Business is Risky: Secured lenders should have exited before insolvency occurred.

The case concerns the country’s most high-profile bankruptcy, Essar Steel India Ltd. Insolvency judges recently ruled that creditors whose claims are backed by collateral won’t get preferential treatment in the $6 billion sale of the company’s plant to ArcelorMittal. Secured creditors will stand in line with unsecured creditors.

India has been attracting foreign distressed-debt specialists to take advantage of $200 billion-plus of bad loans. The ruling, if it survives, may kill that trend.

Under an agreement with the Essar creditors’ committee, ArcelorMittal’s offer would have made secured financial lenders more than 90 per cent whole. While that’s a good recovery rate, it’s less than 100 per cent, meaning unsecured operational lenders should have had to go empty-handed.

In the insolvency judges’ view while collateral gives seniority in a liquidation, everyone’s equal in a bankruptcy resolution. Energy companies, power utilities, and even the state tax officer will have the same rank. [ At least the public (or public money will go where it belongs ]

Hong Kong-based investor SC Lowy also wants to appeal the decision. Global distressed-debt investors have been placing small bets in India, often by standing behind asset reconstruction firms. Now they’ll be unable to price the Indian opportunity.