Bankers, lawyers in a tizzy after SC scraps JSW Steel’s Bhushan buy

The Supreme Court on Friday ordered the surprise liquidation of Bhushan Power & Steel Ltd, nearly five years after India's largest steelmaker JSW Steel Ltd acquired the bankrupt company in an insolvency auction. 

Lawyers termed the order unprecedented, as it overturns prior orders by the company law tribunal, raises questions over the fate of loans recovered by the banks, and imperils the investments that JSW Steel made into the company.

JSW Steel's ₹19,700-crore rescue plan violated provisions of the Insolvency and Bankruptcy Code (IBC), and BPSL's committee of creditors (CoC) erred in approving it, a bench of justices Bela M. Trivedi and Satish Chandra Sharma ruled. 

The court declared the resolution plan “illegal and contrary to IBC provisions” and criticized the CoC for failing to follow the legal framework, before invoking Article 142 of the Constitution to order the liquidation.

Dramatic end

The decision marks a dramatic end to one of India's longest and closely-watched insolvency cases. It could have significant implications for lenders including State Bank of India and Punjab National Bank, among BPSL's largest creditors. That's because liquidations typically result in much lower recoveries than resolutions. It is unclear what happens to the recoveries made by banks.

Shares of JSW Steel, India's largest steelmaker, initially tumbled as much as 8% before paring losses to close 5.5% lower at ₹972.15 on the BSE.

“We are yet to receive the formal copy of the order to understand the grounds for rejection in detail and its implications,” said a spokesperson for JSW Steel. “Once we receive the order and are able to review the same along with our legal advisors, we will decide on our further course of action.”

A banker from a lender that was part of the resolution process termed the order unprecedented, adding that lenders will discuss it with their legal teams. “JSW acquired it four years ago, and the character of the asset has changed over the years. It is difficult to say what happens now,” the banker added.

'No precedent'

Others were also left perplexed by the judgement.

“All creditors had been paid, and there is no precedent like this in the history of IBC,” a second person said. “We are waiting for the full judgment and will consult with our legal counsel and the CoC to decide the next steps.”

The IBC debuted in December 2016, raising hopes that it would be the ultimate solution for cleaning up India’s bad loan mess. The initial years saw several tycoons lose control of their assets and banks making significant recoveries.

According to Durgesh Khanapurkar, a partner at law firm Desai & Diwanji, the asset value (of BSPL) has improved because the plant is now operational. "JSW has invested time and money into making the unit functional. It remains to be seen how the entire plan will be undone,” Khanapurkar said.

“This is a case that has scope for review,” he said. “JSW may file a review petition to secure relief.”

Legal tangle

Daksh Ahluwalia, founder and principal, Aikyam Law Offices said it appears that BSPL's insolvency plan was derailed by a tangle of legal complications.

“A major factor was the Enforcement Directorate’s (ED) attachment of over ₹4,000 crore in alleged proceeds of crime under PMLA,” said Ahluwalia. “These combined factors—regulatory attachments, statutory ambiguity, and non-performance—made meaningful restructuring impossible," he said.

The resolution plan faced several legal challenges, including from former promoter Sanjay Singhal, operational creditors like Kalyani Transco and Odisha government which sought ₹139 crore in unpaid entry tax dues. Most of these claims were dismissed by the NCLAT.

Big bad loans

BPSL was one of the 12 large non-performing assets (NPAs) identified by the Reserve Bank of India in 2017 for priority insolvency resolution under the IBC. At the time, it owed more than ₹47,000 crore to lenders and over ₹780 crore to operational creditors. Troubles were compounded by an ED investigation on its former promoters, who allegedly diverted ₹4,025 crore in bank loans.

This is the second major IBC liquidation order by the Supreme Court in recent months, following the Jet Airways case, where too it used Article 142 to override previous NCLT and NCLAT approvals.

The JSW Steel rescue plan was first okayed by the National Company Law Tribunal (NCLT) in September 2019. It was upheld by the National Company Law Appellate Tribunal (NCLAT) in February 2020, despite multiple legal challenges.

ED case

Former promoter Singhal had challenged JSW Steel’s eligibility under Section 29A of the IBC, citing alleged related-party connections. Several operational creditors had complained about claim rejections and alleged lack of transparency.

ED had initially attached these assets under Section 5 of the Prevention of Money Laundering Act (PMLA), alleging former promoters had diverted bank loans for personal gains. The CoC challenged the action, arguing it violated IBC provisions that protect resolution applicants. However, the ED later withdrew its objections, citing Section 32A of the IBC, which offers immunity to resolution applicants from the liabilities of previous management.

The agency returned attached assets worth ₹4,025 crore to JSW Steel, clearing the way for the implementation of the resolution plan.