Go First insolvency: Making promoter’s bid count

After Go First filed for voluntary corporate insolvency resolution process (CIRP) under section 10 of the Insolvency and Bankruptcy Code (IBC), the National Company Law Tribunal heard its bankruptcy plea, where the airline requested for a moratorium allowing it to function and preserve its assets.

The outcome of Go First’s insolvency could set a precedent for other companies in similar situations to bid for assets while undergoing insolvency. This could spur filing for insolvency at an early stage, increasing the prospect for revival. The debtor can either opt for the procedure under section 12A (withdrawal of application), or submit a resolution plan under section 30 of the IBC at a later stage.

Exit option

As per the insolvency model, the promoters may lose control of the airline. However, the IBC has left a window open under section 12A, which enables formal withdrawal from the insolvency process if the airline and creditors agree on a one-time settlement (OTS) post admission of the insolvency application. This action must be vetted by 90 per cent of the voting share of creditors. The Supreme Court has upheld the withdrawal of insolvency proceedings in several cases by referring to section 12A. More recently the court had, in the case of Brilliant Alloys, allowed an exit from the insolvency proceedings even after the invitation for ‘expression of interest’ had been issued.

Also read:Go First suspends operations till May 26; may resume on May 27, airline tells pilots

With the number of liquidations significantly higher than resolutions, the lengthy proceedings, and the challenges identified in the Jet Airways insolvency, the possibility of seeking recourse under section 12A cannot be precluded in future.

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Experience shows that OTS is prone to massive haircuts by creditors. For instance, in the case of Siva Industries and Holdings, the withdrawal application was driven by an OTS agreed with a haircut of around 93 per cent by the lenders.

Alternatively, a resolution plan can be submitted under section 30. However, this is subject to section 29A, clause ‘c’, where the promoters of a company undergoing insolvency are prohibited from participating in the bidding processes.

Re-looking the clause

The Wadia Group, the promoter of Go First, is reportedly seeking waiver of section 29A. This provision, however, may not restrain Wadia Group — because, on the date of insolvency application, the airline did not commit any default in payment of dues to financial creditors, and its account continues to be classified as a ‘standard account’. This might safeguard the promoter against the stringent disqualification provision in section 29A (c).

The Go First insolvency proceeding is a textbook instance of preference for rescue ethos by promoter-owned companies in India, despite the risk of losing control on account of the creditor-oriented model of insolvency law. The recourse seems to be a tactical move to preserve its existing assets, restructure its debts, infuse fresh capital, and remain as a going concern and repay its debts. It sparks a ray of optimism for the maturity of the insolvency ecosystem in India.

Also read: Go First CEO to employees: Salaries for April will be paid, no haircut to be expected

The guiding principle behind 29A (c) is to curb unscrupulous promoters from acquiring distressed companies at a discounted price. However, changed circumstances indicate a need to widen the room for promoter participation. With the development of a healthy and fair debtor-creditor relationship, it is better to let the commercial wisdom of the committee of creditors prevail on the resolution plan submitted by promoters.

(Deb is a faculty member (business law) at Indian Institute of Management, Tiruchirappalli; Shreyashi is an advocate)

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