Resolution Plan Cancelled for Fraud: Legal Case Review

Date of Judgment: May 02, 2025

Case Name: Kalyani Transco vs. M/s. Bhushan Power and Steel Ltd. & Ors. (Civil Appeal No. 1808 of 2020 and connected appeals)

This article delves into the seminal judgment delivered in the batch of appeals concerning the Corporate Insolvency Resolution Process (CIRP) of M/s. Bhushan Power and Steel Limited (BPSL). The judgment addresses critical aspects of insolvency law, the roles and responsibilities of various stakeholders, and the sanctity of the resolution process.

Factual Background

The CIRP against BPSL, a major player in the steel industry, was initiated on July 26, 2017, following a petition by Punjab National Bank. BPSL was identified by the RBI as one of the “dirty dozen” large accounts requiring immediate resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). The Resolution Professional (RP) admitted significant claims from financial and operational creditors. After a competitive bidding process involving JSW, Tata Steel, and Liberty House, the Committee of Creditors (CoC) evaluated their resolution plans. JSW’s consolidated resolution plan, amended by an addendum letter, was eventually approved by the CoC through e-voting.

The National Company Law Tribunal (NCLT) approved JSW’s resolution plan on September 5, 2019, subject to certain conditions. Subsequently, the Directorate of Enforcement (ED) attached BPSL’s assets under the Prevention of Money Laundering Act, 2002 (PMLA) on October 10, 2019. Various parties, including JSW, erstwhile promoters, operational creditors, and the State of Odisha, filed appeals before the National Company Law Appellate Tribunal (NCLAT). The NCLAT, by its judgment dated February 17, 2020, largely upheld the NCLT’s order but modified/clarified certain conditions, allowing JSW’s appeal and dismissing others. This batch of appeals arose from the NCLAT’s common judgment.

Issues Before the Court

The appeals raised several critical legal questions, including:

1. The maintainability of appeals filed by various stakeholders, including ex-promoters and operational creditors, under Section 62 of the IBC.
2. The maintainability of the appeal filed by the Successful Resolution Applicant (SRA), JSW, before the NCLAT challenging conditions imposed by the NCLT.
3. The mandatory requirement of disclosure and eligibility of the Resolution Applicant under Section 29A of the IBC.
4. The power of the NCLAT to judicially review decisions of statutory authorities like the ED under the PMLA.
5. Compliance with mandatory timelines for completion of CIRP under Section 12 of the IBC.
6. The roles and responsibilities of the Resolution Professional and the Committee of Creditors in ensuring compliance with the IBC and its regulations.
7. The binding nature of the approved resolution plan and the consequences of its non-implementation by the SRA.
8. The distribution of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) generated during the CIRP period.
9. The treatment of claims by operational creditors, including government dues, in the resolution plan.

Arguments Advanced

• Appellants (Operational Creditors, Ex-Promoters, State of Odisha): Argued that there were gross violations of mandatory IBC provisions by the RP, CoC, and SRA. They contended that the resolution plan was indeterminate, payments to operational creditors were not prioritized, and the SRA delayed implementation, thereby breaching the plan. Issues were also raised regarding the wrongful re-classification of creditors, non-compliance with Section 29A, and the improper handling of EBITDA. The State of Odisha highlighted the drastic reduction of its legitimate dues.
• Respondents (JSW, CoC, RP): Raised preliminary objections on the maintainability of the appeals, asserting that the plan had been substantially implemented. JSW argued that it had fulfilled its commitments and that any delays were justified or covered by extensions permitted under the plan. They maintained that the distribution of EBITDA was as per the plan and legal precedent. The CoC initially alleged malafides against JSW for delaying implementation but later supported JSW, stating decisions were taken in their commercial wisdom to ensure the plan’s success. The RP contended that the process was conducted fairly and that the plan’s approval should not be interfered with.

