Amendments to liquidation process in India & likely litigation funding boom

(With inputs from Hitoishi Sarkar)

The Insolvency and Bankruptcy Board of India (Liquidation Process) (Fourth Amendment) Regulations, 2020 were notified on 13th November. These regulations allow the liquidator to assign or transfer an asset to any person, in consultation with the stakeholders’ consultation committee, provided that the liquidator’s attempts to sell such assets have failed.

Two new regulations: 30A and 37A have been inserted.

Regulation, 37A states:

A liquidator may assign or transfer a not readily realisable asset through a transparent process, in consultation with the stakeholders’ consultation committee in accordance with regulation 31A, for a consideration to any person, who is eligible to submit a resolution plan for insolvency resolution of the corporate debtor.

What this means is that “any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions” can now be assigned to a third party.

This should help create a robust market for third party funding of litigation (particularly in the context of insolvency) in India. As the IBBI’s discussion paper noted, such assignment of assets by the liquidator is already allowed in countries like UK, Australia, Honk Kong and Singapore. The litigation funding market for liquidation claims is fairly developed in most of these jurisdictions

Bankruptcy principles remain the same for state owned firms

The restructuring of South African Airways (SAA) has been in the news for a while now. A recent Business Day piece says:

SAA was never a good candidate for business rescue. This is evidenced by it not being able to trade itself to liquidity without relying on post-commencement financing (PCF) of R10.5bn — at the taxpayers’ expense.

These “cash injections” are from the government. If this isn’t a giveaway, I’ll spell it out – the airline is wholly owned by the South African government. This particular story is about a South African business owned by the state but it rings true for many other state owned business. Businesses that are not viable should be allowed to fail even if they are owned by the state. Its a message worth repeating.

Regulated by one’s competitors

There are many good arguments against professional licensing. One argument is that it can sometimes takes away a person’s livelihood. In a recent New Zealand High Court case, an insolvency professional, Mr. Grant was denied membership of Restructuring and Insolvency Turnaround Association New Zealand (RITANZ) which meant that as per the newly introduced Insolvency Practitioners Regulation Act 2019 (IPRA) he would be unable to practice in his chosen profession (i.e. that of a liquidator) of 14 years.

The IPRA has introduced a co-regulatory model under which accredited professional bodies are responsible for licensing. As per the IPRA, insolvency professionals should be a member of the New Zealand Institute of Chartered Accounts (NZICA). There are some exceptions to this requirement, one of which is that the person should be a member of a “recognised body”. RITANZ is a recognised body as per the IPRA and since Mr. Grant is not a chartered accountant, his only route to being licensed is through membership of RITANZ. Membership decisions at RITANZ are made by empanelled members of an elected board in accordance with procedures set out in Section 5 of the Association’s Rules. One of the rules under this section states that the applicant must, amongst other things, “be of good character (as determined by the Board in its absolute discretion)”. Also listed amongst the Association’s rules is one that states that the Board is “not required to give any reason for determining not to admit an applicant to membership”.

In other words, RITANZ can make membership decisions which might determine a person’s right to practice as an insolvency professional without needing to give any reasons. This is already problematic without adding the additional fact that the market for insolvency professionals in New Zealand is a small one. Thus, what we have is a small community of professionals well-known to each other making decisions about the ability of members’ of the community to practice the profession. The court recognises this latter point when it says, “the involvement of other industry professionals (even, in a literal sense, competitors) in the decision-making process is an inevitable consequence of the statutory regime” while discussing the IPRA as against the scheme of regulation for legal professionals in New Zealand. This comment is however supplemented by a footnote where the court notes that “in the present case, …only a minority of the Panel (Mr Fisk and Ms Johnstone) were themselves insolvency practitioners. Their evidence was that, professionally, their paths seldom crossed those of Mr Grant”.

Mr. Grant had a criminal history, by his own admission. As Justice Muir notes, “in summary the position is, therefore, that Mr Grant has a serious history for dishonesty offending, albeit that the last such offences occurred 27 years ago”. However, Mr. Grant has not re-offended since 1994 and the court makes much of presenting him “as something of a “poster boy” for reform”. I reproduce the court’s words regarding his reform story below:

In prison, he recommitted himself to earlier academic studies, enrolling with the Open Polytechnic. On release, he completed his Bachelor of Commerce Degree and Honours Degree in Economics. He then worked in the gas industry. In 2006, while a consultant to that industry, he accepted his first appointment as a liquidator. He then undertook extensive private study in respect of insolvency law and practice. That is the genesis of what is now Waterstone Insolvency – a firm of which he is the principal and sole director and which has now grown to in excess of 20 employees. Mr Grant has himself been appointed to over 800 insolvencies (i.e. liquidations, receiverships and voluntary administrations). His current appointments number approximately 200.15 He says that over the last three years he has been appointed in respect of approximately three per cent of all insolvency applications in New Zealand and approximately five per cent of all non-IRD appointments.

