MC Explains: What is Section 10 and 14(1) of IBC and what it means for crisis-ridden Go First

The National Company Law Tribunal (NCLT) on May 10 admitted stalled domestic carrier Go First's insolvency plea. In a relief to the Wadias, the moratorium will kick in under section 14(1) of the Insolvency and Bankruptcy Code (IBC).

Go First announced on May 2 that it has filed an application for voluntary insolvency resolution proceedings after it was forced to ground half of its fleet. The company blamed what it called faulty engines supplied by American aerospace manufacturer Pratt & Whitney.

The airline filed for insolvency under Section 10 of the IBC before the National Company Law Tribunal (NCLT) in New Delhi.

What is the case?

Go First’s announcement that it company has filed for insolvency was made by Chief Executive Officer (CEO) Kaushik Khona, shortly after the carrier said it will temporarily suspend flight operations on May 3 and 4 due to a "severe fund crunch". The flights will be restarted once the NCLT admits the application, Khona said.

Also read: Wadias’ Go First manoeuvre should set the tone for IBC use

The loss-making airline said in a statement: “Go First has had to take this step due to the ever-increasing number of failing engines supplied by Pratt & Whitney’s International Aero Engines LLC, which has resulted in Go First having to ground 25 aircraft (equivalent to approximately 50 percent of its Airbus A320neo aircraft fleet), as of May 1, 2023.”

The airline further stated that the percentage of grounded aircraft due to Pratt & Whitney’s faulty engines has grown from 7 percent in December 2019 to 31 percent in December 2020 to 50 percent in December 2022. This is despite Pratt & Whitney making several assurances over the years, which it has repeatedly failed to meet.

How does Section 10 of IBC work here?

A company can file an application for initiating a corporate insolvency resolution process only if it has committed a default.

Go First, in a hearing with the NCLT on May 4, argued that the company had come to NCLT not because of bad corporate governance but due to Pratt & Whitney's unserviceable engines, forcing it to ground 28 of its 54 aircraft. Kaul argued that if Go First stops functioning, it will lead to a monopolistic situation in the market.

Also read: 'Severe fund crunch': Go First files for voluntary insolvency resolution before NCLT

The airline contended that the news of its application for voluntary insolvency resolution proceedings is creating a cascading effect where planes are being seized, leases are being terminated and bank guarantees are being revoked.

The airline had not defaulted on its financial creditors till April 30. However, from then to now, there is a default of Rs 11 crore, Kaul said.

What is section 14 (1) of the IBC?

Section 14(1) of the IBC works around the moratorium of the involved company's insolvency proceedings. The NCLT approved GoFirst's insolvency under section 14(1).

Under the moratorium section, the transferring, encumbering, alienating or disposing of any assets by the corporate debtor is prohibited. Alongside this, any action to foreclose, recover or enforce any security interest created by the corporate debtor is also prohibited.

How much is Go First’s debt?

The airline’s insolvency application showed that the airline owed Rs 11,463 crore to its creditors, which include banks, financial institutions, vendors, and aircraft lessors.

A good chunk of its debt, Rs 6,521 crore, is towards financial creditors.

The list of financial lenders includes Central Bank of India, Bank of Baroda, IDBI Bank, Axis Bank and Deutsche Bank.

What do experts say?

They say that the airline has applied for voluntary insolvency, which means the company is seeking time to come out of bankruptcy and work around its debt.

Also read: GoFirst files for bankruptcy: What it means for Indian aviation

“The company has applied for voluntary insolvency under Section 10. This means that the company needs time to revive and work around its debt operation,” said Sonam Chandwani, Managing Partner, KS Legal and Associates.

An insolvency expert, who did not wish to be named, said that Section 10 provides an opportunity for the company to resolve its debt and revive operations through the voluntary resolution process.

“Companies apply for Section 10 insolvency to start the proceedings independently. This gives them the time to work on their operations,” said the insolvency professional.

Also read: IOCL invokes Rs 500-crore bank guarantee by GoFirst, dues at Rs 50 crore now: Sources