JSW-BPSL Insolvency Row: Can the Status Quo Order Open a Window for Redemption?

[Tushar and Riddhi are students at National Law University Jodhpur.]

The Supreme Court of India’s recent status quo order in the JSW Steel-Bhushan Power and Steel Limited (BPSL) insolvency case can prove to be crucial turning point for implementation of India’s Insolvency and Bankruptcy Code 2016 (IBC) regime. Following the court’s initial judgment annulling an already implemented resolution plan and ordering liquidation of BPSL, the status quo order has temporarily stopped liquidation proceedings and allowed JSW Steel to file a review petition against the court’s ruling.

This lawsuit not only involves an unsettled INR 19,000 crore transaction, but it also questions the fundamental principles of IBC such commercial certainty and revival of businesses. Procedural errors including a missing affidavit under Section 29A caused the court to reject JSW Steel’s already implemented resolution plan. This was following significant integration efforts and adjudicatory approvals under which JSW Steel had acquired BSPL under the IBC framework. 

This blog examines how the Supreme Court of India’s ruling strengthens statutory compliance while concurrently undermining the commercial certainty intended by the IBC, necessitating both institutional and legislative recalibration. 

Background of the Issue

In the year 2019, JSWL Steel stepped in as the successful resolution applicant for BPSL, which owed over INR 45,000 crores to its creditors. After the committee of creditors (CoC) sanctioned a INR 19,700 crore plan, the National Company Law Tribunal (NCLT) followed suit. JSW made payments to the creditors and fully integrated BPSL into its commercial operations, basis the fact that the transaction was final and secure. However, a major challenge surfaced when the Enforcement Directorate attached BPSL’s assets on claims money laundering, so raising questions about whether the entire deal could be in jeopardy. JSW responded by looking for immunity under Section 32A of the IBC, which guards successful resolution applicants against prosecution for offences carried out under the former management. 

After prolonged litigation, the case resulted in the Supreme Court annulling JSW Steel’s resolution plan in Kalyani Transco v. Bhushan Power and Steel Limited. The court held that procedural errors and excessive delays compromising the integrity of the resolution process, and concluded that the plan violated important provisions of the code, namely, Sections 29A, 30(2), and 31(2). Specifically, under Section 29A, bidders must affirm through an affidavit that they are not willful defaulters, undischarged insolvents, and certain related parties, in order to be eligible. The court determined that JSW had violated a mandatory requirement by neglecting to submit this affidavit, even though such eligibility/ineligibility is central to the validity of a resolution process.

Despite its seeming technicality, this non-compliance became a major cause for invalidating one of the most significant resolution plans under the IBC. Crucially, the court pointed out that approval by the CoC cannot be assessed as an exercise of commercial wisdom where a resolution plan deviates from mandatory requirements. This is a major departure from the otherwise deferential status accorded to CoC decisions. In fact, the Supreme Court noted that the resolution plan approved by CoC failed to satisfy the requirements under Section 30(2), constituting a clear breach of the IBC and its regulations and, therefore, should have been rejected by the NCLT under sub-section (2) of Section 31, at the very first instance. This decision has made the principle of finality, enshrined under Section 31 of IBC, look fragile and prone to variation. Hence, careful consideration is required on how to achieve the appropriate balance between judicial scrutiny and commercial stability. 

Implications and Analysis of the Judgment

The court’s invocation of its powers under Article 142 of the Constitution, which is mechanism often utilized to fill legislative gaps and secure just results, sets a unique precent for IBC framework. In the present case, Article 142 was employed not to address a equitable gap but to undo a resolution plan that had already been established through the appropriate statutory approvals. The court’s approach arguably allows for the principle of finality to be subject to judicial reassessment, consequently introducing a degree of legal uncertainty into a process that is supposed to be conclusive. 

Although the aim of maintaining statutory compliance is praiseworthy, the consequences of such retrospective invalidation are extensive. There now exists a potential threat to the stability of commercial expectations for resolution applicant, who undertake considerable financial and operational commitments based on the definitive nature of the plans sanctioned by the NCLT. The IBC framework is meticulously designed to guarantee minimal disruption following the statutory approval of a resolution plan. Nonetheless, the current ruling indicates that even complicated transactions may not be exempt from judicial examination, limiting the confidence that stakeholders can now put into the certainty of transactions.  

