The Insolvency and Bankruptcy Code (IBC) was supposed to change the way India deals with business failure. For decades, insolvency in India was synonymous with delay, litigation and destruction of value. Businesses remained trapped in proceedings for years, creditors waited endlessly, and assets that might once have been productive gradually lost their worth.
The IBC sought to change that equation. Its promise was straightforward: speed, discipline and value maximisation. But a recent personal insolvency case involving Subhash Chandra raises a difficult question about how the system works when the numbers become extraordinary.
The figures are stark:
- ₹22,006 crore — admitted claims.
- ₹6.5 crore — amount approved for repayment.
- 0.03% — recovery.
- 99.97% — haircut.
Numbers of this magnitude inevitably invite scrutiny.
A personal guarantor case—but still a significant question
There is an important qualification. This is a personal guarantor insolvency proceeding. The underlying corporate borrowers remain liable for their obligations. Therefore, the outcome cannot simply be interpreted as the banking system writing off ₹22,000 crore against a single individual.
There is another equally important point. Under the IBC framework, it is the creditors who decide whether a resolution plan represents the best available recovery. The National Company Law Tribunal (NCLT) does not independently negotiate or determine the commercial haircut.
In this case, 80.81% of creditors voted in favour of the resolution plan. That fact changes the nature of the question. The question is not simply: “Why did the NCLT permit such a massive haircut?”
The more fundamental question is: “Why did the creditors conclude that ₹6.5 crore was the best recovery realistically available?”
That is a question worth asking—not as an indictment of the IBC, but as a test of the transparency and discipline surrounding the insolvency process.
A haircut is not necessarily a failure
It is important not to confuse a large haircut with a failed insolvency process. Insolvency is not about recovering every rupee that was originally lent. It is about determining what can realistically be recovered from a distressed situation and doing so within a framework that maximises value.
Sometimes, accepting a substantial haircut may be economically rational. An asset may have little liquidation value. Litigation may be prolonged. Enforcement may be difficult. The debtor’s actual capacity to pay may be limited. Continuing to chase an unrealistic claim can sometimes destroy more value than accepting a negotiated settlement.
Therefore, a haircut by itself is not evidence of a defective system. But a haircut approaching 100% inevitably tests the credibility of that system.
When creditors accept ₹6.5 crore against admitted claims of more than ₹22,000 crore, the public is entitled to ask what made that recovery the economically superior alternative.
- Was there no greater recoverable value?
- Were assets unavailable or already encumbered?
- Were guarantees enforceable?
- What competing recovery scenarios were considered?
- What would liquidation have produced?
And, perhaps most importantly, how did creditors arrive at the conclusion that this was the best available outcome? Transparency around such questions would strengthen—not weaken—the IBC.
The bigger question lies upstream
Yet there is an even more uncomfortable issue. The IBC operates after the failure. It is a mechanism for dealing with the consequences of financial distress. But the accumulation of ₹22,000 crore in exposure happened before insolvency. That is where the real story begins.
- How did such enormous financial exposure accumulate?
- Who assessed the risks?
- What did the boards know?
- What did the auditors report?
- What did the rating agencies see?
- What did the lenders’ credit committees examine?
- What safeguards existed against concentration of risk?
- And when warning signs appeared, how quickly did the financial system respond?
These questions are far more important than simply asking whether the eventual haircut was too large.
Credit discipline begins long before insolvency
A healthy credit system cannot depend upon insolvency law to clean up every problem after it has occurred. Credit discipline begins at the moment a loan is sanctioned.
- It depends upon prudent lending.
- It depends upon honest and transparent borrowing.
- It depends upon vigilant boards capable of challenging management decisions.
- It depends upon accurate and independent audits.
- It depends upon rating agencies exercising genuine analytical judgement rather than merely reflecting prevailing optimism.
- And it depends upon regulators identifying concentrations of risk before they become systemic problems.
The IBC can determine what happens after failure. The banking system must answer what happened before failure. That distinction is crucial.
The real test of reform
The success of the IBC should not be measured merely by how many insolvency cases are closed or how quickly proceedings move. We should also ask whether the larger financial ecosystem is learning from these failures.
Every major insolvency should leave behind more than a resolution plan. It should leave behind lessons for lenders, borrowers, boards, auditors, rating agencies and regulators. Otherwise, there is a danger of creating a system that becomes increasingly efficient at resolving failures without becoming equally effective at preventing avoidable failures.
That would be an incomplete reform.
The Subhash Chandra case should therefore not be reduced to a headline about a 99.97% haircut. Nor should it be used as an argument against the IBC. Instead, it should prompt a more fundamental conversation about credit culture in India.
A modern insolvency regime is essential. But insolvency is the last line of defence. The first line is responsible credit. And somewhere between the sanctioning of ₹22,000 crore and the eventual recovery of ₹6.5 crore lies the story that India’s financial system needs to understand.
The IBC tells us how we deal with failure. Credit discipline determines how much failure we allow to accumulate in the first place. That is the larger lesson.
Indrajit Roy Choudhury 