Resolution to Reversal: Cost of Procedural Lapses in BPSL-JSW Case

[Amishi and Shatrupa are students at Rajiv Gandhi National University of Law.]

The Supreme Court of India (SC), with its judgement in Kalyani Transco v. Bhushan Power and Steel Limited, not only affected the parties involved, but ended up challenging foundational principles of the Insolvency and Bankruptcy Code 2016 (IBC). The SC, while invalidating the resolution plan for Bhushan Power and Steel Limited (BPSL), sends a crucial reminder about the caution behind procedural lapses and the implications of judicial interference years after the execution of judgments. While debates regarding this legal upheaval have begun, key questions regarding future implications remain. This piece intends to underscore the disruptive impact of the BPSL-JSW judgement and highlight the critical implications and challenges that lie before the evolving landscape of future insolvency proceedings and its clashing with Prevention of Money Laundry Act 2002 (PMLA). 

Revisiting ‘Commercial Wisdom’

At its very core, the judgement marks a disruption in the previously-established IBC jurisprudence. The SC overturned a INR 19,700 crore resolution plan that had been upheld by the National Company Law Appellate Tribunal (NCLAT) in 2020. Primarily, it deviates from the doctrine of commercial wisdom of committee of creditors (CoC). The court attempted to balance the supremacy of CoC and its decision-making, with the sacrosanct objectives of IBC, as laid in its preamble, for a time-bound balance in interests of all stakeholders. 

Problems with resolution plan

The primary issue with the resolution plan is the inordinate delay in its submission. While Section 12 of IBC provides conclusion of corporate insolvency resolution process (CIRP) within 180 days and an extension of 90 days, only once, the application for approval of the plan was filed well after the expiry of the 270 days. The unambiguous wording of Section 12 clearly demonstrates that the literal language of the section is not a mere guideline, but a statutory mandate. The court aligned with its precedent set in ArcelorMittal India Private Limited v. Satish Kumar Gupta, upholding the procedural timelines and its principle for time-bound resolutions. 

Moreover, the principle of equitable treatment of creditors was not followed. NCLAT overlooked the key observation by the SC in Committee of Creditors of Essar Steel v. Satish Kumar Gupta (Essar Steel) regarding ‘fair and equitable’ treatment of creditors. The resolution professional (RP) and CoC did not follow Regulation 38 of the Insolvency and Bankruptcy Board of India (CIRP Regulations) 2016, which mandated priority payment to operational creditors over financial creditors. This provision aimed to counterbalance the disproportionate bargaining power, which financial institutions have over vulnerable creditors. The RP failed to flag this error, and CoC approved the plan mindlessly. 

Failure to verify bidding eligibility for JSW

The RP undertook serious lapses and overlooked JSW’s eligibility under Section 29A, as JSW had a JV agreement with BPSL in 2008. This makes JSW a potential ‘related party,’ rendering it disqualified. The Tribunals accepting JSW’s resolution plan raised critical concerns regarding the inherent purpose of Section 29A, which is to prevent potential conflicts of those with vested interests in the distressed company. 

Deviation from previously-established principles

The principle of value maximization, as in the case of Amit Agarwal v. Sandeep Khaitan, is a cornerstone of the CIRP. However, the court overlooked this objective. It must be balanced with procedural fairness and due consideration of all assets and stakeholders.

The issue is the appearance of the liquidation. IBBI has discussed liquidation as the last resort, intended to be used when resolution process fails, as under Section 53. In the instant case, under JSW’s management, BPSL reported profits of about INR 670 crore and operational revenues of around INR 21,000 crore. The liquidation now ordered operates, in effect, as a penalty, not on the wrongdoers (the RP, the CoC, the Tribunals), but on the company and the business-economic landscape. IBC strives for value maximization and prevention of further depreciation of assets, and JSW ensured that. A liquidation order, despite indications of operational revival, suggests a punitive measure in response to gross procedural inefficiencies. It deviates from the primary focus of the legislation, as the SC held in Swiss Ribbons v. Union of India, ensuring revival and continuation of the corporate from ‘liquidation death’, which is also a deviation from the clean state theory. Thus, the intended ‘finality’ purpose of resolution remains defeated by this case. 

While the BPSL-JSW is already forming into a landmark precedent in the IBC landscape, it risks creating a precedent, which undermines the revival aspect of IBC and has the possibility of deterring future CIRP proceedings. By ordering liquidation, it highlights a discernible effect on future IBC processes and sets a precedent where judicial censure, not commercial viability, dictates outcomes.

