Discover more from Boring Money, by Shreedhar
Go First goes first to the NCLT
Or how a good boy exemption can allow a company's owners to get a discount on its debt
If a company wakes up one fine day and realises that it has borrowed too much money, it has two options. It can pay back this debt. Or, it can ignore it and pretend like it doesn’t exist. If it chooses to do that, though, the bank or whoever lent this money to the company won’t be happy and will likely take it to court.
The bank can go to a regular court, but that’s boring, expensive, and can take infinite time. Or the bank can go to a special court called the National Company Law Tribunal (NCLT) whose only job is to deal with issues like companies not repaying their loans.
If the bank goes to the NCLT, it’s not as straightforward as the court deciding that the company must pay back its debts. The idea goes that if this company hasn’t repaid its debt to this bank, it probably hasn’t to other banks as well. It likely doesn’t have enough money to pay back all its lenders; that is, it’s insolvent. So the court must step in and help figure a solution so that all the creditors that are owed money are happy. As happy as can be in the circumstances, of course. Essentially, it’s not about one particular bank or creditor anymore, it’s about everyone that is owed money.
If a company wakes up one fine day and realises that it has borrowed too much money, there’s a third option. Instead of waiting until it runs out of cash and defaults on its loans, it can take itself to the NCLT and claim “voluntary insolvency”. This way, instead of having insolvency forced onto it by a creditor, the company can be a good boy (or girl) and ask the NCLT to figure out a solution before there is even a problem.
Last week, Go First—an Indian airline—went first to the NCLT, before the banks even had a chance. It filed for voluntary insolvency and primarily blamed its engine supplier Pratt & Whitney, which apparently sold the airline faulty engines. The airline couldn’t fly half of its planes and was losing money.
Discount my loans, pls?
Yesterday, the NCLT allowed Go First’s insolvency plea to go through. This does a couple of things:
All of Go First’s assets are frozen so that they can be used (or sold) to repay its loans, if needed
An NCLT-appointed insolvency professional takes over the airline and is responsible for overseeing whatever is to be done with the company. The banks (and other creditors) also have some say about who this insolvency professional is, since they are the ones that are owed money
One of the first things the insolvency professional will do is invite others to buy off Go First entirely. He’ll put out advertisements and write emails. Rich people and companies will submit their bids and proposals. Maybe someone is willing to buy Go First but can only pay back half its loans. Someone else might be willing to pay back all the loans but over a much longer period. Stuff like that.1
In all, Go First owes about ₹11,000 crore ($1.3 billion) to its creditors which include banks, other lenders, vendors, etc. The point of the bids is to find someone competent (and rich) who can give the best deal to all these creditors.
Here’s a potential buyer. From the Financial Express:
The Wadia Group [Go First’s owner] is likely to press for a one-time settlement with banks as part of its resolution plan for Go First airline, under which the financial creditors will have to take a substantial haircut, legal experts dealing with insolvency and bankruptcy matters told FE.
Corporate lawyer Ranjana Roy told FE, “Since the Wadia Group has till date not defaulted on payment to creditors, it won’t be barred from offering a resolution plan for the company once the case is admitted by the NCLT.”
Roy said it seems that the Wadia Group will come up with a resolution plan, but banks will have to take a substantial haircut on their dues. “Once the case is admitted, an interim resolution professional will be appointed, the airline will get a moratorium and will not need to pay its past dues. All it will have to pay is the dues thereon like to oil marketing companies etc,” Roy said.
Typically, when a company goes into insolvency, the entire point of the exercise is that the current owners aren’t able to save the company because of which someone else must step in, buy the company, and pay its dues. If the owner of an insolvent company wants to pay off its dues… he can just pay them? He doesn’t need to involve the NCLT for that.
The Wadia Group, Go First’s owner, likes owning the airline. What it doesn’t like is having to pay off the airline’s loans, in full at least. Usually, the owners of an insolvent company aren’t allowed to bid for their own company, that’s kind of the point of the whole insolvency thing. But the Wadia Group found a loophole. Since Go First hadn’t actually defaulted (yet) on its loans, and up until this point had been paying off its debt on time, there is a good boy exemption that allows the owners to submit a bid.
This doesn’t necessarily mean that the Wadia Group will get back to owning Go First. It has to now compete against other rich buyers who might also be interested in owning the airline. Bloomberg reported that both of India’s largest airlines, Tata and Indigo, are planning to get something out of this episode.
Now that Go First has gone into insolvency, the banks almost certainly lose some money. If the Wadia Group bids for Go First, it doesn’t need to repay all of the airline’s debt. All it needs to do is repay more than the other bidders. That way, the Wadia Group gets a discount on its debt but also continues to own Go First.
This can get complicated. One example: some lenders will have collateral. So a bidder will have to evaluate the value of that collateral (say an aircraft or some real estate) and offer to pay something around that. But it can’t pay the lenders without collateral too less else they won’t approve the bid. So it needs to offer them something worthwhile as well.