25 Jan 2019 18:55 IST

Supreme Court ratifies validity of Bankruptcy Code

Upholds law that prevents loan defaulter founders from buying back stressed assets

In a ruling that may help the nation resolve bad debts more quickly, the Supreme Court has upheld a law which bars founders of companies that have defaulted on loans from buying back stressed assets.

The Supreme Court said a provision of the bankruptcy law that prevents founders from regaining control of delinquent companies was legally valid.

Stressed assets

India has been trying to clean up banks that are suffering from the world’s worst bad-loan ratios after Italy, and that have about $210 billion of stressed debt on their balance sheets. A new bankruptcy code was passed in 2016, exciting interest among distressed debt investors around the world as it barred wilful defaulters, as well as founders of defaulting companies, from submitting revival plans or bids for their failing firms.

The ruling Friday upholding that section of the code will make the insolvency process smoother, according to RK Bansal, CEO of Edelweiss Asset Reconstruction Co., India’s top bad-debt buyer.

Implications for Essar

The verdict is a setback for founders of companies including Essar Steel Ltd. who had offered to clear all dues to regain control. Bidding for Essar Steel has been one of the most hotly contested under India’s insolvency resolution process and the founders of the mill made a last-minute ₹543.9 billion ($7.7 billion) offer to thwart Lakshmi Mittal’s ArcelorMittal bid for the asset.

The ruling comes days ahead of a pending verdict by a bankruptcy court on the Essar Steel case on January 31. An Essar Steel spokesman wasn’t available for comment, while an ArcelorMittal spokesman didn’t immediately respond.

The original founders who didn’t want to pay the creditors are now coming back to hamper the bankruptcy court process, said Deven Choksey, managing director of KR Choksey Shares & Securities Pvt. The verdict will smooth the process and instil confidence in new buyers, according to Choksey.

In the ruling Friday, the court also clarified that the bar on persons related to the defaulting founders would include only those who are connected to the defaulting company.