TURBULENT JOURNEY OF JET AIRWAYS-A RESOLUTION WITH CONTINGENCIES

-By Research Team of IBC Law Reporter

#JET-SET-GO

INTRODUCTION

From one of the first private successful airline operators in India to the first company that tasted cross-border insolvency proceedings. Before we move further with the summary of the plan, let’s have a brief look at the #Turbulent Journey of Jet Airways:

1) Jet Airways started its business operations in the year 1993 when the then Govt of India opened up the airline business to the private sector. It started international flights in the year 2004.

2) In the year 2007, Jet acquired Air Sahara and renamed the same as Jet lite and in the year 2012 Jet Lite merged into Jet Konnect to offer business class seats.

3) Ethiad bought 24% stake in Jet Airways after govt’s notification allowing up to 49% FDI in airlines sector.

4) Although losses started from the year 2008-09 itself but it was in the year 2018 when airways had a loss in all the four quarters with loss of all the quarters above 500 crores. In the same year, it defaulted in the repayment of the debt of around 8000 crores Rupees.

5) In April 2019, Jet Airways suspended its operations after lenders decline the request to infuse funds in the company in the debt-ridden airlines.

6) In June 2019, SBI led Consortium of lenders moved the NCLT with an application under Sec 7 of the Insolvency & Bankruptcy Code, 2016 for initiating CIRP. NCLT admitted the application & appointed Mr. Ashish Chawchharia of Grant Thornton as the Interim Resolution Professional (IRP).

7) 1^st Meeting of COC was held on 16.07.2019 in which IRP was confirmed as the Resolution Professional (RP).

8) Advertisement on 20.07.2019 (First Round) for the invitation of Expression of Interest (EOI).

9) On 19.11.2019, the CoC authorised an extension of time for submission of the resolution plans till 16.12.2019. During this time, despite detailed negotiations, no resolution plan was received from any Prospective Resolution Applicant (PRA).

10) On 17.12.2019, the CoC cancelled and annulled the First Round of the process and approved & authorized the RP to issue a fresh invitation of EoI and Form G for submission of resolution plan for the Corporate Debtor. Subsequently, the RP published fresh advertisements on 22.12.2019 (Second Round) for the invitation of EoIs. Synergy Aerospace Corporation (Synergy) & Prudent ARC Limited (Prudent) were the PRAs. However, no resolution plan was received from either of them.

11) In the 9th meeting held on 12.03.2020, the CoC noted that there could be a possibility of successful resolution if some more time was made available. This was inter alia due to (a) the Covid-19 pandemic hindering the travel plans of potential applicants, and (b) the divestment proposed by the Government of India (GoI) from Air India leading to an interest in the Corporate Debtor too. The same was extended.

12) In or around April 2020, the RP received informal EoIs from two individuals namely Mr. Claude Bothello and Mr. Siva Rasiah. This was brought to the CoC’s notice. However, no EoI or eligibility documents were submitted by either of them.

13) Upon approval from the CoC, the Applicant published a fresh advertisement on 13.05.2020 (Fourth Round) for the invitation of EoI in Form G.

14) The last date for submission of the resolution plan was 11.07.2020. In view of the request received from PRAs on 09.07.2020, the CoC approved & authorized the RP to extend the time for submission of the resolution plan to 21.07.2020. On 21.07.2020, the Applicant received 2 (two) resolution plans from the following resolution applicants:

(i) Jalan Fritsch Consortium; and

(ii) Imperial Consortium.

15) The Resolution Plan dated 21.09.2020 submitted by Jalan Fritsch Consortium as amended by the version dated 30.09.2020 and as supplemented and amended by the addendum dated 02.10.2020 along with the exemptions and waivers sought (Resolution Plan) was approved by the CoC with a majority of 99.22% votes in favour while 0.01% dissented and 0.77% abstained. Resolution Plan of Imperial Consortium received only 8.57% votes in favour.

