*Abhinav Chauhan

(Source: Supreme Court Observer)

The Supreme Court’s recent order directing the liquidation of Bhushan Power and Steel Limited (BPSL) has opened an important debate in India’s insolvency regime. The Court held that the resolution plan submitted by JSW Steel and approved by the CoC, NCLT and NCLAT suffered from illegality and delay, and therefore could not be allowed to stand. This piece analyses the reasoning of the Court, especially the refusal to extend the “clean slate” doctrine, and examines how the judgment balances procedural sanctity against the commercial wisdom of stakeholders. It also highlights the consequences of liquidation for creditors, resolution applicants, and the overall insolvency market. The discussion suggests that while the Court was right in stressing compliance with the Code, ordering liquidation without exploring alternative remedies may not align with the revival objective of the IBC. This case has also exposed gaps in stakeholder accountability and created uncertainty for investors, raising concerns about confidence in the Indian insolvency market. The blog concludes by pointing to the need for targeted reforms to ensure that such outcomes do not undermine the Code’s core purpose of resolution over liquidation.

Introduction

The framers enacted the Insolvency and Bankruptcy Code 2016 (“Code”) in order to consolidate a plethora of laws operating upon similar subject matters, often transgressing upon one another’s jurisdiction and to provide the “freedom of exit”. The code is a mechanism for distressed companies to resolve insolvency within a time bound manner in an organized way. Although the Code has been considerably successful in achieving the post-resolution performance of the entity, and the stakeholders are satisfied with the resolution process and its aftermath support, the decision of the Hon’ble Supreme Court (“SC”) in the Kalyani Transco case, overturning the resolution plan and ordering liquidation of Bhushan Power and Steel Limited (“BPSL”) raises serious doubts about the nation’s legal infrastructure to manage large corporate entities.

Background: BPSL’s CIR Process

BPSL was among the 12 entities termed as “The Dirty Dozen” by the Reserve Bank of India (“RBI”), a list of companies that had accumulated the highest level of financial debt in the Indian banking sector. Established in 1970, BPSL was in the business of manufacturing and marketing  a wide range of steel products, serving various industries domestically and around the globe. Despite having a huge infrastructure and industrial reach, the company accumulated debt amounting to approximately Rs 47000 crore, due to various internal and external failures, ultimately triggering the insolvency process.

The Corporate Insolvency Resolution Process (“CIRP”) against BPSL was initiated by Punjab National Bank (“PNB”), which was admitted by the NCLT on 26^th July 2017, after which it was subsequently joined by several other banks. Three prospective Resolution Applicants (“RAs”) – JSW Steel, Tata Steel and Liberty House submitted their resolution plans, and the CoC accepted the plan submitted by JSW, which scored highest as per the evaluation matrix and was approved by the National Company Law Tribunal (“NCLT”).  However, JSWchallenged the approval of the plan before the National Company Law Appellate Tribunal (“NCLAT”) due to the conditions imposed by NCLT. The NCLAT also approved the plan, but modified a few conditions as imposed by the NCLT, ultimately leading the matter before the SC.

SC Orders Liquidation Over Plan Violations

The SC held that JSW had failed to discharge its statutory duty of implementing the Resolution Plan.  JSW invariably delayed the upfront payment and equity infusion, which was the key factor for the selection of the plan submitted by JSW. Additionally, the CoC & the Resolution Professional also failed to abide by their duties prescribed within the Code, and approved the plan by transgressing their powers, thereby making the approval of the plan as illegal. 

The SC held that the plan submitted by JSW, approved by the CoC and the NCLT was in violation of Section 30(2) of the Code and was liable to be rejected by the NCLT under Section 31(2). Hence, considering the above factors, the SC rejected the plan submitted by JSW & ordered the NCLT to initiate liquidation proceedings against the Corporate Debtor.

Consequence of the Judgment and its Probable impact

Applicability Of Doctrine Of Clean Slate

In this case, the SC did not apply the doctrine of “clean slate” initially propounded in the case of Essar Steel India Ltd. This doctrine states that once the plan is approved by the adjudicating authorities, all claims stand extinguished – whether they belong to private parties or government bodies – no one is allowed to file a claim after the successful resolution process. This doctrine ensures that the SRA does not face novel claims at the time of implementing the plan & should be allowed to proceed with a clean slate on the basis of the approved plan. 

In the instant case the SC refused to give this protective cover to JSW. The Court reasoning was not the rejection of the doctrine itself but the illegality of the resolution plan. The conduct of the stakeholders, which was ultra virus, rendered the approval of the plan illegal & called into question the very foundation of the doctrine. The SC, however, didn’t bifurcate between post-resolution claims arising despite a valid resolution plan & claims arising out of a defective process.            Arguably, a resolution plan that violates the Code should not get the protection of the clean slate doctrine. The overall basis of this doctrine is that once a plan is validly approved under Section 31(1), past liabilities are wiped clean. But if the approval of plan itself is tainted by illegality, then the foundation for applying clean slate just doesn’t exist. Allowing such a plan to enjoy protection would not only validate an unlawful process but also risk turning the doctrine into a tool for procedural abuse under the guise of finality. This judgment conveys a message that the doctrine of clean slate is not a privilege, but a reward, granted only after the compliance of the Code.

Commercial Wisdom vs. Procedural Sanctity

This judgment has again drawn a line regarding commercial wisdom exercised by the CoC. Commercial wisdom is a process exercised by the CoC, determining the best possible solution for the financially distressed entity. This doctrine gained prominence through the case of K Shashidhar v Indian Overseas Bank, wherein it was held to be non-justiciable. However, in later decisions, the SC clarified that theCoC cannot violate the Code under the guise of commercial wisdom & the Adjudicating Authorities can question the commercial viability of the plan, provided that the plan does not comply with the established laws.