(Footnotes omitted.)

Now, getting back to the matter of his RITANZ membership application, the said application was made after the IPRA was introduced and subsequently rejected with no reasons given for the rejection. Mr Grant then commenced judicial review proceedings which were resolved by way of agreement on the part of RITANZ to conduct a rehearing of the application. As per the agreement Mr Grant could attend the rehearing in person with counsel and RITANZ also agreed to provide a written decision with reasons within 14 days. His application was however again declined after the rehearing. As the court notes, in the rehearing, there was a “significantly greater focus on Mr Grant’s past, including the genesis of his offending, aspects relating to his apprehension and plea, the extent of any amends etcetera, than on his subsequent history as a successful member of New Zealand’s commercial community”.

In response, Mr. Grant has brought the current application for judicial review arguing that (i) the decision was made in error of law, was (ii) unreasonable and unlawful because it took into consideration irrelevant matters and failed to adequately consider relevant matters, and (iii) that the decision involved an unfair process, apparent bias and predetermination. Elaborating on the third ground, Mr. Grant submitted that “the approach adopted in the decision was in each case to focus on the most negative aspects and most negative interpretation possible and to minimise the overwhelming body of evidence indicating reform and thus present good character”. He submitted that this was indicative of apparent bias, “the origins for which may ultimately lie in the fact that Mr Grant was in direct and sometimes adversarial competition with some of the decision makers – both those involved in the initial decision and those empanelled for the rehearing”.

The court concluded that the decision was indeed problematic on the first two grounds in Mr. Grant’s submissions. With respect to the third ground however, the court said that there was no evidence of bias in the decision-making. Ultimately, the court said that although the Panel’s decision was quashed it will not substitute its own decision and make an order admitting Mr Grant to membership of RITANZ. Mr. Grant’s application was remitted to RITANZ for reconsideration.

One aspect highlighted by this case (if not by the judgement) is that professional licencing and regulation is complicated by the fact that a professional is regulated by her competitors. Although Justice Muir says at one point in this judgement that he “would not have been prepared to quash the decision on the grounds of apparent bias arising out of the professional status of the Panel members” that is simply the limitation contained within the statute and within the principles of judicial review. As Justice Muir goes on to note, “the statutory regime precludes challenge on the grounds that those adjudicating the application (or at least some of them) may (in the broadest sense) be considered competitors in Mr. Grant”.

From a policy perspective, we need to need to reconsider whether professional licensing decisions should be made by the competitors of the person about whom the decision is made. Justice Muir seems to be aware of this issue when he says that the reconsideration of Mr. Grant’s decision by RITANZ “may well be a case where the Board would benefit from the appointment of senior counsel assisting”. Justice Muir further seems to be conscious of the adverse impact of a delayed decision in this case. He notes that “Mr Grant is currently unable to accept further professional appointments” and “within 10 months he will not be able to continue to act in respect of existing appointments”. This is exactly the kind of case that should make us carefully weigh the benefits versus harm of professional licensing regimes.

Rent obligations in a pandemic – new tricks/ desperate efforts

MACs may be all the rage in the Covid times for getting out of M&A deals, but are there any tricks for retailers trying to getting out of rent obligations?

This week’s Canadian Business Law Blog has reported on an interesting “doing business in the midst of a pandemic” issue. Hudson’s Bay Co. (HBC) filed a lawsuit against Oxford Properties Retail Holdings, the landlord of several of its department stores, alleging a failure to operate and maintain “first class shopping centres.” HBC argues that Oxford “has refused to deliver suitable premises since reopening after COVID-19 shutdowns”…”and no longer provides a retail environment viewed as safe or attractive by the public”. HBC is not only seeking a declaration that it does not have to pay rent until these issues are fixed by the landlord but also asking for the “disgorgement” of rent paid to Yorkdale Shopping Centre Holdings Inc., Square One Shopping Centre Holdings Inc. and other Oxford subsidiaries since April of this year.