PROFILE OF THE SUCCESSFUL RESOLUTION APPLICANT

a) The Jalan Fritsch Consortium is a consortium of (a) Mr. Murari Lal Jalan, a Non-Resident Indian based in United Arab Emirates (UAE) and (b) Mr. Florian Fritsch, the former being the lead Partner. Mr. Jalan will hold shares in the Corporate Debtor in his personal capacity and Mr. Florian Fritsch will hold shares therein through his investment holding company – Kalrock Capital Partners Ltd, Cayman (KCPL). KCPL will incorporate a wholly-owned subsidiary in the UAE (Kalrock Co), which will hold and manage Mr. Florian’s share in the Corporate Debtor.

b) Business interests of Mr. Jalan are spread over in the UAE, Federative Republic of Brazil, Republic of India, Republic of Uzbekistan and the Philippines. He had a net worth of over US$ 138 million (approx. ₹. 979 crores) as on 31st December 2019.

c) Mr. Fritsch, the principal shareholder of Kalrock Group, is an experienced professional in restructuring businesses. He had a net worth of over US$  250 million (approx. ₹. 1770 crores) as on 31st December 2019.

SALIENT FEATURES OF RESOLUTION PLAN

FINANCIAL PROPOSAL SUMMARY

#financial creditors

1) Upfront ₹. 185 Crores – A total sum of ₹. 185 Crores on 180th day from the Effective Date including ₹. 10 Crores if the BKC Property is handed over to RA will be paid to AFCs, secured by PBG of ₹. 47.5 Crores, Mortgage over BKC Property (if given to the RA), Mortgage over Dubai Property No. 1 (Commercial Property located at Plot No. 1236, Jebel Ali Industrial First, Dubai, UAE) valued over ₹. 100 Crores.

Page 12 of order

2) Zero-Coupon Bonds of ₹. 195 Crores – A total sum of ₹. 195 Crores would be paid to AFCs through issue of 19,50,000 ‘Series A Zero-Coupon Bonds’ of the face value of ₹. 1,000/- each, on the effective date. The Bonds can only be redeemed after the closing date within 730th day of the Effective Date. The bonds will be secured by Mortgage over BKC Property (if given to the SRA), Mortgage over Dubai Property No. 1 and Mortgage over Dubai Property No. 2 (Commercial Property located at Plot No. 358-605, Al Quoz, Dubai, UAE) valued over ₹. 100 Crores.

Page 12 of order

3) NPV of ₹. 391 Crores through NCDs-Further Issue of 30,00,000 Non-Convertible Debentures (NCDs) of the face value of ₹.1,000/- each, aggregating to ₹. 300 Crores with guaranteed Net Present Value (NPV) of ₹. 391 Crores for AFCs (using the discount rate specified in the Evaluation Matrix). The NCDs will carry an interest rate of 0.001% from the Allotment Date until the Redemption Date.

Page 12 & 13 of order

3) Upside on Sale of Aircrafts -RA will pay to the AFCs an upside on sale of 11 aircrafts (Five 777s; Three 737s; and Three A330s) owned by the Corporate Debtor through an issue of 6,00,000 ‘Series B ZCBs’ of the face value of ₹. 1,000/- each, aggregating to ₹. 60 Crores which can be redeemed after the closing date and within 365 days from the effective date.

Page 13 of order

4) Upside on sale of Aeronautical Radio of Thailand (ATR) Inventory through an issue of 1,50,000 ‘Series C ZCBs’ of the face value of ₹. 1,000/- each, aggregating to ₹. 15 Crores.

Page 14 of order

5) Upside on sale of Aircraft-Spares through issue of  5 lac series D ZCB’s of the face value of 1000 Rs, each aggregating to the value of Rs. 50 Crores.

Page 14 & 15 of order

6) Upside on BKC Property- RA proposes to pay to the AFCs an upfront payment of ₹. 10 Crores for the BKC Property and pay all savings derived out of settlement towards airport and parking charges below ₹. 245 Crores. In addition, if BKC Property is sold for an amount over and above ₹. 245 Crores in next 2 years (or if the SRA decides to retain the BKC Property for the use of the Corporate Debtor), then 50% of the upside value will be shared with the AFCs.

Page 15 of order

7) 9.5% Equity Stake in Jet Airways -RA proposes to issue to the AFCs, an equity stake of 9.5% in the reconstituted share capital of the Corporate Debtor. the shares will be allotted to the AFCs in such manner that there shall be no dilution in percentage of shareholding reserved for the AFCs below 9.5% until ₹. 600 Crores is invested by the SRA in the Corporate Debtor.

