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

Go First says all its misery is because P&W has neither repaired nor replaced the faulty engines.

Wadias, promoters of the beleaguered carrier Go First, surprised everyone early May when they suspended flights for a couple of days and then filed for bankruptcy at the National Company Law Tribunal (NCLT).

The play is a well-planned move aimed at securing the airline’s future as well as regaining control of it under India’s bankruptcy law, legal experts told Moneycontrol.

In fact, this should set the tone for how companies use the bankruptcy law in India, they added.

“The Wadias have made a smart move. They will initiate insolvency proceedings and then buy it back,” a senior corporate lawyer, who is aware of the developments in the case, told Moneycontrol.

“The only mechanism in the country today to achieve what is called as cross-class cram down is the IBC. If the Wadias are able to use it effectively, this will be a proof of concept of pre-packaged insolvency.” A cross-class cram down binds dissenting classes of creditors and stakeholders to a restructuring plan. A pre-packaged insolvency insolvency process allows for an informal understanding between creditors and debtors.

On May 2, Go First filed an application for voluntary insolvency resolution proceedings before the NCLT due to a "severe fund crunch." Kaushik Khona, Chief Executive Officer of the airline, told Moneycontrol that filing for insolvency was to preserve the company's remaining assets so that it could restart operations soon. Go First has been hit by the double whammy of grounded aircraft due to faulty engines, and mounting dues with vendors and lessors.

If the NCLT admits the insolvency plea and grants a moratorium, this will freeze past liabilities and ensure operational continuity for the carrier, allowing it to survive. Moreover, since the company’s accounts are not classified as bad loans, the promoters will be allowed to offer a resolution plan in due course.

“The objective appears to be that the insolvency of the company is resolved by the promoters by submitting their own resolution plan, as disqualifications under section 29 A (of the IBC) are not attracted. Further, on commencement of the corporate insolvency resolution process (CIRP), the servicing of debt will not be there and operations can continue without much difficulty,” said Ashish Pyasi, Associate Partner at Dhir & Dhir Associates. Section 29 A of the IBC lists individuals who are not eligible to submit resolution plans.

“The promoters realised that if the petition is filed swiftly then the value of the company can be protected without disturbing the operations, which will in turn maximise the value. If the operation is shut for long, slots are gone, and the fleet is taken back, then what will remain with the company?” Pyasi added.

Aircraft leasing companies have sought to repossess and de-register 20 aircraft leased to Go First. The lessors have also opposed Go First’s insolvency plea and its request for a moratorium on its financial obligations. The NCLT has reserved its order on the Go First plea and is expected to deliver it soon.

“The lessors were taking control of the fleets. In order to save it, this is the only opportunity left with the promoters. If they don’t initiate the insolvency at this stage, the lessor may take away the aircraft because they have already applied for de-registering the aircraft,” Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors, said. “The moment it is admitted, the moratorium kicks in, and no creditor can take control of any of the assets.”

Indeed, the NCLT can grant interim relief even before the Wadias’ plea is admitted, T Sundar Ramanathan, Co-founder of Sarvada Legal, said.

“The purpose of the IBC being to rehabilitate and revive the corporate debtor, an interim moratorium / interim stay can be granted to ensure that the corporate debtor "stays alive", or functional, pending its application,” he added.

The Wadia group-owned airline has liabilities worth Rs 11,463 crore. The Wadias are expected to push for a one-time settlement with banks, under which creditors will take a 'substantial haircut,’ according to reports.

The lawyers pointed out that promoters often don’t declare the distress in their companies or apply for voluntary insolvency using section 10 of the IBC as there is stigma around doing so.

“The use of section 10 has happened, but it is not common,” Krishnava Dutt, Managing Partner at Argus Partners, said. “It is an option available under law and the company has utilised it. There is nothing illegal about it. If they hadn’t, someone else would have filed the petition,” he added.

As far as the creditors are concerned, if the company hadn’t filed for insolvency they would’ve collected even less as the company would’ve gone deeper into debt, Dutt added.

As such, the banks are expected not to oppose the admission of the insolvency plea, experts said.

“At least the public sector lenders are not expected to oppose this. It is likely to go through. Everything is happening at lightning speed,” the senior lawyer, who did not wish to be named, said. “Obviously if they pay 10 cents to a Dollar, it will create a ruckus in the market. But if they pay 70 cents, then it is going to be fine. One-time settlement is not a bad thing,” he explained.

Under the IBC, if two-thirds of the lenders agree to restructure debt or take a haircut while the company is under insolvency, it is applicable to all the lenders, lawyers said.

If the Wadias’ move succeeds, it will set a precedent that will ensure that the IBC works as it is meant to.

“This is how it should be done. Distress is normal in a business, but if one cannot get all the lenders to agree, the account risks becoming an NPA and the company going into liquidation,” the senior lawyer said.

“You should restructure at the point of distress. Not five years later,” he added.