Chinks in the IBC Amour?

The author was resisting commenting on the recent SC JSW judgment (ordering liquidation of Bhushan Power & Steel Ltd [BPSL], and cancellation of the resolution plan under implementation by JSW group). Many experts have already provided comments. Some perceive the judgment as posing grave dangers to IBC, while others support it (shock/awe). Both may be relevant depending on the perspective. However, considering the nature of arguments that have followed (and the proportions it has assumed), a need is felt to contribute with few perspectives. To lightly quote from the legendary Godfather III, ‘Just when I thought I was out, they pull me back in’.

JSW Judgement

At the outset, it is useful to understand that the struggle in IBC has been twofold: enhancing perspectives around it and improving its effectiveness/efficiency. In the author’s opinion, the former has been equally troublesome. Hence, in this case also perspectives are important, rather than just legalities for which several redressal mechanisms exist (the SC has recently stayed liquidation of BPSL, pending review).

Many earlier judgments have also been criticised for derailing IBC, notably Vidarbha Industries (2022) and Rainbow Papers (2022). The former had the implication of granting discretionary powers to the AA to admit a case (beyond debt default), while the latter gave certain government dues priority, effectively treating them as secured creditors. In each, there were concerns on their implications on the spirit of the code. The arguments (right or wrong) may be set right by proposed regulatory clarifications/amendments.

The recent JSW judgment is however much more than just judicial interpretations. It is the intention to right a wrong albeit after much water has flown under the bridge. The SC not only observed issues with the Resolution Professional (RA) /Resolution Applicant (RA) but also the Adjudicating Authority (AA) finding these important pillars wanting in basic procedures/checks (such as s30 [2], OC treatment, equity infusion, extension filings, etc.). Even Section 29A compliances were not followed leading to doubts on the eligibility of the RA. The judgment has economic ramifications with banks staring at refunding the monies received. It has shaken the comfort that the IBC pillars are functioning in consonance with law and spirit.

Some Perspectives

Though the judgment contains many important facets, I will focus on three aspects on which there have been many concerns raised: retrospective implications, delays, and the liquidation decision (in lieu of a fresh resolution opportunity).

The first deals with a larger question: can wrongs be undone with retrospective implications? Put simply, should one continue to pursue a path if reversal is too costly? Depending on perspectives (legal or otherwise), there are no easy answers. Though, arguments exist that wrongs (omissions or design) should not be perpetuated unless barred by limitations /other legal reasons. In this case, the court found the RA selection and resolution was itself carried out improperly. Then where is the bona fide transaction whose reversal is being questioned? At the risk of ‘apples and oranges’ comparison, major reversals have been witnessed in other matters as well, such as the deallocation of coal blocks (often cited as a cause for a case’s induction into the so-called ‘dirty dozen’). Furthermore, IBC has successfully delivered resolutions in several instances. Hence, to say that IBC is broken solely due to this judgment may not be fair.

Second, concerning delays in rectifying wrongs, it is noteworthy that IBC, while having specialised AA, functions within the overall judicial system and is subject to many constraints (despite the stringent time limit in the code). There are instances of significantly delayed justice, at times years if not decades later (‘Tareek Pe Tareek’ issue). However, notwithstanding delays, as recently noted in The Economist (May 2025), India enjoys relatively higher confidence levels in its judiciary (a silver lining).

Third, in terms of the decision to liquidate BPSL, the court has periodically recognised the time-critical nature of IBC. This decision must also be seen against the backdrop of prior judgments, where the SC has in fact been praised for protecting the code’s interests (Swiss Ribbon /Essar Steel Judgments). Even in the Jet Airways case (referred to in the instant judgment) the court ultimately ordered liquidation, frustrated at inordinate delays and resolution of non-compliances.

Key takeaways

Differing perspectives on the gravitas notwithstanding, key takeaways are that stakeholders need to exercise greater caution in their respective processes/diligence. The judgment has bought to fore certain chinks in the IBC armour which must be tackled. No doubt, it has had its consequences. For instance, assuming that everything is functioning as per process is no longer tenable. Key stakeholders (RP/CoC/RA) must exercise more caution, to ensure processes are followed. For genuine RAs, the principle of ‘Caveat Emptor’ (‘let the buyer beware’) becomes more relevant. However, the impact on larger investor sentiment remains to be seen. After all, ease of doing business measures are static and exclude dynamic jurisprudence in an evolving law.

The larger issues requiring redressal are how to ensure all pillars follow the code (in law and spirit), there are no slip-ups, and RAs fulfill their obligations (after an often long-winded insolvency process). It is of little doubt that all stakeholders (especially in high-profile cases), would have sound legal advice (also observed in the judgment). However, the system checks /balances have not worked in this instance. If adequate safeguards are built, perhaps we can prevent a repeat of the saga. Each judgment ultimately highlights issues that contribute to improving the code (and perspectives around it).

Hence there are reasons to be optimistic (for a better tomorrow) rather than writing obituaries for the code. The judgment by itself may have inherent beneficial effects on perspectives and adherence to the code (notwithstanding any final outcomes on review petitions). Its integration into the IBC ecosystem (greater caution) is already evident with the judgment starting to find reference even in recent positive resolution orders (for example, see NCLT order on NSL Nagapatnam). At the same time, legitimate concerns exist, given its ramifications. Learnings may be formally integrated into IBC regulations as well.

The writer is a Visiting Fellow at Research & Information System for Developing Countries (RIS), New Delhi. Views expressed are personal