Page 15 of order

8) 7.5% Equity Stake in Jet Privilege Private Limited (JPPL) –RA proposes to offer 7.5% stake held by the Corporate Debtor in JPPL to the AFCs. It is further submitted that to secure the AFCs interest upfront, such 7.5% shares will be given from the 49.9% stake held by the Corporate Debtor in JPPL (Jet Privilege Private Limited) i.e. the Corporate Debtor will hold 42.4%, AFCs will hold 7.5% and Etihad will hold the remaining 50.1%. It is proposed that the AFCs will have the option to exercise ‘Tag Along Right’ to sell their 7.5% stake to Etihad or any other party to whom the SRA sells the Corporate Debtor’s 42.5% stake, on the same terms and conditions as offered to the SRA.

Page 16 of order

9) Positive Bank Balance- RA will pay the positive cash balance of 40 crores in the balance sheet of the Corporate debtor & to transfer the un-utilized portion of  CIRP cost to the Assenting FC’s & transfer of Rs.8 crore contingency fund remaining un-utilized.

Page 16 & 17 of order

10) The RA proposes to offer 100% stake held by the Corporate Debtor in Jet Lite to the AFCs on the Approval Date. If this proposal is not acceptable to AFCs, then the SRA shall liquidate Jet Lite immediately after the Approval Date.

Page 17 of order

11) Dissenting Financial Creditors would be paid the liquidation value due to them in priority to other financial creditors in terms of Section 30(2) of the Code read with Regulation 38(1)(b) of the Regulations, out of the amounts reserved for the Financial Creditors in terms of this Resolution Plan.

Page 17 of order

#employees and the workmen

12) RA proposes that all the #employees and the workmen of the CD will form a trust and they will be the beneficiary & RA will transfer an equity stake of 0.50% to the Trust, if formed, in the reconstituted share capital of the Corporate Debtor, through conversion of their outstanding claims. The SRA proposes that if and when the Trust sells the shares held by it in the Corporate Debtor, the value derived (Rs. 183 Crore estimated by RA) from such sale be distributed in the following manner:

 i. 60% to Workmen

 ii. 15% to employees on salary of up to 12 lac p.a.

 iii. 15% to employees on salary between 12-15 lac p.a.

 iv. 10% to employees on salary above 15 lac p.aEquity stake of 76% to the trust in Airjet Ground Services Limited.

Page 17 & 18 of order

13) RA proposes to pay a token sum of Rs.11000 to each of the employees of the corporate debtor.

Page 19 of order

14) Cash payment for workmen – The SRA proposes to pay the following to each workman of the Corporate Debtor:

i. ₹. 11,000/- cash to each workmen of the Corporate Debtor.

ii. ₹. 5,100/- cash as medical expense reimbursement for the parents of the workmen of    the Corporate Debtor.

iii. ₹. 5,100/- cash as school fee reimbursement for children of the workmen of the Corporate Debtor.

iv. Stationary (notebooks, school bags etc.) collectively valued at Rs.1100

v. One time recharge of Rs.500

Page 19 & 20 of order

15) IT Assets – The SRA proposes to give to each workman, one IT equipment (phone or iPad or laptop) out of the existing IT assets of the Corporate Debtor.

Page 20 of order

16) RA proposes to give credits for future tickets worth ₹. 10,000 to each employee and workmen of the Corporate Debtor. The credit for future tickets will be issued in the form of redeemable vouchers in the multiples of ₹. 1,000/- (equivalent to ₹. 1,000 worth of credit for future tickets). The vouchers will be transferable in nature (prior to issuance of any ticket). No tickets will be transferable in nature. Vouchers can be redeemed against more than 1 (one) ticket. Booking of tickets against redemption of such vouchers must be completed within 30 days of the Corporate Debtor recommencing its domestic operations.

Page 20 & 21 of order

17) It is stated in the Resolution Plan that this proposal to Employees and Workmen (i.e. equity stake in the Corporate Debtor; equity stake in AGSL, cash payment for employees and workmen, IT Assets and Free Tickets) is valid only if at least 95% of the employees and workmen of the Corporate Debtor (as on ICD) support this Resolution Plan by not contesting or challenging its approval by the Adjudicating Authority (the Authority) and/or its implementation in the manner approved by the Authority. If the above proposal is not accepted by the employees and workmen within 30 days from the Approval Date, then no other creditor will have the right to seek such benefits or any part thereof and such proposal shall stand withdrawn. After the expiry of the said period of 30 days from the Approval Date, the equity stake of 0.50%, and cash payments of up to ₹. 8 Crores currently earmarked for employees and workmen will be given to the AFCs. The proposal with respect to ticket credits, equity stake in AGSL and handover of IT assets shall revert to the Corporate Debtor and no other creditor will be entitled to it. After expiry of 30 days from the Approval Date or upon non-receipt of necessary approvals, the SRA shall have the discretion to deal with its equity stake in AGSL in the manner deemed appropriate by it without causing any prejudice to the implementation of the Resolution Plan.

