Recently, GoAirlines India Limited (formerly known as Go Air and now as GoFirst) filed a voluntary insolvency proceeding under Section 10 of the Insolvency and Bankruptcy Code,
2016 (“the Code”), before the Principal Bench, National Company Law Tribunal (“NCLT”), New Delhi. NCLT, on May 10th 2023, admitted Corporate Insolvency Resolution Process[1] (CIRP) against Go First.
The Wadia-group-backed airline company contended they were facing severe losses as their flights were grounded because of defects in the engines supplied by American company Pratt & Whitney (“P&W”).
Go First submitted that the faulty engines and their non-availability had increased the number of grounded planes from 31% to 50% (28 out of 54 aircraft) and incurred a loss of INR 10,800 Crores. Further, it contended that a default in payment of the financial debt of INR 1 Crore had been committed by it, which fulfils all the ingredients of Section 10 of the Code and thus prayed for initiation of CIRP and imposition of a moratorium to keep the company operating in the public interest.
NCLT, while reserving the orders in the petition, remarked, “Moratorium is a consequential effect of admission. There is no provision for an interim moratorium. You are seeking a pre-emptive action to stop creditors from asking for money… some interim relief. Can one insolvency resolution professional run a company when so many professionals could not run it”.[2]
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Filing an application under Section 10 of the Code- is it mandatory to notify the Creditors of the Corporate Debtor?
NCLT referred to M/S Unigreen Global Private Limited v. Punjab National Bank & Ors.[3], where it was decided by the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) that the creditors can dispute the application only on two grounds, i.e., if there is no debt due or due not payable in law or fact or the applicant is ineligible to file an application under Section 11 of the Code. Further, referring to Rule 7 of Application to Adjudicating Authority Rules, 2016, held that the rule does not mandate service of any notice or application upon the creditors.
Rejecting the contentions of the OCs, NCLT held that hearing every creditor can cause inordinate delay and lead to erosion of the value of the assets and defeat the objective of the Code. Adding to it, where there is an apprehension of deterioration of the assets value of the Corporate Applicant (“CA”), and larger public interest is involved, notice at the pre-admission stage cannot be claimed as a right.
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Is it mandatory for NCLT to decide on an application under Section 65 of the Code before admitting an application under Section 10 of the Code?
Section 65 of the Code states that the Adjudicating Authority has the power to impose a penalty on any person who initiates an Insolvency Proceeding with malicious intent or for any other intention except for the resolution of insolvency or liquidation.
While interpreting the section, NCLT referred to the word “initiates” in clause (1) of Section 65 of the Code. To decode its meaning, NCLT referred to the definition of “initiation date” under Section 5(11) of the Code. As per the definition, the “initiation date” is the date on which an application for initiation of CIRP is filed before the Adjudicating Authority.
Considering the provisions mentioned above, the tribunal found that Section 65 does not specify any stage of pre-admission or post-admission of CIRP. Meaning it is not mandatory for the tribunal first to decide an application under Section 65 of the Code and then decide the application under Section 10 of the Code. The rationale behind this decision was that fraud could be detected at any stage of the CIRP. Limiting the applicability of the section to pre-admission of the application for initiating CIRP will narrow the scope of Section 65 of the Code.
❖ NCLT admitted the petition to initiate CIRP and imposed a moratorium.
Lessors’ appeal to the National Company Law Appellate Tribunal (NCLAT)
After admitting the CIRP application, NCLT suspended the board and appointed an Interim Resolution Professional (“IRP”). Hours after the NCLT order of admitting the insolvency application of the airlines, one of the aircraft lessors of the airlines, SMBC Aviation Capital, moved to the NCLAT (“Appellate Tribunal”), challenging the NCLT order. Further, two more lessors, G Y Aviation and SFV Aircraft Holding, approached the NCLAT challenging the said order.
The Appellate Tribunal agreed with NCLT’s rationale and affirmed NCLT’s decision. It stated that neither the Code nor its regulations require a corporate applicant to notify creditors before filing an application under Section 10 of the Code. Moreover, the Adjudicating Authority is not obligated to hear the application under Section 65 of the Code before accepting the application, as mentioned earlier.
The Appellate Tribunal further did not decide on the issue of termination of the lease agreement before the admission of the application and exclusion from the imposition of a moratorium on the assets of the lessors and their claim of possession of the assets, as NCLT did not deal with it.
However, the Appellate tribunal granted liberty to both the appellant and the IRP to file appropriate applications under Section 60 (5)[4] of the Code.
Status Quo & the Future Implications
After the admission of the application for initiation of CIRP by the NCLT and dismissal of the appeal by the NCLAT, the aircraft lessors have now approached the Delhi High Court for de-registration of their leased aeroplanes by the Director General of Civil Aviation (“DGCA”) and get the possession of the leased aircraft.
Learned counsel Mr Harish Salve, appearing for the IRP, argued that the lessors had filed parallel proceedings for the possession of the aeroplanes, even after the NCLAT allowed the lessors to approach the NCLT for the same.[5]
On the one hand, the lessors were gripped by panic due to the airlines’ existing default of INR 2660 Crores (Rupees Two Thousand Six Hundred Sixty Crores) towards them. On the other hand, they could not regain possession of the leased assets due to the imposed moratorium during the CIRP.
Delhi HC’s decision in the present case will undoubtedly have a significant impact on the insolvency proceedings of the airline company and also on its operations. If the decision allows the lessors to take possession of the aeroplanes, it will affect the primary objective of the Code, which in this case is to keep the airline company on a going concern while simultaneously appearing for insolvency proceedings.
It is pertinent to note that in the recent past, there have been no significant voluntary insolvency applications filed in NCLT. Back in 2017, Synergies-Dooray Automotive Limited filed for voluntary insolvency, which resulted in a massive haircut for creditors. This led to the introduction of Section 29A of the Code, which categorises persons not eligible to be a resolution applicant.
Author: Mr Shreyas Mehrotra, Partner- Dispute Resolution, Mr Anant Roy, Associate- Dispute Resolution
Footnotes
Experts believe that even after Section 29A, in the present case, the creditors may have to bear the haircut.[6]
[1] CIRP is the process of resolving the corporate insolvency of a corporate debtor under the provisions of the Insolvency and Bankruptcy Code, 2016.
[2] Live Mint, NCLT reserves orders on Go Air
[3] Company Appeal (AT) (Insolvency) No. 81 of 2017
[4] Under Section 60(5)(c) of IBC, NCLT has been conferred with the jurisdiction to entertain and dispose of any question of law or facts “arising out of or in relation to the Insolvency resolution or liquidation process of Corporate Debtor.
[5] Money Control, Go First Case: IRP argues Delhi HC can’t decide on aircraft lessors’ plea
[6] Financial Express, Wadias’ resolution bid to test IBC might