Go First may have been the first airline in India to file for protection under Section 10 of the Insolvency and Bankruptcy Code (IBC) but not the first globally to undergo insolvency in 2023. It filed for a voluntary corporate insolvency resolution process (CIRP) under Section 10 of the IBC on May 3, 2023. The National Company Law Tribunal (NCLT) heard its bankruptcy plea where the airline prayed for a moratorium from the tribunal to allow it to function and preserve its assets. The application has been admitted, and a moratorium has been initiated since May 11, 2023. The NCLT appointed Abhilash Lal as IRP (insolvency resolution professional) to oversee the process.
The initial signs of distress were witnessed back in 2019 when the company started facing liquidity issues. Subsequently, it had deferred its plans to go public in 2022. Further, to add to Go First’s woes, the Covid-19 pandemic disrupted the travel demand, increased costs and accelerated employee exits.
It has been alleged that about 34 percent of aircraft were grounded in 2022 owing to premature failure of engines supplied by P&W. Moreover, Pratt & Whitney allegedly refused to repair/provide a replacement. This led to the cancellation of 4,118 flights with 77,500 passengers leading to an adverse impact on cash flow and customer confidence. The distressed airline defaulted toward payment obligations to vendors and aircraft lessors and received notices from the lessors seeking payment.
Go First is now seeking a resolution under IBC, which allows a company to restructure its debt and revive its business under the court-appointed administrator.
Options available to Wadia Group
According to the present insolvency model, the existing promoters may lose control of the airline. However, the law has kept a window open for a formal exit from the IBC process if the airline and creditors agree on a one-time settlement (post-admission of CIRP application) vetted by 90 percent of the voting share of its creditors. Pursuantly, the Supreme Court upheld the withdrawal of insolvency proceedings in several cases by referring to the very purpose of Section 12A. More recently, the court also allowed the withdrawal of insolvency proceedings even after issuing of invitation for expression of interest in the case of Brilliant Alloys Versus Mr. S Rajagopal (2018).
Alternately, under Section 30 of the IBC, submitting a resolution plan subject to Section 29A prohibits the promoters of a company undergoing insolvency from participating in the bidding process. Section 29A states that a person shall not be eligible to submit a resolution plan if such person, at the time of submission of the resolution plan, has an account, or an account of a corporate debtor under the management or control of such promoters or of whom such person is a promoter, classified as NPA and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor.
The Wadia Group is reportedly mooting for a waiver of Section 29A under the IBC. The application of clause C of Section 29A may not constrain Wadia Group because as on the date of insolvency application, the airline did not commit any default towards payment of dues to the financial creditors, and its account continued to be classified as a standard account.
Thus, Wadia Group has both options in their bag, whether to opt for the procedure under Section 12 or, at a later stage, submit a resolution plan under Section 30 of the IBC. The outcome of Go First’s insolvency could set a precedent for other companies in similar situations to bid for assets undergoing insolvency. This could entice insolvency filing at an early stage and the prospect of revival increases. It remains to be seen how further attempts of Go First promoters and the legal course of action proceeds.
Revisiting Clause C of Section 29A
The Go First insolvency proceedings stood a highlighter towards a preference for rescue ethos by promoter-owned companies in India, even though the risk of losing control of their company will be higher on account of the creditor-oriented model of insolvency law in India. The airline owes around Rs 10,383 crore to its stakeholders, coupled with disruptions to adequate cash flows due to grounded aircraft, indicative of debt overhang.
The insolvency process has been initiated to preserve its existing assets, restructure its debts, infuse fresh capital, and business continuation as a going concern and repay its debts. The promoters could have also resorted to additional external financing in the vicinity of default toward operational creditors. But it might have been difficult for the airline to convince the capital market in the trying situations narrated in its insolvency application. Even if they had been able to raise capital, much of the cake pie would apparently be applied to meeting existing debt obligations. The airline might also face difficulties in renegotiating with all its creditors due to the likely problem of hand-outs by some creditors and by the time they renegotiate, its existing assets might have been swept away due to individual enforcement actions by the creditors.
Go First initiated insolvency proceedings when its loan accounts continued as standard accounts. This shall safeguard the promoters towards the stringent disqualification provision mentioned in clause C of Section 29A of IBC. Thus, the airline’s recourse to insolvency seems to be a tactical and appropriate stride to access the renegotiating platform where the airline and its creditors can renegotiate their relationships.
With the number of liquidation cases being significantly greater than cases of resolutions and the instances of lengthy timelines for completion of insolvency proceedings and learnings from Jet-Airways insolvency, the possibility of recourse to Section 12A driven by a one-time settlement cannot be precluded from future courses of action. Nevertheless, the episode of recourse to IBC in the case of Go First Airlines creates a ray of market maturity and the need to widen the room for promoters’ participation in insolvency by revisiting the ambit of Section 29A.
The one-time settlement apparently gives the impression of the promoters’ participation in insolvency, in a hypothetical absence of clause C, Section 29A (which is predominantly aimed at curbing the acquisition of a distressed at a discounted price by promoters). Existing evidence indicates that one-time settlement is prone to massive haircuts by creditors. For instance, in the case of Siva Industries and Holdings Ltd insolvency case, the withdrawal application was driven by a one-time settlement agreed with a haircut of around 93 percent by the lenders.
Although the principal philosophy behind clause C of Section 29A is to curb unscrupulous promoters from acquiring distressed companies at a discounted price, it was indeed welcoming at the time when the amendment was introduced to the IBC. But today, with the development of a healthy and fair debtor-creditor relationship in India and the maturity of the insolvency ecology, and relying on the premise of commercial wisdom of creditors, it is apt to let the committee of creditors take a call on the perils of approving any resolution plan submitted by promoter/s on a case-to-case basis.
Trisha Shreyashi is an Advocate & Columnist. Views expressed are personal.
Comments
0 comment