A practical alternative in Bhushan Steel insolvency case

The impact of the judgment in the Bhushan Steels insolvency case is not territory or sector specific and spreads out internationally.

By Anjali Jain

The humongous blow by the Supreme Court in Bhushan Steel’s case in ordering liquidation of a fully approved and almost implemented resolution plan of JSW Steel indicates that Indian insolvency laws need a tangible review as mature insolvency jurisdictions do not push for resets of approved plans.

The procedural laxities of the Insolvency and Bankruptcy Code (IBC), dishonest conduct of JSW Steel i.e. Successful Resolution Applicant (SRA), collusive intent of the stakeholders, including Committee of Creditors (CoC), Resolution Professional (RP) and the SRA etc. dominate the operative part of the observations, demonstrating thereby that the resolved is required to be un-resolved. The impact of the judgment is not territory or sector specific and spreads out internationally, signalling multidisciplinary impact at international investment opportunities.

Grounds for overturning Bhushan Steel resoultion

The major ground for overturning the plan seems to be suppression of information by SRA, indirect equity infusion through merger of SRA’s group company, surreptitious extension of plan implementation dates, non-compliance of timeline directives and failure to make upfront payments despite no stays in the implementation. Apart from this, the conduct of CoC and RP has been slammed for their failure to make sustained efforts for rescuing the distressed company and taking on a responsive attitude for the higher economic transformative goal.

It is interesting to note that the Bhushan Steel reported Profit of Rs 1100 Crore in Q3 FY25 and Revenue from Operations for the quarter stood at Rs 5,340 crores; the EBITDA increased by 25% QoQ.

However, with the invocation of inherent powers under Article 142, it has rippled the vitalities of not just the insolvency ecosystem, but overall economic growth.

Disquieting aspects of the verdict

The Supreme Court highlighted the flaws in the conduct of the entire proceedings, but the moot question here is: Were the processes were so blatantly violated that the systematic-cum-operational integration of the plants, process and industrial operations, and the financial integration-cum-infusion of Rs1900 crore ought to be reversed?

Undoubtedly, the process was misused, but are we really grappling with the scarcity of better alternatives? If yes, India needs to learn resolution lessons where stakeholders’ balance goes hand in hand with judicial innovation.

An alternative route that could have been taken

Scrutiny of procedural laxities or the operational misconduct could have been avoided by the Supreme Court and specifically, an attempt to cure at this belated stage may have been discouraged.

A more innovative way may have been curated where balance is drawn between the parties, ensuring the implementation with effective checks for contravention or abuse of process by SRA as the reversal of the implementation would require forceful disintegration of the operational and industrial processes, unforeseeable disruption of future cashflows and recalibration of future projections of the SRA and the Corporate Debtor.

A subtle attempt to rip off the deficiencies may have been made by ordering for additional compensation or other forms of consequence against SRA, RP and CoC etc. for violation of resolution plan or the resolution process.  More formal directives may have been issued by requiring the formulation of express framework of conduct and consequences for serious violations of RP and CoC.

Moreover, the alleged wrongful combination of equity structures and mala fide intention of SRA could have escaped the radar of judicial scrutiny as the IBC does not clearly bar the alleged indirect or wrongful infusion of equity by way of CCDs, as long as, the commercial sense of the creditors is aligned with the offer.

Consequences of uncertainty

If the finality of the resolution process is not ensured, then IBC would fail to attract serious bidders who envision the potential synergies of deep integrated resolutions. We need to be cognizant of the fact that the prospects of interest shall henceforth be vested with traditional distressed market funds or special situation funds, who primarily participate to financially contest for the lowest levels of negotiations, with lowest levels of interest in resolutions and ultimately, denting the rescue framework in real terms.

The judicial review of the process or procedures must have a definitive and restrictive line of operation and finality of the plan once approved should be the law of the land. In case, serious infirmities surface at any subsequent point of time, the implementation may be effectively stayed along with expeditious disposal of pending challenges. The deficiencies in the judicial system must, to the extent possible, be shunned to insulate the economic and operational impact of the proposed resolutions as vitality for sector specific cases must be considered.

This, being a mammoth steel player, would certainly receive interest in liquidation but distressed value bids might have been innovatively escaped. The casual overturning of the approved resolution plan does not merely indicate refunds or forfeiture of bank guarantees, but the larger economic impact must be carefully assessed.

(Anjali Jain is Partner at Areness Law.)

Views are personal and do not represent the stand of this publication.