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Done, dented, damaged: The IBC edifice, even before it’s 10

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– Sikha Bansal, Senior Partner | resolution@vinodkothari.com

What was ushered in as a new era of legal reforms in the country, with keen interest from all over the world, is now a bruised, battered structure, even before it cuts its cake for the 10th time.

The BLRC Vision

When the Bankruptcy Law Reforms Committee first put the Insolvency and Bankruptcy Code, 2016 (“IBC”) into its mould, they envisaged it as a tool in the hands of creditors who should decide on the fate of a defaulting firm. As they put it, “The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.” Needless to say, they also recognised that decision-making has to be quick – as delays lead to value destruction. Indeed, the design and structure of IBC was promising enough – a unique categorisation of creditors as financial and operational creditors (found no-where in the world) with financial creditors, a creditor-driven resolution process, strict hardbound timelines, an irreversible liquidation outcome, a well-thought of priority waterfall, and a court-appointed liquidator taking the corporate debtor to the death pyre.

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GoAir Insolvency: Lessors’ rights gone in thin air?

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– Financial Services Division, finserv@vinodkothari.com

A Special Bench of NCLT,  New Delhi admitted the insolvency of Go Airlines (India) Ltd, popularly known as GoAir, on the 10th May 2023. The insolvency was admitted on an application of the company itself, on the ground of a self-admitted default of Rs. 11.03 crores towards interest to financial creditors, out of a pile of debt, that is, Rs. 2660 cr towards aircraft lessors and Rs. 1202 cr towards its vendors. The application was admitted in the face of strong opposition by the financial creditors and the lessors of aircrafts taken on lease by the company.

Subsequently, on an appeal before the NCLAT, the appellate forum affirmed the order of the NCLT, rejecting the contention that the filing of the insolvency application was malicious. The matter may still be taken up to higher or other forums, but in the meantime, there are question marks on India as a favoured jurisdiction for aircraft leasing. Aircraft lessors need certainty as to the exercise of their rights over the leased aircraft in the event of a lessee default, and the Cape Town Convention (CTC), signed under the auspices of UNIDROIT way back in 2021, is a set of minimum assurances that the countries signing that convention have provided to aircraft lessors. The question is, India having actually been a signatory to the Convention, is it okay to have stayed the rights of the lessors by way of a moratorium during the entire period of insolvency resolution?

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NCLAT gives a go signal to the Go Airlines insolvency application

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– Neha Malu, Senior Executive & Tanay Dubey, Legal Intern | resolution@vinodkothari.com

Background

In India, airline companies prefer acquiring aircrafts through lease rather than buying them. According to a report released by PwC, as of 2018, around 80% of India’s commercial aircrafts are leased, much more than the global average of leased commercial aircrafts as compared to commercial aircrafts in use, 53%. According to the report, airlines prefer leasing aircrafts predominantly due to two reasons: first, the lower overall cost of leasing which allows the airlines company to spend available capital on giving price advantage to the price sensitive customers in India and; second, because of the shorter fleet replacement cycles, leasing aircrafts provides airlines an option to quickly increase or decrease the capacity, thereby keeping the fleet younger.

Go Airlines, an ultra-low-cost airline, possesses a fleet of 54 aircraft, with the majority obtained through leasing arrangements with different aircraft lessor companies. Unfortunately, the airline is currently facing financial difficulties caused by the non-delivery of engines from Pratt and Whitney (P&W), a US-based jet engine manufacturer. As a result, they have been compelled to ground over 50 planes. Due to concerns about the feasibility of the CIRP and the airline’s revival, the lessors want to recover their aircrafts from the airline.

