The IBC’s Missing Stakeholders: A Critical Reflection on the Soul of Insolvency Jurisprudence
The Insolvency and Bankruptcy Code (IBC), 2016, was heralded as a watershed moment in India’s economic history. It promised to replace the fragmented and archaic laws of the past with a time-bound, efficient process for reorganization and insolvency resolution. As a Senior Advocate who has witnessed the evolution of this law from its inception, I have observed its many triumphs. However, a recent high-profile saga involving the acquisition of Jaiprakash Associates Limited (JAL) by Adani Enterprises—overshadowing a counter-appeal by the Vedanta Group—has brought a simmering discontent to the surface. It forces us to ask a fundamental question: In the race for “value maximization” and “upfront liquidity,” has the IBC lost sight of the very people it was meant to protect?
The core philosophy of the IBC was never merely the recovery of dues for banks. It was designed to be a balancing act—a mechanism to ensure the survival of the corporate debtor, the protection of the interests of all stakeholders, and the overall health of the credit market. Yet, as we analyze the latest developments in the JAL case, a troubling pattern emerges. The “Commercial Wisdom” of the Committee of Creditors (CoC) is increasingly being equated with a narrow focus on immediate financial metrics, often at the expense of equity, fairness, and the broader socio-economic impact on “missing stakeholders.”
The JAL Verdict: A Case Study in Creditor Primacy
The recent battle over Jaiprakash Associates Limited serves as a perfect microcosm of the systemic tensions within the IBC. Adani Enterprises emerged as the favored bidder, primarily because its proposal offered higher upfront payments to the financial creditors. Vedanta Group, which challenged the proceedings, found itself on the losing side of a decision dictated by the CoC’s preference for immediate cash flow over other qualitative parameters of the resolution plan.
While the legal sanctity of the CoC’s decision-making is well-established through landmark judgments like K. Sashidhar v. Indian Overseas Bank and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the JAL case highlights a growing disconnect. When the law speaks of “maximization of value of assets,” is that value purely monetary? In the context of a massive infrastructure and real estate conglomerate like JAL, the stakeholders extend far beyond the consortium of banks. They include thousands of homebuyers who have waited decades for their roofs, thousands of employees whose livelihoods depend on the company’s revival, and hundreds of small-scale operational creditors who form the backbone of the supply chain.
The Hegemony of Financial Creditors
Under the current IBC framework, the Committee of Creditors consists exclusively of financial creditors. This structural choice was based on the premise that financial creditors have the capability to assess the viability of the debtor and the risks involved. However, this has led to a “Financial Creditor Hegemony.” In the JAL-Adani-Vedanta context, the creditors’ inclination toward the highest bidder for upfront recovery is understandable from a banking balance-sheet perspective. But is it the most “just” outcome under the spirit of the Code?
By prioritizing upfront liquidity, the CoC often overlooks the long-term sustainability of the resolution plan or the haircut suffered by operational creditors. This creates a hierarchy of suffering where the most vulnerable stakeholders—the ones without a seat at the table—are the ones who bear the maximum brunt of the insolvency process.
Who are the Missing Stakeholders?
To understand the depth of the crisis, we must identify who the IBC is leaving behind. These are not just names on a ledger; they are the people whose lives are inextricably linked to the corporate debtor.
1. The Homebuyers: The Perpetual Victims
In the specific context of the Jaypee group (of which JAL is a significant part), the homebuyers have become the face of the IBC’s limitations. Despite being granted the status of “Financial Creditors” through an amendment to the Code, their actual influence in the CoC remains marginal compared to institutional lenders. When a deal like the Adani-JAL acquisition is evaluated, the primary focus is often on the repayment of term loans. The homebuyers’ concerns—timely possession, quality of construction, and the fulfillment of past promises—often take a backseat to the financial math of the banks.
2. Operational Creditors and MSMEs
The IBC distinguishes sharply between financial and operational creditors. In many resolution plans, operational creditors—including MSMEs that have supplied goods and services—are offered a mere pittance, sometimes close to zero, while financial creditors take the lion’s share. If a resolution plan is chosen solely on the basis of how much “upfront” cash it gives to the banks, the operational creditors are pushed further into financial ruin, leading to a domino effect of insolvencies in the SME sector.
3. The Workforce: Beyond Retrenchment Benefits
A corporate debtor is not just an assembly of assets; it is a community of workers. While the Code provides for the payment of workmen’s dues, a “successful” resolution plan often involves significant “right-sizing” of the workforce. When the process favors the highest bidder without a stringent evaluation of the bidder’s intent to preserve employment, the human cost of the insolvency is ignored.
