Is India’s Insolvency Framework Failing Its Purpose?
The Supreme Court’s recent ruling on the Bhushan Power and Steel Limited (BPSL) insolvency case has stunned India’s financial and industrial sectors. Once hailed as a flagship success under the Insolvency and Bankruptcy Code (IBC), the case has now taken a sharp turn. The Court’s order to reverse the sale of BPSL’s Odisha steel plant to JSW Steel is a landmark judgment that upholds the sanctity of legal procedures, but it comes at a potentially devastating cost to economic productivity and investor confidence. BPSL’s story is rooted in the boom-bust cycles of India’s post-liberalisation economy. During the 2000s, optimism about India’s growth story led to an investment surge, especially in capital-heavy sectors like infrastructure and steel. BPSL, like many others, took on massive debt to build one of India’s largest private steel plants in Odisha. But the global financial crisis, domestic policy paralysis, and an industry downturn brought the company to its knees by 2017. It owed INR 47,000 crore and was declared one of the infamous dirty dozen defaulters — the worst among India’s bad loans. Enter the IBC — enacted in 2016 to help banks recover value from failing companies by transferring assets to more competent owners. BPSL’s revival through JSW Steel’s acquisition was touted as proof that the IBC could work even in the messiest of situations. JSW promised to pay INR 19,700 crore to creditors and inject INR 8,550 crore in equity. After years of delays and disputes, it finally took control in 2021 and managed to turn the plant around, achieving record production and profitability by FY 2024.
Yet this revival was short-lived. The Supreme Court, ruling on petitions filed by various stakeholders including operational creditors, the state of Odisha, and BPSL’s former promoters, concluded that the resolution process was fundamentally flawed. It cited repeated procedural lapses, including unlawful delays, lack of transparency in bidding, failure to uphold creditor rights, and questionable conduct by JSW. In particular, the court noted a) Violations of IBC’s 270-day resolution limit without formal extensions, b) a lack of disclosure of JSW’s prior associations with BPSL, c) Operational creditors receiving disproportionately low settlements, and d) continued interference by investigative agencies, which cast doubts over asset ownership. A delayed payment strategy by JSW that, in the Court’s view, exploited the system. The ruling nullified the resolution plan and ordered BPSL’s liquidation. JSW must be refunded its payment, and the steel plant, now fully functional, will be sold for parts.
While the judgment enforces accountability and reiterates the importance of rule-bound processes, it raises troubling questions about the economic fallout. For one, liquidation is typically a last resort under the IBC, meant for assets beyond recovery. In BPSL’s case, the plant was not only operational but also profitable. Liquidating a thriving enterprise could cause immense job losses, destroy economic value, and hurt downstream industries dependent on its output. Moreover, the banks already distressed will now have to refund money they had considered recovered and await a far less lucrative liquidation process. There’s also a psychological toll. For potential investors looking to acquire stressed assets under IBC, this case is a red flag. The uncertainty around finality, even after NCLT and NCLAT approvals, will dampen risk appetite. If successful turnarounds can be reversed years later, the incentive to invest in complex resolutions diminishes.
While the Supreme Court rightly flagged legal violations, it may be time to ask whether the IBC framework itself needs reform to accommodate real-world complexity. Few large insolvency cases unfold without procedural hiccups, especially when criminal investigations, multiple stakeholders, and legacy issues are involved. To avoid such costly rollbacks in the future, the government and judiciary could consider creating a safe harbour clause that protects successful resolution applicants from retroactive legal challenges, provided they acted in good faith. Establishing clearer coordination between insolvency courts and investigative agencies like the ED and CBI. Strengthening the role of operational creditors in the process to reduce post-facto litigation. Enforcing strict timelines not just in theory but through penal provisions for delays.
References:
- Business Standard – How Bhushan Power & Steel entered the ‘dirty dozen’ list of defaulters
- The Hindu – JSW Steel may face challenges in meeting the expansion target after the SC order on BPSL.
- Economic Times – SC rejects JSW Steel’s resolution plan for Bhushan Steel and Power, orders liquidation.
- Image by storyset on Freepik
