Kingfisher Woes Show Need for Bankruptcy Law: Corporate India
Kingfisher Airlines Ltd. (KAIR), controlled by liquor tycoon Vijay Mallya, is struggling to resume services after five straight years of losses and mounting debt forced it to ground planes. India’s bankruptcy laws aren’t helping.
The carrier can’t emulate U.S. airlines that have gone through court-led Chapter 11 restructuring, as India doesn’t have any similar procedures for service providers. Under the existing law, a government body only oversees rehabilitation of companies with licenses to run factories.
Kingfisher’s troubles highlight how India’s corporate laws have failed to keep pace with growth and emergence of new businesses in Asia’s third-biggest economy. Lack of a modern legal framework makes it slower for struggling companies to renegotiate debts and cut cost, said Jai Pathak, partner-in- charge at Gibson, Dunn & Crutcher LLP. in Singapore.
“India needs a comprehensive bankruptcy law that will allow financially distressed companies to revive faster,” Pathak said. The existing system doesn’t “provide a framework by which companies can take preventive measures to avoid a further downward spiral.”
Current rules allow companies that operated for at least five years and holding a factory license to approach the Board for Industrial and Financial Reconstruction if accumulated losses equal or exceed their net worth. The recourse is available under the Sick Industrial Companies (Special Provisions) Act of 1985.
Under the Indian Companies Act of 1956, firms can voluntarily wind up operations or a court can order their closure. In a court-ordered shutdown, an official liquidator will be appointed to oversee the process and distribute the proceeds from sale of assets to creditors.
“BIFR is the most outdated tool available under law in India,” Kishor Ostwal, managing director at CNI Research Ltd. in Mumbai, said. “There are examples where companies have applied for rehabilitation and it has taken several years for even the plan to be approved. It’s next to impossible.”
BIFR took almost four years to approve a rehabilitation plan for Windsor Machines Ltd. (WML), which was declared a ‘sick’ company in June 2006. By the time the revival plan got approval from the agency in April 2010, the company had made quarterly profits.
India ranked 116 among 185 economies when it comes to ease of resolving insolvency, according to Doing Business 2013 data published by International Finance Corp. and the World Bank. The nation’s ranking fell from 109 in 2012. India scored 132 for the overall ‘ease of doing business’ in the latest report published last month.
In 2001, as an alternative to the BIFR process, India’s central bank allowed companies and their creditors to enter into a debt recast arrangement to help businesses return to financial health. The mechanism was limited to firms that had borrowed more than 200 million rupees ($3.7 million) from a group of lenders.
Kingfisher in 2010 restructured 77.2 billion rupees of debt it had run up by ordering aircraft and buying a budget carrier. It can seek a second round of debt recast if a majority of its lenders agree, said Avinash Gupta, head of financial advisory services at Deloitte Touche Tohmatsu India Pvt. The carrier has been seeking more loans and investments at least for a year after losses widened and debt swelled to 86 billion rupees.
Shares of the airline gained 4.4 percent to 13.15 rupees at 9:51 a.m. in Mumbai today. Kingfisher shares have slumped 38 percent this year, compared with a 20 percent gain in the benchmark Sensitive Index. (SENSEX)
Debt restructuring may offer little help for distressed companies because of the lengthy procedures, said Thomas Britt, a Hong Kong-based partner at Debevoise & Plimpton LLP.
“Negotiations with creditor banks take place in a time- consuming Reserve Bank of India-supervised process and only after the company has reached a state of severe financial crisis, if not a complete collapse,” Britt wrote in an e-mail. That makes “the prospects remote for that company’s return to financial health and viability.”
India’s Civil Aviation Minister Ajit Singh said he will push for an overhaul of the bankruptcy laws to help companies like Kingfisher restructure operations. He didn’t say what changes he is seeking in the rules.
“It’s not just the owner who suffers, it’s also the employees, the creditors and the consumers,” Singh said in an interview in New Delhi on Oct. 27. “Reform of the companies law will not only offer protection from creditors, but also from labor unions and other agencies.”
Prakash Mirpuri, spokesman at Kingfisher Airlines, didn’t respond to an e-mail seeking comments.
India’s aviation regulator suspended Kingfisher’s license on Oct. 20 after the carrier failed to provide a plan to resume operations that were halted Oct. 1 because of a strike by pilots and engineers. The employees resumed work last week after management promised to pay their salary dues. The carrier will soon prepare a “comprehensive” revival plan, Mallya said in New Delhi Oct. 30.
In the U.S., carriers including Delta Air Lines Inc. have used bankruptcy protection to restructure debt and shed costly pension and retiree benefit plans in the years after the 2001 terrorist attacks. In November last year, American Airlines parent AMR Corp. filed for bankruptcy after failing to secure cost-cutting labor agreements. With the filing, American became the final large U.S. full-fare carrier to seek court protection from creditors.
India has been planning to update company laws for almost a decade. A new Companies Bill that proposes to replace the 1956 Act with easier restructuring rules has been in the works since at least 2004. The Bill needs to be passed by parliament. Its previous versions have been introduced in parliament at least three times.
Absence of bankruptcy laws means Mallya has very few options to revive Kingfisher unless he wins investments, said Pathak at Gibson, Dunn & Crutcher. He can either seek to restructure the debt or try to reach a compromise with the carrier’s creditors after getting approvals from a high court.
“Had Kingfisher been a U.S. carrier, the natural choice for it would have been to seek Chapter 11 bankruptcy protection,” CNI Research’s Ostwal said.
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