Moneycontrol Pro Panorama | Will GoAir’s manoeuvre end in a safe landing?

A critical issue in teh GoAir case was NCLT’s desire to ensure the protection of assets and employees and to act in the larger public interest.

Dear Reader,

Typically, creditors are the ones who drag a defaulting company kicking and screaming to the insolvency courts. A legal battle then ensues even to admit the company into the CIRP and if they succeed, then begins the long journey to resolution or if that fails then liquidation. In Go Airline’s (GoAir) case, the company offered itself to the insolvency process even as aircraft lessors—who had suffered default-firmly opposed it. While GoAir succeeded in admission, how this case eventually ends will hold significant lessons for the insolvency process and companies in trouble.

In fact, in GoAir’s case, financial creditors had not suffered a default, except recently, in May 2023 for a small interest payment of Rs 11.03 crore. As of April 28, GoAir's debt amounted to Rs 6521 crore. The amounts it has defaulted on are: Rs 1202 crore to vendors and Rs 2660 crore to aircraft lessors, totalling Rs 3862 crore. It appears that GoAir prioritised financial creditors while putting operational creditors on hold for payments.

The primary reason cited by GoAir for its financial troubles is that a third of its aircraft were grounded in 2022 due to defective engines supplied by Pratt & Whitney, and this has risen to a little over half of the 54 aircraft it has as of date. It won an arbitration order in its favour, which directs Pratt & Whitney to supply 10 engines by April 2023 and 10 engines per month till December 2023. But, GoAir claims this has not been followed and it’s now filing an enforcement application in Delaware, USA. News reports show Pratt & Whitney as saying that GoAir has not been making payments on time.

This case is an important one, being a high profile corporate debtor that has approached the court for voluntary insolvency. The lessors were keen on repossessing the aircraft, saying that the airline could not survive as a going concern due to the absence of flying aircraft and grounded aircraft are unproductive assets and will burden the debtor with additional dues. They did make other contentions too, including that they may initiate proceedings under Section 65, that is initiation of insolvency with malicious intent. The NCLT order states that nothing prevents them from doing so even after admission into the insolvency process.

The order may be appealed, according to news reports, at the NCLAT and depending on the outcome there may even reach the Supreme Court. For now this order recognises the ‘urgency’ in this case. A critical issue in this case was NCLT’s desire to ensure the protection of assets and employees and to act in the larger public interest.

The airline industry is a peculiar one, not just because many of them make losses. The main asset are aircraft costing hundreds of millions of dollars but these can be leased or owned, depending on the airline’s business model. Whichever business model they choose, these aircraft have little operational value if they can’t be flown. That, in turn, also depends on crucial intangible assets such as flying rights and airport slots. Airlines don’t have any permanent entitlement over these slots, as bankrupt airlines have found out to their dismay.

If the airline were to lose these aircraft, it would not be able to fly on the routes allocated to it, and if it does not fill its schedule as committed, then it may find them being handed to other airlines who have the capacity. Similarly, if airports find their slots being unutilised, they will hand them over to other airlines. A non-operational airline won’t be able to meet its payments to these entities. The government too plays a role in these matters. It’s a symbiotic relationship between the airline and these various players but also a commercial one. An airline that is not flying finds itself losing access to these ‘assets’.

While the NCLT order does not get into these specifics, it’s clear that without being admitted to insolvency, the lessors would have moved to take back the aircraft, and if they succeeded GoAir would have had an uphill task even if it managed to secure engines later. This order gives it a window of opportunity to enforce the order, get the engines and get its aircraft off the ground. And, while it works on that, to keep its existing aircraft in the air, so that cash flows resume and it can earn revenue and meet expenses, basically stay as a going concern.

However, note that it’s like any other corporate debtor admitted to insolvency. The order says that “the suspended board of directors and ex-management” shall extend support to the interim resolution professional (IRP). They have already been stripped of their positions. It’s a different matter that the IRP has been proposed by GoAir, so it’s unlikely to be an adversarial relationship. But, now creditors will have to come together and figure out the next course of action and the process will take over.

The enforcement of the arbitration award against Pratt & Whitney will be a priority. But, a committee of creditors will now be formed with financial creditors at the helm, with other creditors also on board, who will attempt to stitch together a revival package. How banks will respond to its financing needs remains to be seen, as is the co-operation from vendors that are critical to flight operations.

The existing owners may hope that they can work out a solution which could involve some capital restructuring and some funds’ infusion, and if they are able to secure supply of engines then more aircraft will be in the air and will improve its operational position. Then, the company could exit the insolvency process with the existing ownership protected.

But, there’s the question of whether the committee of creditors will wait till then or push for a management change. After all, the typical procedure is for the IRP to invite resolution plans. If a pair of stronger hands puts forth a proposal that gives more confidence to creditors, won’t they prefer that? There is also a question of whether existing promoters will be allowed to submit a resolution plan or be barred under insolvency law provisions.

Ultimately, this case will not only determine the fate of India’s 3rd largest airline but also contribute to strengthening of the insolvency process, which has been shaped by several judgements since the code was enacted. In some ways, GoAir can be said to have sought protection from bankruptcy proceedings that would have become inevitable if the current situation had continued. Then, banks would have dragged it to insolvency and matters would have been altogether taken out of its hands.

How this case attains finality will determine if GoAir did the smart thing by opting for voluntary insolvency. Others will then take inspiration from its experience, or not, when faced with a similar situation.

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