Will Bhushan Power’s Past Continue To Haunt JSW Steel?

JSW Steel Ltd.’s Rs 19,700-crore resolution plan for Bhushan Power and Steel Ltd. has run into an unpleasant surprise.

The CBI accused Bhushan Power and Steel of diverting Rs 2,348 crore. And while approving JSW Steel’s resolution plan, the National Company Law Tribunal refused to grant immunity to the post-insolvency avatar of Bhushan Power from ongoing criminal investigations.

If the NCLT’s view prevails through appeals, investigative agencies could potentially attach Bhushan Power’s properties—something that JSW Steel has contended will make its resolution plan unviable and unfeasible.

But experts BloombergQuint spoke with said that it’s unreasonable for a bidder to expect that the Insolvency and Bankruptcy Code is the holy water that can wash away the criminal past of a corporate debtor.

Bhushan Power’s Past: Damocles Sword?

JSW Steel’s resolution plan was approved by Bhushan Power’s committee of creditors in October last year. In April this year, the Central Bureau of Investigation filed an FIR against Bhushan Power and several erstwhile directors of the company. A month later, the Enforcement Directorate too filed a case of money laundering against the company, its promoters and former directors. And then, in July, Punjab National Bank reported a Rs 3,805-crore fraud by steelmaker.

JSW Steel contended before the NCLT that all present and future liabilities on account of criminal investigations against Bhushan Power and Steel should stand extinguished. The absence of any such protection would jeopardise the feasibility and viability of the resolution plan, it argued.

JSW Steel’s argument is primarily under section 238 of the insolvency code that gives it overriding effect over all other laws. There cannot be any liability at all on the corporate debtor subsequent to insolvency proceedings. And if investigative agencies are allowed to attach assets once the resolution plan has been approved, it will defeat the purpose of the IBC process, a person involved in the case told BloombergQuint, requesting anonymity. If money is diverted and assets have been created, the investigative agencies should only be allowed to go after those assets and not those of the corporate debtor, the person said.

But the NCLT refused to grant Bhushan Power any such immunity. The ongoing criminal investigations should not affect the implementation of JSW Steel’s resolution plan. And the creditors’ committee can file appropriate applications if the criminal proceedings result in recovery of the money that’s been siphoned off, the NCLT said.

Anti-Money Laundering Law vs IBC

The Prevention of Money Laundering Act allows the Enforcement Directorate to attach and confiscate equivalent assets in India if the asset that’s a proceed of crime cannot be forfeited. Proceed of crime is broadly defined as property obtained via criminal activity.

And herein lies JSW Steel’s fear – that if the ED fails to lay its hands on the assets created out of the diverted funds, Bhushan Power’s property of the same in India can potentially be attached. So far, the diverted funds amount to Rs 2,348 crores but it could significantly go up as the investigation proceeds, JSW Steel argued before the NCLT.

What could make matters worse for JSW Steel is a recent Delhi High Court judgment that has held that IBC will not prevail over PMLA. To be clear, in this case, the facts were different from JSW Steel-Bhushan Power situation. Here, while the lenders were taking action against the erstwhile debt recovery laws and their application was admitted under IBC, the Enforcement Directorate proceeded to attach the properties of the borrower. The lenders’ argument that their security interest under debt recovery laws and IBC should prevail over PMLA and that the ED should be disallowed from attaching assets was set aside by the high court.

The Delhi High Court judgment aside, experts told BloombergQuint it’s unlikely the argument that IBC should prevail over criminal laws once a resolution plan is approved, will prevail.

Merely because the company has been through an insolvency process doesn’t mean that its criminal liability goes away because the corporate structure hasn’t been extinguished, Sidharth Luthra, senior advocate at the Supreme Court, said. IBC has supremacy when it comes to commercial claims and proceedings and criminal law is a separate domain, he added.

If a contrary view is taken, companies facing criminal investigations will file for voluntary insolvency and take the plea that all liabilities fall away. If a company is subjected to fraud by the promoter, then you could argue that there shouldn’t be any criminal liability against the corporate debtor. But if the company has been used to divert money lent to it by creditors, in such a case the company has also participated in the crime, and hence will face action.

Sidharth Luthra, Senior Advocate, Supreme Court

A literal interpretation of section 238 of the IBC makes it clear that it can’t override criminal laws, Vikram Nankani, senior advocate at the Bombay High Court told BloombergQuint.

Section 238 says: The provisions of this code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The section says that IBC will prevail where a provision under any other law contradicts what the Code says. But there is no provision under IBC that says that there can’t be a criminal liability against a corporate debtor that has gone through the insolvency process, and so, the question of inconsistency vis-a-vis PMLA doesn’t arise, Nankani explained. The only way to resolve this is if the courts exercise their extra-ordinary powers to allow for criminal investigations against the individuals allegedly involved in the fraud and give the company immunity, he added.

I can see why resolution applicants will be worried. It is unfair that a resolution applicant puts up Rs 19,000 crore to revive the company under one law and then you take away the assets of the corporate debtor under another law, thereby eroding its ,

Vikram Nankani, Senior Advocate, Bombay High Court

The objective of IBC is to pull the company out of the financial problem it has landed itself in—it could be a result of genuine business reasons, lack of liquidity, diversion of funds etc. The law doesn’t want to go into the reasons and is asking potential resolution applicants to rescue the company. But once an applicant has come in with a plan that’s been approved, you can’t say that the cause of the financial problem was a criminal matter and now you’ve to face the brunt of it, Nankani added. “That’ll be most unfortunate,” he said.

Commercially speaking, resolution applicants take a bet when they bid for a stressed asset—the risk of a criminal liability can come up while the insolvency process is underway or even much after that, Sudipta Routh, partner at IndusLaw, said. There is this conceptual fuzziness that once a corporate debtor goes through the insolvency process, some magic happens, and all past sins fall away. That’s not the case, Routh added.

The case will come up for hearing next on Oct. 14 before the NCLAT, which has asked the Ministry of Corporate Affairs and the ED to make their case on this question of law.