SC ruling can redefine insolvency

Rejection of BPSL takeover raises questions on processes under the Insolvency and Bankruptcy Code

The Supreme Court’s rejection of the takeover of Bhushan Power & Steel Limited (BPSL) by JSW Steel has gone beyond issues related to the correctness and legal soundness of the decision taken by the two companies under the Insolvency and Bankruptcy Code (IBC).

It has raised questions about the implementation of the IBC itself and the processes it entails. The IBC, which was introduced by the government in 2016, has been considered an important tool and guide to deal with problems arising from insolvency and bankruptcy of companies and other entities. It was intended to reassure businesses, investors, creditors, and other stakeholders about a legal, orderly, and predictable process of resolution.

The court’s ruling in the case, which held that JSW Steel’s resolution plan for BPSL was illegal, is a serious setback to the process of recovery from bankruptcy prescribed under the IBC.

The National Company Law Tribunal (NCLT) approved JSW Steel’s resolution plan for BPSL in 2019. The resolution process was stretched for over two years which is more than what is envisaged under the code. Two years later, JSW acquired BPSL. But the court has now rejected JSW’s bid and ordered the liquidation of BPSL. It criticised the conduct of all stakeholders and questioned the process as such.

The court said that JSW made misrepresentations, and had “not complied with the terms of the said approved resolution plan for a period of about two years.” The resolution plan did not conform to the requirements of the IBC, and the resolution professional “failed to discharge his statutory duties.’’

The Committee of Creditors (CoC) failed to apply commercial wisdom in accepting the resolution plan and failed to protect the interests of creditors by taking contradictory positions. The prescribed procedures were violated at every step and there were no legal consequences for the violations.

The ruling has placed the institutional mechanism created as part of IBC under scrutiny. It has several implications. Pushed into liquidation, BPSL will take a hit on its value.

The lenders will be severely affected too. IBC was intended to save the corporate debtor through resolution, to ensure that the damage suffered by various stakeholders is minimised, and the larger economy is not unduly hurt. But the ruling shows that most malpractices indulged in by companies in the pre-IBC era and which the code intended to put an end to are possible under IBC by other means.

The spirit and processes of IBC have been compromised. The ruling is bound to be appealed against, but it necessitates a relook at the implementation of the code.