC is not a general purpose recovery mechanism. This approach is consistent with the supreme court’s observations in GLAS Trust Co. LLC v. BYJU Raveendran where it cautioned against using insolvency proceedings as a tool for coercion or debt recovery. The primary objective of the code remains resolution and revival of the corporate debtor with recovery being a consequence of that process rather than its underlying purpose.

The major concern arises when the consequences of CIRP become the reason for invoking it. Admission triggers the section 14 moratorium and subjects the corporate debtor to a collective resolution process which materially alters the parties’ bargaining positions.

Section 65 addresses this concern by providing consequences where insolvency proceedings are commenced fraudulently or with malicious intent for a purpose other than resolution of insolvency. The principle here is that commercial strategy must remain connected to the resolution oriented purpose of the IBC and cannot turn insolvency proceedings into a tool for objectives the code was not designed to serve.

Similar concerns have also emerged around the valuation and sale of assets during IBC proceedings. In February 2026, the Supreme Court flagged concerns over alleged undervaluation and sham auctions in proceedings concerning Reliance Communications, and directed investigative agencies to examine the matter. The observations underscore the need for scrutiny not only at the stage of initiating insolvency, but also in the conduct of the resolution process.

The existence of a default does not, by itself, make insolvency the appropriate remedy. The IBC is designed to address financial distress through a collective resolution process, rather than provide an alternative mechanism for enforcing individual claims.

The choice of remedy should therefore be assessed against the circumstances in which insolvency is being invoked:

• Nature of the default: Whether the default reflects a broader financial distress requiring resolution, or an isolated dispute capable of being addressed through ordinary remedies.

• Financial position of the corporate debtor: The debtor’s ability to continue its business and meet its obligations is relevant to understanding whether insolvency proceedings serve a genuine resolution purpose.

• Purpose of invoking the IBC: The process should be directed towards resolution of insolvency rather than primarily securing payment, exerting pressure or obtaining a tactical advantage.

• Availability of alternative remedies: Where established mechanisms such as civil proceedings, arbitration, execution or other statutory remedies are available, their relevance to the choice of insolvency proceedings must be considered.

• Collective nature of CIRP: Insolvency proceedings affect the interests of multiple stakeholders. The IBC therefore cannot be viewed solely through the relationship between one creditor and one debtor.

The central consideration is whether the remedy chosen corresponds with the problem sought to be addressed. A statutory mechanism carrying consequences as significant as CIRP must remain connected to the purpose for which the insolvency framework was created.

The IBC permits strategic outcomes, but its primary purpose remains the resolution of genuine financial distress. The critical question is whether insolvency proceedings are being used to facilitate resolution or primarily to secure leverage, recovery or another commercial advantage.

Strategy may shape insolvency proceedings; it cannot replace the statutory purpose of the IBC.

About the author: Monisha Handa Bhargava is a Partner at SNG & Partners.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.