Go First bankruptcy tests India’s bankruptcy regime

G.Orfast, of An Indian low-cost airline went bankrupt in May under the weight of four years of losses, and in January a flight from Bangalore to Delhi forgot about a third of its passengers while carrying luggage. However, it was accused of safety negligence and flight disruption. At least the airline had a valuable asset: some 45 aircraft stranded at Indian airports. As a high-priority case, it is said to have been subject to accelerated bankruptcy proceedings.

A quick liquidation and redeployment of assets would have clear benefits for the airline industry, its creditors, and perhaps rivals looking to procure aircraft on short notice to accommodate overcrowded flights and increase capacity. increase. It won’t be too soon, the court hearing GoFast’s case now seems to say. Instead of allowing easily identifiable assets like the company’s aircraft to be recovered while more complex financial assets were unwound, it placed a blanket hold on all of the airline’s assets.

The Go First stumbling block marks a long standing problem with India’s bankruptcies. These were to be resolved by a new bankruptcy law introduced in 2016. The provisions of the law transferred power from indebted corporations protected by the previous quagmire of rules to creditors. This made it possible to finally end a series of endless bankruptcy proceedings, including forcing the sale of industrial giant Essar Steel, which had defaulted on various creditors until 2002. A smooth transition through the court system was intended. It sends a broader message that lending risk to Indian companies can be mitigated by making collateral easily transferable. He argued that this would reduce borrowing costs for Indian companies more broadly.

But despite some successes, such as Essar, the regime has not lived up to its promises. One persistent problem is the low collection rate of creditors. Over the past seven years, lenders to companies with successful resolution plans have received, on average, just 32% of their claims. And he is only one in four companies that have gone bankrupt to offer such plans. His remaining three-quarters of cases end in liquidation, and the average recovery rate for creditors is a dismal 7% of his debt amount.

Official figures may exaggerate the actual returns owed by creditors. They don’t take into account his second problem of the time and effort that the process takes, the code that is actually applied. Under the law, the case is to be resolved within his 330 days. The latest quarterly report by the Indian Insolvency and Bankruptcy Commission, which administers the law, shows that it took an average of 456 days to settle cases leading to liquidation. The average number of cases in which companies survived through resolution plans was a staggering 614 days. The number of applications that take more than two years increased to 85 in the 12 months through March 2022, up from 15 a year ago. Bankruptcy lawyers complain that it has become harder to file an application in the first place, and that process can take years.