IBC — To Implement Or Not To Implement

Here are the Supreme Court's grounds for rejecting the approved resolution plan:

Under the IBC, each bidder must submit an affidavit confirming its eligibility under Section 29A of the IBC that must be verified by the resolution professional. The SC observed that the RP of BPSL failed to demonstrate whether he adequately ensured compliance with Section 29A of the IBC. However, the SC has not held JSW to be ineligible under Section 29A, but merely that it appears that sufficient diligence with respect to this requirement was apparently not conducted by the RP.

Section 29A is a fundamental feature of IBC as it prevents moral hazard and debars bidders with undesirable track records. If SC had misgivings about JSW's antecedents, it could have asked JSW to submit an undertaking to the court or ordered the lenders to conduct a fresh diligence to make a factual determination with respect to JSW's eligibility.

Under law, operational creditors do not get a seat at the CoC and are guaranteed only the liquidation value of their claims. Being disadvantaged, the law accords them with a degree of protection by prescribing that the amounts due to operational creditors must be paid in priority over financial creditors.

From the order of the NCLT approving the resolution plan, it appears that JSW had discharged the liquidation value to operational creditors along with financial creditors but went ahead and promised an incremental amount. It appears that this additional amount was paid to operational creditors at a later stage. However, the SC has held that JSW paid the operational creditors in March 2022 much after the financial creditors were paid, in breach of the provisions of the IBC.

If there was indeed a delay in paying the operational creditors an amount higher than their minimum legal entitlement, the SC could have cured the breach by ordering a redistribution of the resolution amount, between the creditors, to compensate the operational creditors for the delay in payment.

The JSW plan provided that the effective date would be achieved within 30 days from the NCLT order approving the plan (i.e. September 2019) but the plan was finally implemented in 2021. The SC observes that it is not clear from the records as to how, when and by whom the effective date was extended. The SC failed to appreciate that the authority to extend the effective date was specifically conferred on the CoC under the provisions of the approved resolution plan submitted by JSW.

Further, the submissions made by the CoC as recorded in the SC order show that the lenders exercised their discretion with a 97.25% vote to permit extension of the effective date, presumably on account of the uncertainties surrounding the ED attachment and various appeals. The SC has raised a pedantic objection that since the CoC ceases to exist after Plan Approval Order, lenders could not have possibly ratified such an extension.

Under Section 12 of the IBC, the entire resolution process must be completed within 180 days, extendable to 330 days if the NCLT approves it, on an application filed by the RP.

The SC observes that in this case, the time from initiation of the insolvency to the pronouncement of the approval order by the NCLT was beyond what is prescribed in IBC and no applications appear to have been filed by the RP for extension of the prescribed timelines. At the same time, the SC has noted that in the insolvency of BPSL, the NCLAT, in another appeal filed by Tata Steel, had taken note of the delay in the completion of process under IBC on account of intervening litigation.

Yet again, the SC's grouse is purely technical in nature. The SC acknowledges that the NCLAT had partially extended the timeline for completion of process under IBC, but it is miffed that no formal application for extension was filed by the RP.