From the market’s aspect, the ruling is likely to have a dampening effect on investor sentiment. India’s IBC has been promoted globally as a clear and efficient framework for resolving corporate insolvency cases. The retroactive judicial intervention in the case of JSW-BPSL has introduced a complex layer of legal risk, in particular, the potential for reversal of an implemented plan on grounds of non-satisfactory procedural compliance. This risk is aggravated in capital intensive industries like steel and infrastructure, that require substantial long-term financial planning.  

Further, the decision brings to the fore certain fundamental weaknesses in the insolvency framework. Although the IBC mandates that the corporate insolvency resolution process must be concluded within 330 days from the insolvency commencement date, though it can be extended under special circumstances, adherence to this timeline frequently seems to be more of an aspiration than a ground reality, impeded by constraints in judicial backlog, institutional incapacity, and prevalence of strategic litigation. In the JSW-BPSL case, one could argue that these procedural delays significantly contributed to the legal vulnerabilities recognized by the court. The judiciary’s insistence on rigorous compliance can be interpreted as a corrective method, in an attempt to control the leniency present in the system that leads to flagrant violations of the code. 

The Way Forward: Is There Scope for a Middle Ground?

Although the Supreme Court of India’s decision has garnered significant criticism, it is not without its merits. It emphasizes how the integrity of the insolvency process must remain sacred. The IBC transcends the role of a simple debt recovery mechanism; it is a framework rooted in legal principles and the equitable treatment of all stakeholders involved. Relaxing statutory eligibility criteria or procedural thresholds to promote expediency may indeed streamline the process, but such actions pose a significant threat to the integrity of rule of law and may inadvertently encourage exploitation of the legal system. 

However, the solution lies not in sporadic judicial interventions but in thoughtful and institutional strategies. The legislature ought to deliberate on amending the IBC to clearly delineate the scope of finality and certainty for resolution plans. One feasible approach would be to prescribe a statutory limitation period beyond which approved and implemented resolutions plans will be immune to challenge, except for instances of fraud or material non-disclosure. Integrating this presumption of finality would enhance confidence while protecting avenues for appropriate redress. Hence, creating an appropriate balance in the framework. 

Parallelly, the judiciary should develop a deferential approach that prioritizes the commercial decisions and approvals sanctioned by the Adjudicatory Authorities under the IBC framework, unless the entire process is tainted prima facie illegal. Ad hoc judicial interventions, despite their well-meaning intentions, introduce an element of unpredictability into a fragile system that hinges on certainty and reliability, thereby dissuading participation and increasing transactional risk. 

Additionally, upgrading institutional capacity is another important reform which is needed. The NCLTs needs to increase its strength of judges and appoint judges who have the required technical expertise to deal with insolvency cases, and be provided with enhanced infrastructure and training to ensure effective implementation and scrutinization of the resolution process. If NCLTs take enough precautions to ensure that a resolution process is not tainted by procedural lapses, the chances of a reversal by the High Courts and Supreme Court of India will be significantly lowered. The Insolvency and Bankruptcy Board of India ought to adopt a proactive role by mandating regular audits of resolution process and creating a repository of prevalent procedural deficiencies to help in uniform implementation and adherence to the code by all the stakeholders involved. 

The IBC was designed to prioritize the revival of financially distressed companies, maximize asset value and protect the interest of all stakeholders. This vision is distorted when procedural liabilities are permitted to supersede the objectives of economic revival. The aim of IBC was never to be a venue for retrospective punishment. However, the case of JSW-BPSL has also brought necessary attention to the need for stricter procedural oversight. It emphasizes that a resolution applicant cannot reap the advantages of a fresh start if compliance was compromised during the resolution process, even if not intended. Thus, in order to lessen the possibility of future roadblocks, pre-approval structural measures like real-time audits or third-party review of resolution plans are required. 

The current status quo order has presented a crucial opportunity to rethink the principles that should be given primacy under the IBC structure. Although the decision has raised some critical issues, its wider economic and institutional consequences require careful consideration. To maintain IBC’s credibility, India must enhance the transparency, commercial viability and dependability of the system.