The case of Go First, the Wadia Group-backed airline that sought voluntary insolvency protection, may set off a trend of crisis-ridden companies opting for this route to seek temporary relief from lenders during times of stress, experts said.
The airline filed for voluntary insolvency in the National Company Law Tribunal in New Delhi on May 10 under Section 10 of the Insolvency and Bankruptcy Code, which allows a debtor to initiate insolvency proceedings against itself. It also suspended flights.
The airline said it was forced to ground half of its fleet because of faulty engines supplied by US manufacturer Pratt & Whitney.
Section 10 of the IBC deals with the initiation of the corporate insolvency resolution process by corporate applicants that have defaulted on loans. The NCLT admitted Go First’s petition on May 10, granting it bankruptcy protection and disallowing lessors from repossessing the carrier’s aircraft.
It appointed Abhilash Lal of Alvarez & Marsal as the interim resolution professional (IRP) to run the company.
Temporary relief
Experts said other companies facing cash crunches may opt for this route to seek short-term relief.
Also read: MC Explains: What is Section 10 and 14(1) of IBC and what it means for crisis-ridden Go First
“The Go First IBC case has certainly sparked a significant conversation around IBC in India,” said Sonam Chandwani, managing partner at KS Legal and Associates. “Given its unique circumstances, it may indeed set a trend for future IBC cases, with more companies potentially considering this route to seek temporary relief from financial distress.”
According to Vineeta Kabra, a partner at Novatis Expert Resolution, Go First now can work around positioning its financials and restructuring operations because it has got the time and a revival plan, which other companies may follow during their crises.
“The move can be smart only when the airline can effectively restructure its business. Also, if the airline keeps its creditors happy and emerges with a healthier financial position, this could be called a smart move,” said Kabra.
After the NLCT hearing, Go First CEO Kaushik Khona said: “This is the best thing that could happen for the airline. The plan of action will now include IRP to discuss refunds and the resumption of flights. Our job was to see that the airline does not go down and does not lose its aircraft. Now, everything is in the IRP's hands.”
Experts said the NLCT proceedings will help the company revive and in turn benefit all the stakeholders and employees associated with Go First.
“Now, the aim for Go First will be to work around the proceedings in the right earnest of all the stakeholders,” said Ram Ratan Kanoongo, senior managing partner at Headway Resolution and Insolvency Services.
Also read: NCLT admits Go First's voluntary insolvency plea; moratorium to kick in
Chandwani highlighted that Go First can now make crucial operational adjustments and optimise its business model for improved performance in the long run.
By filing for voluntary insolvency, Go First aims to restructure its debt through negotiations with creditors, ensuring a more sustainable financial position.
“Additionally, the moratorium period during the corporate insolvency resolution process provides breathing room for the airline, preventing further legal action by creditors and allowing the company to focus on reorganising its business,” said Chandwani.
Supriya Mehta, an advocate with a law firm, said Go First is not the first to opt for voluntary insolvency in India.
“Companies go for voluntary insolvency by themselves. These cases are common in India,” said Mehta.
Balance needed
Moneycontrol reported previously that Go First expects to return to the skies by May 24. It aims to restart with about 20 aircraft to operate about 1,200 flights a week and slowly scale up operations.
While the Go First insolvency case has been hailed as a quick smart move, experts highlighted the need for checks and the need to eliminate loopholes associated with the proceedings.
According to Chandwani, regulators and lawmakers must strike a delicate balance between offering temporary relief to genuinely distressed companies and preventing misuse of the insolvency framework.
“This may involve tightening eligibility criteria or introducing additional safeguards to ensure that only companies facing genuine financial distress can opt for this route. Moreover, it is crucial for the insolvency process to be transparent and efficient, allowing stakeholders to monitor the progress of cases and hold decision-makers accountable,” Chandwani said.
Also read: Go First: Banks in wait-and-watch mode on fresh funding, seek clarity
However, an insolvency professional who previously worked on an airline case said on condition of anonymity that this move has given a bad name to Go First and can raise doubts in the minds of stakeholders.
“Creditors were kept in the dark and stakeholders may feel that the insolvency proceedings will attract bad light to the Wadia-owned airline,” the professional said.
Kanoongo said the decision to go for insolvency shows there are several factors that can affect a company’s operations.
“Other companies will take note of the reasons the airline went for insolvency. Be it operational issues or a financial crunch, the IBC framework opted for in this case can certainly be a guiding light favouring all the stakeholders involved,” said Kanoongo.
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