Avoidable delay

Jet's assets lay rusting as banks dithered on going to NCLT

On Thursday, the National Company Law Tribunal (NCLT) admitted a plea made by a consortium of lenders to initiate bankruptcy proceedings against the grounded Jet Airways. This follows the failure of the bank consortium, led by the State Bank of India, to find a buyer. This search had been ongoing even before the consortium took operational control of the airline in March this year. The banks had hoped to find an entity willing to take over Jet after its former chairman Naresh Goyal was out of the picture. But even a formal process of bidding resulted in only a single effective bid, from Jet’s existing minority shareholder, the cash-strapped Etihad Airways from Abu Dhabi. There were enough problems with this bid in the banks’ eyes that they allowed the opportunity to pass them by. First of all, Etihad could not become a majority owner; second, it needed regulatory exemptions from the Securities and Exchange Board of India; and, finally, the banks were uncomfortable with the size of the write-off of their loans that reviving Jet on Etihad’s terms would have entailed.

 
The debt-laden airline’s troubles began when it defaulted on a loan last December. For inexplicable reasons, Mr Goyal was given an inordinately long rope by the lenders, which worked to the detriment of everyone else.  As a consequence of the banks’ dithering, Jet Airways is now being subjected to the bankruptcy procedure after having been grounded for weeks — since the middle of April, in fact. A going concern with prime landing slots is a far more valuable entity than an airline that has been grounded, thanks to the mistakes of its former management and creditors. It remains to be seen how much value destruction the banks’ consortium has created for itself. With the airline now referred to the NCLT, lenders can expect to recover only a fraction of the Rs 8,400 crore it owes them. Instead of facing facts, the banks made grandiose statements such as claiming that a buyer would be found for Jet by May 31. Who knows how much longer the banks would have allowed Jet’s assets to rust without taking any real action to dispose of them, if their hand had not been forced by the non-financial creditors of the airline who moved the NCLT on June 9.

 
This is another reminder that in bankruptcy proceedings a swift acknowledgement of failure from the financial creditors is vital. Banks must act swiftly when an asset has become distressed. The longer they wait, the more money they will lose. It is unfortunate that too many in banking have failed to see the advantage of early action. During Thursday’s hearing, the NCLT has asked the interim resolution professional to try and resolve the matter within three months. That’s good news, but one that doesn’t inspire much confidence, given that the resolution of cases so far referred under the Insolvency and Bankruptcy Code has been fraught with long delays and disputes.