IBC at Crossroads: Finality, Fairness, and the Fallout of BPSL

BPSL Precedent: What Went Wrong for JSW Steel?

The derailment of the JSW Steel – Bhushan Power and Steel Ltd. (BPSL) deal serves as a cautionary episode in India’s Insolvency landscape, revealing how the risks posed by procedural lapses and strategic errors can undermine even large-scale and substantial commercial transactions. The Supreme Court’s annulment of the Rs. 19,350 crore acquisition was due to a series of failures on the part of stakeholders – JSW, the Resolution Professional (RP), and the Committee of Creditors (CoC) to comply with the statutory framework laid down by the Insolvency and Bankruptcy Code, 2016 (IBC).

The Supreme Court, in its judgment in Kalyani Transco v. M/s Bhushan Power and Steel Ltd, highlights the disregard and the failure to adhere to the IBC’s timeline. The resolution plan was submitted to the NCLT (National Company Law Tribunal) 127 days later by the Resolution Professional after the CoC approval, beyond both the 270 and the 330-day limit, without offering any valid or legitimate justification. Further, the acceptance of delayed payments and the passive stance of the CoC, coupled with JSW’s delay of nearly 900 days in implementing the plan, was viewed as a fraudulent attempt to profit from inertia.

The intervention of the Supreme Court highlights that the adherence to statutory timelines, due diligence, and the integrity of the process are non-negotiable, and failures in these can lead to the fall off of seemingly completed deals.

Supreme Court’s Rationale

Over the years, the Apex Court has showcased restraint in stepping in with the commercial decisions of the CoCs, invoking the “commercial wisdom” principle, and limiting the interference of the judiciary only in cases of illegality and injustice. However, the JSW-BPSL judgment highlights that the non-interference clause of the judiciary is not absolute, and the judiciary can step in if there’s a question on the integrity of the process, and no matter how big the commercial outcomes may be, it cannot validate the violations of the procedure.

The court rejected the defence of “fait accompli”, despite the partial implementation of the resolution over 5 years, demonstrating that finality in insolvency depends on procedural compliance. This stance of the court represents the shift from the business judgment doctrine of NCLAT. Further, the court clarified that collusive conduct, concealment, or any sort of non-compliance will be subject to judicial scrutiny when such failures risk the rights of the stakeholders and undermine the IBC’s mandate.

Judicial Scrutiny of Resolution Plans: A New Era of Accountability

This decision perhaps marks the beginning of a new era of accountability in India’s insolvency regime.  This was prompted by the significant procedural irregularities that were found in JSW’s plan, despite being approved by the CoC and the National Company Law Tribunal (NCLT). The Court described it as “mala fide and dishonest,” with the intent to unjustly enrich itself while market conditions improved, reaffirming that the given deadline is to be followed strictly.

The Court also criticised CoC for not only failing to protect creditor interests but also taking contradictory positions before the Court, in addition to violating Regulation 38. The Supreme Court concluded that the CoC’s approval of the plan, in the face of such non-compliance, could not be shielded by the doctrine of commercial wisdom. Thus, a clear line is drawn which lays down that commercial decisions cannot override mandatory legal requirements or excuse collusive or negligent conduct. 

Through this decision, the Court has effectively expanded the previously limited scope for judicial intervention in future cases of insolvency. Expansion of this scope, coupled with the emphasis placed on the role of “enrichment without performance” and good faith, sets a high standard for good faith in resolution processes.

The Cost of Procedural Lapses: Who Pays the Price?

This decision has a threefold impact across India’s distressed asset market. Firstly, for creditors, especially major banks, such as SBI, PNB, and others, the impact is perhaps the most immediate and profound because it entails reversal of recoveries, which is estimated to be over ₹19,000 crore. This forces reclassification of assets as NPAs and undermines years of balance sheet repair, meaning that it goes well beyond a simple repayment. Considering that funds have already been circulated, taxes paid, and capital expenditure initiated, it then makes unwinding the transaction substantially more complicated.

Secondly, for investors, it delivers a severe blow to sentiment and risk appetite. In this case itself, JSW Steel, which integrated BPSL’s operations and invested an additional ₹3,500 crore to expand capacity, now faces the prospect of deconsolidation and a potential 13% drop in revenues if the asset is lost. There are growing concerns that this precedent jeopardises the finality of other concluded insolvency cases, which could potentially lead to suppressing activity in an already challenging market segment.

Lastly, at a systemic level, the ruling takes the Code into “uncharted territory,” raising questions about the finality of resolution outcomes, which had formed the foundation of the legislation previously. The recognition of such broader implications is reflected by the fact that the government and the Insolvency and Bankruptcy Board of India (IBBI) are now urgently reviewing the judgment, with the Department of Financial Services, which means that policy responses and possible legal remedies are under active consideration. Until such clarifications materialise, however, the risk of undermining the credibility of India’s insolvency framework will continue to be present.

Conclusion

The JSW–BPSL deal becomes especially pertinent in the current scenario because it has been established for both investors and resolution applicants that success parameters have now expanded significantly beyond just financial considerations. Due diligence, transparent disclosures and disciplined timeline adherence are some of the important facets that market participants must demonstrate strict adherence to. Recent regulatory reforms, which include the 2025 amendments to IBC regulations and tightening of Liquidation and auction processes, coupled with the ongoing government efforts to digitize and streamline insolvency processes, build on this foundation further to establish a concrete structure to restore confidence and attract quality investors.

However, it is undeniable that this judgment brings certain repercussions which could be detrimental for the market and hence merit careful consideration. It creates immediate challenges for financial institutions and, more fundamentally, the judgment raises questions on the finality of resolutions, which have potential adverse impacts on investors’ psychology, prompting reassessment of risk-return calculations. It has already brought forward considerable debate about the legitimacy of the decision in terms of aligning with IBC’s objectives, and potentially making the market unappealing to future investors. The Court, recognising this, has temporarily recalled the original judgment and reserved its final verdict.

Ultimately, the way forward is to make legal compliance and transparency the foundation of every deal. But this has to be done in a manner that furthers IBC’s original promise, which is rescuing businesses, not dismantling them. While the judgment risks short-term market instability, it presents an opportunity to fortify India’s insolvency framework. It seems that this is still a developing story, left currently on a cliff-hanger, and how it unfolds will undoubtedly be a turning point in India’s insolvency regime.