The Supreme Court on Friday upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC). The law, which was passed in 2016, prevents founders from regaining control of delinquent companies.
A bench headed by Justice R F Nariman said they have upheld the constitutional validity “in its entirety”. It dismissed the pleas to give operational creditors’ parity with financial creditors while deciding a batch of petitions challenging the IBC. The court, however, said that related parties in the act should mean a person connected with the business.
The operational creditors wanted to be treated at par with secured creditors like banks and financial institution who have first claim over the money coming through the proceedings under the insolvency law.
The verdict upheld the Section 29A of the Code that bars promoters of a company facing insolvency proceedings from bidding to regain its control.
India has been struggling to clean up its banks which are 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. The verdict is thus seen as a big boost to clean credit culture. As per reports, this ruling will help recover Rs 1.8 lakh crore in FY19.
The verdict, as per Bloomberg, is a set back for founders of companies including Essar Steel Ltd. who had offered to clear all dues to regain control. Essar founders Shashi and Ravi Ruia bid was against Steel tycoon Lakshmi Mittal’s ArcelorMittal’s Rs 42,000 cr offer to the banks and a further 80 billion rupees of capital infusion into the company. The ruling comes days ahead of a pending verdict by bankruptcy court on Essar Steel case on Jan. 31.