Page 21 & 22 of order

#Scheme for absorption of the Employees

18) RA will retain 50 employees and workmen forming part of the Asset Preservation Team (APT). (Retained Employees)

19) Excluding the Retained Employees, all employees and workmen on the payrolls of the Corporate Debtor (Demerged Employees) as on 15 September, 2020 (Record Date) will be demerged from the Corporate Debtor and absorbed into Airjet Ground Services Limited (AGSL) with effect from the Approval Date.

20) It is further submitted that as part of such demerger, all the past dues towards salaries and other benefits (such as PF dues, leave encashment, retirement benefits, notice pay, termination dues etc.) of the Demerged Employees for the period after the ICD and until the Approval Date and/or retirement benefits accruing to Demerged Employees which have arisen after the ICD, shall also stand demerged from the Corporate Debtor to AGSL with effect from the Approval Date and the Corporate Debtor shall absorb no liability or responsibility for such payments as the RP has not accounted such salaries and other benefits as CIRP cost.

Page 22 & 23 of order

#operational creditors

21) The liquidation value due to the Operational Creditors (excluding Workmen and Employees) of the Corporate Debtor is presumed to be NIL, the RA proposes to pay a fixed sum of ₹. 15,000/- to each of the claimants classified as Operational Creditors irrespective of their claim amount i.e. an amount not exceeding a total sum of ₹. 10 Crores to the Operational Creditors towards the settlement of their total outstanding dues as set out in the list of Creditors (Admitted OC Claims).

Page 23 of order

#shareholders other than public shareholders

22) SRA proposes to pay a fixed sum of ₹. 10,000/- to the existing shareholders of the Corporate Debtor other than public shareholders (i.e., the existing promoters, Etihad and financial institutions holding shares in the Corporate Debtor).

Page 26 of order

#public shareholders

23) For every 100 existing shares held by the public shareholders, they will be entitled to 1 (one) share in Jet 2.0, post the re-constitution of share capital as per clause 7.4.3(a) of the resolution plan.

Page 26 of order

24) Proposed shareholding pattern of the Corporate Debtor:

Demerger of third party ground handling the business of the Corporate Debtor to AGSL

As a part of this Resolution Plan, SRA has sought the demerger of third party ground handling business of the Corporate Debtor to its wholly owned subsidiary – AGSL. The SRA will transfer 76% equity stake in, and management control of AGSL to the employees’ trust after the Approval Date. Therefore, the employees’ trust will own majority stake and control in AGSL and its business.

The contingency of the Plan

1) The success of the Resolution Plan and its implementation is contingent upon certain future events as provided under Clause 7.6 of the Resolution Plan (pdf 275-276 of the Application). Since the revival of the Corporate Debtor is dependent upon these factors, the CoC has approved the Resolution Plan taking into consideration the necessity of the conditions which are integral to the successful implementation of the Plan. Thus, the effective date also depends upon the conditions being fulfilled. Despite the effective date being uncertain, the CoC has approved the same. Considering the peculiarity of the facts and totality of the circumstances, we feel it appropriate to agree with such decision of the CoC and its fiscal prudence, subject to the following.

2) During the hearing, the uncertainty of the time frame for implementation of the Resolution Plan was discussed. It is stated by the SRA in clause no. 7.6.2 (pdf 276) of the Resolution Plan that the effective date would mean the date of the fulfillment of all the conditions precedent as stated in clause 7.6.1 thereof. The SRA, at clause no. 7.6.4, has gone on to add that the consortium would make all endeavor to ensure all the compliances are done for the fulfillment of the conditions precedent within a period of 90 days. In the unlikely event that the conditions precedent are not complied within this period, SRA would require a maximum of 180 days more to fulfil the conditions. Failing which the Resolution Plan would stand automatically withdrawn without any further act, deed or thing. In view of such uncertainty in the ‘effective date’ the Bench suggested that let the effective date be the 90th day from the Approval Date (clause 3.1 at pdf page 201). The SRA as well as the Applicant (RP of the Corporate Debtor) had agreed to the suggestion. This in our opinion is not in the nature of a substitution or addition to the decision, commercial or otherwise, of the CoC. The suggestion is made only to give finality and certainty to the effective date, which the SRA has otherwise committed in the Resolution Plan to endeavor to do. It could accordingly be ordered so. Failing which the SRA / Corporate Debtor would be at liberty to approach this Authority for appropriate orders with regard to extension of the timeline, as would be deemed proper. That would help prevent the SRA from the frustration of ‘automatic withdrawal’ referred to in clause 7.6.4 of the Resolution Plan.

