Supreme Court's Bhushan Steel verdict exposes systemic rot but leaves the IBC's future hanging

Time of India

10-05-2025

Vivek Narayan Sharma is an Advocate (AOR) at Supreme Court of India with 25 years of core experience in litigation, arbitration, mediation. Known for resolving high-stakes disputes in a quick-time frame & representing industries, business leaders, celebrities, politicos; he also serves as pro bono Lawyer to enhance societal hues & spectrum. LESS ... MORE
'When the insolvency process becomes a comedy of errors, it takes a Supreme Court Bench to remind everyone that the Code is not a joke.'
Shaking Investor's confidence and triggering Legal and Economic aftershocks, in a watershed judgment, the Supreme Court of India struck down the Resolution Plan of JSW Steel for Bhushan Power and Steel Ltd. (BPSL), declaring it illegal and fundamentally flawed under the Insolvency and Bankruptcy Code, 2016. The Court not only ordered the initiation of liquidation proceedings under Section 33 but also invoked its extraordinary powers under Article 142 of the Constitution. This decision, though legally well-reasoned, casts a long shadow over the credibility of India's insolvency regime.
Illegalities at every stage
The Court's findings are an unflinching mirror to the systemic failures within the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional (RP) failed in discharging even the basic statutory duties, from not verifying JSW's eligibility under Section 29A to ignoring procedural mandates such as timely application under Section 31 or investigating avoidance transactions. The RP also failed to seek extensions under Section 12, nor did he alert the Committee of Creditors (CoC) about the expiration of the 180-day timeline.
JSW's Resolution Plan, as eventually submitted and approved by the CoC, flouted several binding norms under the IBC and CIRP Regulations. Most glaring was the Plan's structure, use of Optionally Convertible Debentures (OCDs), which effectively diluted creditor rights and failed to treat operational creditors equitably under Section 30(2). Worse, JSW concealed its connection to the erstwhile promoters of BPSL, breaching Section 29A.
Yet, the CoC exercised what it termed 'commercial wisdom' to approve a non-compliant Plan riddled with violations. The Supreme Court rightly noted that this approval was devoid of scrutiny and rendered the entire process vitiated. Adding to the concern, JSW delayed the upfront payment of Rs19,350 crore by nearly two years, while conveniently benefiting from a favourable steel price cycle.
A deep rot in the system
This is not merely a case of a defective resolution plan. It is a case study in institutional compromise. The Resolution Professional acted more as a passive bystander than a statutory officer. The CoC, far from being a sentinel of creditor interests, capitulated to a flawed plan and later defended it in Court with shifting arguments.
The NCLT and NCLAT, expected to be guardians of due process, failed to check even the most basic procedural violations, including eligibility criteria, payment timelines, and the resolution applicant's bona fides.
This judgment is, at its core, a searing indictment of the rot in the insolvency ecosystem. It underscores the urgent need for accountability mechanisms. Serious penal action under Section 74(3) of the IBC must be initiated against erring professionals and CoC members whose conduct has undermined the sanctity of the insolvency regime.
The use and limits of Article 142
The Court invoked Article 142 to direct BPSL's liquidation. While this may be legally tenable, one is compelled to ask: could this power have been better used to restore legality without derailing an otherwise successful business revival?
Substantively, JSW has already paid substantial sums to creditors, restarted operations, and brought BPSL back into the industrial fold. Was it not possible to preserve this progress by correcting procedural anomalies, imposing penalties, or directing compliance retrospectively? Couldn't the Court have modified the Plan to align with the IBC instead of nullifying it entirely?
This verdict may inadvertently send a chilling message to global investors that in India, even resolution plans implemented over 7- 8 years may be overturned due to procedural infirmities, regardless of real-world success. With the world watching India's insolvency ecosystem as a key plank in its 'ease of doing business' pitch, the implications are serious.
The devil's advocate – A ray of hope for creditors?
To be fair, one must also present the contrarian view, especially from the standpoint of creditors. If the liquidation proceeds successfully, they may actually stand to gain more. Market analysts estimate BPSL's asset base at around ₹40,000 – ₹50,000 crore. If this valuation is realised, creditors could receive 200% to 250% of what they were to get under JSW's Resolution Plan.
That said, liquidation is a gamble. The very purpose of the IBC is to preserve going concerns, not dismantle them. Whether the market's optimism about BPSL's liquidation value is justified remains to be seen.
A hard lesson in governance
The Supreme Court's judgment is undoubtedly a landmark, it lays bare the decay within the processes of CIRP, from regulatory evasion to judicial oversight failure. It is a clarion call to reinforce discipline, transparency, and accountability.
Yet, the Court's choice to liquidate rather than rectify may prove to be a double-edged sword. In a globalized economy, where legal certainty is paramount, the message this sends could be one of unpredictability. Investors and lenders might justifiably worry about finality in Indian insolvency resolutions.
The BPSL case will now be remembered not only for exposing systemic lapses but also for reopening the debate on whether the cure i.e. liquidation, might sometimes be worse than the disease. Going forward, regulators, courts, and insolvency professionals must introspect deeply. The system can ill afford another such collapse from within.
Should you have any queries or require further clarification on the implications of this judgment or the insolvency framework in general, you may write to me at [e-mail]
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Views expressed above are the author's own.