Kalyani Transco v. Bhushan Power & Steel: A request for resolution process

New Indian Express

3 days ago

The recent controversial judgment rendered by the Supreme Court in Kalyani Transco v. Bhushan Power & Steel Ltd.('Bhushan Steel') ignited a lot of debate on the financial implications caused by the court's invalidation of a resolution plan that was approved in 2019 and even partially executed by JSW Steel – the successful resolution applicant. While the order initiating liquidation against corporate debtor – Bhushan Power & Steel has currently been stayed by the Supreme Court, the far reaching effects of the judgement has been critiqued extensively.
The present piece, however, seeks to address a different issue – the impact of the serious procedural violations that have been highlighted in the Bhushan Steel judgment on the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 ('IBC').
Serious procedural missteps
In Bhushan Steel, the Court ruled that the process violated statutory deadlines under Section 12 of the IBC, specifically the 330-day cap, and that the absence of an independent verification of the Section 29A compliance and certain delays in creditor payments rendered the plan fundamentally flawed. As a result, the company was ordered into liquidation—a decision that came not just after judicial approval but after the plan was substantially implemented.
The IBC's language in Sections 30 and 31 envisions a linear progression from creditor consensus to judicial approval and then to implementation. It is, however, unclear as to how the plan even passed the muster of the resolution professional and creditors when such fundamental violations were prevalent in the plan approval process.
One of the serious procedural misstep that was highlighted by the court was the absence of resolution professional's independent examination of JSW's related party status. The court highlighted that the resolution professional's failure to independently examine the Section 29A compliance goes to the 'root of the matter'.
The above procedural lapses are indicative of the poor diligence undertaken both by the resolution professional as well as the creditors. Similarly, it is inconceivable as to how the gross violation of the mandatory 330-day timeline in conclusion of the CIRP proceedings was overlooked both by the NCLT and the resolution professional and creditors.
Adherence to procedural rigour
As Late Justice V.R. Krishna Iyer famously remarked, 'Processual law is not to be a tyrant but a servant, not an obstruction but an aid to justice. Procedural prescriptions are the hand-maid and not the mistress, a lubricant, not a resistant in the administration or justice.'
Now, the obvious arguments against the above procedural violations are that, though significant, they ought not to be considered to the detriment of the approved resolution plan in Bhushan Steel, especially since it interferes with the 'commercial wisdom' of the creditors. These arguments, undoubtedly, merit consideration, especially in a case such as Bhushan Steel where the sums involved are enormous.
However, key questions arise:
Can these violations be brushed aside solely because the CoC exercised its commercial wisdom?
Would the violations have been viewed differently if they had been thoroughly considered by the Adjudicating Authority at the first stage of approval?
Should the Court have remitted the matter for reconsideration instead of ordering liquidation?
The law is now well settled that the deference to the commercial wisdom of the creditors is not absolute, and they can be interfered with when the decisions are 'wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules'.
The procedural violations in Bhushan Steel, especially the resolution professional's failure to independently verify the Section 29A eligibility/ineligibility and the breach of 330-day timeline, could plausibly be interpreted as the commercial wisdom being exercised 'de hors the provisions of the statute or the Rules'.
The mandatory context under which these procedural safeguards are legislatively designed ought not to be disregarded since it would set a dangerous precedent in other plan approval cases. Any instance of a callous approach by the resolution professional and creditors in the plan approval process could be brushed aside under the garb of the creditors having exercised commercial wisdom. Moreover, the insolvency proceeding being a proceeding in rem, the violations could also operate to the detriment of other stakeholders in the process.
Striking a balance
The IBC was crafted with the promise of delivering time-bound resolutions to distressed corporate debtors. But nearly a decade on, that aspiration is still being tested. Although the ruling in Bhushan Steel highlights a deep fragility in India's insolvency architecture, i.e., the lack of finality, even after approval and execution, it also exposes the deeper systemic issues in the resolution plan approval process itself. It cannot be gainsaid that the IBC must pivot away from excessive formalism and proceed towards commercially sound closure.
At first blush, the breach of the 330-day timeline in conclusion of the CIRP proceedings in Bhushan Steel does not seem like a serious issue when pitted against the larger picture of the Bhushan Steel being revived. If one were to draw an analogy of section 29A of the Arbitration and Conciliation Act, 1996 which deals with extension of timeline for conclusion of arbitral proceedings, the law has been well settled that awards passed beyond the arbitral mandate are void.
Similarly, if resolution plans were to be approved beyond the statutory timelines and without any formal approval of extension, it not only questions the objective of IBC of providing time-bound resolutions but it also accords an excessive weightage to the commercial wisdom which could be equally detrimental to other stakeholders.
The Bhushan Steel judgment should not be remembered as an isolated incident but as a call to action. India's insolvency ecosystem must certainly evolve towards being a transformative tool for corporate recovery rather than a procedural labyrinth. At the same time, the cloak of 'commercial wisdom' ought not to be overlooked by the NCLT while evaluating a resolution plan.
(The author is Advocate, Madras High Court)