First’s insolvency resolution process

Source: By Ishan Bakshi: The Indian Express

The low-cost airline Go First (originally GoAir) filed for the initiation of insolvency proceedings in early May this year. The company had been struggling with engine troubles for some time, which had led to the grounding of a large number of its aircraft. The percentage of grounded aircraft had risen from 7% of Go First’s fleet in December 2019 to 50% in December 2022.

As a consequence, the market share of the airline crashed from 11% in November 2019 to 6.9% in March 2023. This significantly affected its cash flows, weakening its ability to meet its obligations.

It is a struggling company’s financial creditors (banks) and operational creditors (who supply goods and services) who typically initiate proceedings under The Insolvency and Bankruptcy Code (IBC), 2016 for non-payment of their dues. In Go First’s case, however, it was the company that filed for the initiation of these proceedings. The airline had not defaulted on its loan repayments to banks, but had reportedly defaulted on obligations to its operational creditors.

Instances of a company initiating IBC proceedings are not common — there had been only 390 such cases until the end of March 2023.

What is the Insolvency and Bankruptcy Code?

In 2016, the government put in place a framework to deal with the problem of bad loans in the country’s banking system. The IBC provides a framework for a time-bound resolution process. Broadly, if a company is unable to service its obligations (payments that are due to its financial and operational creditors), one of two processes could follow: (i) the company’s liabilities are restructured, and it gets a chance to continue its operations, perhaps under new owners; (ii) its assets are liquidated, and the money is recovered.

Before the IBC, there were other regulatory frameworks to deal with bad loans. But it usually took very long for the process to conclude. As per the World Bank’s Ease of Doing Business report, it would take 4.3 years on average to resolve insolvency cases before the IBC was enacted.

The IBC put strict timelines in place. Initially, the process was to be completed within 270 days, failing which the company would be pushed into liquidation; the deadline was subsequently extended to 330 days. The time-bound nature of the process under IBC was appealing, because delays in resolution lead to further destruction in the value of the firm.

So did the introduction of the IBC help creditors?

The IBC attempted to reshape the credit culture in the country by titling the balance in favour of creditors. The threat of losing their company — under this framework, as soon the proceedings are initiated, the existing promoters/ management lose control over the firm — works as a powerful deterrent for errant promoters and puts pressure on them to honour their obligations.

This framework has also given a negotiating tool to operational creditors, who are typically small firms, to negotiate the payment of their dues by larger firms. Data from the Insolvency and Bankruptcy Board of India show that of all the cases admitted under IBC, proceedings in almost half have been initiated by operational creditors, signalling how widely this is being used by these firms.

And has the IBC succeeded in making a difference?

Contrary to expectations, outcomes under the Code have fallen short of expectations. The amounts recovered by banks have been lower than anticipated, and the time for completing the process has generally tended to exceed the prescribed timelines.

By the end of March 2023, 6,571 cases had been admitted under the IBC. Of these, 4,515 have been closed; the remaining are undergoing proceedings. Of the 4,515 cases that have been closed, 2,030 or 45% have ended up in liquidation. Resolution plans have been accepted in only 677 cases (15%). In these cases, creditors have realised only Rs 2.86 lakh crore as against their claims of Rs 8.98 lakh crore — this is less than a third of what was owed to them.

Then there are the delays in the process. The average time it takes to close cases works out to 614 days. Of the cases that are currently going through the resolution process, 64% have crossed the 270-day deadline. And in the cases that have gone into liquidation, 55% have been going on for more than two years, while 19% have been pending for more than one year.

What have been the consequences of Go First filing for bankruptcy?

The cancellation of Go First’s flights, especially in the ongoing busy season, has contributed to the mismatch between demand for air travel and supply of seats, and ticket prices have shot up, especially on routes where Go First had a significant presence.

Also, with Go First’s market share collapsing, that of other airlines has risen. IndiGo’s market share has gone up from 57.5% in April to 61.4% in May. The share of other airlines like Air India has also seen an uptick. Competition has reduced further in the domestic aviation sector.

So will Go First fly again — and if so, when?

Since the airline’s request for initiation of proceedings was admitted, there have been reports that its promoters, the Wadia Group, and the banks who have lent the airline money, are trying to put together a revival package. The airline is reported to have submitted a plan to the aviation regulator. As per this plan, Go First has proposed to commence operations with a fleet of 26 aircraft and 152 daily flights.

The airline is hopeful of beginning its operations by the end of this month. But it will face some difficulties. There are reports of pilots moving to other airlines. Much depends on the bankers. But the longer this process is delayed, the more will be the value lost, and the more difficult it will be to restart operations.