Reasoning of the Court

The Court undertook a meticulous examination of the factual matrix and the legal provisions. Key aspects of the Court’s reasoning include:

1. Maintainability of Appeals: The Court held that “any person aggrieved” has a right to appeal, and this includes operational creditors and erstwhile promoters as important stakeholders whose appeals were dismissed by NCLAT. However, the Court found that JSW’s appeal to NCLAT against the NCLT’s approval of its own plan was not maintainable as none of the grounds under Section 61(3) of the IBC existed.
2. Compliance with Section 29A: The Court expressed serious doubts about JSW’s eligibility due to non-disclosure of a Joint Venture agreement and the RP’s failure to submit a proper compliance certificate in Form ‘H’ verifying the SRA’s eligibility affidavit.
3. NCLAT’s Jurisdiction over PMLA Orders: The Court reiterated that NCLT and NCLAT do not possess powers of judicial review over decisions of statutory authorities like the ED when such decisions fall within the realm of public law and outside the scope of insolvency resolution. The NCLAT’s findings on the PMLA attachment were deemed coram non judice.
4. Mandatory Timelines (Section 12 IBC): The Court emphasized that the timelines prescribed under Section 12 of the IBC for completion of CIRP are mandatory. The RP’s application for approval of JSW’s plan was filed well beyond the maximum permissible 270-day period without proper extension, rendering the NCLT’s approval erroneous.
5. Role of RP and CoC: The Court found that the RP had utterly failed in his statutory duties, including ensuring timely completion, verifying SRA eligibility, and confirming the plan’s compliance with Section 30(2) and Regulation 38 (especially regarding priority of operational creditor payments). The CoC was also found to have failed in its commercial wisdom by approving a non-compliant plan and taking contradictory stances.
6. Implementation of Resolution Plan and Misuse of Process: The Court heavily criticized JSW for not implementing the approved unconditional plan for about two years under the guise of pending litigation, thereby misusing the process of law and unjustly enriching itself. The Court refused to accept the plea of fait accompli due to belated part-implementation.
7. Non-Compliance with Mandatory Provisions: The Court concluded that the resolution plan of JSW was in flagrant violation of mandatory provisions of the IBC (Section 30(2)) and CIRP Regulations (particularly Regulation 38 concerning priority of operational creditors and plan viability).

Case Laws Relied Upon

The Court referred to and relied upon several of its previous judgments, including:

• Glas Trust Company LLC Vs. Byju Raveendran and Others (2024 SCC OnLine SC 3032): On the interpretation of “any person aggrieved” for filing appeals.
• K. Sashidhar Vs. Indian Overseas Bank and Others ((2019) 12 SCC 150): Regarding the limited grounds for appeal against an approved resolution plan under Section 61(3) of the IBC.
• Embassy Property Developments Private Limited vs. State of Karnataka & Ors. ((2020) 13 SCC 308): On the NCLT/NCLAT lacking jurisdiction for judicial review of public law matters.
• Arcelormittal India Private Limited vs. Satish Kumar Gupta and Others ((2019) 2 SCC 1): Affirming the mandatory nature of CIRP timelines under Section 12 of the IBC (prior to the 2019 amendment).
• Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta and Others ((2020) 8 SCC 531): Regarding the outer limit of 330 days for CIRP (post-2019 amendment) and also cited by respondents on EBITDA.
• State Bank of India and Others Vs. Consortium of Murari Lal Jalan and Florian Fritsch and Another ((2024) SCC OnLine SC 3187): Condemning delaying tactics by SRAs in implementing resolution plans and the casual approach of tribunals in granting extensions.

Conclusion of the Court

The Court concluded that the CIRP of BPSL was vitiated by gross non-compliance with mandatory provisions of the IBC and its Regulations at every stage. The Resolution Professional failed in his duties, the CoC did not exercise its commercial wisdom appropriately, and the SRA (JSW) misused the legal process and willfully contravened the terms of its own approved plan. The resolution plan itself was found to be non-compliant with Section 30(2) of the IBC.

Consequently, the Court quashed and set aside the orders of the NCLT and NCLAT. The Resolution Plan of JSW was rejected. Invoking its powers under Article 142 of the Constitution, the Court directed the NCLT to initiate liquidation proceedings against BPSL. Payments made by JSW under the rejected plan were to be dealt with as per the statement made by the CoC’s counsel earlier (refund if appeals succeed). The issue of EBITDA was kept open.

