NCLT ruling on Go First application to refund passengers will bring clarity, say lawyers

Go First Insolvency

On July 31, Go First informed the National Company Law Tribunal (NCLT) that it was seeking its consent to refund the ticket fares of 15.5 lakh passengers, amounting to Rs 597 crore. The application was moved under Section 60 (5) of the Insolvency and Bankruptcy Code (IBC), 2016, which empowers the tribunal to adjudicate on any issue in relation to the insolvency resolution process.

The Resolution Professional (RP) chose to file this application as there is little clarity on the status of money received by a company in the insolvency process for a service to be rendered in the future. In Go First’s case, the airline had taken bookings for a day beyond its grounding i.e., May 3. It now proposes to refund the same in order ensure that its resumption of service is smooth. The Directorate General of Civil Aviation (DGCA) had also asked the RP to inform it of a mechanism to refund passengers whose flights were cancelled pursuant to the airline’s grounding on May 3.

Lawyers have opined that the application is likely to provide legal clarity on issuing refunds when a company has taken money to render services in the future.

Addressing customer claims during insolvency is not a straightforward matter as the IBC provides a mechanism to resolve insolvencies, but does not explicitly outline the treatment of customer claims, such as refunds for cancelled tickets, noted Aditya Chopra, managing partner at Victoriam Legalis, Advocates & Solicitors. “The Go First case could set a precedent for failing airline companies with regard to customer refunds during insolvency. If the NCLT permits the airline to refund passengers, it may signal a shift towards considering customer claims as valid during insolvency proceedings.”

“This is a plea that doesn’t seem to be within the four corners of the IBC code. It is, in essence, a pleading to keep the airline in business, making sure that it doesn’t leave behind disgruntled passengers. It would be interesting to see what legal provisions the NCLT would apply to grant such a right, if at all it does,” notes Archana Balasubramanian, partner, Agama Law Associates.

Not a first
This is, however, not the first time the tribunal has had to deal with ticket refund claims. In the Jet airways insolvency case, refunds were processed as part of the resolution plan. The refunds, however, were presented as a resolution plan, which was subsequently accepted by the tribunal. In Go First’s case, however, the tribunal has been asked to pass orders to this effect.

Aditya Vardhan Sharma, Counsel at SKV Law Offices, noted that this is not the first time the NCLT is adjudicating on refunds, and that normally, refunds fall under the category of ‘operational debt’. “The question of whether a claim regarding refund of advance payment where services have not been provided by a party, despite receipt of such advance, can be considered as ‘operational debt’ under the IBC has not been conclusively settled. This question, if addressed in the Go First Case, will surely be a precedent on refunds in the context of failing transport companies,” he said.

CoC, IBBI response to play key role
During the hearing on July 31, the tribunal sought responses from the Insolvency and Bankruptcy Board of India (IBB) and the Committee of Creditors (CoC) of the airline. The tribunal also opined that it would be appropriate if the RP obtained a resolution from the CoC on refunds, since it would have a direct bearing on them.

“In this case, since the RP is looking to refund the money to the ticket purchasers, it will reduce the asset size of the company, which was frozen as on Insolvency Commencement. It will also impact recovery for the other creditors to the extent of Rs 580 crore. Hence, it seems the NCLT has asked the RP to take approval from the CoC in this regard,” said Nakul Mohta from Chambers of Nakul Mohta and Misha Rohatgi Mohta.

The IBBI is expected to file a response on the classification of the nature of the liability that the airline has with customers. The IBC broadly classifies creditors into two categories: financial creditors and operational creditors. Financial creditors are those from whom the company has borrowed money; operational creditors are those to whom the company owes money by virtue of its operations. Banks can be classified as financial creditors while workmen and employees can be classified as operational creditors.

“Under IBC, any kind of dues that are payable by the Corporate Debtor as on the insolvency commencement date are usually claimed as ‘operational claims’ or ‘financial claims’ under prescribed forms,” said Shashank Agarwal, an advocate at the Delhi High Court. “In the present case, the situation is different. Such monies are paid by the customers to the websites/aggregator/marketplace providers and kept in a separate escrow-like account. Thus, as long as the money is lying in such an account, the Corporate Debtor cannot lay claim on such monies.”

“It will be interesting to see whether the NCLT, COC and IBBI take the view that such a refund is part of the ongoing business of the airline, as part of its revival,” said Prashant Mara, managing partner at BTG Legal. He added that India needs a travel insurance product for delays and cancellations caused due to such insolvencies.

The case is expected to be heard by the NCLT on August 7. Go First was admitted into the insolvency process by the NCLT on May 10. On May 22, the NCLAT upheld the order admitting Go First into the IBC process.