A test for India's insolvency regime

The Supreme Court's recent decision to liquidate Bhushan Power and Steel Ltd (BPSL), five years after its resolution plan was approved and implemented, has sent shockwaves through India's financial and corporate sectors.

- RAJESWARI SENGUPTA

By overturning JSW Steel's takeover of BPSL, the ruling has raised fresh questions about the Insolvency and Bankruptcy Code (IBC) and the institutions responsible for enforcing it.

In a major reversal, the Supreme Court ruled that the resolution plan for BPSL, approved by the committee of creditors (CoC) and cleared by both the insolvency and the appellate tribunals (National Company Law Tribunal, or NCLT, and National Company Law Appellate Tribunal or NCLAT), suffered from procedural lapses and non-compliance with the IBC. The court found the process fundamentally flawed, ordered the return of payments made by JSW Steel to creditors, and directed BPSL's liquidation. This decision, coming after years of revival of BPSL, could lead to major losses for creditors, which now risk recovering less through liquidation than under the earlier resolution.

Introduced in 2016, the IBC was hailed as a major financial reform in India. It aimed to unlock capital from failed businesses, improve credit discipline, and enhance resource-allocation efficiency. Its success in resolving major bad loans strengthened the financial sector and boosted investor confidence.

However, the court's recent ruling has cast a shadow over its future. By overturning a resolution plan years after completion, the decision has created uncertainty for creditors and investors, raising concern about the IBC's effectiveness.