By Nipun Singhvi, Vishal J Dave
Jet AirwaysNSE -1.50 %
shut down its operations temporarily on 17th April of 2019. The shutting down of the company affected their 20,000 employees and more than 60,000 people indirectly. Jet was the second-largest airline by passengers till January this year in the domestic market and was also flying more passengers than national carrier Air India
to overseas destinations from India.
The company is reportedly in a debt of default of Rs 8,000 crores. SBINSE 0.97 % the lead lender and biggest state run bank has decided to change the management and stake sale in the beleaguered airline have opted for calling Expression of Interest (EOI).
Challenges under IBC
Assuming that Jet goes for insolvency, some of the issues that shall crop with respect to first time this Code being tested on airlines and this business being one of the unique nature wherein the model is asset-light and not much is in the hands of company. Let’s analyse the challenges which shall arise under Corporate Insolvency Resolution Process (CIRP).
Customers whether “financial creditors”
In the nature of airline business, most of the bookings are advanced and hence the customers are liable to get refund of the payment done. Usually, customers take two way tickets and also on the international routes where the return tickets are booked well in advance. The advance amount paid by the customers shall be classified as ‘financial creditors’ or ‘operational creditors’ shall also be a matter of debate.
Similar, confusion arose for the homebuyers wherein the different views arose with respect to payment received shall be classified as ‘operational’ and ‘financial’. Even the Insolvency regulator IBBI introduced a third category of form for ‘other creditors’. Because of differing views and also ‘Jaypee Infra’ case the government brought Ordinance, 2018 to include the homebuyer under the category of ‘financial creditor’.
In authors view, the customers shall be financial creditor as the debt obligation has arisen from default committed and the clause (f) of Section 5 (8) wherein the advance amount has been given by customers for commercial effect of borrowing.
Another view is also plausible that the debt has arisen out of provision of services which the customers have paid for and so the operational creditor.
Aircraft: ‘Un-owned assets’
The assets of Jet are mainly leased aircraft , as per the annual report of the Jet airways for 2018, it states that aircrafts were majorly on financial lease. It appears from the media reports that lessor have applied to DGCA for de-registering the aircrafts and are planning to lease it to others.
It is unclear that how many passengers who have taken routes overseas and have booked Jet will be able to return alternatively. ‘Repatriation’ refers to the flying back of such passengers. The financial impact of such passengers cannot be counted as of now in the absence of data. However, recently Delhi high court has issued notice to Jet Airways in plea seeking to ensure that passengers affected by the suspension of the airline’s services either receive a full refund of the airfare paid by them, or get accommodated in alternative flights in other airlines. With the grounding of debt-ridden Jet Airways, more than Rs 360 crore of passengers’ hard earned money is under threat due to non-refund of the ticket value, petitioner Bejon Kumar Misra contended in the application.
2. Regulatory concerns
Highly regulated sector is going to be big concern as the relevant ministry is Ministry of Civil Aviation and Director General of Civil Aviation (DGCA) is the regulator.
It is reported that the slots allotted to Jet airways are being allotted to other players and once the rights of slots are gone, the revival of the company appears to be doomed. The National Civil Aviation Policy of 2016, which modified international flying norms, allows an airline to commence flights on overseas routes, provided it deploys 20 aircraft or 20 per cent of its seat capacity on domestic operations. The policy does not specify the criteria for withdrawal of approval.
3. International learning
Monarch Airlines – UK Monarch, the UK’s oldest airline, filed for administration on 1 October, 2017. The fleet of 35 aircrafts was repossessed quickly. The passengers who had purchased packages were funded by Air Travel Trust. Monarch was denied slots as the interpretation taken by authorities was that the company being insolvent, disqualify as ‘air carrier’ under EU regulations. However, the administrators could get an order from the Court of Appeal for allocation in Monarch favour.
Though the insolvency has been just 2.5 years old but it has shook the entire Indian corporate world. Some of the biggest and influential corporate have been facing insolvency and trying to retain their companies. Several amendments by Ordinances were brought and now the time has come for sectoral regulators recognising the Insolvency.
In authors view, sectoral regulators like DGCA and Ministry of Consumer affairs take seat in COC and decide the future for resolution. Any delay in such efforts may result in death of oldest private carrier adding to the list of erstwhile drowned airlines like Kingfisher Airlines, Air Deccan, Air India Cargo, Indian Airlines and Sahara Airlines.
(Nipun Singhvi and Vishal J Dave practicing Ahmedabad-based advocates engaged in insolvency cases)