How Jet Airways Killed Five Birds With One Stone
In the last three months, insolvent Jet Airways (India) Ltd. sold one of its non-core assets, settled with one of its lenders and repaid another. All this is unthinkable for a company under insolvency resolution since the law prohibits sale of assets and settlements with select creditors while proceedings are ongoing.
But some creative thinking from the resolution professional, a reasonable creditors’ committee and the court’s blessing for a bona fide transaction has resulted in value protection for Jet Airways.
Sale Of Non-Core Assets
Jet Airways needed $13 million to get the title to six Boeing Co. aircraft over which U.S. Export-Import Bank held a charge. Substantial payment amounting to $881 million had already been made by Jet Airways for these aircraft. Payment of the last instalment of the financial lease would have meant adding $200 million to Jet Airways’ estate.
Failure to do so would’ve meant that U.S. Exim Bank would’ve repossessed the aircraft and Jet Airways would have recovered some of its money only when U.S. Exim sold the planes and first recovered its dues and costs for repossession and resale, Ashish Chhawchharia, partner at Grant Thornton and Jet Airways’ resolution professional, told BloombergQuint. “But that would’ve left Jet Airways at the mercy of the financial lessor,” he added.
Unable to raise interim finance from the existing lenders to pay off the last instalment, Chhawchharia decided to put Jet’s assets to use. To pay for the aircraft, he decided to propose the sale of the company’s Mumbai headquarters at Bandra Kurla Complex.
This required making sure that Housing Development Finance Corp. Ltd. was on board with the plan.
Settlement With A Lender
In 2017, mortgage finance major HDFC had lent Rs 400 crore to Jet Airways and acquired first and exclusive charge over a substantial portion (third, fourth and part of second floor) of the BKC property. Sale of this non-core asset will allow the company to raise vital funds for the last instalment and unlock the full value of the six aircraft in Jet Airways’ estate, Chhawchharia told the creditors’ committee.
Here’s what he proposed after reaching an agreement with HDFC.
The sale of the third and fourth floor of the property would fetch around Rs 490 crore. Of this, HDFC would be paid Rs 360 crore prompting it to release its securing interest over the entire premises. The commercials made sense since HDFC’s outstanding dues were around Rs 424 crore and further, Jet Airways would be able to add part of the second floor—valued at around Rs 240 crores—to its estate for the benefit of any resolution applicant.
“HDFC claimed that is was fully collateralised and that via a resolution process or liquidation they should get paid almost entirely,” Nilang Desai, partner at law firm AZB & Partners, said. Desai is a member of the legal advisory team to the resolution professional.
Paying Off Another Lender
The decision to sell an insolvent company’s asset and settle with one of the lenders couldn’t be taken without the backing of the committee of creditors. The arrangement was approved by a vote of 74.45% of the CoC—much higher than the 66% threshold laid down by the insolvency law for various other decisions that need to be put to vote.
It took a considerable amount of time and effort for the CoC to be convinced, Chhawchharia said.
The first point was quite obvious. You pay $13 million and get a title over aircrafts worth over 10 times in value, which also improves the resolution chances for the company. Second, the settlement deal with U.S. Exim was timebound—if we don’t do this now, it may never happen. At that time, we did not have the two interested resolution applicants and if the company goes into liquidation, the creditor will exercise its right to take the aircraft away.Ashish Chhawchharia, Jet Airways’ Resolution Professional
And finally, Jet Airways settled with secured creditor HDFC for an amount that is much lower than their final claim of around Rs 500 crore if the company were to be liquidated, Chhawchharia added.
The three steps—selling a significant, non-core asset, repaying a lender, and using the balance to pay financial lessors to acquire title on very valuable assets—have not been done before under IBC in tandem, Desai pointed out. “So, to evaluate its efficacy as a matter of law, we decided to approach the NCLT,” he added.
With HDFC’s consent and CoC’s approval, Chhawchharia took this proposal to the Mumbai bench of the National Company Law Tribunal. The court pointed to the value addition this arrangement would bring to the company, noted the green light from the charge holder HDFC, the approval of the CoC and permitted the resolution professional to carry out the sale.
On July 30, Jet Airways acquired ownership of the six aircraft after paying U.S. Exim Bank $13 million.
Through this arrangement, the insolvent carrier was able to achieve another success.
In July last year, HDFC had moved the NCLT to keep the BKC property out of the bankruptcy process. State Bank of India, a lead member of the CoC, had filed an intervention application claiming rights over a portion of this property. With HDFC’s settlement, this litigation has gone away since that was one of the conditions for the CoC to give its approval.
And the fifth bird is a potential success.
Jet Airways is facing insolvency in The Netherlands too. In April last year, it was declared bankrupt in response to a complaint filed by two European creditors—H Esser Finance Company and Wallenborn Transport—with preferential claims worth $2.5 million. Having established its bonafides before the court, with cash left from the BKC property sale and title over the six aircraft—one of which is in the Netherlands—the resolution applicant might just be able to convince the CoC to clear this overseas debt as well.