[By Mohak Agarwal & Hemang Mankar]
The authors are students at National Law University, Jodhpur.
GoFirst Insolvency: A tug of war with the lessors
The recent case of GoFirst Airlines’ Insolvency has highlighted certain significant issues in the Indian Insolvency law regime. The tug of war between the airline and the lessors commenced on May 2, 2023, when GoFirst filed for voluntary insolvency proceedings under Section 10 of the Insolvency and Bankruptcy Code [“Code”]. As soon as the insolvency application was filed, certain aircraft lessors terminated the lease agreement in order to seek repossession of the leased aircrafts. Subsequently, on May 5, the lessors invoked the Irrevocable Deregistration and Export Request Authorization [“IDERA”] and applied to Directorate General of Civil Aviation [“DGCA”] for deregistration and repossession of the leased aircrafts. IDERA confers an exclusive right on the lessors to effect deregistration of the aircraft and its export from India. It is a part of the Cape Town Convention [“CTC”], to which India is a signatory. The entire process has to be completed within 5 working days. However, before the elapse of 5 working days, the Adjudicating Authority [“AA”], on May 10, admitted the application and declared a moratorium under Section 14 of the Code.
This led to a situation wherein though the lease agreement was terminated before the declaration of moratorium, the possession of the planes remained with GoFirst since the deregistration process could not be completed. The question of whether the possession of the leased planes would rest with the Corporate Debtor [“CD”] or with the lessors is still a debatable proposition and largely depends on the interpretation of Section 14(1)(d) of the Code that prohibits the recovery of property by the lessor which is in the possession of the CD. Nevertheless, it cannot be denied that had the AA been late even by a couple of days, the lessors would have succeeded in securing repossession of the aircrafts and would have severely impacted the revival prospects of GoFirst. This threat has been averted, at least for now. However, this incident raises serious concerns over the present Insolvency regime and the possibility of the creditors rushing to secure their assets in the period between the date of filing and the date of admission, thus potentially trapping the CD in an irrecoverable state.
Absence of Interim Moratorium: An Achilles Heel?
The absence of an Interim Moratorium in the Indian insolvency regime raises significant concerns and poses a troubling scenario akin to an impending storm that threatens to disrupt the insolvency process of distressed companies. Although the Code stipulates that the AA should admit a Corporate Insolvency Resolution Process [“CIRP”] application within 14 days of its filing (Section 7(4), 9(5), and 10(4) of the Code), the pre-admission stage is often plagued by substantial delays. According to the 2021 IBBI Survey on CIRP Timelines, the AA took an average of 133 days to make a decision from the filing date of a CIRP application. This protracted delay is troubling as it incentivizes syphoning off assets by promoters and/or encourages creditors to rush and enforce their debts, undermining the collective and value-maximising insolvency resolution process envisioned by the Code.
In cases such as NUI Pulp and Paper Industries, and F.M. Hammerle Textiles, the Appellate Tribunal granted an interim moratorium when there was a reasonable apprehension of asset misappropriation. This underscores the pressing need for the incorporation of an interim moratorium into the Code through an amendment. Such an amendment is crucial to prevent a scenario where a distressed company’s assets are syphoned off even before the commencement of a moratorium, which would ultimately defeat the fundamental objectives of the Code. Therefore, it is imperative to address this gap in the Indian insolvency regime promptly to safeguard the integrity and effectiveness of the insolvency resolution process.
Fixing the loophole: A global perspective
The GoFirst case has highlighted a prominent issue in the Indian Insolvency regime that warrants attention. If the leading foreign jurisdictions are perused, majority of them provide for an interim moratorium at the time of filing the insolvency application.
For instance, in Singapore, Section 64(14) of the Insolvency, Restructuring and Dissolution Act 2018 [“IRDA”] imposes an automatic 30-day moratorium as soon as an application for Judicial Management is filed. Within these 30 days, the Court schedules a first hearing in order to review the status of the moratorium. Even before the passing of IRDA, Section 227C of the Companies Act, Singapore provided for a moratorium beginning from the date of filing of the application. In the UK, Section 44(1) of Schedule B1 of the Insolvency Act, 1986 provides for an interim moratorium from the time of making the administration application till the time a decision is made with regards to the appointment of an administrator. Similarly, in the USA, Section 362 of the US Bankruptcy Code provides for an automatic moratorium upon the filing of a Chapter 11 petition.
The purpose behind these provisions is twofold: (i) to prevent individual creditors from taking action against the CD and hampering its prospects of revival; (ii) to prevent the CD’s management from siphoning off its assets. Thus, the existence of an interim moratorium ensures that none of the stakeholders maliciously work towards securing their own welfare and protects their collective well-being by keeping the restructuring and revival prospects of the CD alive.
These regimes have also taken the interests of creditors into consideration. This is important because during the pre-admission stage, the control is still vested in the CD’s erstwhile management which creates an exorbitant room for misuse. In the USA, the automatic moratorium could be lifted upon the application by secured creditors for appropriate cause, including the case wherein the debtor company has not ‘adequately protected’ the property interests of the creditor during the moratorium period. Even in the UK, sufficient power has been granted to the court to lift the moratorium in order to check the misuse.
