Supreme Court upholds bankruptcy code, setback for defaulters

By Suvashree Choudhury

MUMBAI (Reuters) - India's Supreme Court on Friday rejected petitions challenging the country's bankruptcy laws, including a rule that bans owners of insolvent firms from bidding to buy back assets auctioned as part of the bankruptcy proceedings.

The ruling upheld fledgling bankruptcy and insolvency rules and is expected to pave the way for banks to recover billions of dollars from bankrupt firms mired in litigation, lawyers said.

India introduced the Insolvency and Bankruptcy Code (IBC) in May 2016, but there is a backlog of unresolved cases due to legal actions filed by the owners of bankrupt companies who are typically reluctant to give up control.

The "Supreme Court's upholding of IBC will add necessary certainty by way of long term clarity for all stakeholders," said Cyril Shroff, managing partner at the law firm Cyril Amarchand Mangaldas.

"It should significantly boost investor confidence and effectively enhance participation," he added.

Friday's ruling by a two-judge bench was seen as a setback for debt-laden companies like Essar Steel, which owes 508 billion rupees ($7.15 billion) to lenders. Essar Steel's bankruptcy has dragged on for more than 500 days, and beyond the maximum 270 days set by the IBC for a resolution.

The National Company Law Tribunal - the bankruptcy tribunal - is expected to give its decision by Jan. 31 on Essar Steel's insolvency resolution plan, lawyers said.

The Essar Steel case sparked questions about the efficiency of the IBC code, as well as the extent to which banks can reduce the dead weight of bad loans on their balance sheets, which currently stand at $150 billion.

For Prime Minister Narendra Modi, reviving the banking sector is crucial for stimulating the economy and creating more jobs ahead of an election due by May.

In its ruling, the Supreme Court said "the experiment conducted in enacting the Code is proving to be largely successful."

($1 = 71.0350 Indian rupees)

(Reporting by Suvashree Dey Choudhury; editing by Darren Schuettler)