Why The Rulebook Matters In Bankruptcy Cases

India’s bankruptcy regime is at an inflection point. The JSW Steel-Bhushan Power & Steel saga has become a lightning rod for debate over whether commercial expediency should trump the rule of law. 

The Supreme Court’s decision to invalidate JSW Steel’s acquisition of Bhushan Power & Steel has drawn criticism from those who argue that economic revival and job preservation justify bending procedural norms. That argument, while tempting, risks undermining the very fabric of India’s insolvency framework.

This is not the first time the Supreme Court has ruled against questionable process. It famously cancelled 122 telecom licences in 2012, reinforcing that expediency cannot excuse procedural lapses.

The Insolvency and Bankruptcy Code was born to break the stranglehold of crony capitalism and judicial paralysis—a clean, time-bound, and predictable system to resolve distressed assets. Yet, the JSW Steel-Bhushan Power episode exposes how easily this promise can be compromised when commercial interests are allowed to override legal discipline.

Flawed Process
Start with the delays. Bhushan Power’s resolution process dragged on for over two years—far exceeding the IBC’s 270-day deadline. JSW Steel’s winning bid involved substituting compulsory convertible debentures for the mandated upfront equity, a move that obscured the line between genuine risk-taking and financial engineering. Operational creditors—vendors and suppliers who keep the company ticking—recovered less than half their dues. 

The Committee of Creditors approved plan modifications behind closed doors, offering little rationale or transparency. More troublingly, the Enforcement Directorate’s claims on attached assets were brushed aside, leaving the finality of ownership mired in legal ambiguity.

These are not mere technicalities. They represent breaches that undermine the credibility of the IBC itself. If such violations are tolerated in the name of pragmatism, the message to investors is clear — rulebooks are optional. Investor confidence erodes, the cost of capital rises, and the IBC risks becoming yet another tool for the well-connected.

Proponents of commercial flexibility point to Bhushan Power’s operational turnaround under JSW Steel as evidence that the ends justify the means. But this logic is fundamentally flawed. A company’s revival, built on shaky legal grounds, is not a win; it’s a time bomb. If asset attachments can be ignored and statutory timelines flouted, every resolution becomes a legal minefield, deterring serious investors and inviting endless litigation. 

Worse, it creates moral hazard. If large corporates and their financiers can bend rules when the stakes are high enough, the IBC becomes a backdoor for the very cronyism it was meant to eliminate.

Structural Reform
That’s not to say the code must be inflexible. Global innovations like debtor-in-possession financing, widely used in US Chapter 11 proceedings, could offer a middle path. DIP allows distressed firms to raise fresh capital during restructuring, with lenders receiving priority repayment. This model helps preserve enterprise value and jobs, often leading to higher recoveries for all stakeholders.

However, the IBC’s creditor-in-control model differs fundamentally. Once insolvency proceedings are initiated, management control shifts from the debtor to an insolvency professional under CoC oversight.
 
This is meant to curb mismanagement and restore creditor confidence, but is structurally at odds with the DIP model, where the debtor retains control and secures fresh funding. 

While the IBC does permit interim finance with repayment priority, US-style DIP financing framework would require clearer legal safeguards. For such a model to work in India, the law must provide clear provisions for super-priority to DIP lenders, checks to prevent promoter misuse, and expedite judicial approval. 

Corporate lawyers note that some progress is visible in the pre-packaged insolvency process for MSMEs, where existing management can retain control under supervision—unless there is evidence of fraud. A hybrid structure could balance creditor oversight and debtor expertise, making DIP financing viable for businesses. 

The way forward is not to dilute legal standards but to reinforce them. Statutory timelines must be enforced, with automatic penalties for delays. The CoC’s decision-making process should be transparent, including public disclosure of voting records and a clear rationale for any plan modifications. 

Operational creditors deserve a seat at the table, with a minimum voting share to ensure their interests are not sidelined. Judicial and regulatory processes must be synchronised, with standardised protocols to resolve asset attachments swiftly and conclusively. Most importantly, all resolution funds should be deposited upfront in escrow—no more deferred payments or financial jugglery.

India’s bankruptcy code is still in its infancy. Its success won’t be judged by how fast distressed assets change hands, but by how consistently the rules are upheld. Legal integrity is not a luxury, it is the foundation of a trustworthy financial system. 

If commercial realities are allowed to override the rule of law, the IBC risks becoming just another instrument of privilege. That risk can be mitigated by fixing the process, not manipulating the outcome. Only then can India’s insolvency regime deliver on its promise of fairness, efficiency, and genuine economic renewal.