MC EXCLUSIVE Govt finds 'errors' in SC order on JSW-Bhushan deal, likely to seek stay on ruling: Sources

Senior executives of JSW Steel earlier this week met officials in the Ministry of Corporate Affairs (MCA), the Insolvency and Bankruptcy Board of India (IBBI), and the Department of Financial Services (DFS) to discuss the matter, the sources said.

After a thorough review of the Supreme Court's May 2 order on JSW Steel’s acquisition of Bhushan Power and Steel Ltd (BPSL)—which was declared illegal—the government feels that there are many “errors” in the judgement, and therefore its review is warranted.

According to two government officials, the committee of creditors (CoC) will file a review petition against the judgement in the Supreme Court within the next two weeks.

“The effort would be to get a stay on the SC order, as it seems they have erred in the ruling. Many aspects highlighted by the apex court, in terms of misconduct by the resolution professional or by the NCLT/NCLAT, are not true,” an official told Moneycontrol, after reviewing the May 2 order.

Earlier this week, senior executives of JSW Steel met officials in the Ministry of Corporate Affairs (MCA), the Insolvency and Bankruptcy Board of India (IBBI), and the Department of Financial Services (DFS) to discuss the matter, the sources said.

On Monday, Financial Services Secretary M Nagaraju had told Moneycontrol that the government is studying the judgment and exploring all available options. There is a concern within the government that the judgement could dampen business sentiment.

On May 2, the Supreme Court cancelled JSW Steel’s Rs 19,700 crore acquisition of BPSL and ordered the company's liquidation. JSW had bid for BPSL via the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC), which was approved by the National Company Law Tribunal (NCLT) in 2019.

The apex court, however, annulled the resolution plan five years later and raised questions around missed timelines, inconsistent creditor oversight, and the role of promoter-linked structures in resolution plans that were allowed to proceed despite non-compliance on several fronts.

Of the total amount earlier approved, Rs 19,350 crore was to be paid to financial creditors, and Rs 350 crore to the operational creditors. But due to the cancellation of the transaction by the apex court, financial creditors – including State Bank of India and Punjab National Bank – will now have to return these funds and liquidate BPSL, the sources added.

‘No judicial overreach’

One key issue highlighted by the SC was that neither the NCLT nor the NCLAT is vested with the powers of judicial review over decisions taken by any statutory authority under the Prevention of Money Laundering Act (PMLA). The NCLT and NCLAT are constituted under Sections 408 and 410 of the Companies Act, 2013, and not under the IBC, noted the court.

However, officials feel that the NCLT/NCLAT did not exceed their powers and acted well within the law, as prescribed under Section 32A of the IBC. This Section protects the corporate debtor (CD) from prosecution for an offence committed prior to the commencement of the CIRP once the resolution plan has been approved by the NCLT.

To be sure, the ED had issued a provisional attachment order (PAO) of BPSL’s assets, valued at over Rs 4,000 crore, in October 2019, for alleged violation of PMLA by its erstwhile promoters. But this order was issued after the NCLT had approved JSW Steel’s acquisition of BPSL in September 2019. JSW Steel, therefore, challenged the authority of the ED by filing an appeal in the NCLAT, and got a stay on the PAO.

Officials feel that if at all the SC has to take any action against violations of PMLA, the action should be against the erstwhile promoters of BPSL and not the company. “The (May 2) ruling goes against the provisions of the IBC and the spirit of the law. This may set a precedent, and investors may lose confidence in IBC,” another official told Moneycontrol.

Experts say that the “clean slate” theory under Section 32A of the IBC, upheld by the Supreme Court in Essar Steel and Ghanshyam Mishra, in 2021, ensures that upon a change in control through a resolution plan, the corporate debtor and the successful resolution applicant are absolved of past offences, thereby enabling a fresh start and avoiding endless uncertainty.

“The Supreme Court’s recent ruling (May 2) in the JSW Steel case signals a narrowing of this principle, clarifying that protections under Section 32A do not extend to proceedings under public law statutes such as the PMLA. Notably, liability of erstwhile promoters for past offences remains unaffected,” Kalpit Khandelwal, Partner, Aekom Legal, said.

Yogendra Aldak, Partner, Lakshmikumaran & Sridharan Attorneys, said that the SC ruling opens Pandora’s box of judicial reviews, suggesting that even long-closed insolvency resolutions may be reopened if procedural errors are discovered by courts at a later stage.

Moreover, it suggests that the commercial wisdom of the CoC can be disregarded, irrespective of the huge commercial and economic consequences on the stakeholders involved, Aldak added.