The other side of the story is that HBC has not paid rents owed to Oxford for seven months and according to Oxford, “recurring attempts to engage the company in a constructive dialogue were repeatedly ignored” by HBC. Retail stores have struggled to pay rent in the post Covid world. In the UK, many high street companies are using restructuring and other insolvency processes to deal with the situation. HBC seems to have decided to find other avenues to handle its non-payment of rent.

Airline insolvencies in India- Part II

Hitoishi Sarkar*

The COVID-19 pandemic has unarguably impacted the financial stability of the aviation industry immensely. The International Air Transport Association (IATA) predicted losses totaling $84 billion for the aviation industry in 2020. At its low point in April, air traffic ran at 95 per cent below 2019 levels. At the time of writing of this post, almost 23 airlines have collapsed due to COVID-19.

A pertinent issue which has engaged stakeholders across the spectrum is that of refund for flights cancelled due to the pandemic. The issue is incredibly complex from the standpoint of regulators as the rights bargain is challenging to rise up to. For instance, if regulators insist on airlines issuing traditional full refunds to passengers, while it may be a significant reiteration of the supremacy of passenger rights but will also irreparably damage the ability of the aviation industry to recover from the current financial stress.

Several airlines across the world have refused to offer refunds for cancelled tickets and have instead insisted on issuing vouchers to passengers of cancelled flights. As per reliable calculations, U.S airlines alone have issued vouchers to the tune of USD 10 billion to customers. The International Air Transport Associations (IATA) estimates that airlines across the world owe approximately $35 billion to passengers for cancelled flights.

Typically, regulations across jurisdictions often mandate refunds to passengers to customers in such situations with the customer having the discretion to decide whether or not the refund is to be retained in a credit shell. However, airlines have raised concerns about enforcing these regulations while the entire industry struggles to stay afloat. For instance, Airlines for Europe (A4E) and other airline associations in Europe are calling for an amendment to the European Commission’s EC 261 Air Passenger Rights Regulation, that would allow airlines to issue refundable vouchers or delayed reimbursements instead of traditional refunds.

Indian airlines have also resonated similar demands with almost all major airlines issuing credit shells instead of traditional refunds. The issue assumes much more significance for the financially stressed Indian aviation industry, which already operates on paper-thin margins and unreasonably high operating costs.

This post seeks to delineate the Indian regulatory framework with regard to refund of cancelled airline tickets and analyze the recent decision of the Supreme Court of India on this issue through the lens of airline insolvencies. The latter part of this post will also briefly touch upon how regulators elsewhere around the world have dealt with this issue.

The Indian Credit Shell Dilemma

In the wake of the COVID-19 pandemic, most Indian airlines have refused to refund the fare amount to customers for cancelled flights. The reason is comprehensible considering that most Indian airlines have not structured their business models to be able to withstand even regular shocks, such as elevated fuel prices or economic downturns, let alone once-in-a-century events such as the present pandemic. Even major players in the Indian aviation industry are known to have precarious liquidity levels. Thus, there is considerable apprehension that if Indian airlines are forced to offer traditional refunds in these extraordinary circumstances they will be pushed to the verge of bankruptcy as the quantum of funds used in providing refunds will far exceed the revenues from new bookings and thus push several airlines to the brink of insolvency.

The regulations governing refunds for cancelled flights is relatively unambiguous in India. The Directorate General of Civil Aviation (DGCA) which is the primary regulatory body in the field of Civil Aviation in India vide Civil Aviation Requirements (CAR) Section 3 Air Transport Series ‘M’ Part II Issue I mandated that the option of holding the refund amount in a credit shell by the airlines shall be the prerogative of the passenger, and not a default practice of the airline. Likewise, Civil Aviation Requirements Section 3 – Air Transport Series ‘M’ Part IV Issue I also obligates airlines to refund the airfare or to provide an alternative flight in the event of a flight cancellation.

Thus, it is evident that airlines’ present policy of creating credit shells by default instead of offering cash refunds fall foul of the Civil Aviation Requirements (CARs) and is thus unsustainable in law.

What is the catch?

The idea of mandating cash strapped airlines in a developing country to offer full cash refunds in the midst of a pandemic may look quite attractive from the standpoint of the supremacy of passenger rights. However, the wider impacts of such a measure will cause more harm than good.

