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Saloni Kothari, Corporate General Counsel 

08 May 2023

Wadia Group’s voluntary bid for resolution of its cash-strapped airline Go First will be the first major test of the Insolvency and Bankruptcy Code (IBC) after it was buttressed in 2017.

Insolvency lawyers and experts, however, believe the group may have acted with the confidence that the resolution will end up with sharp haircuts for the lenders, allowing it to pare its massive debt and come out stronger.

The country’s first corporate resolution plan under IBC resulted in a 94% haircut to the lenders in August 2017 as Synergies-Dooray Automotive promoters retained the firm by paying just 54 crore to the creditors, against dues of over900 crore. This cast doubts on the efficacy of the IBC, which was then a little over a year old, and prompted the government to arm it with Section 29A, making it difficult for promoters of bankrupt companies to regain control of their firms by inflicting injuries to creditors.

Section 29A sets out exclusion criteria for persons to become a resolution applicant, and it virtually puts promoters at greater risk of losing control. The sharp drop in the share of resolutions driven by corporate debtors since 2017 (from 22 of 37 initiations at end of March 2017 to just 370 of 6,195, as of December, 2022) has showed that corporates have indeed become wary of taking the insolvency process for a ride after Section 29A was added to the IBC.

According to experts, given the current law, there are two situations where the debtors themselves could resort to resolution of a troubled company. One, when its equity base is completely eroded and the promoter hasn’t given personal guarantee to lenders, and second, when the promoters believe they they will remain in control and the resolution will result in reduction of debt.

Whatever be Wadia group’s strategy, the statement of the National Company Law Tribunal (NCLT) while reserving its order in the case on Thursday, that there’s no provision in the IBC for the interim moratorium sought by the company, indicates that the going may be tough for the promoter. As of now, legal experts say, lenders or vendors can invoke the airline’s bank guarantees with them, and the lessors are already seeking to take repossession of aircraft.

Noted insolvency lawyer Sumant Batra said: “Until now there have not been any big-size voluntary filings by corporate promoters for insolvency. Go First process is likely to see some innovation, but I see no short cuts. We are probably looking at a fairly long-drawn process.” He added that, after a point, the lenders would likely exert control over the process, much against the wish of the promoters. “It will be interesting to watch how the process unfolds.”

MS Sahoo, former chairman of the Insolvency & Bankruptcy Board of India (IBBI), said companies have generally been wary of initiating the IBC resolution process for fear of Section 29A, which may result in change of hands. “Ideally, this (debtor-driven resolution) should be the route to deal with failure,” he said. However, he warned that if the creditors are not careful, such a process could result in “deep haircut without true resolution”.

However, IBBI data shows that average time taken for a corporate insolvency resolution process is significantly lower for processes initiated by debtors, even as the realisation by lenders, at 18.3% of claims, is much lower, as compared to processed initiated by the latter (32.4%).

Already, the Go First resolution process has run into rough weather, with aircraft lessors urging the aviation regulator to deregister some of its planes, as a prelude to taking them back. GY Aviation Lease, SMBC Aviation Capital, Pembroke Aircraft Leasing and others have submitted requests to take back at least 20 planes from the troubled airline.

Soumitra Majumdar, partner at legal firm JSA, said, “In the case of voluntary filings (by corporate debtors), the moratorium commences after its admission in the tribunal, much like in the case of lenders moving the bankruptcy courts. The time taken for admission under a voluntary filing may be comparatively faster. Post admission, the CIRP process is much similar.”

Nishant Singh, partner, Luthra and Luthra Law Offices India, noted that in the past, Reliance Communications was one of the companies that had filed for voluntary insolvency resolution. “The motive of the promoter of filing under Section 10 of the IBC is to get a breather, so as to negotiate with creditors and also to get a moratorium on any claims,” he said.

Saloni Kothari, corporate general counsel & restructuring services partner, BDO, in India also noted that a company of the size and scale as Go First, especially in the aviation sector, has not been admitted into voluntary insolvency in India so far.

Even though Section 29A successfully prevented delinquent promoters from regaining control of their companies, most litigation initiated under the IBC still relates to it.

The persons barred from filing for insolvency under the section include non-discharged insolvent, a wilful defaulter under the Banking Regulation Act, 1949, and those barred by the market regulator Sebi from trading in securities or accessing the securities markets. Persons who have been disqualified to be director of a company under the Companies Act and those punished for offences with imprisonment above certain periods are also barred.

Wadia group could initiate the resolution process and the NCLT allowed it because it has met these eligibility criteria and hasn’t defaulted yet.

Source : Financial Express