Modern insolvency law is built on a compelling moral premise. It exists to rescue distressed companies, maximise value for creditors, and preserve economic stability. Frameworks such as the Insolvency and Bankruptcy Code, 2016 were introduced with the explicit objective of shifting economies away from debtor protection towards creditor driven discipline.
Yet, as insolvency regimes mature, a more complex and less publicly discussed reality has begun to emerge. Insolvency is no longer merely a response to financial distress. In certain cases, it is becoming a strategic instrument deployed by market participants to eliminate competition, consolidate sectors, and acquire assets at deeply discounted valuations. This is not a story of illegality in the conventional sense. It is a story of lawful process producing anti competitive outcomes.
The transformation of insolvency from a remedial framework into a strategic tool is rooted in its design. Insolvency law prioritises speed, creditor control, and value maximisation. These objectives, while essential for efficiency, also create conditions in which distressed firms become targets rather than candidates for revival.
Under the Insolvency and Bankruptcy Code, 2016, once a company is admitted into the Corporate Insolvency Resolution Process, control shifts from management to a resolution professional, and ultimately to the committee of creditors. This shift is intended to prevent value erosion. However, it also removes existing promoters from decision making at a critical stage, often leaving the company vulnerable to acquisition strategies designed by competitors or financial investors. The process, therefore, does not merely resolve distress. It re allocates economic power.
In practice, several patterns have emerged that indicate the strategic use of insolvency frameworks. A financially stressed company may be pushed into insolvency through aggressive enforcement by creditors, even where restructuring outside formal proceedings may have been viable. Once admitted, the company enters a time bound process that places immense pressure on stakeholders to accept resolution plans quickly. This compressed timeline often results in assets being sold at valuations significantly below intrinsic worth. Competitors, private equity funds, or asset reconstruction entities then acquire these assets through the resolution process, effectively eliminating a rival while expanding their own market position. In some instances, financial creditors themselves may have aligned interests with potential bidders, raising concerns about whether resolution outcomes are always driven by value maximisation or by strategic consolidation objectives.
The introduction of pre packaged insolvency mechanisms has further intensified this debate. Pre packs are designed to enable quicker resolutions by allowing debtors and creditors to negotiate a plan prior to formal admission. While this enhances efficiency, it also raises questions about transparency and competitive bidding. If key terms are agreed in advance, the scope for open market discovery of value may be reduced, potentially favouring pre identified acquirers. This creates a tension between procedural efficiency and market fairness. The risk is not merely theoretical. It lies in the possibility that insolvency becomes a controlled transaction mechanism, rather than a genuinely competitive process.
A defining feature of the Insolvency and Bankruptcy Code, 2016 is Section 29A, which disqualifies certain categories of persons, including defaulting promoters, from submitting resolution plans. The provision was introduced to prevent backdoor re entry of errant promoters. However, its practical effect has been to significantly narrow the pool of eligible bidders, particularly in sectors where industry expertise is concentrated among existing players. By excluding promoters who may have the greatest operational knowledge of the business, Section 29A can inadvertently strengthen the position of external bidders, including competitors. While this may enhance governance standards, it also raises the possibility that insolvency outcomes are shaped not only by financial considerations but by strategic exclusion embedded within the law itself.
One of the most critical aspects of insolvency proceedings is valuation. Distressed assets are inherently difficult to price, particularly within compressed timelines and uncertain market conditions. Resolution applicants often factor in litigation risks, operational disruptions, and capital expenditure requirements, leading to bids that are substantially lower than the book value of assets. Creditors, facing the alternative of liquidation, may accept these valuations as the best available outcome. However, from a market perspective, this results in systematic transfer of valuable assets at discounted prices, often to entities that are already dominant within the sector. Over time, this can lead to increased market concentration and reduced competition.
Adjudicatory bodies such as the National Company Law Tribunal and the National Company Law Appellate Tribunal have consistently emphasised the importance of timely resolution and commercial wisdom of creditors. The judiciary has generally refrained from interfering with the decisions of the committee of creditors, recognising that financial stakeholders are best placed to assess value. While this deference enhances predictability, it also limits scrutiny of potentially anti competitive outcomes embedded within resolution plans. The question that arises is whether insolvency adjudication should remain confined to procedural compliance, or whether it should engage more actively with broader market implications.
A striking feature of the current framework is the limited interface between insolvency law and competition regulation. While combinations arising out of insolvency proceedings may require approval from the Competition Commission of India, the analysis is often conducted within tight timelines, with a focus on immediate market impact rather than long term structural changes. This creates a regulatory gap. Insolvency proceedings can facilitate acquisitions that significantly alter market dynamics, yet these outcomes are not always subject to the same level of scrutiny as conventional mergers and acquisitions. The result is a form of regulatory arbitrage, where insolvency becomes a pathway for consolidation that might otherwise face greater resistance under competition law.
This is not a uniquely Indian issue. Jurisdictions with mature insolvency regimes, including the United States under Chapter 11 and the United Kingdom under administration procedures, have witnessed similar concerns. Distressed acquisitions by private equity funds, strategic competitors, and distressed asset specialists have become a defining feature of modern insolvency landscapes. The underlying pattern is consistent: financial distress creates acquisition opportunities, and legal frameworks facilitate their execution.
At its core, the debate is not about whether insolvency law is being misused in a technical sense. It is about whether its outcomes align with its stated objectives. If insolvency leads to efficient resolution but also results in systematic concentration of market power, then the framework may be achieving financial efficiency at the cost of competitive integrity. This raises fundamental policy questions. Should insolvency law incorporate safeguards against anti competitive consolidation. Should there be deeper coordination between insolvency and competition regulators. Should valuation processes be subjected to greater transparency.
Insolvency law today sits at the intersection of finance, law, and market structure. It is no longer merely a mechanism for dealing with failure. It is a tool that shapes who survives, who exits, and who ultimately controls the market. The danger lies not in overt abuse, but in subtle transformation. When a framework designed for rescue begins to facilitate strategic elimination, the line between insolvency and strategy becomes increasingly difficult to draw. The question is no longer whether bankruptcy law can resolve distress. It is whether it is quietly being used to decide the winners of the market itself.