The National Company Law Appellate Tribunal (NCLAT) recently dismissed appeals challenging Sarda Energy and Minerals Ltd’s (SEML) resolution plan for SKS Power Generation (Chhattisgarh) Ltd. under the Insolvency and Bankruptcy Code (IBC). This decision marks a significant step in the ongoing insolvency proceedings of SKS Power, which has been facing financial difficulties for several years. The NCLAT’s ruling is expected to have far-reaching consequences for both the companies involved and the broader landscape of insolvency resolution in India.
In this article, we will explore the background of the SKS Power insolvency case, the role of Sarda Energy in the resolution process, the key aspects of the appeals dismissed by the NCLAT, and the wider implications of the tribunal’s decision on the insolvency framework in India.
1. Background of the SKS Power Insolvency Case
SKS Power Generation (Chhattisgarh) Ltd., a thermal power company, became embroiled in financial troubles due to a combination of high debt, operational inefficiencies, and an unfavorable market environment. The company’s power plant, located in Raigarh, Chhattisgarh, was unable to generate enough revenue to meet its financial obligations, leading to significant losses.
As SKS Power’s debts mounted, its creditors, led by lenders such as Power Finance Corporation (PFC) and REC Ltd., initiated insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) in 2022. The objective was to find a suitable resolution plan that would allow for the recovery of the company’s outstanding dues while also ensuring the continuity of its operations.
After a competitive bidding process, Sarda Energy and Minerals Ltd. emerged as the successful resolution applicant, offering a plan to revive SKS Power and repay a portion of its debts. SEML, a prominent player in the steel and energy sector, saw the acquisition of SKS Power as an opportunity to expand its presence in the power generation space.
2. Sarda Energy’s Resolution Plan for SKS Power
The resolution plan proposed by Sarda Energy included several key components aimed at reviving the ailing power company:
- Debt Repayment: SEML committed to repaying a portion of SKS Power’s outstanding debts to its creditors. While the exact figures were not disclosed, the plan was approved by the Committee of Creditors (CoC), indicating that it met the financial expectations of the lenders.
- Operational Turnaround: As part of its plan, SEML outlined strategies to improve the operational efficiency of SKS Power’s thermal plant. This included investing in technology upgrades, optimizing fuel consumption, and improving plant maintenance to increase the plant’s output and reduce costs.
- Management and Ownership Changes: The resolution plan also involved a change in the management structure of SKS Power. Sarda Energy would take over the day-to-day operations of the company, and the ownership of the power plant would be transferred to SEML.
- Long-Term Growth Strategy: SEML’s resolution plan was not just focused on addressing the immediate financial crisis but also aimed at positioning SKS Power for long-term growth. This included exploring opportunities for renewable energy projects and diversifying the company’s revenue streams.
The Committee of Creditors (CoC) approved the resolution plan, and it was subsequently submitted to the National Company Law Tribunal (NCLT) for final approval. However, the process was met with challenges as certain stakeholders filed appeals against the approval of the plan.
3. Appeals Against the Resolution Plan
Following the NCLT’s approval of Sarda Energy’s resolution plan, several appeals were filed with the National Company Law Appellate Tribunal (NCLAT). These appeals were primarily brought by operational creditors and other stakeholders who were dissatisfied with the terms of the resolution plan, particularly the treatment of their claims in the repayment structure.
The appellants argued that the resolution plan favored the financial creditors over the operational creditors, which they claimed was a violation of the principles of equitable distribution of proceeds under the IBC. Additionally, concerns were raised about the valuation of SKS Power’s assets and whether the plan provided adequate returns to all stakeholders.
The appellants also questioned the due diligence conducted during the bidding process and alleged that certain procedural irregularities had occurred. These included claims that the resolution professional did not properly assess all the bids and that the CoC’s decision to approve Sarda Energy’s plan was not transparent.
4. NCLAT’s Decision and Rationale
In September 2024, the NCLAT delivered its verdict, dismissing the appeals against Sarda Energy’s resolution plan. The appellate tribunal upheld the NCLT’s approval of the plan, stating that the resolution process had followed all the necessary legal procedures and that the CoC’s decision to approve SEML’s plan was based on a fair and transparent assessment of the bids. 
