WHAT IS DIFFERENCE BETWEEN RECOVERY AND INSOLVENCY PROCEEDINGS ?
Insolvency proceedings and recovery proceedings are distinct legal remedies. Therefore, before initiating insolvency proceedings, a creditor must carefully evaluate the available options and their legal consequences.
The objective of recovery proceedings is the recovery of debt. If a creditor is owed money by a company, the creditor may initiate recovery by filing a civil suit. Where a contract exists between the creditor and the debtor containing an arbitration clause, arbitration proceedings may also be initiated. If the creditor succeeds, the recovery proceedings culminate in a decree or award, which can be executed by a competent civil court. In such proceedings, the creditor can recover the full amount of debt along with applicable interest. Recovery proceedings are strictly bilateral in nature, involving only the creditor and the debtor company, with no involvement of third parties.
In contrast, insolvency proceedings are initiated against a company under the Insolvency and Bankruptcy Code, 2016 (IBC). The primary purpose of insolvency proceedings is the resolution, restructuring, and revival of a financially stressed company. Once an insolvency application is admitted, the role of the applicant creditor effectively ends, and the creditor loses control over the process. All creditors of the company become stakeholders in the insolvency proceedings, and the company undergoes the Corporate Insolvency Resolution Process (CIRP).
During CIRP, the applicant creditor’s claim is treated according to its classification (financial creditor, operational creditor, etc.), and payment is made strictly in accordance with the approved resolution plan. The creditor may receive the full amount, a partial amount, or even nothing at all. If the CIRP fails and the company enters liquidation, the creditor’s recovery is governed by the waterfall mechanism under Section 53 of the IBC, where recovery may again be nil or only a percentage of the claimed debt.
Therefore, a creditor must exercise caution before initiating insolvency proceedings and should seek appropriate legal advice to assess whether insolvency or recovery proceedings best serve their interests.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
