Go First pushes foreign financing to test India’s bankruptcy framework

The New Delhi bench of the National Company Law Tribunal (NCLT) is yet to take a final decision, showing initial reluctance. But the case has sparked a larger debate over third-party financing in India, where bankruptcy laws have yet to be tested for such situations.

Read this article | Go chase first $Rs 12,000 crore for litigation financing

Vishwanathan Iyer, partner at Anand Sharma and Associates, said: “Foreign funding can provide additional financial resources, which may help resolve debts more efficiently and potentially increase the value recovered by creditors.”

$20 million gamble

In early September, Go First formally filed for liquidation, citing a lack of assets and a viable recovery plan. After exhausting all moratoriums under the Insolvency and Bankruptcy Code (IBC), the airline’s Resolution Professional (RP) sought court approval to obtain $20 million from US litigation finance firm Burford Capital. The funds will be used to pursue arbitration cases at the Singapore International Arbitration Center, where Go First is seeking more than $1 billion in damages.

The airline blamed its failure on a Pratt & Whitney engine failure that grounded its fleet in May 2023, disrupting operations beyond repair.

Under the terms of the agreement, Burford Capital’s loan will only be repaid if Go First wins arbitration.

Creditors refuse to provide additional funds – already invested $Rs 160 Crore – RP approached Burford arguing that the arbitration was the only remaining asset of the airline to provide any recovery to the lenders.

According to its bankruptcy filing, Go First owes at least $A total of Rs 11,463 crore has been provided to banks, international lessors and suppliers. Among them, at least $It owes Rs 6,000 crore to financial creditors including the Central Bank of India, Bank of Baroda, IDBI Bank and Deutsche Bank. The airline had hoped to restart with interim financing from these lenders, but its aircraft lessors objected, saying their dues should be settled first.

For Go First’s creditors – Central Bank of India ( $1,934 crore), Bank of Baroda ( $1,744 crore) and IDBI Bank ( $750 million) – This arbitration is now their last hope to recover dues from the collapsed airline.

Legal and Regulatory Risks

Allowing foreign litigation funding will set a new precedent in the Indian insolvency regime. While third-party funding is common in the US, UK and Australia, in India the concept is still relatively unknown, with only a handful of cases reported so far.

As part of the practice, financiers incur legal fees and costs associated with commercial litigation, arbitration, or shareholder disputes in exchange for partial settlements or awards in successful cases.

The first known example of litigation financing under IBC in India involves LegalPay, a startup specializing in litigation and interim financing. In 2021, LegalPay successfully exited its interim financing agreement with Yashomati Hospitals, generating a pre-tax internal rate of return (IRR) of over 26% for its investors in less than nine months.

Yashomati Hospitals was dragged into bankruptcy proceedings by Pegasus Assets Reconstruction in March 2021 due to default on payment obligations.

Legal experts believe that the NCLT ruling may pave the way for structured regulation to govern litigation financing.

More here | Reviving Go First won’t be easy. that’s why

“Go First’s application for foreign litigation funding is unprecedented, especially after a failed insolvency, which appears to impose additional liabilities on insolvent companies,” said Yogendra Aldak, partner at Lakshmikumaran & Sridharan. Paving the way for third-party financing regulation in India , such regulation can address this gap in commercial litigation and enhance India’s position as a global hub for commercial dispute resolution. “

But if arbitration fails, the consequences can be severe.

“If they lose the arbitration, and assuming the company has no other assets to liquidate, Go First will be shut down and dissolved considering the decision to liquidate.” Creditors Bikash Jhawar, senior partner at Saraf and Partners said will lose their irrecoverable claims but may make claims based on any guarantees or guarantees provided by the promoter or third parties. “

The NCLT also expressed concerns over approval of foreign litigation funding. During the hearing, the tribunal questioned whether IBC allowed such foreign loans and asked Go First’s RP to cite precedent. The judges warned that granting the request could set a precedent that would encourage other troubled companies to rely on similar foreign financing and complicate bankruptcy resolutions.

“Go First’s application for foreign litigation funding is unprecedented, especially following a failed insolvency, which appears to impose additional responsibilities on insolvent companies. It remains to be seen whether the NCLT opinion will pave the way for third-party funding regulation in India. Such regulation can fill this gap in commercial litigation and enhance India’s position as a global hub for commercial dispute resolution,” said Yogendra Aldak, partner at Lakshmikumaran & Sridharan.

Who will lead the liquidation?

Apart from litigation financing, the airline has also sought NCLT to allow its current RP Shailendra Ajmera to continue as liquidator. While RP previously managed both roles under the IBC, a notification issued by the Insolvency and Bankruptcy Board of India (IBBI) in July 2023 now discourages RP from becoming a liquidator in the same proceeding.

“The IBC does not specifically prohibit an RP from transitioning as a liquidator,” Aldak said. “If the NCLT allows this, it can set a precedent for the Committee of Corporate Debtors and Creditors (CoC) to retain an RP in liquidation.”

Deep Roy, managing partner at Equilex, added that creditors usually prefer to retain RP for liquidation as it ensures continuity. “The RP is already familiar with the company’s accounts and operations, making the transition to liquidation smoother,” he said.

ALSO READ | Why are creditors now going after insolvency professionals?

NCLT has signaled resistance, warning that approval could trigger a flood of similar filings that could complicate insolvency administration. The outcome of the issue will be closely watched, with the next hearing scheduled for November 8.

long road to recovery

Go First, which has been grounded since May 3, 2023, has struggled to stay afloat after its parent company, Wadia Group, filed for voluntary bankruptcy citing Pratt & Whitney engine delays. and $With debts of Rs 6,200 crore outstanding, lenders are now banking on arbitration awards to recover what they are owed.

Allowing foreign funding could inject much-needed liquidity into the process, but it raises broader questions about the evolution of India’s insolvency regime.

Lawyer Amir Bavani, founder of AB Legal, points out that India’s written insolvency laws still lack the flexibility to handle such unique cases.

ALSO READ | Mint explainer: Why bankruptcy reform should be a top priority for the new government

“The move to allow foreign financing is a solid step towards maximizing the value of debtors’ assets, although the lack of specific provisions in the IBC may pose challenges,” Bhawani said.