Key aspects of the NCLAT’s ruling included:
- Treatment of Creditors: The NCLAT ruled that the resolution plan did not violate the rights of the operational creditors, as the IBC gives priority to financial creditors in the distribution of proceeds from an insolvency resolution. The tribunal noted that the operational creditors were entitled to a share of the resolution proceeds, but the allocation was in line with the provisions of the IBC.
- Valuation of Assets: On the issue of asset valuation, the NCLAT found that the valuation of SKS Power’s assets had been conducted in accordance with the IBC’s guidelines and that there was no evidence to suggest that the process was flawed. The tribunal concluded that the CoC’s decision was based on a fair assessment of the bids received.
- Procedural Compliance: The NCLAT also addressed the allegations of procedural irregularities, stating that the resolution professional had followed the IBC’s requirements and that the CoC’s decision to approve Sarda Energy’s plan was made after due consideration of all relevant factors.
In dismissing the appeals, the NCLAT effectively cleared the way for Sarda Energy to proceed with its acquisition and restructuring of SKS Power.
5. Implications of the NCLAT’s Ruling
The NCLAT’s decision to uphold Sarda Energy’s resolution plan has several important implications for the companies involved, as well as for the broader insolvency resolution framework in India.
A. Impact on Sarda Energy and SKS Power
For Sarda Energy, the dismissal of the appeals marks the successful conclusion of a complex and competitive insolvency resolution process. SEML can now move forward with its plans to take control of SKS Power and implement its strategies for reviving the company’s operations.
This acquisition will significantly enhance Sarda Energy’s presence in the power generation sector and provide the company with valuable assets in the form of SKS Power’s thermal plant. If SEML is able to successfully execute its turnaround plan, it could unlock new growth opportunities and strengthen its position in the energy market.
For SKS Power, the approval of the resolution plan offers a lifeline. The company’s operations had been severely hampered by its financial troubles, and the acquisition by SEML provides the resources needed to revive the business. With a new management team in place and fresh investments on the horizon, SKS Power has the potential to regain its footing in the power sector.
B. Precedent for IBC Cases
The NCLAT’s ruling also sets an important precedent for future insolvency resolution cases in India. The tribunal’s decision reaffirms the principles of the IBC, particularly the priority given to financial creditors in the distribution of proceeds. This ruling is likely to strengthen the position of financial creditors in future insolvency cases, providing them with greater confidence in the IBC process.
Additionally, the NCLAT’s emphasis on procedural compliance and transparency in the resolution process highlights the importance of following the IBC’s guidelines to avoid legal challenges. This could encourage greater adherence to the code’s provisions in future cases, reducing the likelihood of protracted legal disputes.
C. Broader Impact on the Power Sector
The successful resolution of SKS Power’s insolvency could have broader implications for the Indian power sector, which has faced several challenges in recent years, including financial stress, overcapacity, and regulatory hurdles. The revival of SKS Power could serve as a model for other distressed power companies seeking to resolve their financial issues through the IBC process.
Moreover, the involvement of a company like Sarda Energy, which has a strong track record in the steel and energy sectors, could bring fresh expertise and resources to the power industry. This could lead to more efficient operations, better asset management, and improved financial performance for companies in the sector.
6. Conclusion
The NCLAT’s dismissal of appeals against Sarda Energy’s resolution plan for SKS Power Generation marks a significant milestone in India’s evolving insolvency resolution landscape. The decision not only paves the way for the revival of SKS Power but also reaffirms the principles of the IBC and strengthens the position of financial creditors in the resolution process.
For Sarda Energy, the acquisition of SKS Power presents a strategic opportunity to expand its presence in the power generation sector, while for SKS Power, the resolution plan offers a chance to overcome its financial difficulties and return to profitability. The ruling also sets an important precedent for future insolvency cases and could have a positive impact on the broader power sector in India.
As India continues to refine its insolvency resolution framework, cases like SKS Power’s demonstrate the potential of the IBC to resolve complex financial issues and facilitate the revival of distressed companies. With the NCLAT’s ruling now in place, all eyes will be on Sarda Energy as it embarks on the challenging task of turning around SKS Power’s fortunes. ALSO READ:- Maruti, Hyundai, Tata Motors Witness Decline in September 2024 Wholesales Amid Inventory Management and Demand Weakness