Prior to the COVID-19 outbreak, India‘s aviation industry’s economic contribution was estimated at $35 billion, supporting 6.2 million jobs and contributing 1.5 per cent to the GDP in India. Even if conservative estimates are to be taken the disruptions in air travel from COVID-19 could reduce about 575,000 jobs and $3.2 billion in GDP supported by the air transport industry in India. Thus, an aggressively pro-passengers rights regulation in these times will only aggravate the already stressed financial situation in the Indian aviation sector. 

It is pertinent to note that if airlines are forced into bankruptcy through refund regulations which do not account for the present extraordinary circumstances, it may lead to cessation of their operations. As we have discussed in our forthcoming chapter, an airline insolvency is far complex than insolvency in other industries. This is for the reason that if an airline turns insolvent and ceases operations, there are several issues that would need the immediate attention of the state machinery. For instance, passengers booked through the airline who may be left stranded due to the cessation of operations would need to be repatriated. Likewise, the issue of providing refunds to passengers who had booked through the airline for travel at a future date will also need to be addressed. The issue of mobility of assets also adds significant complexity to airline insolvencies.

The Supreme Court’s ruling

In Pravasi Legal Cell v. Union of India, a three-judge bench of the Supreme Court of India was called upon to adjudicate on whether the refusal by airlines to offer traditional refunds was arbitrary and violative of the Civil Aviation Requirements.

The Court reiterated that in ordinary course modalities and timelines for a refund on cancellation of tickets are governed by the CARs. However, the Court ruled against strict enforcement of the CARs noting that it would further restrict/reduce their operations and may further jeopardize the possibilities of generation of cash by airlines which can further adversely affect/delay the refund cycle.

After consultation with relevant stakeholders, the Court issued an eight-point direction in its order, thereby effectively carving out a middle ground for all parties. The directions of the Court were as follows:

  1. For tickets booked during the lockdown for travel during that period, the airline shall refund the full amount collected without any cancellation charges.
  2. If tickets have been booked during the lockdown through travel agents, in all such cases full refund shall be given by airlines immediately. The agents shall immediately pass on the amount to the passengers.
  3. In all other cases, airlines will refund the amount to the passengers within 15 days. If due to financial distress that is not possible, then airlines shall provide credit shell to passengers for bookings done personally or through agents, and that shall be used for future bookings before March 31, 2021. Passengers will have the option to utilize the credit shell on any route of their choice or can transfer the credit shell to any person, including the travel agent through whom they have booked the ticket, and airlines shall honor such transfers.
  4. In all cases where credit shell is issued there shall be an incentive to compensate the passenger from the date of cancellation up to June 30, 2020, in which event the credit shell shall be enhanced by 0.5% per month of the fare collected till June 2020. Subsequently, the incentive shall be enhanced by 0.75% per month up to March 31, 2021.
  5. After the expiry of the March 31, 2021 deadline, the amount has to be refunded to the consumer.
  6. In cases where passengers have purchased the ticket through an agent, and credit shell is issued in the name of passenger, such credit shell is to be utilized only through the agent who has booked the ticket. In cases where tickets are booked through agent, credit shell as issued in the name of the passenger which is not utilized by 31st March, 2021, refund of the fare collected shall be made to the same account from which account amount was received by the airline.
  7. Even for international travel, when the tickets have been booked on an Indian carrier and the booking is ex-India[1], if the tickets have been booked during the lockdown period for travel within the lockdown period, immediate refund shall be made.
  8. If the tickets are booked for international travel on a foreign carrier and the booking is ex-India during the lockdown period for travel within the lockdown period, full refund shall be given by the airlines and said amount shall be passed on immediately by the agent to the passengers, wherever such tickets are booked through agents. In all other cases airline shall refund the collected amount to the passenger within a period of three weeks.

Following this, the  Directorate General of Civil Aviation vide circular dated October 7, 2020 issued guidelines mirroring the eight points provided by the Supreme Court. Thus, the Supreme Court’s ruling in Pravasi Legal Cell is a welcome development as it resonates the United Nations Conference on Trade and Development’s (UNCTAD) recommendation to “devise amicable solutions which are acceptable to both the customers and the industry itself.”

How have regulators elsewhere dealt with the issue of refunds?

Several countries have introduced regulatory policies to ensure that consumer rights are not sidelined under the garb of financial stability of airlines and have introduced regulatory measures to ensure that passengers right to refund are not adversely impacted.