Reasserting the Tilt towards PMLA

The complex interplay between PMLA and IBC is highlighted in this case. Generally, Section 32A of IBC seeks primacy to facilitate timely resolution and protect the interests of creditors while providing immunity from liabilities of fraudulent transactions. 

A critical aspect of the judgement involves the SC taking away the power from National Company Law Tribunal and NCLAT to interfere with PMLA enforcement, as it derives its authority from the Companies Act 2013 instead of IBC. The SC in Manish Kumar v. Union of India held commercial wisdom of the CoC and value maximization not to be hampered by related laws by Section 32A unless fraud is proven and the need to shield resolution applicants from prosecution pertaining to prior misconduct.

While the BPSL-JSW Judgement invalidated JSW’s resolution plan, primacy of PMLA made BPSL’s resolution under IBC untenable. Thus, it reinforces prioritization of anti-money laundering laws and sets a precedent that PMLA authorities retain supremacy over insolvency, even when a plan is approved. 

Implications of the Judgment

While the SC rightly pointed out significant flaws and shortcomings in the plan, the decision comes years after the acquisition was successfully completed in 2021, bringing with it uncertainty and a wavering belief in India’s insolvency rigor. The judgment is expected to have several implications for both the legal as well as economic sector as it stands as a notable example of the primacy of law in commercial matters.

Legal uncertainties

While the decision of the SC establishes primacy of law, it also undermines the purpose of the IBC, and implies that a resolution plan can be overturned even after approval from the competent authorities and its subsequent implementation. This risk of judicial reversal may deter future applicants and consequently endanger the very foundation of insolvency. This has the potential to disrupt the flow of capital and establish a shaky foundation of the harmony between courts and regulatory bodies.

However, SC’s reasoning for not holding an illegal transaction simply because the transaction was complete resonates with its duty to uphold the law. The judgment raises the bar for stricter compliance with insolvency laws, highlighting the need for a stronger framework, which does not allow for such irregularities. 

Economic and financial ramifications

A closed case, well into implementation, being reopened years later presents a troubling image for investors, for whom predictability is the basis of investment decisions. This liquidation is expected to yield lower recoveries for creditors compared to resolution, which is an estimated 10-15% as compared to JSW’s 40% offer. Prolonged litigation and asset freezes under PMLA could deter foreign investment and harm economic ease of doing business in India. 

JSW’s stock saw a sharp decline, losing more than INR 13,700 crores in market value immediately. The decision is likely to cause a 13% drop in revenues of JSW , and expected to impact about 4-5% of the financial value of the company. However, the long-term consequences are worse. The resolution plan set in motion a payment of approximately INR 20,000 crores to creditors, and the redistribution of such an amount years later will set off a chain of unfortunate events for banks that had written off BPSL as resolved. It will also impact a broader range of stakeholders, including the creditors, investors and employees who joined the company post-resolution.

Road Not Taken

The socio-economic and business fallout shows perception that revived companies can be forced into liquidation due to procedural lapses, however serious, is a characteristic that could discourage strategic investors from future resolutions. 

In Essar Steel, ArcelorMittal cured its ineligibility by paying off NPAs and was allowed to bid. JSW could have been given reasonable window to regularize by paying off all overdue amounts, thereby curing ineligibility under Section 29A. 

Borrowing from UK’s Virgin Atlantic Restructuring, SC could have attempted to save BPSL by exercising extraordinary powers under Article 142, as has previously been applied in India’s insolvency regime for circumstances, which require special care, and invited fresh resolution plans and ensured eligibility through creditor consultation. This specific socio-economic sectoral sensitivity is important to save BPSL as liquidating an important player in the steel industry as JSW-BPSL not only destroys value but also has cascading effects on employment, supply chains, and industry. 

Nonetheless, this case, through the route not opted for, strives to establish a stronger insolvency landscape for India, emphasizing rigor over convenience. 

Conclusion

The judgment serves as a critical reminder of the judiciary’s firm stance on procedural fairness even at the cost of commercial expediency. While it undoubtedly reinforces the need for strengthening the insolvency process, it also risks undermining the IBC’s primary objective: corporate revival. The retrospective invalidation of a long-concluded resolution plan has not only shaken investor confidence, but has also exposed vulnerabilities in the insolvency framework.

Economically, it hampers ease of doing business and magnifies the costs imposed on stakeholders and investors. The road ahead for India’s insolvency regime now depends on the recourse taken by BPSL, as the option for filing a review or curative petition remains open. Whether this case will serve as a cautionary tale or a course correction hinges on future interpretation and application of the case.