Case Note & Summary
The Supreme Court adjudicated a batch of civil appeals under Section 62 of the Insolvency and Bankruptcy Code, 2016 (IBC) challenging the approval of the Resolution Plan for Bhushan Power and Steel Limited (BPSL), a corporate debtor. The appeals were filed by erstwhile promoters and operational creditors against the judgment of the National Company Law Appellate Tribunal (NCLAT) dated 17 February 2020, which had largely upheld the plan approved by the Committee of Creditors (CoC) and sanctioned by the National Company Law Tribunal (NCLT) on 5 September 2019. JSW Steel Limited (JSW) was the successful resolution applicant (SRA). The Supreme Court quashed both the NCLT's approval order and the NCLAT's judgment, and remanded the matter for fresh resolution proceedings, holding that the plan suffered from multiple legal infirmities and had become unviable due to inordinate delay. The CIRP of BPSL commenced on 26 July 2017 after an application by Punjab National Bank under Section 7 of the IBC, following RBI's identification of BPSL as one of 12 major defaulters. The RP invited claims, and the CoC approved the consolidated resolution plan submitted by JSW on 10 October 2018. The RP filed the plan before the NCLT for approval on 14 February 2019. Several objections were raised by erstwhile promoters and operational creditors. The NCLT approved the plan on 5 September 2019 with certain conditions. JSW appealed some conditions before the NCLAT. Simultaneously, the Enforcement Directorate (ED) attached assets of BPSL under the PMLA. The NCLAT, by its impugned judgment dated 17 February 2020, partially allowed JSW's appeal, modified conditions, and dismissed all other appeals. The ED's appeal regarding attachment was disposed of separately by the Supreme Court on 11 December 2024, permitting JSW to take control of properties as restitution under PMLA. The Supreme Court addressed ten major legal issues. It held that erstwhile promoters have locus standi to challenge a resolution plan as their rights are affected. The CoC does not become functus officio upon plan approval by the NCLT but its role is limited to implementation and cannot include extending the timeline, which power lies exclusively with the NCLT under Section 31(3). The clause in the plan permitting the CoC to extend time was therefore illegal. The Court found that the plan's implementation was delayed by over six years due to litigation, rendering it unviable and against the time-bound objective of the IBC. The upfront payment of Rs. 100 crore by JSW to the CoC before plan approval violated the statutory waterfall mechanism under Section 53. EBITDA generated during CIRP belonged to the corporate debtor and had to be distributed as per priority, but the plan allowed JSW to retain it, which was impermissible. The plan failed to provide for contingent claims of Jaldhi Overseas and gave nil payment to pre-CIRP dues of operational creditors Medi and Darcl, violating Section 30(2)(b) and principles of equity. Consequently, the Court set aside the plan approval and ordered the CoC to return any monies received from JSW, and remanded the matter to the NCLT for fresh resolution process strictly in accordance with the IBC.
Headnote
A) Insolvency Law - Locus Standi - Erstwhile Promoters - Section 62, Insolvency and Bankruptcy Code, 2016 - The Court held that erstwhile promoters, though not creditors or shareholders during CIRP, are aggrieved persons whose rights are affected by the resolution plan and thus have locus standi to appeal. Held that NCLAT erred in denying standing, and promoters were entitled to challenge the plan on merits (Paras not mentioned). B) Insolvency Law - Role of Committee of Creditors - CoC Post-Plan Approval - Insolvency and Bankruptcy Code, 2016 - The Court held that the CoC does not become functus officio upon NCLT approval but its role is limited to supervision and implementation; it cannot modify the plan or usurp NCLT's powers under Section 31(3) to extend time (Paras not mentioned). C) Insolvency Law - Resolution Plan Implementation - Extension of Time - Section 31(3), Insolvency and Bankruptcy Code, 2016 - A clause permitting the CoC to extend the implementation period beyond 90 days was held illegal as the power to extend time vests exclusively with the NCLT. The clause was void and vitiated the plan (Paras not mentioned). D) Insolvency Law - Delay in Implementation - Viability of Resolution Plan - Insolvency and Bankruptcy Code, 2016 - Inordinate delay of over six years in implementing the plan due to litigation rendered it unviable and frustrated the time-bound objective of the IBC, warranting quashing of approval (Paras not mentioned). E) Insolvency Law - Upfront Payment to CoC - Waterfall Mechanism - Section 53, Insolvency and Bankruptcy Code, 2016 - Upfront payment of Rs. 100 crore by SRA to CoC before plan approval violated the statutory waterfall mechanism and Section 30(2), prejudicing operational creditors. Held that such payment was impermissible and plan approval based on it was illegal (Paras not mentioned). F) Insolvency Law - Treatment of EBITDA - Asset of Corporate Debtor - Insolvency and Bankruptcy Code, 2016 - EBITDA generated during CIRP belongs to the corporate debtor and must be distributed as per the waterfall. The plan's provision allowing SRA to retain EBITDA was held illegal (Paras not mentioned). G) Insolvency Law - Contingent Claims - Provision in Resolution Plan - Regulation 38(1)(c), IBBI (CIRP) Regulations, 2016 - Contingent claims must be recognized and provided for in the resolution plan; the failure to do so for Jaldhi's claim rendered the plan non-compliant (Paras not mentioned). H) Insolvency Law - Pre-CIRP Dues of Operational Creditors - Section 30(2)(b), Insolvency and Bankruptcy Code, 2016 - Operational creditors are entitled to at least liquidation value of their claims. The plan's zero payment to Medi and Darcl while paying similar creditors violated the IBC and principles of equity (Paras not mentioned).
Issue of Consideration
Whether the resolution plan approved by the CoC and NCLT was valid, legal, and implemented in accordance with the Insolvency and Bankruptcy Code, 2016, including issues of locus standi, delay, contravention of statutory provisions, distribution of EBITDA, and treatment of contingent and operational claims
Final Decision
The Supreme Court allowed the appeals. The judgments and orders dated 2019-09-05 by NCLT and 2020-02-17 by NCLAT were quashed and set aside. The approval of the Resolution Plan submitted by JSW Steel Limited was set aside. The Committee of Creditors was directed to return the amount received from the SRA. The matter was remanded to the NCLT for fresh consideration of a resolution plan in accordance with the Insolvency and Bankruptcy Code, 2016.
Law Points
- erstwhile promoters have locus standi to challenge resolution plan despite not being creditors
- CoC does not become functus officio after plan approval by NCLT but its role is limited
- clause in resolution plan allowing CoC to extend implementation period is illegal as it usurps NCLT's power under IBC
- inordinate delay in implementation of resolution plan vitiates its viability and contravenes objective of IBC
- upfront payment of Rs. 100 crore by SRA to CoC before plan approval is contrary to IBC's waterfall mechanism
- EBITDA generated during CIRP must be treated as asset of corporate debtor and distributed as per waterfall
- contingent claims cannot be rejected outright and must be provided for in resolution plan
- pre-CIRP dues of operational creditors must be paid as per Section 30(2) of IBC
