Rethinking Bankruptcy: A Strategic Move

Welcome to the first edition of "The Governance Connect", your monthly dose of corporate governance, presented in a simplified manner, with the intent to serve as an informational and educational medium for audiences interested in the domain of Corporate Governance.

EDITION SUMMARY

In this edition, we do a quick dissection of the ongoing GoFirst Bankruptcy case and map that with the Bankruptcy Law and provisions in India to provide a better understanding of this strategic tool.

Bankruptcy is more often than not seen as a sign of failure and a last resort for companies that are not able to manage their debts and obligations.  However, bankruptcy can also be a strategic move that allows companies to restructure their operations, renegotiate their contracts, and emerge stronger.

We will also explore some of the benefits and challenges of filing for bankruptcy as a strategic move for companies in distress.

What is Bankruptcy?

It is a legal process that allows individuals or companies, that are unable to sustainably manage their debts, to get relief or resolution. For this blog, we will stick to bankruptcy for companies.

There are 2 types of bankruptcy for businesses:

a.) Chapter 7 a.k.a Liquidation

This option involves liquidating all assets of the business and using the proceeds to pay off creditors. This is exercised when the company has no hope of revival and recovery from its debts.

• As per the Companies Act 2013 and Bankruptcy law, a liquidator is assigned by the court to oversee the insolvency proceedings
• The entity ceases to exist, employees lose jobs, and all shareholder value is wiped off
• The whole process takes a long time during which assets depreciate, due to which a large part of the due amount may not be recovered.

Chapter 7 bankruptcy results in the dissolution of the business and the loss of all equity for shareholders.

b.) Chapter 11 a.k.a Resolution

This involves reorganizing the business's debts and operations under a court-approved plan. Chapter 11 bankruptcy is usually chosen by businesses that have a viable future but need some relief from their current obligations. 

Under this provision, the company is allowed to operate while it negotiates with creditors and stakeholders.

Along with this, few important developments take place:

1. An Interim Resolution Professional (IRP) is assigned to oversee the proceedings
2. Post negotiations, there can be a reduction or modification of debts, contracts, leases, and other liabilities.
3. There may be a restructuring of the business's ownership and management.

Who can initiate Insolvency proceedings?

As one would normally imagine financial creditors and operational creditors to make the first move in insolvency cases, the Insolvency & Bankruptcy Code, 2016, also allows the company itself to file for bankruptcy. The GoFirst case is one such example.

The GoFirst Insolvency Case

The low-cost carrier, known as GoAir has been flying for 17 years and was recently rebranded as Go First. It ran into a financial crisis due to the grounding of 50% of its fleet of A320 neos, claiming issues with the engines. It held about 8% market share in the Indian aviation industry.

Quick Facts:

• Go First Airlines voluntarily filed for bankruptcy with the National Company Law Tribunal (NCLT) in May 2023. The NCLT would therefore be the Adjudicating Authority (AA)
• At the time of filing, it owed INR 11463 Cr. to multiple financial & operating lessors
• Go First had not defaulted up until the time of filing for insolvency
• Volatility & macroeconomic uncertainties majorly impact the operating costs of the airline industry.
• According to the International Civil Aviation Organization (ICAO), 44% of operating expenses is fuel, maintenance & crew. Fluctuations in fuel costs will obviously wreak havoc on the financials in such cases.

Factoring in the situation where 50% of the fleet is grounded while the doom of debt loomed large, invoking the bankruptcy (under Chapter 11) option, seems like a brilliant win-win strategy for all stakeholders. Here's why:

From Go First's perspective:

1. Go First would be shielded from all legal action and creditors for a period of 6 months (extendable to 270 days)
2. All assets would safely remain in possession of the company and allow it a chance to revive operations and get back to health
3. Debt restructuring: During this period, Go First can negotiate with creditors and restructure the outstanding debts which can potentially result in a considerable chunk of savings.

From the Creditor's perspective:

1. Financial creditors in such cases would hope that Go First makes good of the Chapter 11 provisions and gets back on track. The other option (Chapter 7) would mean bad loans and no one wants NPAs on their portfolio.
2. Bankruptcy filings under Chapter 7 take a long time to wind up(often up to 24 months) during which the assets depreciate and erode value for the creditors and lessors. Under Chapter 11, the creditors stand a better chance to recover a major portion of the debts, if not all.
3. As per the Insolvency & Bankruptcy code 2016, banks can give a loan to Go First on the pretext of saving the company and giving it a chance to repay the debt, which otherwise would not have been possible
4. The operating lessors who have leased aircraft and engines, had approached the NCLAT (National Company Law Appellate Tribunal) against the ruling and wanted the moratorium to be removed for assets whose lease expired prior to the filing of bankruptcy. These requests have been parked citing the reason that Bankruptcy law supersedes such requests

On a side note, Go First has also sued the engine manufacturer for damages worth $1.1 Bn, which it can pursue in the moratorium period. The outcome would be crucial to Go First's move ahead.

In Conclusion:

While the fate of Go First hangs in a tight balance, this case has been an excellent example of using Bankruptcy as a strategy for revival and it would be interesting to see the following unfold:

• How soon can Go First resume operations?
• Can Go First be successful in retaining critical staff to resume operations and maintain a healthy customer base in light of these proceedings?
• What will be the outcome of the lawsuit against the engine manufacturer?
• To what extent do the restructuring negotiations go in favor of Go First?

Indeed, this one is turning out to be a gripping case study...... one to watch out for and learn from.

Do post your thoughts on the content and share your valuable opinion and suggestions for future editions.

Disclaimer: The information contained in this article is for general informational purposes only and is not intended to be a substitute for professional legal advice. The author of this article makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the information contained in this article. Any reliance you place on such information is strictly at your own risk. In no event will the author be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this article.