Go Airlines (‘Corporate Applicant’) has been defaulting towards the aircrafts lessors, vendors, and financial creditors from 2022 onwards. In order to keep the company as a going concern and retain the possession of leased aircrafts, the Corporate Applicant filed an application under Section 10 of Insolvency and Bankruptcy Code, 2016 (‘IBC’). The umbrella of moratorium was opened for Go Airlines after its voluntary application for resolution under section 10 of IBC was admitted by the NCLT leading to a complete prohibition on transfer of any of the leased aircrafts which were in possession of Go Airlines as on the date of admission of the CIRP application. In the present case, though the lessors of the aircrafts had terminated the lease agreement days before the admission of the CIRP application by NCLT, the possession remained to be transferred to the lessor as on the date of admission.

An appeal was preferred by the lessors against the order of the NCLT contending that the said application was filed with fraudulent and malicious intent. Further, the lessors were not given the notice providing for an opportunity of hearing before admitting the application. In addition to this, given the fact that the lease agreement was cancelled by the lessor prior to the admission of CIRP application, the Corporate Applicant has no legal right to claim possession and moratorium under Section 14(1)(d) of IBC on the assets of the lessor.  

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Contractual Freedom Vs. Corporate Rescue: Taking Anti-Deprivation Rule beyond Gujarat Urja ruling

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  • Vinod Kothari, Managing Partner and Sikha Bansal, Partner

Insolvency is a state of insufficiency – as such, the need to protect ‘whatever is there’ is quite
obvious. The rule of ‘anti-deprivation’ offers that protection.
Under normal circumstances, the autonomy of parties entering into contracts is well-established.
However, in insolvency, there is an inherent tension between contractual freedom and the objective
of corporate rescue and the need to ensure pari passu treatment to all claimants clamouring to share
what is insufficient, and therefore, contractual provisions are quite often subjected to either statutory
challenge or are read down or invalidated by courts. The anti-deprivation rule, also sometimes
called rule against ipso facto clauses in contracts, seeks to invalidate any contractual provision
which has the effect of depriving the insolvent’s estate of any right, property, or benefit, by the very
fact (hence, ipso facto) of the entity becoming insolvent. The rule of anti-deprivation thus seeks to
protect the insolvent’s estate (and consequentially, its creditors) from getting ‘deprived’ as such.

The full article is published in the Quinquennial of Insolvency and Bankruptcy Code, 2016  and can be read here. 

Resolution Plans – A Non returning visa to the resolution land

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Anushka Vohra | Deputy Manager (corplaw@vinodkothari.com)

On September 13, 2021, in the matter of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited[1], the Apex Court ruled that a Resolution Plan, once submitted with the Adjudicating Authority (“AA”) for approval, cannot be subsequently withdrawn at the behest of the Resolution Applicant. While this question of withdrawal of resolution plans has been around for quite some time, especially due to the COVID disruption, the Hon’ble Supreme Court has now given the final word of law.

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Inter-se Ranking of Creditors – Not Equal, but Equitable

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-Megha Mittal, Associate and Prachi Bhatia, Legal Intern 

(resolution@vinodkothari.com)

Insolvency laws, globally, have propagated the principle of equitable distribution as the very essence of liquidation/ bankruptcy processes; and while, “equitable distribution” is often colloquially read as “equal distribution” the two terms hold significantly different connotations, more so in liquidation processes – an ‘equitable distribution’ simply means applying similar principles of distribution for similarly placed creditors.

Closer home in India, the preamble of the Insolvency and Bankruptcy Code, 2016 (‘Code’/ ‘IBC’) also upholds the principles of equitable distribution – thus balancing interests of all stakeholders under the insolvency framework. Judicial developments have also had a significant role in holding such equity upright[1]. However, in the recent order of the Hon’ble National Company Law Appellate Tribunal, in Technology Development Board v. Mr. Anil Goel[2], the Hon’ble NCLAT has refused to acknowledge the validity of inter-se rights of secured creditors once such security interest in relinquished in terms of section 52 of the Code.

