The recent discussion by the Supreme Court on the protracted corporate insolvency of Bhushan Power and Steel Ltd (BPSL) in Kalyani Transco v. Bhushan Power and Steel Ltd. & Ors made the headlines as the Court signed off on JSW's resolution plan for the company.
However, there is a legal question in the body of the judgment which could have far greater implications for the future of India's insolvency regime: what happens to Earnings Before Interest Tax Depreciation and Amortization (EBITDA), made from the time the corporate debtor is kept as a going concern?
The Court did not adjudicate upon the treatment of EBITDA created while BPSL was maintained as a going concern. In doing so, an area of continued uncertainty with respect to every large corporate resolution lingers.
The Importance of EBITDA in the event of the Corporate Insolvency Resolution Process (CIRP) is designed to be a time-sensitive process. However, even as creditors and prospective resolution applicants discuss and negotiate resolution plans, the company continues to operate under the control of the RP.
It continues to sell products, to pay salaries,and often generate operating profits. Profits as EBITDA are real profits. They are profits that resulted from a group of assets which are largely funded by creditors’ money. The biggest question is should those profits belong to creditors, the corporate debtor or the successful resolution applicant (SRA)? Creditors claim that since they took the risk and provided the interim funds, the profit should come back to them. The SRA claim that if their plan is approved, then the company and whatever profits it earned in that interim period ought to vest with them. There are even some that will argue that the EBITDA should go to the company itself to be included as part of its operating cash resources. The lack of statutory clarity has resulted in a lack of uniformity in practice and a great deal of litigation.
In the BPSL case, the figures were not insignificant. According to the RP's affidavit, EBITDA exceeded ₹1,800 crore during the CIRP period. At various points, the Committee of Creditors (CoC) indicated that this sum should be distributed among creditors. JSW Steel, whose resolution plan was ultimately approved by the CoC, contended that EBITDA was simply an accounting figure and not profit available for distribution.
The National Company Law Tribunal (NCLT) sided with the creditors and ordered EBITDA to be treated as an asset. The National Company Law Appellate Tribunal (NCLAT) reversed this decision and permitted JSW Steel to remain in control. The matter then proceeded to the Supreme Court.
Initially, the Supreme Court rejected JSW Steel's plan for being in violation of the Code, ordered liquidation of BPSL. In the latest judgment, the Court stated that it was not determining the issue of EBITDA distribution, leaving the legal question for another day.
The Court's silence was no coincidence; it demonstrates the challenges of the issue. Unlike disputes about timeframes or locus of promoters, EBITDA distributions do not have a clearly determined statutory base. Section 30 of the Insolvency and Bankruptcy Code (IBC) governs resolution plans, but it does not address interim profits. The Insolvency and Bankruptcy Board of India (IBBI) is also silent on this aspect.
The consequence is uncertainty. Every notable CIRP involving operational companies steel plants, power projects, refineries raises this question. The numbers are often in the hundreds of crores. Without clarity, disputes arise, resolution plans slow down and the very purpose of the IBC - speedy maximisation of value - is undermined.
The Supreme Court, in the Essar Steel case, stated that it was the CoC's commercial wisdom to distribute the proceeds. However, that case was only regarding the distribution of proceeds from the resolution, not profits achieved on an ongoing basis from operations prior to the implementation of the resolution plan.
The BPSL facts are distinct because the profits were generated during their own operations, before a resolution plan was implemented. Should those profits be classified as an asset of the corporate debtor and distributed under the approved resolution plan? Should those profits be quarantined for the creditors who financed the CIRP? Should the incoming SRA, after a plan is approved, receive the EBITDA profits, even though they did not provide capital during the time the profits were generated?
Each question has significant ramifications. If EBITDA is dispensed to the SRA without regard to the compensation contract, it has the potential to amount to a windfall for the SRA at the expense of the creditors. If EBITDA is distributed to the creditors, it may dissuade other resolution applicants from bidding prevalent in the process. If EBITDA is retained by the company, it could provide it with liquidity for its ongoing operations, but could complicate distribution provisions for the creditors.
Keeping the question open has left stakeholders in uncertainty. A legislative or regulatory change, rather than case by case litigation, is probably the answer.
The first step toward clarity is IBBI regulations. The Board can simply move to amend the CIRP regulations to specify what to do with interim profits. A straightforward rule such as keeping EBITDA in a trust to be paid out under the approved plan should avoid disputes.
Second, the CoC's authority could explicitly be recognised. Given the mantra of commercial wisdom, the CoC could be empowered to allocate EBITDA to the proper parties, as long as there is a resolution to the approved plan recording the CoC's decision. This authority would align to the creditor’s control of the insolvency process.
Finally, any framework must maintain the right incentives. Resolution applicants cannot be disincentivised from losing interim profits and creditors should not be shortchanged. A formula to prorate between creditors (to the extent they funded the CIRP) and the SRA (to incentivise timely takeover) could strike the balance between effectiveness and fairness.
Vandana Tiwari is a practising advocate.