Views | Why India needs a Chapter 11- Style Bankruptcy Law

Views | Why India needs a Chapter 11- Style Bankruptcy Law

Friday marks the 10th anniversary of the day when Enron filed for Chapter 11 bankruptcy protection in the US.

The Indian airline industry is in a mess. The absence of a good Chapter-11 style law means that the focus is now on government bailouts, fiddling with bank rules about recognizing bad debts, backdoor lobbying. And tough decisions on restructuring loss-making operations are nowhere on the scene.

According to the Centre for Asia Pacific Aviation (CAPA), which tracks the airline industry, the accumulated losses and debts of Jet, Air India, Kingfisher and Spice Jet stood at .18 lakh crore (after deducting IndiGo’s profit) on 30 September. During the July-September quarter, Jet Airways posted a loss of 13.60 crore compared to a net profit of 2.4 crore in the year-ago period, while Kingfisher Airlines doubled its net loss to 468.66 crore. Spice Jet posted a net loss of 40 crore in the second quarter of the current fiscal as against a net profit of 0 crore in a year ago.

While state-owned Air India is expected to be provided with some respite in the form of soft loans and a fresh infusion of equity, private airlines are facing a turbulent operating climate against the backdrop of high taxes on aviation turbine fuel, which makes it the most expensive in world. Typically fuel accounts for 40% of airline costs. Banks are also refusing to extend fresh advances or to restructure the debt unless the airlines raise fresh equity, which is next to impossible given the state of the stock market. Breathing space is what these airlines would be looking for.

Unlike US, there is no such separate bankruptcy law in India which provides such breathing space to help companies come out of financial difficulty. The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was enacted to take preventive or remedial measures for sick companies. This act established a quasi-judicial body, the Board for Industrial & Financial Reconstruction. The board was set up under SICA to deal with the revival and rehabilitation of sick industrial companies. Sickness has been linked to the event of default of payment by the company to its creditors or on demand by a secured creditor representing 50% or more of the debt of the company. SICA defines “sickness" to apply only to industrial companies, the criteria being a track record of erosion of net worth over a period of five years. However the process is plagued by poor enforcement mechanisms and the time taken to complete bankruptcy procedure remains long. The firms usually enter BIFR when they have completely eroded their net worth.

This is quite a contrast with the Chapter 11 situation, where a company can anticipate its insolvency and file for bankruptcy before the situation gets worse. There is an urgent need for the amendment of SICA to enable detection of bankruptcy at an early stage to rehabilitate struggling companies by restructuring their debts and reorganize their finances to help them sail through financial difficulty. Our existing bankruptcy-related laws focus solely on firms that are already on their death bed. BIFR steps in when liquidation is the only option left to please creditors.

India needs a Chapter 11-style bankruptcy code.