Go First’s Voluntary Insolvency, A Change In Societal Thinking
The Wadia Group is a prominent Indian conglomerate with interests in textiles, real estate, FMCG and aviation, among other sectors. The recent announcement by the group's aviation arm, GoFirst, to undergo voluntary insolvency under the Insolvency and Bankruptcy Code (IBC) has generated significant interest in the market. It would be the first voluntary insolvency application, more so from a large wealthy promoter-led business group.
While the move may be seen as a strategic decision to deal with the impact of the pandemic and issues of aviation engine troubles that it has been struggling with, it is likely to test the market's perception of voluntary insolvency and the Wadia Group's corporate framework in India.
The recent admission of GoFirst airline's voluntary insolvency by the National Company Law Tribunal (NCLT) is yet another indication of the effectiveness of the Insolvency and Bankruptcy Code (IBC) in India. The IBC, which was enacted in 2016, was aimed at streamlining and expediting the resolution of corporate insolvency in India, and it has been a game-changer in the country's corporate governance landscape.
The company's management decided to file for insolvency under the IBC to initiate a resolution process that could potentially revive the airline's fortunes. The NCLT's admission of the insolvency petition is a significant milestone for GoFirst, as it opens up the possibility of a resolution plan that could help the airline survive.
The decision by GoFirst to opt for voluntary insolvency under the IBC has been viewed by some market analysts as a sensible move given the challenges faced by the aviation sector due to the pandemic. They have saved themselves the perceived-ignominy of their debtors taking them to insolvency, something that could have hurt the image of their larger enterprise. Thus demonstrating the changing thinking of Indian promoter-led businesses. But the benefits of Go First's decision to initiate voluntary insolvency proceedings extend beyond the company itself.
The move is also expected to have positive strategic outcomes for the larger Wadia Group. By taking decisive action to address Go First's financial challenges, the Wadia Group has demonstrated its commitment to protecting its subsidiaries and ensuring their long-term viability. Moreover, by taking control of the insolvency proceedings, the Wadia Group has been able to protect its interests and avoid a potentially messy and costly insolvency process. This could help the group maintain its reputation and financial stability, while also preserving its relationships with key stakeholders such as creditors, suppliers, and customers.
The voluntary insolvency framework provides a mechanism for companies to restructure their debt and operations while protecting the interests of stakeholders. By initiating the process voluntarily, the company can maintain control over its assets and management and work towards a resolution that is in the best interests of all parties involved. This could also ensure the stability of the other lines of business that they operate within their group.
However, others in the market may perceive the move as a reflection of the Wadia Group's corporate framework in India. The group has been known to have a conservative approach to debt and has been cautious about taking on excessive leverage. The decision to opt for voluntary insolvency could be seen as an acknowledgement of the challenges faced by the group's aviation business and the need to address them through a formal process.
Challenges of social imagery, especially in the corporate circles is critical. Insolvency has traditionally been seen as a social stigma in India. The societal acceptance around accepting failure in one business unit of a promoter and that business owner continuing with the other lines of business has been low. The traditional view in India is that insolvency reflects a failure on the part of the company's management and a lack of responsibility towards its creditors and stakeholders. However, this perception is changing, and voluntary insolvency is increasingly seen as a viable option for companies facing financial difficulties.
IBC, a context
The IBC has been a much-needed reform for India's corporate sector, which was previously saddled with a cumbersome and ineffective legal framework for dealing with insolvency. The IBC provides a comprehensive legal framework for the resolution of insolvency, with clear timelines and procedures for all parties involved. The code empowers creditors to initiate insolvency proceedings against defaulting companies, and it provides for the appointment of insolvency professionals to manage the resolution process.
One of the key strengths of the IBC is its emphasis on time-bound resolution. The code requires that the resolution process be completed within 180 days, with an extension of 90 days in exceptional cases. The IBC has also created a robust market for distressed assets, which has attracted a wide range of investors, including private equity firms and distressed asset funds. However, the implementation of the IBC has not been without its challenges. One of the key issues has been the lack of capacity among the insolvency professionals and the infrastructure required to support the resolution process. The code also faces the challenge of balancing the interests of various stakeholders, including creditors, shareholders, and employees. The recent amendments to the IBC, including the introduction of the pre-pack insolvency resolution process, aim to address some of these issues and make the resolution process more efficient and effective.
Voluntary insolvency is a unique concept in the IBC, which enables a debtor to admit its insolvency and seek the appointment of a resolution professional to oversee the resolution process. This framework is particularly significant because it provides a mechanism for corporate debtors to take control of their own insolvency proceedings, rather than waiting for creditors to initiate the process. By taking steps to address financial difficulties and restructure their operations, companies can emerge stronger and more competitive, creating new job opportunities and contributing to economic growth.
The voluntary insolvency framework also tests the corporate governance framework in India. It is an opportunity for companies to demonstrate their commitment to good corporate governance practices by taking responsibility for their financial difficulties and seeking professional help to resolve the situation. This can help build investor confidence in the Indian market and improve the overall corporate governance framework in the country.
However, the success of the voluntary insolvency framework will depend on the effective implementation of the IBC and the willingness of corporate debtors to take advantage of the framework. The government and regulatory authorities need to create awareness about the benefits of the voluntary insolvency framework and provide support to companies that choose to use it.
Author (Time for Bharat), Policy Researcher & Corporate Advisor
Twitter : @ssmumbai