For instance, China has established a free ticket exchange policy for all tickets purchased before January 2020. Likewise, the United States warned airlines of their obligation to refund cancelled tickets to consumers.  The European Union has also issued a recommendation to make travel vouchers an attractive alternative to cash reimbursement, allowing for vouchers to be issued with a validity of 12 months after which the reimbursement is actionable.

Conclusion

Covid-19 has highlighted the need to balance various stakeholder interests. However, balancing these interests is significantly more complex in a country such as India with low per capita incomes as not all consumers will be in a position to accept a voucher or a delayed refund. The Supreme Court’s ruling in Pravasi Legal Cell has laid to rest all speculations on how Indian airlines are to pay the estimated sum of Rs 6,000 crores which they owe to passengers as refund payments. The Court’s ruling also serves as a textbook example of how stakeholder interests can be effectively addressed in these extraordinary circumstances.

The pandemic has also brought to light the need for India to think about the position of airline customers in the event of an airline insolvency. As the Jet Airways episode has demonstrated, Indian regulations lack clarity on how repatriation is to be carried out if an airline turns insolvent and ceases operations thereby leaving passengers stranded. However, the scenario is not all gloomy. The Cape Town Convention Bill, 2018 is a welcome development in this regard as once enacted it will override several IBC (Insolvency and Bankruptcy Code, 2016) provisions and account for industry specific complexities associated with airline insolvencies. The enactment of the Bill will significantly ease aircraft financing and leasing in India. Recently, India also amended the Aircraft Act, 1934 which seeks to provide statutory status to the DGCA, the Bureau of Civil Aviation Security (BCAS), and the Aircraft Accidents Investigation Bureau (AAIB).  Thus, there is considerable hope that the Indian regulatory structure will address these concerns in the near future.

See Airline Insolvencies in India – Part I.


[1] “Ex” is a Latin prefix meaning “out of” or “from. “Ex-India” signifies that the flight originates out of/from India.

* Hitoishi Sarkar is an undergraduate student of Law and Arts- Year III, Gujarat National Law University, Gandhinagar.

Does litigation funding amount to abuse of process if the funder has an ulterior motive?

The High Court of New Zealand recently considered this question in Cain v Mettrick [2020] NZHC 2125. The question is an important one in New Zealand where the market for litigation funding is still developing (less than 10 litigation funding companies are currently in play). It is also important because the Law Commission in New Zealand is presently undertaking a review of class actions and litigation funding. Although Cain v Mettrick involves litigation funding in the context of liquidation which is less controversial, the allegations of ulterior motive add an interesting layer of complication and the decision of the High Court offers clarity even though it held that there was no evidence to support the alleged ulterior motive.

As a preliminary step, the Court referred to Waterhouse v Contractors Bonding Ltd [2013] NZSC 89 to note the recognised categories of case that will attract the court’s intervention on abuse of process grounds:

(a) proceedings which involve a deception on the court, or those which are fictitious or constitute a mere sham;

(b) proceedings where the process of the court is not being fairly or honestly used but is employed for some ulterior or improper purpose or in an improper way;

(c) proceedings which are manifestly groundless or without foundation or which serve no useful purpose; and

(d) multiple or successive proceedings which cause or are likely to cause improper vexation or oppression.

The argument in this case was that Mr Meehan (the person in control of the litigation funding entity) has a vendetta against Mr Boult (one of the defendants) and intended to interfere in his election as Mayor for a collateral purpose of influencing Council activity in respect to Mr Meehan’s commercial interests. [21]. Amongst the evidence provided in this regard, mostly consisting of affidavits and depositions, Mr Boult deposed that Winton (company controlled by Mr. Meehan and funding the litigation) has never before been a litigation funder in any normal sense and the funding of this litigation is inconsistent with its business model. [23]. On the other hand, it was argued on behalf of Mr. Meehan that Winton was funding the litigation for a commercial return on its investment. Although Winton had not previously been involved in litigation funding of this kind, it had looked into such opportunities. [28] Mr. Meehan further argued that the funding agreement was entered into by another entity, PLF, to provide anonymity for Winton since he wanted to avoid allegations of favoured treatment by the Council for Winton-related entities and equally to prevent Mr Boult (who was also the mayor of the Queenstown Lakes District Council) negatively influencing consent applications to the Council. [30].

