What went wrong: A relook at Bhushan Power and Steel Limited insolvency process

As the Supreme Court rejected the resolution plan of JSW Steel for Bhushan Power and Steel Limited (BPSL) almost six years after its approval by NCLT, we take a relook at the corporate insolvency resolution process of the corporate debtor.

Background

Bhushan Power and Steel Limited (BPSL) was one of the 12 major accounts identified by the Reserve Bank of India (RBI) in its circular dated 13.06.2017, for resolution under the Insolvency and Bankruptcy Code (IBC). These 12 accounts, including BPSL, constituted about 25% of the total non-performing assets in the country.

Key Events

• CIRP Initiation: The Corporate Insolvency Resolution Process (CIRP) against BPSL was initiated by Punjab National Bank, which filed a petition before the National Company Law Tribunal (NCLT). The petition was admitted on 26.07.2017.
• Claims Invitation: The Interim Resolution Professional (IRP) invited claims from all stakeholders on 28.07.2017.
• Claims Admitted: The Resolution Professional admitted claims of Rs 47,204.5 crore from financial creditors and Rs 621.3 crore from operational creditors.
• Resolution Applicants: Three prospective resolution applicants (JSW, Tata Steel, and Liberty House) submitted their resolution plans.
• Multiple Negotiations: After multiple rounds of negotiations and deliberations, the three resolution applicants submitted their revised resolution plans. JSW was ranked the highest per the evaluation matrix.
• Consolidated Resolution Plan: JSW submitted a Consolidated Resolution Plan which was amended and clarified vide letter dated 10.10.2018.
• Approval of JSW’s Plan: The Committee of Creditors (CoC) approved JSW’s resolution plan. The Resolution Professional filed a Company Application on 14.02.2019, seeking approval of the plan.
• Criminal Proceedings: On 05.04.2019, the Central Bureau of Investigation (CBI) registered a First Information Report (FIR) against BPSL, its directors, and others for various offenses. The Directorate of Enforcement also registered a case under the Prevention of Money Laundering Act, 2002 (PMLA).
• NCLT Approval: The NCLT approved JSW’s resolution plan on 05.09.2019, subject to certain conditions.
• Enforcement Directorate Action: The Directorate of Enforcement passed an order on 10.10.2019, provisionally attaching the assets of BPSL under PMLA.
• NCLAT Stay: The National Company Law Appellate Tribunal (NCLAT) stayed the provisional attachment order and the resolution plan concerning payments to creditors.
• Supreme Court Stay: The Supreme Court stayed the provisional attachment order on 18.12.2019.
• NCLAT Approval with Modifications: NCLAT upheld the NCLT order approving JSW’s plan, subject to certain modifications.

The Bidding War

Three major players submitted resolution plans:

1. JSW Steel: Offered ₹19,700 crores, including ₹8,550 crores in equity infusion.
2. Tata Steel: Bid ₹17,000 crores.
3. Liberty House: Submitted a late bid of ₹18,500 crores.

The Committee of Creditors (CoC) approved JSW’s plan in October 2018, citing its higher valuation and upfront payment promise. However, Tata Steel and Liberty House challenged the process, alleging irregularities.

Resolution Plan

• The CoC approved the resolution plan submitted by JSW.
• JSW’s plan involved a payment of Rs. 19,350 crores to financial creditors.
• Operational creditors were to receive 50% of their admitted claims, capped at Rs. 350 crores.

Supreme Court Decision

The Supreme Court, in its judgment, made the following observations and decisions:

• Resolution Professional’s Failure: The court found that the Resolution Professional failed to discharge their statutory duties under the IBC and CIRP Regulations.
• CoC’s Failure: The CoC failed to exercise its commercial wisdom in approving JSW’s resolution plan.
• Timeline Violation: The court emphasized the importance of adhering to the timelines prescribed under the IBC. It noted that the CIRP should ideally be completed within 330 days, including any extensions and time taken in legal proceedings. The court found that the mandatory timelines under Section 12 of the IBC were violated.
• Rejection of Resolution Plan: Given the violations and irregularities, the Supreme Court rejected JSW’s resolution plan.

Implications

• Creditors: Face uncertainty as liquidation may yield lower recoveries.
• IBC Framework: The judgment reinforces strict adherence to timelines and procedural fairness.
• Precedent: Courts will scrutinize CoC’s “commercial wisdom” if processes are manipulated.
• Expansion plans in limbo: At Bhushan Power & Steel Limited (BPSL), when acquired by JSW Steel, had a capacity of 2.75 MTPA, which was raised to 3.5 MTPA in the first phase of expansion. In the Phase-II of expansion, the company had planned to increase the capacity from 3.5 MTPA to 5 MTPA.
• Uncertainty over operations: BPSL reported its highest ever annual steel sales of 2.96 Mn Tonene, up 17.5 % y-o-y in 2023-24. The total revenue from operations was at Rs 21,893 crore as compared to Rs 20,077 crore in the previous year. EBITDA increased from Rs 1,805 crore in FY 2022-23 to Rs 2,765 crore in FY 2023-24, primarily due to decline in coking coal prices, lower power and fuel costs and lower conversion costs partially offset by lower sales realisations. Profit after tax stood at Rs 674 crore visà-vis Rs 160 crore in FY 2022-23. JSW Steel had availed a loan of Rs 10,800 crores from State Bank of India (Rs 7,300 crores) and Bank of Baroda (Rs 3,500 crores) to acquire the business of Bhushan Power & Steel Limited.

Also See: SC quashes tax demand notice against JSW Steel in Monnet Ispat & Energy insolvency case