India's Insolvency Reversal: A Cautionary Tale for Investors in Distressed Deals

The Supreme Court of India's recent rejection of JSW Steel's resolution plan for Bhushan Power and Steel Limited (BPSL) has sent shockwaves through India's corporate restructuring landscape. By overturning a 2022 deal worth ₹4,800 crore (approximately $550 million), the court underscored a strict interpretation of the Insolvency and Bankruptcy Code (IBC) and its procedural requirements. For investors, this ruling is a stark reminder that even seemingly settled insolvency cases are vulnerable to reversal if compliance with timelines, regulatory norms, and due diligence is lacking.

The decision, which ordered BPSL's liquidation and revoked JSW's equity stake, highlights systemic risks in India's insolvency framework. The court identified six critical violations, from misuse of legal provisions to collusion between the debtor, creditor committee, and resolution professional (RP). These lapses not only derailed JSW's acquisition but also reignited debates about the balance between commercial pragmatism and legal rigor in insolvency proceedings.

The anatomy of a flawed resolution: Key compliance failures

The Supreme Court's ruling revealed a cascade of procedural missteps that investors must now treat as red flags:

1. Procedural Overreach Under Section 61:
   JSW's appeal against the resolution plan approval was dismissed because Section 61 of the IBC permits appeals only on grounds of legal contraventions or material irregularities—not to challenge one's own approved plan. The court also criticized the National Company Law Appellate Tribunal (NCLAT) for exceeding its jurisdiction by addressing an attachment of BPSL's assets by India's Enforcement Directorate, a matter outside IBC purview.

JSW's shares dropped 8% on the ruling, reflecting investor anxiety about regulatory risks in distressed acquisitions.

1. Eligibility Gaps Under Section 29A:
   JSW failed to submit a mandatory affidavit affirming its compliance with Section 29A, which bars entities with prior affiliations to the debtor (e.g., joint ventures) from bidding. The RP also neglected to verify JSW's eligibility, despite its 2008 joint venture with BPSL. This lapse, coupled with the RP's broader dereliction of duty—including missing timelines and avoiding due diligence—exposed systemic weaknesses in oversight.

2. Timelines and Collusion:
   The Corporate Insolvency Resolution Process (CIRP) must conclude within 270 days under IBC Section 12. The RP delayed filing an extension request, and the resolution plan was submitted post-deadline. Worse, the Committee of Creditors (CoC) initially opposed JSW's delayed payments but later relented, suggesting collusion. The Supreme Court condemned this as a breach of “commercial wisdom,” a term rarely invoked in Indian judicial rulings.

3. Payment Priorities Violation:
   JSW paid financial creditors in 2021 but delayed payments to operational creditors until 2022, flouting IBC Regulation 38. The court called this unconscionable, especially given JSW's alleged strategic delay to capitalize on rising steel prices.

Strategic Implications: A New Era of Due Diligence

The BPSL case marks a pivotal shift in India's insolvency regime. Investors in distressed assets must now account for heightened judicial scrutiny of procedural compliance, even years after a deal closes. Key takeaways include:

• Timelines Are Non-Negotiable: The 270-day CIRP deadline must be treated as sacrosanct. Extensions require explicit justification and timely filings.
• Eligibility Scrutiny: Bidders must rigorously assess their own compliance with Section 29A, including historical ties to the debtor, and ensure the RP performs due diligence.
• Avoid Collusion Risks: Investors should be wary of CoCs or RPs that appear overly accommodating to delays or non-compliance.
• Monitor Judicial Priorities: The Supreme Court's use of Article 142 to unwind a completed deal—even after three years—suggests no transaction is final until full compliance is verified.

Investment Advice: Proceed with Caution

For now, investors should adopt a risk-averse stance toward companies involved in prolonged insolvency cases until the Supreme Court's stance crystallizes. Key recommendations:

1. Avoid Assets with Procedural Red Flags: Steer clear of deals where timelines, affidavits, or payment priorities are in doubt.
2. Demand Transparency on Historical Ties: Ensure bidders disclose prior affiliations with the debtor to avoid Section 29A pitfalls.
3. Diversify Exposure: Limit reliance on single distressed assets, especially in sectors like steel or power, where regulatory and macroeconomic risks are concentrated.
4. Track Judicial Precedents: Monitor rulings on IBC cases to anticipate evolving compliance expectations.

Conclusion: A New Litmus Test for Restructuring Deals

The JSW-BPSL saga is not merely a legal setback but a paradigm shift. It signals that India's insolvency framework now demands perfection in compliance, not just good faith efforts. For investors, the message is clear: in distressed acquisitions, the devil is in the details—every affidavit, timeline, and payment sequence. Until the IBC's ambiguities are clarified through legislative or judicial reforms, caution and exhaustive due diligence will be the price of survival in India's restructuring markets.

The Supreme Court's ruling serves as a warning: in the era of strict liability, even the largest corporate players cannot afford to treat regulatory rules as guidelines.