Decoding SC Ruling On JSW Steel’s Bhushan Power Buyout: What Went Wrong? What Does It Mean For IBC?

The recent Supreme Court ruling against JSW Steel's resolution plan for Bhushan Steel Power Limited (BSPL) will have an overarching impact on the company's financials, implementation of the Insolvency and Bankruptcy Code (IBC) and lenders associated with the Committee of Creditors (CoC), highlighted experts.

The apex court in its ruling last week rejected the insolvency resolution plan for BPSL and directed its liquidation, citing JSW's resolution plan as illegal. BPSL was one of the 'dirty dozen' defaulters in India, which were identified by the Reserve Bank of India in 2017. It had nearly Rs 47,000 crore of outstanding debt to banks and financial institutions and nearly Rs 621 crore outstanding dues towards the government, vendors and service providers.

JSW Steel-BPSL IBC Judgement: What Went Wrong?

The Sajjan Jindal-led steelmaking company will reportedly file a review petition against the SC order rejecting its resolution plan for BPSL. But what is the Supreme Court ruling on JSW Steel's high-profile takeover of BPSL? What are its implications? Let's understand here:

JSW Steel-BPSL Resolution: Extension Of Timeline

The JSW Steel's resolution plan received a green nod from the CoC in October, 2018. But it took the resolution professional to submit the plan to National Company Law Tribunal (NCLT) more than four month, which exceeded the permissible period of 270 days.

According to reports, JSW Steel failed to provide legitimate explanation for the delay. "JSW Steel was found to have delayed the implementation of the Resolution Plan for over two years, misusing the process of law and frustrating the objectives of the IBC. The Court criticised JSW for its dishonest conduct and failure to honour commitments made in the Resolution Plan," noted Vijay K Singh, Senior Partner at S&A Law Offices.

Lapses in RP and CoC

The Committee of Creditors (CoC) and the Resolution Professional were found to have failed in their duties. The CoC did not exercise its commercial wisdom effectively, and the Resolution Professional did not ensure compliance with mandatory provisions of the IBC.

BPSL Liquidation

Rejecting JSW Steel's resolution plan for BPSL, the SC has ordered the liquidation of BPSL. In its order, the SC said that the payments made by JSW Steel to financial and operational creditors will be death by JSW Steel as per the March 6, 2020 statement by CoC.

"Liquidation naturally results in lower recovery for creditors and stakeholders compared to a resolution plan, leading to a loss of value for BPSL's operations and assets. As against the outstanding loans of ₹47,000 crore, banks were getting around ₹19,000 crore IN CIRP. In liquidation, there will be further losses to the banks," explained Vijay K Singh.

JSW Steel Resolution Plan For BPSL: What It Means For IBC?

The Insolvency and Bankruptcy Code, 2016 (IBC) is an umbrella legislation for insolvency resolution of all entities in India, including corporations and individuals. The provision came into force on December 1, 2016. The insolvency law aims to provide a greater coherence in law and facilitate the application of consistent and lucid provisions to different stakeholders affected by business failure.

"The Supreme Court decision reinforces the importance of strict compliance with IBC's provisions and timelines. It highlighted the need for stakeholders to act responsibly. The CoC and the RP must follow the IBC and CIRP Regulations in letter and spirit, as their decision will be subject to judicial intervention.

After this decision, contravention of the terms of the approved plan may result in liquidation of the corporate debtor, which may become a new norm in the coming days," explained Vijay K Singh.

JSW Steel Resolution Plan For BPSL: What It Means For The Metal Major?

The impact of the SC judgment on BPSL is likely to impact nearly 4-5% of the financial value of JSW Steel, as estimated Kotak Institutional Securities in its report on May 5.

"We analyse 4 different scenarios for JSTL post the Supreme Court judgement (Exhibit 2).We believe cases 2/3 are most probable, wherein case 2 - JSTL recovers the initial investment (Rs 194 bn) but loses the asset and in case 3 - JSTL pays additional Rs100 bn to retain the asset through the liquidation process. In both scenarios, we estimate ~4-5% impact on the FV of JSTL," noted KII.

The SC ruling is likely to cause a 13% drop in revenues of JSW Steel due to the rejection of its resolution plan of BPSL, reported PTI citing ratings firm CreditSights on Tuesday.

JSW Steel Resolution Plan For BPSL: What It Means For Lenders and Banks?

The SC verdict is also likely to have an unprecedented impact on the financials of banks and other lenders part of CoC and JSW Steel, reported Moneycontrol. As per the report, experts are worried that the liquidation and repayment may hit the business growth for lenders and the company. However, there has no clear information about the impact on lenders and banks of the decision.