OBSERVATIONS OF THE HON’BLE NCLT

1) On the issue of slots: The Hon’ble NCLT held that the Corporate Debtor had ceased its operation much prior to the insolvency commencement date and on the date of insolvency commencement it did not have any slots operating in its favour. Viewed from any perspective the slots cannot be allocated to the Corporate Debtor beyond the procedure prescribed under the guidelines. Therefore, the claim of historicity advanced by the Corporate Debtor / SRA cannot be made available to it. Despite the temporary allotment of slots to the other Airlines, their restoration has to be worked out within the parameters prescribed under the guidelines.

2) Facts and circumstances would indicate that presently the slots cannot be restored to the Corporate Debtor on a historic basis. The thumb rule being ‘use it or lose it’. Be that as it may, we must remember that running an Airline, much less reviving one, is not a facile business. It involves entire gamut of complex and diverse activities from land to sky and everything in between.

3) Considering the peculiar nature of slots allotment and its usage, the principle of slots allotment could not come within the commercial wisdom of the CoC. As already held the slots being not assets of the Corporate Debtor, the CoC’s decision on the protection of historicity would not be of any help to the Corporate Debtor

4) Section 14(1)(d) deals with the move by the owner or lessor to recover a property in the possession or in occupation of the Corporate Debtor. The allocation of slots cannot be construed as a ‘property’ of the MoCA or the DGCA or for that matter the Government of India. Moreover, there has been no move by these authorities to wrest control of the slots from the Corporate Debtor

5) On Effective Date: In view of uncertainty in the ‘effective date’ the Bench suggested that let the effective date be the 90th day from the Approval Date.

6) On Flight Credit: In our considered opinion the window period of 30 days appears to be quite negligible in the present circumstances and the pandemic. People the world over are jittery of traveling, more so by Air. Under such a situation most of the prospective passengers may not avail the sop within the period of 30 days. That would also be prejudicial to their interest. Besides considering the various conditions precedent there is the possibility that the RA would not be in a position to commence flight operations within 30 days of the 180th day of the effective date. The same was also discussed during the hearing and the RA as well as the Applicant had agreed to extend the window to one year from the stipulated 30 days.

7) The Resolution Plan doesn’t take into account the dues of the employees and workmen during the CIRP period in view of the fact that except for 50 employees retained as ‘Asset Preservation Team’ of the Corporate Debtor none of the other employees or workmen were under the employment of the Corporate Debtor nor did they work for the Corporate Debtor during that period. The decision in that regard appears to be reasonable based on the principle of ‘no work no pay’.

COMMENTS

1) While Jet Airways may be ready to take off after 2 years of a long break, but we feel the IBC journey for resolution of debt-ridden companies is taking a huge hair-cut break, In less than 1 month we have seen DHFL, Videocon resolution plan in which creditors are getting mearge 2-3% of their total dues. In Jet Airways also, the recovery rate is also similar.

2) The Order does not give much clarity on what is the plan for JET 2.0 (after plan implementation) and also on the sale of Aircrafts & other assets of the Corporate Debtor.

3) Feasibility and viabliity of the plan seem to be the missing points in the Order.

4) Washing out the CIRP dues of Employees & Workmen considering the principle of no work no pay’ which gives an indication that even the CIRP dues can be settled at NIL.

5) How the RA addresses the cause of default.

6) What the basic terms & conditions of the Demerger envisaged in the plan and the rationale behind it.

7) 95% of Jet staff must consent to Kalrock-Jalan proposal or lose benefits & legal rights available to them. A plan can seek a waiver of legal rights.

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About the Author: The summary of this Order has been composed CS Lovkesh Batra and Mr. Shikhar Pandey (Research Associate-IBC Law Reporter).

Disclaimer: The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author and IBC Law Reporter do not take responsibility for the same and this document cannot used to be quoted before any authority under any law.

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