The Supreme Court on Friday upheld the two-year-old Insolvency and Bankruptcy Code (IBC) in its entirety, thereby continuing to bar promoters from bidding for insolvent companies.
The development deals a massive blow to the promoters of debt-laden Essar Steel, among others. The Ruias had offered to clear all dues in a bid to regain control of the steelmaker, and along with other operational creditors, had challenged the IBC in the country’s highest court on the grounds that it was discriminatory.
But a two-judge bench headed by Rohinton F. Nariman said a provision of the bankruptcy law that prevents founders from regaining control of the delinquent companies was legally valid.
In October last year, Essar Group founders Shashi and Ravi Ruia had bid for Essar Steel to counter steel tycoon Lakshmi Mittal’s ArcelorMittal’s offer, which has been approved by the committee of creditors (CoC) as the highest bid. ArcelorMittal had offered Rs 42,000 crore to the banks and a further Rs 8,000 crore of capital infusion into the company.
The Supreme Court ruling comes just six days before the Ahmedabad bench of the National Company Law Tribunal is expected to rule on Essar Steel's insolvency resolution plan.
"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."
The apex court on Friday also rejected pleas seeking changes in the IBC and refused to grant operational creditors parity with financial creditors.
The bench was hearing several petitions, including those of some operational creditors who had challenged the insolvency law on the grounds that it discriminates against their interests as against financial creditors.
Under the IBC, the committee of creditors (CoC) can only consist of financial creditors who assess and vote on resolution plans submitted by interested bidders.
The case to allow promoters to bid for their companies under IBC was originally filed by the promoters of Bhushan Power & Steel. The Supreme Court had later merged similar petitions by the operational creditors of Binani Cement, who felt that their rights were being obliterated under the insolvency law.
The petitioners had argued that by barring promoters from bidding for their own companies, the IBC forces the sale of the company to new bidders. This, according to them, is against the fundamental rights of promoters of a company.