Why “Go First” gone insolvent: IBC 2016

Lately, the low-cost carrier “Go First” got bankruptcy protection by National Company Law Tribunal (NCLT), after it has made an application to the tribunal reporting losses arising out of grounding of its of half of Airbus A320neos i.e. 54 due to the faulty Pratt&Whitney engines. Now, with the acceptance of its bankruptcy application, the tribunal has ordered the moratorium period as well as appointed an IRP (Interim Resolution Professional) under IBC 2016, further directing the IRP to not lay-off its employees. During this resolution period, no lessor or creditor can take any adverse action against the company. This move by the company will help it in restructuring its contracts and debts. The company owes around 6,521 crores to financial creditors and Indian banks. 

What is Bankruptcy protection?

The Insolvency and Bankruptcy Code, 2016 was introduced to overhaul the past enactments on corporate distress resolution procedure and loan recovery procedures. It deals with the default committed by the debtor and gives them opportunities to mend their financial defects in efficient way to tackle with the debt owed to the creditors. It also relieves the formal court from pilling up cases. It aims to resolve the matter as soon as within 330 days as provided in the code.

On the initiation of insolvency proceedings two things follows i.e. resolution or liquidation. The former gives opportunity to the debtor to come up with restructure or new owner which has been prioritized in the code. The later is the result of failure of resolution and all the assets of the debtor are liquated to meet the obligations of debt he owed. Under section 10 of the code, a corporate debtor can make an application for insolvency resolution process with the adjudication authority. Thereupon the authority is required to admit it or reject it within 14 days from the date of receipt of such application. Once the application is admitted, it results in temporary stay on collection and legal proceeding in respect of debt in financial matters. During this stay, no enforcement or appeal of judicial proceedings or administrative action shall take place against the debtor. The properties and assets of the debtor shall be as it is till the completion of bankruptcy proceeding. Moratorium period is also imposed to prevent lessor from taking back possessions. The same has transpired in the “Go First” issue right now and it means that no lessor can repossess the aircrafts it had lent.

What lies ahead for “Go First”?

As the tribunal has accepted the insolvency application of it, now lessor won’t be able to take back its possession of aircraft till the resolution process. The lessor will be also losing on the rental payments of its aircraft. The company’s board of directors has been suspended and IRP has been appointed to proceed with the resolution process and it has also been directed to deposit 5 crores with the IRP to meet the expenses in carrying out the resolution process. Currently, the lessor and its concerned about its possession and future workforce respectively. On May 22, NCLAT (National Company Law Appellate Tribunal) has upheld the decision of the tribunal in petition filled by the lessor.