This judgment underscores the judiciary’s commitment to upholding the integrity of the insolvency resolution process and ensuring strict adherence to the statutory framework.

FAQs:

1. Who can appeal an insolvency ourt’s decision under the Insolvency and Bankruptcy Code (IBC)?

Under the IBC, you don’t need to be the original applicant or the company in debt to appeal a decision made by the National Company Law Tribunal (NCLT) or the National Company Law Appellate Tribunal (NCLAT). The law uses the term “any person aggrieved,” which means anyone directly affected by the order can file an appeal. Once insolvency proceedings start, they become a collective process affecting all creditors and even ex-directors, who are considered important stakeholders. Therefore, if an NCLAT decision dismisses their appeal, operational creditors or former promoters are considered “persons aggrieved” and can appeal to the Supreme Court, provided they raise valid questions of law.

2. On what grounds can an approved Resolution Plan be challenged before the NCLAT?

If a Resolution Plan (a plan to rescue a bankrupt company) is approved by the NCLT, it can only be appealed before the NCLAT on very specific grounds. These grounds include:

• The approved plan goes against any existing law.
• There were significant procedural errors by the Resolution Professional during the insolvency process.
• The plan doesn’t properly address the debts owed to operational creditors (e.g., suppliers) as required by the Insolvency and Bankruptcy Board of India (IBBI).
• The costs of the insolvency process haven’t been prioritized for repayment over other debts.
• The plan doesn’t meet any other criteria set by the IBBI. An appeal cannot be filed by the successful resolution applicant (the entity whose plan was approved) if they are merely unhappy with certain conditions imposed by the NCLT, unless one of these specific legal grounds exists.

3. Can insolvency courts (NCLT/NCLAT) interfere with orders from other government bodies like the Enforcement Directorate (ED)?

The NCLT and NCLAT generally do not have the authority to judicially review decisions made by government or statutory authorities (like the ED under the Prevention of Money Laundering Act, PMLA) when those decisions fall within the realm of public law. Their jurisdiction is primarily defined by the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016. If a matter involves a public law decision, it cannot typically be brought before the NCLT under the argument that it “arises out of or relates to insolvency resolution.” For instance, challenging a Provisional Attachment Order (PAO) issued by the ED under PMLA directly in an appeal before the NCLAT, especially if the NCLT hadn’t ruled on it, would be beyond the NCLAT’s jurisdiction.

4. How important are deadlines in the insolvency process under the IBC? Is the timeline for CIRP mandatory?

Yes, timelines are a crucial factor in the Insolvency and Bankruptcy Code (IBC) to ensure a speedy resolution. The Corporate Insolvency Resolution Process (CIRP) initially had a mandatory maximum period of 270 days (180 days plus a one-time extension of 90 days) for completion from the date the insolvency application was admitted (this was before later amendments introduced a 330-day outer limit). The law uses phrases like “shall be completed,” indicating the mandatory nature of these timelines. If a resolution plan isn’t submitted to or approved by the NCLT within this maximum permitted period, the company in debt is generally required to be liquidated. Failure by the Resolution Professional to adhere to these timelines, such as by filing for approval of a resolution plan well after the 270-day limit without proper justification or NCLT extension, is a serious violation of the IBC.

5. What happens if the company that promised to rescue a bankrupt company (Successful Resolution Applicant or SRA) doesn’t follow through on the approved plan or unduly delays it?

An approved Resolution Plan is binding on all stakeholders, including the Successful Resolution Applicant (SRA). The SRA has a profound responsibility to implement the plan in both letter and spirit and cannot treat its obligations as optional or conditional, even if faced with challenges. Willfully contravening or not complying with the terms of an approved plan, such as by significantly delaying upfront payments or equity infusion without valid reasons or by misusing court processes to defer implementation, can vitiate the entire insolvency proceeding. Such conduct can be seen as a misuse of the process of law and a fraud on the Committee of Creditors and other stakeholders. If an SRA flagrantly violates the plan’s terms, frustrating the IBC’s objectives, the courts may refuse to endorse such actions, and it could even lead to the rejection of the plan and potential liquidation of the corporate debtor. Furthermore, contravention of an approved plan can lead to prosecution and punishment under the IBC.

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