The Supreme Court of India. (Source: PTI)

Bankruptcy Law Upheld by India in Win for Faster Resolutions

(Bloomberg) -- India’s top court upheld a law that bars founders of companies that have defaulted on loans from buying back the stressed assets, a ruling that may help the nation resolve bad debts faster.

The Supreme Court said a provision of the bankruptcy law that prevents founders from regaining control of delinquent companies was legally valid. The move affects the billionaire Ruia family’s bid to regain control of the indebted Essar Steel India Ltd.

Owners who have been unable to service their own debt are “unfit to be eligible to become a resolution applicant,” according to the judgement delivered by Justice Rohinton Fali Nariman and Justice Navin Sinha. “This policy cannot be found fault with.”

Legal challenges by owners of defaulting companies to regain control of their firms have been stalling the bankruptcy process. The latest ruling may deter founders from testing the law and accelerate recovery of 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.

“The judgment will add necessary certainty and long-term clarity for all stakeholders,” said Cyril Shroff, managing partner at Cyril Amarchand Mangaldas. It should “significantly boost investor confidence, and effectively enhance participation,” he said.

The ruling Friday upholding that section of the code will make the insolvency process more smooth, according to R.K. Bansal, chief executive officer of Edelweiss Asset Reconstruction Co., India’s top bad-debt buyer.

The founders of companies including Essar Steel 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-rupee ($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 Jan. 31.

Mahesh Agarwal, managing partner at Agarwal Law Associates, who represented Essar’s owner in the insolvency case, said the top court’s ruling clarifies that ”only those relatives would be barred who have a business connection with the promoter”. Court also clarified that an offer to resolve the insolvency case can be given even after revivals plans are invited.

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 K.R. Choksey Shares & Securities Pvt. The verdict will smooth the process and instill 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 ailing company. The number of cases and recoveries made under India’s new insolvency law is proving to be largely successful, the judges said.

“The defaulter‘s paradise is lost,” Nariman and Sinha said in the judgement. “In its place, the economy‘s rightful position has been regained.”

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