No resolution for Jet Airways: Bankruptcy it is

Jet airways, naresh goyal

The final fate of what was once India’s largest privately operated airline, Naresh Goyal founded Jet Airways, was sealed in a meeting of creditors on Monday afternoon. A consortium of lenders led by SBI and Punjab National Bank (that are the two biggest lenders to the beleaguered airline with close to ₹ 2,000 crores in loans) have finally given up on their rescue efforts after being unable to find a buyer for Jet following months of action packed search and have decided to refer it to bankruptcy court for insolvency proceedings, thereby ending all hopes for a miraculous recovery.

The decision to drag it to NCLT for insolvency proceedings seemed inevitable, especially considering that the one-time premier airline that was grounded two months ago on April 17th for what was then termed as a “temporary cash crunch” experienced turbulence of the worst kind including seizure of planes, senior management exits, allocation of its airport slots to other airlines and attempting to operate without a functional board. Add to that, the last two remaining independent directors, Ashok Chawla and Sharad Sharma too stepped down on Monday. One aviation expert, Jitendra Bhargava, questioned “Why did it take so long for banks to take the company to NCLT? Banks have been totally bureaucratic in their approach; there was never a firm process to revive the airline”.

However, a valiant effort was made by the consortium of lenders to find a resolution for Jet instead of putting their hands up in a hurry. The last of the efforts involved London based Hinduja Group that was in negotiations to pick up a stake along with Jet’s strategic investor Etihad Airways bargaining to maintain only a minority stake, not wanting to risk further capital for what it believed was a lost cause. However, the offer put forward by Hinduja and Etihad Airways were deemed extremely unfavourable by the consortium of lenders as it would entail a haircut of over 85% which was unacceptable and on top of that the offers were non-binding and lacked commitment. Therefore, with the exit of the only potential investor, the lenders were left with no option but to proceed to insolvency court.

The reason why bankruptcy proceedings were chosen as an option of last resort and a concerted effort was made for a resolution outside NCLT, particularly in the case of Jet Airways, is because unlike manufacturing industries, in the service sector, there is little value left when a company is moved for insolvency proceedings as there are minimum tangible assets left to sell as most of the airplanes are either leased or acquired through rights. Therefore, what is available for sale are bilateral rights, airport slots and license to operate the airline. Out of a fleet in excess of 120 aircrafts, Jet Airways owns just about 13 aircrafts, most of which are mortgaged to financiers. And to top it all off, the properties owned by the airline are also mortgaged as security for loans. Therefore, with the company now going to NCLT, lenders may be able to recover only a fraction of the ₹ 8,400 crore owed to them. Let’s also not forget the total liabilities of the airline, including unpaid salaries and dues to vendors are nearly ₹ 15,000 crore.

Under the Insolvency and Bankruptcy Code of 2016, the money received from asset sales is distributed as per the waterfall mechanism in accordance with section 53. The order in which priority of claims will be fulfilled is clearly defined under the act. Insolvency related costs such as general expenses to carry out the procedure and remuneration for the resolution professional is to be paid first. Then, unpaid workmen’s dues (i.e. dues to daily wage workers and other workmen, not to be confused with employees) for a period of 24 months and debts owed to secured creditors such as SBI, PNB and other banks will be satisfied proportionally from sale of assets. And, only if there is money remaining after this, will the 20,000 odd employees of Jet Airways receive their unpaid salary for a maximum period of 12 months.

The shares of Jet Airways, on the back of this news, touched an intraday low of just below ₹ 32 per share, which is a fall of over 50% in a single trading session. However, it managed to recover a tad bit and closed the day at ₹ 40.50 per share, a loss of close to 41% from the previous day’s close.

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