New Delhi. India’s top court upheld a law that bars founders of companies that have defaulted on loans from buying back stressed assets, in a ruling that may help the nation more quickly resolve bad debts.
The Supreme Court said a provision of the bankruptcy law that prevents founders from regaining control of delinquent companies was legally valid.
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 on Friday upholding that section of the code will make the insolvency process more smooth, according to R.K. Bansal, CEO of Edelweiss Asset Reconstruction Co., India’s top bad-debt buyer.
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-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.
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 defaulting company.