SC's JSW Steel decision a blow to insolvency process, say experts

The Supreme Court had invoked Section 142 of the Constitution to nullify the CoC decision

The Supreme Court decision setting aside JSW Steel’s resolution plan for Bhushan Power and Steel and ordering its liquidation could spook investors and be a serious setback for the Insolvency and Bankruptcy Code (IBC) process in the country, according to experts.

 

“This decision has serious implications for the IBC. This would discourage applicants from submitting plans on apprehensions that it might be undone someday. Who would want to take that kind of risk? It is not only rewriting the past but also creating uncertainty for the future of the IBC,” M S Sahoo, distinguished professor, National Law University, Delhi, told Business Standard.

 

JSW Steel was declared the successful resolution applicant for Bhushan Power and Steel Ltd (BPSL) — one of the big 12 non-performing assets (NPAs) referred to the IBC by the Reserve Bank of India (RBI) — in 2021, with a winning bid of ₹19,350 crore. The transaction was funded through a mix of equity and debt.

 

The deal, however, was mired in legal hurdles from the outset. In 2020, the Enforcement Directorate named BPSL and its former top management in a ₹47,204 crore bank fraud and money-laundering case, delaying the resolution process.

 

The Supreme Court invoked Section 142 of the Constitution, which empowers it to pass “any decree or order necessary for doing complete justice in any case or matter pending before it” within the country, to nullify the decision of the committee of creditors (CoC). 

 

IBC lawyers pointed out that the top court faulted the CoC for endorsing a plan that utilised optionally convertible debentures, deemed non-compliant with Section 30(2) and Regulation 38 of the Corporate Insolvency Resolution Process Regulations, and for failing to enforce timely implementation, thereby allowing delays that undermined the insolvency process.

 

“The court signals a diminishing tolerance for perceived CoC oversights, raising concerns about the erosion of its autonomy and the potential chilling effect on creditor-driven insolvency frameworks, necessitating clearer guidelines to balance judicial oversight with CoC authority,” said Sonam Chandwani, managing partner, KS Legal & Associates.

 

Legal experts said the SC decision in this matter represented a troubling prioritisation of “procedural exactitude” over the IBC’s fundamental objective of fostering corporate revival.

 

However, other IBC experts said the decision reinforced a crucial principle under the Code — that a resolution plan must offer certainty, finality, and timely value realisation for creditors.

 

“The bidders need not be discouraged solely because there are pending criminal cases against promoters. Instead, their focus must be on delivering upfront value and ensuring prompt execution of the resolution plan in compliance with the Code,” said Shiju PV, senior partner, IndiaLaw LLP.

 

Several insolvency law practitioners said the verdict not only jeopardised JSW’s substantial investment and undermined creditors’ expected recovery but also disregarded the practical challenges of insolvency proceedings, such as external impediments from Enforcement Directorate interventions.