Resolution vs. Liquidation: What the BPSL Case Means for Future Acquisitions

In what is a ground-breaking ruling, the Supreme Court of India’s decision to revoke JSW Steel’s acquisition of Bhushan Power and Steel Limited (BPSL) has redefined the way the Insolvency and Bankruptcy Code of India (IBC) functions with respect to arbitration procedures and brings insolvency frameworks under scrutiny.

With friction between corporate rehabilitation under the IBC and the need for criminal accountability under the Prevention of Money Laundering Act (PMLA), the Court’s verdict to overrule JSW’s successful bid of INR 19,350 crore, which was approved by the National Company Law Tribunal (NCLT) and upheld by the National Company Law Appellate Tribunal (NCLAT), reiterates the bench’s decision to check immunity provisions, particularly regarding statutory mandates under PMLA.

With a bid of INR 19,350 crore, in 2019, JSW Steel emerged as the successful resolution applicant under the insolvency proceeding corresponding to BPSL’s outstanding debt of INR 48,000 crore. The NCLT, remaining consistent with the IBC’s mandate of corporate rehabilitation and resolution of ‘bad’ loans, approved JSW Steel’s bid for acquisition of BPSL, granting JSW Steel immunity from any past criminal liabilities against BPSL and its previous management under the PMLA.

However, JSW Steel’s bid for acquisition faced challenges by numerous investigative agencies including the Enforcement Directorate (ED), challenging the immunity granted by the NCLT while approving JSW Steel’s bid for acquisition, claiming that BPSL’s assets could not be separated under criminal proceedings instituted under the PMLA.

Contrary to the IBC’s pro-resolution approach, the Supreme Court’s detailed judgement overturning JSW Steel’s liability-free acquisition of BPSL accentuated the inconspicuous trend of providing a clean-slate to corporate debtors under the existing insolvency and bankruptcy framework of the country, especially in the context of the statutory underpinning of the PMLA.

The Hon’ble Court, in exercising its plenary jurisdiction under Article 142 of the Constitution categorically stated that granting a blanket immunity to the resolution applicant i.e., JSW Steel in this instance, in the wake of a criminal proceeding would amount to a grave violation of the principles of natural justice. In doing so, the Apex Court also clarified that the immunity provision under Section 32A of the IBC, providing immunity to resolution applicants from any prior liability in the resolution process does not necessarily extend to criminal investigations. Therefore, clarifying that non-obstante provision contained under Section 71 of the PMLA would have an overriding effect over immunizing of past liabilities under the aegis of the insolvency infrastructure of the country.

Although the JSW ruling was considered a setback for statutory immunity under the IBC, the SC’s pivotal decision in Kalyani Transco v. Bhushan Power and Steel Ltd. had already redefined the parameters of legal boundaries.

The SC invalidated the entire resolution plan that was approved by the NCLT and NCLAT in JSW Steel’s favor and ordered the liquidation of BPSL, citing that there were procedural lapses, a manipulation of the appellate process, and non-compliance of regulatory mechanisms. Notably, JSW Steel had appealed against its own approved plan, which the Court observed was an abuse of process and was done to delay JSW’s financial obligations. The Court also held that NCLT and NCLAT exceeded their jurisdiction by staying the proceedings of PMLA, emphasizing that these tribunals cannot judge matters outside their territory.

The decision by the Supreme Court seeks to balance the aims of the IBC and PMLA by working for due accountability, but the decision may have a far-reaching and debilitative impact on the current IBC framework. With an increased emphasis on non-immunizing criminal liability, regardless of a resolution plan being approved, there is an increased responsibility on resolution applicants to conduct comprehensive due diligence, especially in the context of criminal liabilities under the PMLA and otherwise. The precedent laid by the Supreme Court could also potentially erode investor confidence due to the increased prospect of liabilities after the approval of resolution plans by the NCLT—therefore, negatively impacting investments, both Foreign Direct Investment (FDI) and within private equity in the context of distressed assets. Most significantly, the decision passed by the Supreme Court destabilizes one of the most crucial pillars of the IBC regime in India i.e., creditor recovery. Considering the primacy accorded to criminal investigations over the protective scope of the IBC, prospective resolution applicants and bidders might account for any past, concurrent or future liabilities—thus, potentially diminishing bidder confidence and reducing participation. This may lead to a stricter degree of scrutinization among potential resolution applicants, therefore, prolonging the bidding process, ultimately prolonging the recovery of debt, and hindering corporate rehabilitation.

Demonstrably, the Court’s decision of upholding the paramountcy of statutory provisions over the expediency of corporate debtors to move toward debt rehabilitation helps decide the line between insolvency and criminal investigations.

However, despite the restitute accorded to criminal adjudication, the challenges posited by the decision have shaken the roots of the insolvency and bankruptcy framework of the country. The judgement passed by the Supreme Court compromises the basic tenets of the IBC, by superseding the ‘clean slate’ provisions of the IBC with criminal investigation and adjudication, as it should be, which creates new challenges for investors and existing stakeholders. But, with this ruling, a larger shift occurs—a move from supportive resolution to strict legal enforcement. Therefore, warranting a more nuanced and comprehensive approach by potential stakeholders.