EBITDA during CIRP: Who owns it?

The Insolvency and Bankruptcy Code (IBC) was enacted to consolidate and streamline the insolvency resolution process for corporates, partnership firms, and individuals in a time-bound manner. It aims to hasten the resolution process and thereby maximize the value of the assets of such entities. The IBC seeks to balance the interests of all stakeholders, including creditors and debtors. Over 8000 cases have been referred to IBC since its enactment, and as of September 2024, around ₹3.5 lakh crore has been recovered by creditors through the process.

Recently, in ‘Kalyani Transco v. Bhushan Power and Steel Ltd,’ an issue was raised by the Appellants regarding the distribution of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) generated during the Corporate Insolvency Resolution Process (CIRP). The case arose from the insolvency proceedings against Bhushan Power and Steel Ltd. (BPSL) under the Insolvency and Bankruptcy Code (IBC), 2016. Kalyani Transco, an operational creditor, challenged the resolution plan approved by the Committee of Creditors (CoC) and later by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). JSW Steel, the successful resolution applicant, submitted the resolution plan. Kalyani Transco and other appellants raised concerns about non-compliance with mandatory provisions of the IBC, discriminatory treatment of operational creditors, delay in implementation of the resolution plan, and retention of profits (EBITDA) generated during the CIRP by JSW. The Supreme Court found that the resolution plan was implemented in violation of the IBC and CIRP regulations and that JSW had delayed implementation while benefiting from the process. Hence, it set aside the resolution plan and directed the liquidation of BPSL, but declined to rule on the EBITDA issue, leaving it open for future adjudication. The Supreme Court, stated in para 84(v): “Since we have rejected the Resolution Plan of JSW, we have not dealt with the issue of the EBITDA though raised and argued by the Learned Advocates for the parties. The question of law with regard to EBITDA is kept open.”

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In this case, the Supreme Court was presented with arguments concerning the distribution of EBITDA generated during CIRP. The appellants contended the profits earned during the resolution process should be equitably distributed among creditors, especially operational creditors who often receive minimal recovery under resolution plans.

This non-decision has left a significant legal vacuum. While the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) had differing views on the matter, the Supreme Court’s refusal to settle the issue means the ambiguity persists. During CIRP, a resolution professional (RP) takes over the management of the corporate debtor and attempts to keep it as a going concern. The company often continues to generate revenue and even profits during this period. As a measure of operational profitability, EBITDA becomes a critical indicator of the company’s financial health during CIRP.

Judicial deference to “commercial wisdom” in IBC resolution depends on the premise that the CoC has a robust and transparent process. Until 2020, Regulation 39(3) of the CIRP Regulations required the CoC to record reasons for every approval or rejection of a resolution plan. However, in the IBBI’s 2020 amendment, this safeguard has been watered down. With no duty to log time-stamped rationales, minority creditors and courts alike cannot verify whether the CoC’s judgments were reasonable or arbitrary.

Further, the IBC does not explicitly guide how such earnings should be treated or distributed. This has led to disputes among stakeholders—financial creditors, operational creditors, and resolution applicants—regarding their respective entitlements to the profits generated during CIRP. Neither the IBC nor its regulations specify how to treat profits earned post-plan approval, resulting in divergent rulings. In Kalyan Janata Sahakari Bank v. CICIL Biochem, the NCLT ordered that profits must be distributed to the secured financial creditors. On the other hand, the insolvency law committee report urges flexibility and recommends avoiding unjust enrichment by a single party or parties.

There are 3 players who can stake their claim on the EBITDA earned by the debtor during the resolution process. Operational creditors may argue that they should share in the profits generated during CIRP, especially if their goods and services contributed to the company’s continued operations. Given that they are often unsecured and receive low recoveries, a share in the EBITDA could provide some measure of fairness. Financial Creditors, who typically form the Committee of Creditors (CoC), may contend that they bear the primary risk and should therefore, be entitled to the profits. They may also argue that EBITDA should offset the deep discounts they are forced to take in such resolutions. The resolution applicants may claim that the profits generated during CIRP are part of the going concern value they are acquiring. Having admitted that there was an unresolved issue in the said matter of distribution of EBITDA, the IBC should be amended to provide clear guidelines on the treatment of earnings during CIRP. A framework should be developed to ensure fair distribution of EBITDA among all stakeholders.

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One approach is to use a surplus waterfall approach. The base amount recovered upon liquidation can be for the financial creditors. The initial surplus EBIDTA could clear the debts of the operational creditors and the further surplus can be provided for the buyer to continue operations. To ensure that EBITDA allocations are accountable without reducing the primacy of secured creditors, the CoC must maintain notes on distributing the EBITDA in its discussion. Such a “sunlight policy” would ensure that courts can adjudicate the commercial aspects without being left flummoxed. The Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta highlights that IBC’s “equitable treatment” must also include other stakeholders, including the shareholders.

Notwithstanding this, there is a fundamental question as to whether EBITDA-positive companies must be subjected to liquidation. Those in favour would argue that EBITDA-positivity does not equate to solvency; the company may still be unable to service its debts, and CIRP can facilitate transparently restructuring of ownership and liabilities. As a counter, one would say that EBITDA-positive companies are operationally viable and capable of revival with a little support. The process will destroy value and disrupt operations that are not in the interest of the stakeholders, including employees and suppliers. Alternative mechanisms like out-of-court mediation and arbitration and restrictions may be more appropriate for such cases.

EBITDA distribution during CIRP remains unresolved, creating uncertainty for stakeholders. The Supreme Court’s decision in the ‘Kalyani Transco’ case has highlighted the need for legal and policy reforms. As India’s insolvency regime matures, addressing these gaps will ensure fairness, efficiency, and value maximization in the resolution process.

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