Insolvency and the Bhushan Power & Steel Ltd Judgment: Implications for the Indian Economy, Banking Sector, and Common Debtors

Insolvency and the Bhushan Power & Steel Ltd Judgment: Implications for the Indian Economy, Banking Sector, and Common Debtors

A. Introduction

The Insolvency and Bankruptcy Code (IBC), enacted in 2016, was a game-changer in India's corporate resolution framework, introducing a time-bound and creditor-driven process for resolving insolvencies. Among the landmark cases under the IBC regime, the Bhushan Power & Steel Ltd (BPSL) judgment stands out due to its size, complexity, and far-reaching implications. This blog explores the background of the BPSL insolvency, the key findings of the Supreme Court’s ruling, and the broader impact on India’s economy, financial institutions, and the common debtor.

B. Background: The BPSL Insolvency Case

Bhushan Power & Steel Ltd, a major player in the steel industry, was referred to insolvency in 2017 under the IBC after defaulting on loans exceeding ₹47,000 crore. The company had amassed huge debts across multiple banks including PNB, Allahabad Bank, UCO Bank, and others. Following the Corporate Insolvency Resolution Process (CIRP), JSW Steel emerged as the successful resolution applicant, proposing a bid worth approximately ₹19,700 crore to acquire BPSL. However, the resolution hit a legal roadblock due to parallel criminal proceedings initiated by the Enforcement Directorate (ED), which attached BPSL’s assets under the Prevention of Money Laundering Act (PMLA). This led to a major legal tussle between the supremacy of the IBC versus attachment under the PMLA.

C. Supreme Court Verdict: A Turning Point

In “JSW Steel Ltd v. Mahender Kumar Khandelwal & Anr”, the Supreme Court delivered a decisive judgment in 2021 (with further clarification in 2022), ruling that:

Once a resolution plan is approved by the NCLT under Section 31 of the IBC, it becomes binding on all stakeholders, including government authorities such as the ED.

Assets of the corporate debtor (like BPSL) cannot be attached or confiscated under PMLA after the successful completion of the resolution process.

The purpose of IBC is revival, not punishment, and post-resolution the company obtains a "clean slate".

This judgment was hailed as a landmark affirmation of the supremacy of IBC and reinforced the sanctity and finality of the CIRP outcomes.

D. Impact on the Indian Economy

1. Strengthening Investor Confidence

The BPSL verdict restored the faith of investors in India’s insolvency process. By ruling out post-resolution risks, the Supreme Court encouraged strategic investors, especially foreign players, to actively participate in distressed asset resolutions without fear of retrospective penal actions.

2. Boosting ‘Ease of Doing Business’

A predictable insolvency mechanism is a key pillar of ease of doing business. By clarifying that new management cannot be penalized for past misdeeds of promoters, the judgment safeguards innocent buyers, promoting business continuity and fresh capital infusion into ailing sectors like steel and infrastructure.

E. Effect on the Banking Sector

1. Recovery of NPAs

With the resolution of BPSL, lenders recovered over 40% of their dues—a significant improvement over earlier recovery frameworks like SARFAESI or DRTs. The success of such large recoveries positively impacted the balance sheets of banks, especially public sector banks burdened with non-performing assets (NPAs).

2. Clarity on Asset Attachment

The judgment eliminated the ambiguity caused by multiple laws operating concurrently. By prioritizing the IBC over PMLA, banks were assured that insolvency proceedings would not be derailed by asset attachment orders, ensuring faster and cleaner recoveries.

3. Risk Mitigation in Future Lending

Banks now have a clearer roadmap and legal backing when dealing with insolvency-bound companies. This encourages more structured and secured lending practices, while deterring willful defaulters.

F. Implications for Common Debtors and MSMEs

While the BPSL case pertains to a large corporation, it has significant trickle-down effects:

1. Principle of “Clean Slate”

Common debtors, especially MSMEs, benefit from the reaffirmation that new buyers will not inherit past liabilities if they come through the IBC route. This facilitates smoother takeovers and revivals.

2. Deterrent Against Misuse of Law

The verdict draws a line between corporate misconduct and resolution. Promoters can no longer shield their assets by dragging insolvency into criminal litigation, ensuring a more disciplined credit culture.

3. Encouragement for Resolution Over Liquidation

The judiciary's preference for resolution over liquidation reflects a shift in approach—preserving economic value, jobs, and business continuity. This benefits employees, suppliers, and small stakeholders dependent on the debtor company.

G. Conclusion

The Bhushan Power & Steel Ltd case is more than just a high-value insolvency—it is a testament to the evolving legal and financial ecosystem in India. The Supreme Court’s decisive stance has reinforced the primacy of the IBC in the hierarchy of economic laws and provided much-needed clarity on the treatment of criminal investigations vis-à-vis insolvency resolutions. As India marches towards becoming a $5 trillion economy, robust and credible insolvency jurisprudence—as exemplified by this case—will play a critical role in unlocking capital, reviving industrial assets, and sustaining the trust of global and domestic stakeholders in Indian legal processes.

Authored by:

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