The clock ticks on the bank-led corporate restructuring exercise at Jet Airways. However, legal uncertainties that involve prospective investors, the employees and the operational creditors could make finding an early resolution to Jet’s financial woes challenging, say experts. This is the first instance of action by banks in a debt-riddled, financially-stressed services company under ‘Project Sashakt’. The 180-day period to resolve Jet’s financial stress started on January 1. If no resolution is found within this period, Jet Airways could slip into bankruptcy proceedings under the provisions of the Insolvency and Bankruptcy Code.
Legal experts say per se there does not seem to be any legal challenge to the debt to equity conversion method adopted by the lenders to get control of Jet Airways, since a nominal debt has been converted into the majority equity shareholding. “I do not anticipate any legal challenges. The courts would be reluctant to jeopardise the continuing operations and functioning of Jet Airways, especially keeping in view the fate of the employees of Kingfisher Airlines,” says Lalit Bhasin, managing partner, Bhasin & Co.
However, in the course of the restructuring exercise, the banks or prospective investors have to keep the interests of the employees in mind. “If there is no satisfactory solution for the employees, they can derail the process by moving the courts and also invoking the IBC as operational creditor (OC),” says Bhasin.
Experts say even Jet’s other OCs — that includes aircraft lessor, fuel suppliers, and maintenance providers —are unlikely to challenge the equity restructuring process as conversion of debt to equity by the banks to take over the airline’s management would only enhance the chance of recovering their dues.
Depending on how banks build a relationship with the OCs to keep the airline afloat, operating creditors have to weigh in their options carefully. “Without the OCs’ robust support, this asset will be like a melting ice cube on a hot pan,” says Nishant Singh, partner, IndusLaw.
Industry experts point out that even after the interim bailout by the lenders, the funding mismatch still exists as the airline would need a huge capital to repay its existing debt. “On account of this, the threat of Jet falling into IBC on the basis of operational creditors’ claim or financial creditors’ claim will always remain, unless an umbrella moratorium is sought, akin to the one granted in the IL&FS matter,” says Siddharth Srivastava, partner, Link Legal.
An option before the company is to invoke Section 230 of the Companies Act to enter into an NCLT-monitored arrangement for reconstruction or amalgamation of the company. “Unlike the Insolvency Bankruptcy Code, this gives operational creditors a voice and vote in the restructuring process but does not enable a moratorium that IBC offers,” says Abizer Diwanji, head, financial services & restructuring & turnaround services, EY India.
Diwanji says this could be the first ‘pre-pack’ resolution under the IBC where the resolution applicant is identified through a bidding process outside of the IBC period and then put into the Corporate Insolvency Resolution Process to execute the transaction for the selected bidder.
Experts, however, point out that while the provisions of the IBC could be used as a pass-through mechanism, there is fear of the exercise being value destroyer for the company. Airlines being a service industry, Jet slipping into bankruptcy may have the effect of grounding the airline, they fear. “Considering that it’s a super specialised and heavily regulated sector, it may not find takers within the timelines under the IBC and will ultimately result in liquidation,” says Srivastava.
However, there are some who feel that the debt-equity swap is only a matter of change in the books of account, and will not necessarily change the quality of Jet’s assets.
“By swapping delayed interest payments for an uncertain dividend, the banks are merely shifting their short-term loss to long-term risk and increasing the period required to recover their capital,” says Piyush Gupta, partner, Kochhar & Co. Gupta says he is not in favour of keeping Jet away from slipping into bankruptcy. He is of the view since the Reserve Bank of India is aware of the fallouts under the Strategic Debt Restructuring Process — that subsequently gave way to IBC — the initiative at Jet by bank-led consortium should itself be liable for a challenge in a court of law.
While bidding for Jet Airways, potential investors will not only have to evaluate the past and the future liabilities in the airline, they would also be required to comply with all Sebi mandated laws, provisions under FDI regulations and competition laws, say experts. “The investors would also need to keep in mind the risks from the perspective of on-going disputes with lessors and other parties,” says Karan Mitroo, partner, L&L.
While any acquisition of more than 25 per cent by a new investor may trigger open offer requirement under Sebi’s Takeover Code, the bidder may have to shell out additional money to buy out the minority public shareholders. However, the open offer requirement is exempted under the IBC process, say experts.
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