In what may potentially jeopardize interests of a larger body of secured creditors, the Appellate Authority held that inter-se arrangements between the secured creditors, for instance, first charge and second charge over the same asset(s), would not hold relevance if such secured creditors choose to be a part of the liquidation process under the Code – thus placing all secured creditors at an equal footing. The authors humbly present that the instant order may not be in consonance with the established and time-tested principles of ‘equitable’ treatment of creditors. The authors opine that contractual priorities form the very basis of a creditor’s comfort in distress situations – as such, a law which tampers with such contractual priorities (which of course, are not otherwise hit by avoidance provisions) in those very times, will go on to defeat the commercial basis of such contracts and demotivate the parties. This, as obvious, cannot be a desired outcome of a law which otherwise delves on the objective of ‘promotion of entrepreneurship and availability of credit’. The authors have tried putting their perspective in this article.

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An Odd Scheme: Case for exclusion of schemes of arrangement from scheme of liquidation

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Sikha Bansal, Partner

[resolution@vinodkothari.com]

The Article below has also been published on the IndiaCorplaw Blog, see here 

The concerns around section 230 schemes in the background of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) have been partly addressed with the ruling of Supreme Court (SC) in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. The SC has held that the prohibition contained in section 29A should also attach itself to a scheme of compromise or arrangement under section 230 of the Companies Act, when the company is undergoing liquidation under the auspices of IBC. Reason being: proposing a scheme of compromise or arrangement under section 230 of the Companies Act, while the company is undergoing liquidation under the provisions of the IBC, lies in a similar continuum.

Earlier, there were several rulings of NCLAT which allowed schemes of arrangement during liquidation – for instance, see S.C. Sekaran, Y. Shivram Prasad, etc. After such rulings, the IBBI (Liquidation Process) Regulations were amended to include Regulation 2B, which also state that “a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.” Read more →

Comments on Proposed Framework for Prepacks

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-Sikha Bansal & Megha Mittal

(resolution@vinodkothari.com)

While there had been murmurs of a prepack insolvency resolution framework, the Report of the Sub-Committee of the Insolvency Law Committee, on Pre-packaged Insolvency Resolution Process[1] issued on 8th January, 2021 (“Sub-Committee Report”/ “Report”) comes as the first concrete step in bringing prepacks to India. In an earlier write-up, we have discussed possible framework for bringing pre-packs in India; see here- Bringing Pre-Packs to India

Below we discuss the various facets of the Report in terms of application and feasibility, both legal and practical.

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ARCs and Insolvency Resolution Plans – The Enigma of Equity vs Debt

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– By Sikha Bansal (resolution@vinodkothari.com)

This article has also been published in IndiaCorpLaw Blog, the same can be viewed here

A regulatory framework for asset reconstruction companies (ARCs) was introduced in India through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This intended to put in place a system for clearing up non-performing assets (NPAs) from the books of banks and financial institutions. Over a decade later, the Insolvency and Bankruptcy Code, 2016 (IBC) was introduced with the objective of reorganisation and resolution of insolvent entities.

Although the common goal of both these legislation seems to be the cleaning or reconstruction of bad loan portfolios, it is important to understand the difference between the basic premises of these two laws: while the SARFAESI Act deals with ‘recovery’ and is more of a ‘class’ remedy, the IBC is about ‘resolution’ and intended to constitute a collective process. Given a common set of stakeholders involved under both these laws, there remains an obvious possibility of overlaps or inconsistencies. Read more →

IBC and related reforms: Where do MSMEs Stand?

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The MSME industry, colloquially referred to as the power engine of the economy has been a focal point of several reforms over the years. The recent reforms w.r.t. MSMEs and the Insolvency and Bankruptcy Code, 2016 (“Code’) has altered the stance of MSMEs, both as creditors and debtors. In this article, we shall discuss some significant reforms/ amendments w.r.t. MSMEs (due to COVID, or otherwise), and those under the Code and analyse the cumulative impact of these reforms on the sector in the prevailing scenario