The Myth of “Value Maximization”
The Preamble of the IBC mentions “maximization of value of assets” as a primary objective. However, the interpretation of this phrase has become dangerously narrow. In the JAL-Adani scenario, value is being maximized for the secured lenders. But true value maximization should include the preservation of the business as a “going concern” in a way that minimizes social disruption.
If a bidder like Vedanta or any other entity offers a plan that might have a different payment structure but ensures better outcomes for operational creditors or homebuyers, the CoC is currently under no legal obligation to prioritize those “softer” metrics. This creates a “bidding war” environment where the bidder with the deepest pockets and the most aggressive upfront cash offer wins, regardless of whether they are the best fit for the company’s long-term health or the stakeholders’ welfare.
The Judicial Shield of “Commercial Wisdom”
The Indian judiciary, particularly the Supreme Court, has been hesitant to interfere with the “Commercial Wisdom” of the CoC. The rationale is that the NCLT and NCLAT are not experts in business and should not second-guess the financial decisions of the lenders. While this has speeded up some processes, it has also created a vacuum of accountability. If the CoC decides to accept a bid that provides 90% recovery to themselves and 0.1% to others, the courts have largely kept their hands tied. This lack of a “fairness test” is what the JAL case brings to the forefront.
The Need for a “Stakeholder-Centric” Approach
As a legal fraternity, we must advocate for a shift from “Creditor-Centric” insolvency to “Stakeholder-Centric” insolvency. This does not mean undermining the rights of the banks, but rather ensuring that the IBC lives up to its promise of being a balanced legislation.
Reforming the CoC’s Mandate
There is a compelling argument for introducing a mandatory “Code of Conduct” for the CoC. Currently, the CoC acts as a trustee for all stakeholders, but there are no punitive consequences if they act solely in their own self-interest. A reformed Code should require the CoC to provide a reasoned explanation as to how the chosen resolution plan addresses the interests of all stakeholders, including operational creditors and homebuyers, not just the financial recovery percentage.
The Role of the Resolution Professional (RP)
The RP must be more than just a facilitator for the banks. They must act as the conscience of the process. In complex deals involving entities like Adani or Vedanta, the RP’s role in highlighting the socio-economic impact of a bid is crucial. They should be empowered to present a “Social Impact Audit” of each resolution plan alongside the financial audit.
Comparative Jurisprudence: Learning from the World
India is not alone in grappling with these issues. In the United Kingdom, the “Absolute Priority Rule” and the concept of “Fair and Equitable” treatment in the US Chapter 11 proceedings provide some safeguards. While the Indian IBC is unique, we can certainly borrow the principle that a plan cannot be “unfairly discriminatory” against any class of creditors. The JAL case demonstrates that while a plan may be “legal” under the current IBC framework, it can still feel “unfair” to those on the periphery. This sense of unfairness undermines the public’s trust in the insolvency system.
The Danger of Monopolization
Another angle that the “Missing Stakeholders” debate highlights is the risk of market concentration. When the same few large conglomerates acquire distressed assets across sectors—from cement to ports to power—through the IBC route, it impacts the competitive landscape. The “stakeholders” here include the Indian consumer. If the IBC becomes a pipeline for the consolidation of corporate power in the hands of a few, it may lead to long-term economic repercussions that the CoC, in its search for upfront cash, is not equipped to consider.
Conclusion: Restoring the Soul of the IBC
The IBC was a reform born out of necessity. It has successfully shifted the “debtor-in-possession” model to a “creditor-in-control” model, which was essential to tackle the NPA crisis. However, the pendulum has perhaps swung too far. The JAL-Adani-Vedanta controversy is a wake-up call for the legislature and the judiciary to re-evaluate the human element of insolvency.
We must remember that a company is more than its debt; it is a vital organ of the national economy. When the IBC process ignores the “missing stakeholders”—the homebuyers, the workers, and the small creditors—it fails in its ultimate objective of equitable resolution. The “Commercial Wisdom” of the CoC must be tempered with a “Duty of Fairness.”
As we move forward, the success of the IBC should not be measured solely by the billions of rupees recovered for the banking system. It should be measured by the number of homes delivered, the number of jobs saved, and the number of small businesses that survived the collapse of their larger partners. Only then can we say that the IBC is truly serving the people it was meant to protect. The law must evolve from being a mere tool for financial recovery into a robust instrument of economic justice. The people are watching, and they are no longer willing to be the “missing” part of the equation.
