When Hospitals Become Debtors: Insolvency Law and the Healthcare Sector

Hospitals occupy a peculiar position in every economy across the world. They are institutions that societies rely upon for their most fundamental needs and are, simultaneously, commercial enterprises, generating revenue, carrying debt, and are accountable to shareholders and creditors. When a hospital becomes insolvent, the consequences extend far beyond the balance sheet: patients lose access to care, staff lose livelihoods, and communities are deprived of the critical infrastructure that may take years to replace. This dual character poses a challenge that general-purpose corporate insolvency legal frameworks are not designed to address. When I began writing on the social dynamics of corporate insolvency laws in India and across Asia, I became increasingly intrigued by how general insolvency law can be adapted, through judicial innovation, to protect public health. My recent Working Paper examines this challenge through the lens of the Indian experience, undertaking a first enquiry into this hitherto unmapped terrain. But the underlying questions are universal: whether conventional commercial paradigms can accommodate the normative imperatives of healthcare provision, and what reforms may be required to safeguard public interest in a sector marked by growing corporatisation and financialisation. 

While insolvency is an unfortunate outcome for any enterprise, its magnitude worsens when it plagues a healthcare service provider (HSP) and, generally, the healthcare sector, affecting a wide range of stakeholders. Similar to other enterprises and listed entities (limited liability companies), HSPs may obtain financing for sustaining their operations and utilise the stock and credit markets for this purpose. Most of the hospitals around the world owe it to their shareholders to maximise their profit whilst carrying leverage and often relying on debt for their sustenance. In fact, today, several major hospital chains, in India and abroad, run on significant private equity backing. 

Hospital insolvency is structurally distinctive in ways that carries significant implications for legal design. These entities operate on low profit margins, leading to their carrying considerable default risk and, in that process, becoming highly vulnerable to insolvency. Their cost structures are defined by high fixed expenditure, on personnel, equipment, and infrastructure, while their revenue streams are tied to reimbursement regimes that adjust slowly and, in many systems, are subject to chronic delay. The result is a persistent mismatch between cost incurrence and revenue realisation, generating acute liquidity risk. At the same time, the assets that underpin a hospital’s value, namely, clinical staff, patient trust, specialist accreditations, referral networks, etc., are largely intangible and highly time-sensitive. They dissipate rapidly once a facility enters distress. Unlike a factory, which may remain idle while retaining much of its underlying value, a hospital that ceases operations experiences an almost immediate erosion of its core assets. For this reason, when an HSP closes or veers into the zone of insolvency, the ramifications can have a far more detrimental impact on society and the economy as a whole. The non-fiscal impact (particularly the ‘social’ impact) of HSP financial distress and the vitality of insolvency resolution laws, in this milieu, becomes significant, making financial distress of an HSP a ‘social’ issue.

Most corporate insolvency law regimes apply uniformly to all ‘corporate persons’ without sectoral differentiation. While such statutory neutrality is coherent in the context of ordinary commercial enterprises, it produces a structural mismatch when extended to essential service providers like hospitals. A hospital in financial distress is not merely a corporate debtor: it also functions as a care provider, an employer of regulated professionals, a custodian of sensitive patient data, and a critical node within a regional health system. Standard insolvency mechanisms, such as the moratorium, the resolution professional’s (RP) mandate, the creditor voting process, and the liquidation waterfall, are improvised to produce outcomes that are necessarily ad hoc and often uneven. 

Where the statutory scheme exhibits lacunae, the judicial rendition endeavours to partially fill the gap, and it is here that the Indian experience offers instructive lessons for the international community. The Indian insolvency courts, being the adjudicating authority (AA) under the Insolvency and Bankruptcy Code (IBC), 2016, (National Company Law Tribunal-NCLT) the appellate authority (National Company Law Appellate Tribunal-NCLAT), and the Supreme Court of India, have adopted a welfare-aware reading of the general insolvency law in cases where hospitals as ‘corporate persons’ are involved. The judiciary has emphasised the imperative of preserving hospitals as a ‘going concern’, in both operational and functional ways, throughout the corporate insolvency resolution process (CIRP). The interpretive sensitivity reflects an engagement with deeper socio-economic constitutionalism and its values. There is an implicit recognition that a closure due to insolvency will not merely be a private creditor-debtor question. It has a systemic social impact and is not purely contractual. The judicial rendition further establishes that while insolvency is a part of economic governance, the law should function as an instrument of socio-economic reorganisation. A purely creditor-centric reading of the law would favour a swift liquidation. A purely social reading would displace creditor rights indefinitely. The courts, instead, adopt a calibrated approach integrating market efficiency with public welfare. The principle of going concern serves as the doctrinal vehicle through which this balance is realised.

India’s decade of hospital insolvency cases (2016–2026) reflects a mixed landscape. On the positive side, the IBC has worked as a ‘lifeline’ for the sector: resolutions outnumber liquidations at roughly a 2:1 ratio (among tracked cases), and hospital assets command premium valuations—an enterprise value of more than 25 times EBITDA on average. But the failures are equally instructive. Proceedings routinely far exceed the statutorily stipulated timelines, driven by AA capacity constraints and the complexity of healthcare assets: hospitals average 1,200–2,000 days in proceedings. For hospitals, this delay is not merely procedural—it is value erosion and destruction, as clinical staff leave, patient volumes fall, and accreditations lapse. Trade creditors comprising the pharmaceutical suppliers, diagnostic equipment lessors, etc., consistently absorb severe haircuts, even though their financial health directly sustains the hospital ecosystem that the CIRP is meant to preserve.

Conclusion

A judge of the Supreme Court of India recently observed: ‘IBC is a specialist hospital for distressed companies’. A slight word-play that follows is more significant: IBC is also a specialist for distressed hospital companies. Hospitals present a unique challenge as ‘living institutions’ under general insolvency frameworks, where distress affects human lives, not just machinery. The deeper question raised by hospital insolvency is one concerning institutional design: whether a framework built around commercial efficiency can simultaneously serve as a mechanism for social stabilisation. The evidence from India suggests that it can: partially. Courts can adapt general principles to account for the distinctive character of hospital debtors, and creditor-driven processes may, at times, yield going concern outcomes that advance both public and private interests. Yet judicial ingenuity is no substitute for legislative design. As private capital continues to deepen its presence in healthcare systems worldwide, the interface between corporate insolvency law and hospital distress will become an increasingly urgent site of reform. The emerging imperative is clear: corporate insolvency law must continue its evolution as a mechanism of socio-economic stabilisation, displacing its narrow orientation, which rested on debt realisation and creditor bargaining.

The author’s working paper can be accessed here.

Dr Surbhi Kapur is an Associate Professor of Law at Jindal Global Law School, O P Jindal Global University, India