By Anwesha Ganguly & Ankur Mishra
Lenders and insolvency professionals in India walked into uncharted territories this year by taking Jet Airways and Dewan Housing Finance Corporation (DHFL) to the insolvency court. Both cases will pave the way forward for resolution of the aviation and financial services sectors, respectively, under the Insolvency and Bankruptcy Code, 2016, (IBC).
Timely recognition of stress and the treatment of a variety of stakeholders emerged as key challenges. Jet Airways, which was the country’s second largest by market share till last year and was grounded in April 2019, is the first airline to undergo resolution under IBC. It is also the first airline under the new laws to undergo cross-border insolvency. DHFL is the first financial services company to undergo resolution under IBC. Without a precedent, lenders and judges at the National Company Law Tribunal have a tough task ahead.
Jet posted losses in eight out of ten fiscals between 2008-2018 and began showing signs of increasing stress in August last year, when it delayed salary payments of some employees. The airline has been grounded for over eight months, after lenders refused to provide emergency funding to continue operations.
Since April, lenders made multiple attempts to sell the airline before they finally dragged Jet Airways to NCLT in June. The tribunal had directed that Jet, being a matter of “national importance”, should be resolved expeditiously. The process has been anything but.
Under IBC, bids were again invited for Jet’s revival. Things took a turn for the worse when Etihad Airways, Jet’s erstwhile strategic partner, said it would not participate in the resolution process. It is understood that Etihad wanted assurance that criminal proceedings would not be initiated against the airline.
Reviving an airline which has been grounded for eight months is a near impossible task, say industry experts. Now, only one foreign entity, Colombia’s Synergy Group, remains interested. But without clarity on Jet’s slots, which are among the airline’s most valuable assets, Synergy is yet to seal the deal. The slots were redistributed among other airlines after Jet was grounded. Slots allow an airline to enter and exit airports at scheduled times. “The government is not giving assurance on Jet’s slots. Lenders have written to the government almost monthly, seeking some assurance, so far, they have not responded. The court has also now made the civil aviation ministry party to the insolvency proceedings, but it may be too little too late,” said the source requesting anonymity.
There are other logistical issues with Jet which had a wide international network and presence in several countries. “We had over six lakh passengers who were impacted. The scale is massive. We have received email claims from over 28 different currencies in the world,” said Ashish Chhawchharia, resolution professional for Jet. Asset preservation became a huge challenge. Aircraft maintenance for Jet is now done by Air India and has become nearly doubly expensive, one of the people involved in the process told FE. Jet, which at its peak had 112 aircraft, had by June reduced its fleet size to 12. Of these, some were seized at foreign airports. “Engines were sent out of India for servicing, and they have been withheld by service providers until payment is released. When told they are mandated to return assets under IBC, their response is that they do not recognise it. So, cross-border issues are a substantial challenge in this,” Chhawchharia said.
The insolvency proceedings of DHFL will be significantly different from other corporate entities. The beleaguered housing financier, which has liabilities of over Rs 92,715 crore, first defaulted on payment obligations in June this year.
Lenders initially tried to resolve DHFL’s stress as per the RBI’s prudential norms on stressed assets resolution, under which lenders are mandated to sign an inter-creditor agreement (ICA). A resolution plan was then approved by DHFL’s board in September, which proposed a conversion of debt to equity leading to lenders acquiring a 51% stake in the company. All mutual funds did not sign the ICA and the plan stalled as multiple funds houses and fixed deposit holders initiated legal proceedings against DHFL. “For any future cases wherein pre-IBC resolution is considered, it is necessary that attempt should be made to involve all the stakeholders, else the resolution proposed by some stakeholders under a regime may be challenged by the other stakeholders, who are not involved,” said Ashish Pyasi, partner, Dhir & Dhir Associates.
In November, shortly after the government empowered the RBI to refer NBFCs with assets above `500 crore to NCLT, the central bank superseded the board of DHFL and filed insolvency proceedings against the company. DHFL was admitted for insolvency on December 6.
The issues with DHFL’s insolvency proceedings were evident during the first hearing itself. The two-member bench at the Mumbai NCLT raised multiple issues and the judges’ key concern was whether the insolvency process will help or harm the large number of stakeholders, including depositors.
Indian fund houses have an exposure of over Rs 8,500 crore to DHFL group companies, while deposit holders reportedly have an exposure of around Rs 6,000 crore. “This case is the first IBC process with respect to NBFCs, and given the multitude of stakeholders involved, the building of a consensus inter-se creditors will be critical to the process,” said Ajay Shaw, partner, DSK Legal. Meanwhile, the value of DHFL’s assets depleted significantly after proceedings were filed by lenders and mutual funds in various forums. Now, as per insolvency laws, a moratorium was put in place on legal proceedings against DHFL since December 6.
“The objective of IBC is maximisation of value of the assets, and in the case of DHFL,these assets will be protected and the company will remain a going concern. Any enterprise which is running will fetch a better value in comparison to assets being sold separately.” Pyasi said.
In a bid to attract more investors, the government recently proposed changes to the insolvency process — which would ring-fence potential bidders from criminal proceedings against erstwhile promoters of the insolvent company. The government also proposed to raise the threshold of eligibility for filing insolvency petitions — mandating at least 10% of creditors have to come together to file proceedings. These changes along with the recent Supreme Court judgment in the case of Essar Steel insolvency will help streamline the process. In Essar Steel proceedings, the appellate insolvency tribunal had held operational creditors at par with financial ones. The judgment, which went against the waterfall mechanism of creditors stipulated under IBC, was set aside by the Supreme Court last month.
Under Section 53 of the IBC, secured creditors are given priority over unsecured ones when it comes to distribution of sale proceeds from liquidation. The judgment will result in increased activity in the stressed assets space, Ashu Khullar, Citi India head, told FE in a recent interview. “If this ruling had not come out, it would have been a huge deterrent,” Khullar said.
The IBC norms have evolved much since their inception, but DHFL and Jet Airways cases have highlighted some gaping holes that still remain to be plugged. “Erstwhile promoters of corporate debtors, disgruntled operational or financial creditors hold up the resolution under one pretext or the other, which effectively defeats the purpose of corporate resolution under IBC. All challenges to successful resolution plan duly approved by the committee of creditors should be decided at the earliest and this should be done in a time-bound process. Appeals to the NCLAT or SC should only be permitted on points of law and parties must not be allowed to re-agitate facts,” Shaw said.