The Saga of Interim Moratorium: Tracing the history
Let’s look back at the legislative history of interim moratorium in India and how various reports have rooted for its inclusion over the years.
Pre IBC
The Interim Report of The Bankruptcy Law Reform Committee [“Interim Report”], published in February 2015, prior to the enactment of the Code, drew attention to critical deficiencies in the Companies Act, 2013. Notably, one of the highlighted issues was the absence of provisions for an interim moratorium while the AA is hearing an application for grant of moratorium. Furthermore, it highlighted the misuse of automatic moratoriums by debtor companies operating under the Sick Industrial Companies Act, 1985 [“SICA”]. In light of these findings, the Interim Report recommended the establishment of provisions for interim moratorium to prevent a precipitous break-up of a viable company till the time AA decides on an application for moratorium. It proposed a maximum/non-extendable period of thirty days, or until the AA’s decision, whichever occurs earlier, as the ideal duration for the interim moratorium.
Nevertheless, the final report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design [“BLRC Report”], published in November 2015, diverged from the earlier suggestion and did not extend interim moratorium to corporate entities. Instead, this suggestion was exclusively applied to individuals/firms insolvency, which eventually became Part III of the Code. This discrepancy raises concerns regarding the differential treatment of corporate and individual insolvencies within the framework of the Code as the rationale could have been extended to corporate entities.
Post IBC
The recommendations put forth in the BLRC Report, regarding moratorium, were adopted by the Parliamentary Joint Committee Report, 2015, which was eventually incorporated into the Code. While Section 14 of the Code outlines the provision for a moratorium applicable to corporate entities, it notably lacks any provision for an interim moratorium, unlike Section 96 which provides interim moratorium in cases concerning individual and firm insolvency. This deliberate distinction made by the legislature signifies their intent to not extend the provision of interim moratorium to corporate entities. This became abundantly clear after provision for interim moratorium (as an extension of Section 14) was introduced exclusively for Financial Service Providers, through the FSP Rules, 2019.
Furthermore, the Report of The Insolvency Law Committee [“ILC Report”], released in February 2020, also put forth significant recommendations regarding the imposition of interim moratorium and suggested an amendment in Code. It proposed empowering the AA to issue orders declaring an interim moratorium. Where the AA may grant interim moratorium if it determines, considering the facts and circumstances of the case, that it is urgent and necessary to achieve a value-maximising collective insolvency resolution process. The benefits derived from imposing such a moratorium should outweigh any potential harm caused. It further recommended that the order declaring an interim moratorium should specify a time limit, not exceeding sixty days from the date of the order which should not be subject to further extensions, ensuring a timely resolution process.
It is noteworthy that the Model Law includes provisions for interim relief, under Article 19. However, in India, the Report of Insolvency Law Committee on Cross Border Insolvency [“Cross Border Insolvency Report”] released in October 2018, highlighted that the Code lacks provisions empowering the AA to grant interim relief in CIRP, in light of past misuse of under the SICA. As a result, it recommended against incorporating grant of interim relief in the Draft Part Z, which pertains to cross-border insolvency in India.
Nevertheless, in June 2020, the Cross Border Insolvency Rules/Regulations Committee, in its report [“CBIRC Report”], highlighted that the recommendation against the grant of interim relief made in the Cross Border Insolvency Report, appears to have been overridden by the ILC Report which recommended interim relief, in the form of interim moratorium, for domestic proceedings. The CBIRC Report acknowledged that there is merit in re-considering the recommendation of the ILC Report on the grant of interim reliefs in cross-border proceedings. However, there was consensus in the CBIRC that the adoption of explicit provisions allowing the AA to grant interim reliefs in cross-border cases should follow parallel amendments in the Code in relation to domestic proceedings. No consequential amendments to Part Z or any delegated legislation are, therefore, required with respect to the issue of interim reliefs.
The way forward
In order to quell the possibility of stakeholders misusing the period between the date of filing and the date of admission, the protection of interim moratorium is required to be extended to the CD under Section 14. At the same time, a balance is required to be struck off between the interests of creditors and the company so that the provision is not misused by the CD.
The ILC Report suggested conferring a discretion on the AA to grant interim moratorium. While this would certainly be beneficial, it won’t fix the loophole in totality since there would still exist a window in which the creditors could withdraw before the application for interim moratorium is allowed. Therefore, a better way to proceed would be to grant an interim moratorium as soon as an insolvency application is filed for a limited time frame of 30 or 60 days, within which the AA must either decide on the application or at the least conduct a review of the applicability of the interim moratorium. Inherent in this power, should be the power of terminating, annulling, modifying or imposing conditions on such moratorium. Furthermore, since the general affairs of the company would still be in the hands of the management during the interim moratorium, it is extremely necessary to regulate the affairs of the company in a manner such that this provision is not misused against the creditors. Additionally, a mechanism could be developed for the stakeholders to approach the AA for lifting the interim moratorium if the intent behind seeking it seems mala fide and a provision for a strict monetary penalty could be put in place for such cases.
Above all, the amendment should be brought about by keeping the inputs of all the affected stakeholders into consideration in order to achieve the true aims and objectives of the Code.