The SC held that the caveat attached to the exercise of commercial wisdom was not observed in this case & the actions of the CoC highlighted blatant violations on their part from the very beginning of the process. However, this raises substantial questions about the degree of procedural lapse or non-compliance required to render an implemented insolvency into liquidation. The SC did not carve a dividing line between minor defects which may have legally been violated but have negligible or no effect on the process, compared to those witnessed in this case. So, whether a missing certificate or just a few days’ extension for CIRP completion would also result into the liquidation or not has not been answered by the SC.

Another concern lies in the treatment of stakeholders involved in this case. As explained by the SC, all the stakeholders, even the Adjudicating authorities involved in this CIRP, were at fault for approving the plan. Yet, the consequences of this failure are being borne out only by JSW & creditors. JSW has been ordered to reverse the implementation of the resolution plan & all the creditors must return the money received from JSW, relying only upon the statement given by the FC, which did not reflect other creditor’s view. Although, the IBBI has used its powers u/s 196(1) of the Code and the IBBI (Inspection and Investigation) Regulations, 2017 to carry out investigations on IPs and even taken disciplinary actions against them for violating the Code, the Code still does not have any clear way to directly make other stakeholders, like the CoC, equally answerable, and the adjudicating authorities are protected when acting in the course of their duties. Instead of ordering liquidation, the SC could have ordered supervised re-negotiation of the plan among stakeholders limited to the disputed areas, considering the peculiar facts of the case & could have directed the IBBI to investigate the conduct of RP, thereby ensuring accountability while letting the business continue. 

The order of liquidation also questions the core objective of the Code – to work for the revival of the stressed entity rather than opting for liquidation. The SC should have considered some intermediate alternative to resolve this issue, resorting to the best possible outcome for all the stakeholders. Directly ordering liquidation without allowing the CoC and other stakeholders to cure the defects, may be well within the power of SC under Article 142 but is not in line with the core objective of the Code and could have negative impact upon all the stakeholders.

Investors Confidence And Market Implications

One of the core objectives of the Code was the timely achievement of a final outcome for the distressed entity.  However, the decision in this case has rendered both outcomes ineffective. The insolvency process of the CD was already plagued with various issues, causing financial losses to lenders and now the order of liquidation would require additional resources and time, adding more uncertainty & time required to decide the fate of BPSL. Considering India’s image as a nation of prolonged litigation, it could certainly affect investors’ appetite to invest in distressed assets.

Additionally, it would undermine investors’ confidence, making borrowing more difficult, along with increasing the cost of lending. This judgment would certainly compel stakeholders to ensure better due diligence and overall assessment at every step of the process, requiring these stakeholders to diligently fulfill their roles & ensure the completion of CIRP within the ambit of the Code.

Reversing the resolution plan also raises questions regarding the provisions of finality within the Code, which were meant to bind all stakeholders, as investors prefer certainty and predictability. After this judgment, there will always be an element of uncertainty in their minds. The fear of invalidation of the approved plan due to subsequent disclosure, procedural lapses, or fraud even at the implementation stage of the plan could restrict foreign investors from bidding for the debtor as they seek stability for their funding.

This ruling could also affect other ongoing insolvencies or even completed CIRPs as the stakeholders could challenge those insolvencies alleging procedural lapses by the stakeholders. However, challenging a concluded insolvency would be tricky, as initially they would have to justify their own delay in approaching the forum.    

Legislative Reform   

This judgment warrants some necessary reforms to be incorporated within the Code if similar scenarios arise again in the future. Some of the suggestions are as follows:

• The Code should enhance the responsibility of due diligence on the Resolution professional & the CoC and should provide punitive measures for the Successful Resolution Applicant if found to have commit fraud upon other stakeholders or to have violated the mandatory requirements of the Code.
• The Code should provide a statutory time limit, along with specific conditions, within which the stakeholders can challenge the approved resolution plan that is already at the stage of implementation.
• The Code should specify a structured process to deal with such specific issues, providing viable solutions that are favourable to all stakeholders, instead of ordering liquidation, which may not be viable for any of them.

Reports suggest that the government is planning to bring some amendments in response to this judgment. Immediately after the pronouncement of this judgment, JSW filled a review petition against this order and the SC has stayed the implementation of the liquidation proceedings for the time being, considering the interest of all the stakeholders. Hopefully, the SC will resolve the challenges and the issues raised through this judgment. 

Conclusion

This judgment highlights the consistent failure of the Resolution Professional, the CoC, and the SRA to fulfill the procedural requirements of the Code, as they failed to ensure due diligence at every stage of the process. Through this case, the Court has reiterated the importance of complying with the provisions of the Code; otherwise it could lead the CD to the liquidation, even after a considerable period of time.

However, this judgment also raises various questions left unanswered by the SC. It has again raised the pertinent issue of balancing procedural requirements with that of commercial wisdom of CoC. The preliminary order of maintaining the status quo has created a path of uncertainty for the CD and its stakeholders. This case elucidates the need for amendments in the insolvency regime of India, in order to prevent such mishaps in future

*Abhinav Chauhan is a final-year law student specializing in Mergers and Acquisitions, with a keen interest in insolvency law. Through internships and publications, he is building a strong perspective on corporate and insolvency law, while also engaging with broader commercial and regulatory issues.