Bijoy P Pulipra
#GoFirst insolvency was a stitch in time
Go First Airlines, being in debt and operational hassles due to insufficient cashflows, had approached the National Company Law Tribunal (NCLT), for initiating the resolution process against itself under the provisions of the Insolvency and Bankruptcy Code. As the said action of the Airlines is voluntary in nature, this article analyses the same from a legal perspective, to bring out better clarity to the matter.
Conventionally, when a borrower/debtor makes a default in repayment of its liabilities, the creditors/ lenders shall initiate the recovery proceedings against it. Section 7 and 9 of the Insolvency and Bankruptcy Code, 2016(Code) enables a creditor to file an application before the Adjudicating Authority(NCLT) for the initiation of the Corporate Insolvency Resolution Process (CIRP) against the defaulting debtor. Section 7 is being filed by Creditors who had disbursed the money to the debtor against a promise to repay the same along with interest and such creditors are called ‘Financial Creditors’. Normally Banks, financial institutions, home buyers etc are coming under the said category. The other section of creditors is called operational creditors, who are basically suppliers and service providers. If a debtor is defaulting in making payments to the said operational creditors, they can approach the NCLT under Section 9 of the Code for initiating the CIRP against the said defaulters. The minimum amount of default should be Rs 1 Crore to file the application before the NCLT against a debtor who defaulted in repayment. At present the provisions can be invoked only against the Companies, LLPs and the Personal guarantors of such entities. Apart from the application submitted by the Creditors, the defaulting debtor itself can voluntarily approach the NCLT, under section 10 of the Code, with an application to initiate the CIRP, if they are unable to pay its debts.
On such application, the NCLT shall ensure compliance under the Code and admit the same, if there is a debt which is defaulted. On admission of the application filed by the Creditor, the CIRP shall be commenced and a moratorium shall come into effect which prevents any further legal or recovery proceedings against the debtor. The said moratorium is intended to give breathing time to the Resolution Professional appointed by the NCLT to look for a better takeover plan for the debtor, with the support and assistance of the Committee of Creditors(CoC). The Resolution professional shall conduct the valuation of the Corporate Debtor with the help of registered valuers and prepare the documents keeping in mind the said valuation. Unlike other recovery laws such as SARFAESI, the intent of the Code is to revive a debt-ridden entity from a debt trap under the wings of a new set of promoters and thereby protect the economic, social and operational texture of the debtor. During the CIRP process, the Resolution professional invite the prospective buyers to submit their revival action plan and evaluate the same from various aspects. If the revival plan submitted by any of the applicants is acceptable, the CoC shall approve the same and place it before the NCLT for its final nod. On getting the final approval of the NCLT, the applicant shall settle the creditors as mentioned in the plan and proceed with the revival mechanism envisaged in the plan.
If there is no plan, or the plans submitted are not acceptable to the CoC or NCLT, the debtor will have to face the liquidation proceedings under the Code. During the said process, the Liquidator appointed by NCLT shall sell the assets of the Debtor and utilize the proceeds to settle the liabilities as per the provisions of Section 53 of the Code.
Apart from the above methods, there is another mode for winding up the company. The said process is called ‘voluntary liquidation’, under the Code and governed by Section 59. The said process can be initiated by the shareholders of the company for reasons other than default in repayment of debts.
In the case of Go First, the application was moved by the company itself as it is unable to pay the salaries and other liabilities. Instead of waiting for a creditor to move the application before the NCLT, they voluntarily moved the application under Section 10 of the Code to initiate the CIRP against it. The said action is justifiable due to many reasons. Primarily, it will help to avoid further erosion of the assets and ensure early professional intervention to prevent value erosion. One of the main objectives of the Code is to maximize the value of the Corporate Debtor. Unlike a creditor-driven application, the process will be smoother as the same is being initiated with the full support of the debtor. This will help the Resolution Professional to get maximum value for the assets of the Corporate Debtor during the plan submission process.
In many cases of financial failures, the promoters, though fully aware, shall be hesitant to accept the hard reality of losing control over their business and shall resist any kind of actions by the creditors. However, historically almost all such attempts were proved to be a failure, as their resistance will eventually result in a delayed and value-eroded takeover. Any timely and proactive measures to save the ship from sinking are to be considered as the wisest decision and such attempts are to be encouraged and applauded. Another laudable factor in the case of Go First is the speed at which the NCLT, Delhi Bench had acted upon the application submitted before it. As proclaimed, speed is the essence of the Code and the steps taken by the NCLT to admit the application in less than 10 days time period is really a welcome move.
So, it can be seen that the promoters of Go First, being well aware of their inability to pay its debts, had moved the application before the NCLT to save the company from an impending failure. Coupled with the timely intervention of the NCLT, the application saved a lot in terms of time, money and value. This will help Go First to land safely in the hands of a new set of promoters and thereby protect the employability, economic and commercial aspects etc. to a larger extent.
Bijoy Pulipra LL.M,. FCS