JSW-Bhushan case: Time to rewrite India’s insolvency code?
The Supreme Court’s scrapping of a big acquisition by JSW Steel Ltd raises troubling questions over the efficacy of India’s Insolvency and Bankruptcy Code (IBC). Should we reform it? If so, along what lines?
Few come out smelling of roses from the Supreme Court (SC) ruling that annulled the takeover of Bhushan Power and Steel Ltd (BPSL) by JSW Steel Ltd and ordered BPSL’s liquidation, using the SC’s special powers to ensure “complete justice" under Article 142 of India’s Constitution.
The successful bidder, JSW, the Committee of Creditors (CoC) in charge of BPSL and the Resolution Professional (RP) all came in for criticism from the bench for acts of omission and commission that should have been penalized by the National Company Law Tribunal and its appellate body. The SC’s decision was critiqued for its apparent disregard of alternative remedies that would have penalized offenders without severe blows being taken by economic value and the reputation of how India resolves cases of insolvency.
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In all this, it is unclear why the Insolvency and Bankruptcy Board of India (IBBI), the relevant regulator, was not hauled up for ineffective oversight of the resolution process in this case.
The BPSL saga began with the Reserve Bank of India forcing various banks to subject 12 big defaulting corporate borrowers to the pathway laid out by the Insolvency and Bankruptcy Code (IBC) in 2016. Whether the entire dozen truly merited it, their lenders were in a better position to judge than the banking regulator, but once banks were pushed, proceedings began in 2017. Eight years later, several cases remain unresolved. Now BPSL, hailed four years ago as an IBC success, joins their stalled ranks.
Also Read: Mint Quick Edit | JSW-Bhushan case: Close insolvency process gaps
The SC found serious misconduct in the way BPSL’s resolution was carried out. While there were two bidders apart from JSW, namely Tata Steel and Liberty Steel, the CoC failed to record their bids, called in only JSW for parleys, and then let JSW alter the terms of its original bid, delay payments and renege on its commitment to pay off operational creditors before financial ones. Also found amiss was the use of certain convertible debentures for payments by JSW, which was held as having failed to carry out its promised equity infusion in BPSL.
The SC has shone a light on the acquirer’s failings, the CoC’s tolerance of these and the RP’s violations of IBC norms and IBBI rules. As for JSW's eligibility as an acquirer (or lack thereof), the Enforcement Directorate had challenged the company’s bid for BPSL on the ground that both were ‘related parties,’ as they jointly owned a coal company, and such a deal was disallowed under the IBC.
Also Read: Do creditor committees in insolvency cases need an oversight body?
Several questions arise. Can insolvency resolution be reformed to guard it from such setbacks? Should we strengthen the current process by making the IBBI a true regulator, rather than a mere framer of bylaws? Or should the IBC-laid process be overhauled to resemble the US model, in which the incumbent management is given a chance (under Chapter 11) to freeze loan-servicing temporarily, while it takes drastic steps to revive the company; and if that fails, it gets liquidated under court supervision. This would do away with the RP’s role, which can be dubious.
On another plane, if fraud is detected in the award of a highway contract, say, should the judiciary rip up an already built road or let the asset keep generating value while fraudsters are penalized? The answers don’t blow in the wind. They must be firmed up and acted upon. Let’s resolve bankruptcy cases speedily, for which integrity and efficiency must combine to shuffle poorly used assets into more capable hands when so required. It’s a must-have for any dynamic economy.
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