Discussing when an ulterior motive amounted to abuse of process, the court stated that the “plaintiff’s purpose must be shown to be “not that which the law by granting a remedy offers to fulfil, but one which the law does not recognise as a legitimate use of the remedy sought”.” Further, it stated that “where a plaintiff has multiple purposes for bringing an action, including some that might be condemned as a collateral advantage, it will be sufficient that one of those purposes is legitimate”. [31] Citing Broxton v McClelland [1995] EMLR 485, the court stated that “where a plaintiff’s action is funded, the funder’s purposes and motivations will not be attributed to the plaintiff”. [31]. In the current case, the court held that the liquidators were pursuing genuine causes of action to obtain compensation on behalf of the companies in question. [33]. It further held as follows:

They do not seek any advantage beyond that which the law allows. There is no criticism of the manner the proceeding has been conducted (apart from the issue of funding). The Liquidators and PLF have a common commercial interest in seeking the payment of compensation. It is from the success of the proceeding, or a settlement, that PLF will receive the Services Fee. [33]

About Mr. Meehan’s motives, the court simply held that his purpose in funding this litigation was to make a profit. Even if Mr Meehan had “a subordinate purpose that may be achieved as a by-product of the litigation, that is not an abuse of process, nor can such purpose be imputed to the Liquidators to taint this proceeding”. [34]

Airline insolvencies in India – Part 1

While Covid-19 has highlighted the need to balance various stakeholder interests generally, some adversely impacted sectors (like airline companies) might also need to engage with insolvency procedures. In a forthcoming book chapter, I along with Hitoishi Sarkar, have detailed airline insolvency cases in India before and after the IBC and provided an overview of legal developments that can be expected in the area. In a two-part series, we will discuss legal issues and developments regarding airline insolvencies in India. This first part briefs the chapter.

Airline insolvencies are more complex than insolvencies in other sectors because of the international mobility of assets and passenger interests. As has become all too clear in the aftermath of Covid-19, when an airline becomes insolvent, travel tickets that passengers might have paid for become worthless; and there are additional welfare costs when such passengers are stranded abroad. Thus, more specific solutions than what we have under the general insolvency framework might be required.

The Cape Town Convention and the Aircraft Equipment Protocol establish an international legal system for security interests in aircraft equipment and is aimed at easing asset-based financing in the aviation sector. Although the primary aim of these legal instruments is to ease secured asset-based financing in the aviation industry, they also have insolvency-related provisions incorporated into them to deal with situations where the debtor turns insolvent. Though India is a signatory to the Cape Town Convention, there is no local legislation that gives effect to the provisions of the Cape Town Convention, and thus the repossession of the aircraft from India is subject to extant Indian laws. Insolvency proceedings in India, including those in the aviation sector, are governed by the IBC. On 8 October 2018, the Indian government proposed the enactment of the Cape Town Convention Bill, 2018 (Bill), which when enacted will give primacy to the provisions of the Convention on International Interests in Mobile Equipment (Convention) and Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol). The proposed enactment is designed to override any conflicting provision contained in any other law in force, especially the IBC and its moratorium provisions. This is a welcome change as it will align the Indian position with that of the Convention and Protocol to which India acceded in 2008.

Another area that needs attention is cross border insolvency law. As the Jet Airways case shows, a cross-border framework is important and more so for airline companies. Cross-border insolvency protocols are something that could work on a case to case basis but a legislative framework will provide certainty to both Indian companies and overseas creditors and suppliers working with Indian companies. The Indian government released draft guidelines on this in 2018 and it is expected that this will be an area of ongoing interest in the post-Covid-19 time with corporate insolvencies surging across the world.

The string of pre-IBC cases we discuss in the chapter also speaks to the promise that an informal restructuring regime can bring to the airline insolvency sector. The aviation sector features prominently in the list of  26 sectors selected by the KV Kamath Committee (set up by the RBI to make recommendations on the one-time restructuring of loans hit by Covid). However, as our chapter outlines, a restructuring regime even beyond Covid-19 will be useful generally, and for the aviation industry specifically.

Finally, it would be useful for India to think about the position of airline customers in the event of an airline insolvency. This will be explored in more detail in Part II of this two-part series on airline insolvencies in India.

IBC off the books

Anjali Sharma and Bhargave Zaveri have published an interesting analysis of the functioning of NCLTs in India during the lockdown imposed due to Civid-19 and compared this with the pre-lockdown period and also a period after the lockdown was lifted.

