Court Upholds Law Protecting New Owners of Bankrupt Indian Firms

India’s Supreme Court upheld laws that protect new owners of insolvent companies from charges filed against the previous management in a verdict that could pave the way for faster resolution of big bankruptcies.

A bankrupt company and its assets cannot face criminal proceedings once it is sold to new owners, the Supreme Court said on Tuesday while dismissing petitions challenging the rules. The former management can still be prosecuted.

The verdict offers some clarity and protection to potential investors looking to buy into one of the world’s biggest piles of bad loans. India’s central bank forecasts soured assets will almost double to 13.5% of total advances in the year through September as the pandemic slams businesses.

There is an “imperative need to attract resolution applicants who would not shy away from offering reasonable and fair value” for the bankrupt company and its property, a three-judge panel headed by Justice Rohinton F. Nariman said in its verdict. Extinguishing criminal liability will help the new management “to make a clean break with the past and start on a clean slate,” it said.

The sale of bankrupt companies, including JSW Steel Ltd.’s takeover bid for Bhushan Power & Steel Ltd. -- one of the 12 big debtors pushed into bankruptcy by the central bank in 2017 -- have been stuck after India’s anti-money laundering agency seized assets and opposed the deals while investigating alleged offenses by previous owners.

The law granting immunity was first passed by a bankruptcy tribunal last year. The Supreme Court’s judgment Tuesday was part of a case by homebuyers and some creditors who challenged the law.

“With multiple criminal prosecutions often plaguing debtor companies, the ring fencing done by the 2020 amendment would hopefully serve as impetus for resolution for the Reserve Bank of India’s dirty dozen and beyond,” said Sushmita Gandhi, a partner at law firm IndusLaw.

The court on Tuesday also upheld curbs disallowng individual homebuyers from initiating bankruptcy against builders. The new law requires at least 100 buyers or 10% in a project to initiate a bankruptcy case.

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