Resolution realities

Go First's complexity will be a test case

The National Company Law Tribunal (NCLT) has done well to swiftly admit Go First’s voluntary insolvency plea under the Insolvency and Bankruptcy Code (IBC) and appoint an interim resolution professional. The initiation of the process means creditors will not be able to recover dues for now. The airline, which had been operating for about 17 years, stopped flying earlier this month because of financial difficulties. Notably, it blamed US-based Pratt & Whitney (P&W) for not supplying engines, which led to the grounding of more than half its fleet. The airline informed the tribunal that it had won an arbitral award against P&W. It has also initiated enforcement proceedings against P&W because of non-compliance. The airline had liabilities worth Rs 11,463 crore, which made regular operations difficult.

While the timely admission of the case is the first right step, it will be of interest to see how the matter proceeds, given the complexities involved. It is worth noting, although the airline was facing financial difficulties, it blamed a third party for its woes and has an arbitration ruling in its favour. It has also gone voluntarily to seek a resolution. One of the most important outcomes of this step is lessors looking to take possession of aircraft owing to payment defaults will not be able to do so because of restrictions imposed under the IBC. In fact, this may be the biggest motivation for approaching the NCLT because having aircraft in possession will improve the chances of restarting operations.

It would also be worth watching how the lenders approach the matter and to what extent they are willing to extend relief. Besides, there will be a high public interest in the way the matter proceeds. The airline was operating about 200 daily flights before approaching the NCLT. The non-availability of those flights clearly has price implications for flyers. It has been reported that the Go First matter may increase aircraft lease rentals for Indian carriers because of increased risks. The most critical thing to watch, however, would be how quickly the matter is resolved at the NCLT. The primary objective of the IBC is to resolve corporate insolvencies in the given timeframe so that productive assets can be put to use at the earliest. But the experience so far has been underwhelming. According to the Insolvency and Bankruptcy Board of India (IBBI), 611 insolvencies that yielded a resolution plan by the end of December 2022 took, on average, 482 days. Similarly, about 1,900 cases that went for liquidation took, on average, 445 days. There is clearly a need to reduce the amount of time taken to resolve insolvencies.

Time is of the essence in insolvency resolution. Delays erode the value of assets in question and affect realisation, which is a loss for the economy at a broader level. To be fair, the government has been working to improve the bankruptcy system, but more will need to be done. The IBBI is also seeking public comments on regulations it has notified till now. It intends to process the suggestions and make necessary changes. Both the government and the regulator must make adjustments to improve the efficacy of the bankruptcy process. In many ways, the Go First matter is a test case for the IBC. An early and fair resolution will increase confidence in the system.