One of their findings provides an interesting insight. As they say in their article:

In the pre-lockdown period, while a large number of hearings were getting scheduled, nearly 82% of these resulted in a next hearing date being given. During the lockdown period, this changed. The disposal rate improved significantly, from 17.9% to 54.5%.

They explain the improvement as follows:

One possibility is that during the lockdown, since the NCLT was hearing urgent matters only, they had to be disposed of. The second is that the pre-lockdown scheduling of nearly 40-50 cases per courtroom per day, was unrealistic. It resulted in a few matters getting actually heard and a next date being given in the remaining. Since the number of hearings getting scheduled during the lockdown period were low, these matters were actually getting the attention of the court, which resulted in an improved disposal rate. Finally, it is also possible that the manner in which courts have dealt with hearings in the lockdown period changed. They were less amenable to allowing re-scheduling.

Their third and final explanation is particularly interesting from the perspective of the role of courts/ tribunals in the effectiveness of India’s insolvency resolution framework. In a previous article, I had noted that part of the failure of India’s Sick Industrial Companies Act (SICA) was due to the tribunals’ and courts’ tolerance of delays. Has the NCLT (the designated adjudicating authority under the IBC) fallen into the same habit? This may not entirely be the case; but if indeed a tendency to tolerate has set in, it should be curbed consciously by the NCLT members. The surge in bankruptcy cases once the suspension of filings under the IBC is lifted will be a strain on the NCLTs and they will do well to caution against unnecessary delays.

Jurisdictional basis for cross border insolvency protocols – from Cayman Islands Grand Court

Insolvency protocols have been used in the past between courts in various countries. Cayman Islands joined this list of countries yesterday when the Financial Services Division of the Cayman Islands Grand Court approved a cross border insolvency protocol between itself, the bankruptcy court in the US (Southern District of New York), the second civil court of Santiago, Chile, and the Superintendencia de Sociedades in Columbia. The protocol is for the matter of the restructuring of LATAM group of companies. The protocol recognises the Chapter 11 proceeding as a foreign main proceeding.

Since it was the first cross border insolvency protocol (or any court-to-court communications protocol) being approved by the Cayman Islands, the court spent some time discussing the jurisdictional basis for this. Citing Singularis Holdings Limited-v-Pricewaterhouse Coopers  [2015]  AC  1675 (amongst other cases), the court held [at 17]:

It is this common law duty to assist foreign insolvency courts in service of the goal of a universal application of the regime for dealing with creditors claims being applied in the main insolvency proceeding, which is the principal foundation of this Court’s jurisdiction to approve the Protocol in the present case.

Additionally, the court also references the practice directions of Financial Services Division Guide which “seeks to nudge, rather than push, office holders towards  considering  in  suitable  cases  inviting  the  Court  to  adopt  either  one  of  the  two annexed sets of Guidelines [the American  Law  Institute/International Insolvency  Institute  Guidelines  Applicable  to  Court-to  Court  Communications  in Cross-Border   Cases   (ALI/II) and   the   Judicial   Insolvency   Network   Guidelines   for Communication  and  Cooperation  between  Courts  in  Cross-Border  Insolvency Matters (JIN)]”.

Further citing a post by Gert-Jan Boon and Bob  Wessels (Soft  Law  Instruments  on  Restructuring  and  Insolvency  Law:  Why  They Matter (or Not)), the court notes that the two sets of guidelines i.e. ALI/II and JIN may be viewed as soft law instruments. Finally, it goes on to note that these instruments “most directly provide a jurisdictional basis for approving the Protocol, building on the more substantive common law principle mandating assisting foreign insolvency courts as far as possible and the inherent jurisdiction of the Grand Court to manage its own processes”. [at 26].

More on turnover rents (and New Look’s impending CVA)

I’d previously blogged about New Look trying to get its landlords to agree to turnover rent in its CVA where I wondered about whether landlords should get a cut of online sales. That won’t be happening in New Look’s case. But the desperation of landlords is capture in one provision in the CVA: landlords landlords have the opportunity to exit the lease if they believe they can identify an alternative tenant on improved terms.

However, as the FT reports, retailers will have to offer more than this in cases where the situation is not quite as desperate. One obvious this is to define turnover broadly so as to include “online orders fulfilled via leased premises but exclude returns, would mean landlords benefit from increased click-and-collect footfall”. Success payments when turnover exceeds a certain threshold will also make the deal sweeter for landlords.

It is worth mulling over these tools since brick and mortar stores have been troubled even before the pandemic and the issues are not going anywhere.