The Rise Of Distressed Asset M&A: Legal Lessons From The Jet Airways Resolution And Beyond

There has been an enormous shift in the landscape of mergers and acquisitions (M&A) in India in the last decade, not only due to strategic corporate expansion but also due to the opportunities of distressed assets. Having Insolvency and Bankruptcy Code, 2016 (IBC) being a systematic approach to corporate insolvency resolution, the acquisition of troubled businesses through the distressed asset M&A has become a complex procedure that allows the investor to procure a running business despite complicated legal, financial, and regulatory limitations. The resolution of Jet Airways is one of the outstanding examples of the paradigmatic way in which the IBC provisions are utilized to achieve a commercially viable and legally acceptable acquisition of the distressed assets. The blog will explore the dynamics of the distressed asset M&A through the IBC via the case study of Jet Airways, and analytical commentary on other high-profile resolutions (Bhushan Steel and Videocon Industries), focusing on the legal framework, procedural protections, and investor/creditor implications.

Distressed Asset M&A and the IBC Framework

The introduction of IBC has radically changed the situation in acquiring distressed assets as the law was enacted to simplify the insolvency settlement process and ensure that the maximum value is achieved on a distressed asset. The Code gives an elaborate structure where the financially strained or defaulted company may be resolved by way of a corporate insolvency resolution procedure (CIRP) where the investors have the authority to attain dominance of the assets that may be supervised by a tribunal. The heart and soul of this framework is Section 30 that allows the Committee of Creditors (CoC) to debate on the resolution plans presented by potential investors, and what would have been an M&A is now transformed into a legally binding process of acquisition.

According to the IBC, a resolution plan should meet various statutory qualifications: it has to comply with the terms and conditions of the Companies Act and meet financial and operational viability criteria along with assuring creditor protection. A plan approved by 75 percent of the CoC under Section 30(4) and approved by the National Company Law Tribunal (NCLT) under Section 31 is binding on all the stakeholders including those who dissent to the plan and the corporate debtor. This virtually transforms the resolution process into a regulated acquisition process wherein the legal assurance by the IBC mitigates the risks to strategic and financial investors.

Section 43, addressing preferential transactions, and Section 14, creating a moratorium on actions to enforce, assure that the resolution process makes sure that the assets of the debtor are not misused, and that claims or clawbacks are not opportunistic. Moreover, an individual is able to bring claims or procedural compliance into question under Section 60 thus favouring certainty of the investors with the protection of the stakeholders. This legal rationality model has made it easier to conduct high profile acquisition where a stressed company becomes part of the larger corporate ecosystem without protracted legal suit or business interruption.

Case Study: Jet Airways

Jet Airways was the second-largest airline in India, but faced years of losses in its operations, increasing debt burden, and the threats of competitors, thus pushing the company in a dire financial situation. As of April 2019, the airline had been defaulting on a number of debt obligations, prompting Section 7 petitions under the IBC of financial creditors, and commencing CIRP. The moratorium under Section 14 was effected immediately and it suspended the action of enforcement, safeguarding the assets held by the airline and ensuring that the continuity of operations of the business was still in place in the course of the resolution process.

The CoC was mainly made up of the financial creditors and an assessment of the various resolution plans was carried out where the Resolution Professional (RP) coordinated the due diligence and statutory compliance. Some of the legal aspects that had to be addressed were to ensure that the proposed investors met the requirement of the fit and proper criterion, the Companies Act and the regulatory approvals of the aviation operations by the Directorate General of Civil Aviation ( DGCA ). The resolution process was also focused on transparency, where the investors were required to show their sources of funding, debt repaying schemes, and restructuring plans of their operation.

In the end, it was the approved resolution plan that helped in acquiring the operational assets of Jet Airways by a consortium of strategic investors. The plan became binding by section 31 of the NCLT and the management control and operational assets could be transferred, with clarification on the restructuring of the debt being given. Interestingly, the plan surpassed the statutory requirements such as the in-favour transaction protection in Section 43 such that previous intra-group transaction or director-related transactions did not weaken the recovery of creditors. The legal structure was used to make certain that the purchase was a commercially sound decision and was not legally liable to attack, which showed the IBC able to transform the troubled businesses into investible properties under regulated circumstances.

Other Distressed M&As: Bhushan Steel and Videocon

Although Jet Airways is a good example of acquiring a service-based company that is already operational, there are other failed M&As like Bhushan Steel and Videocon Industries; which demonstrate IBC mechanisms in the industrial and manufacturing context. Bhushan Steel, bought by Tata Steel, had an intricate resolution strategy in which the CoC examined asset evaluation, the construction of debt requirements, and functioning continuity, and the decision would be approved under the condition of adhering to the Sections 30 and 31 and controlled by the NCLT. In the same manner, in the case of Videocon Industries, it was decided that procedural co-ordination and safeguarding creditors, whereby the strategic investor was obligated to commit to repayment schedules of debts, reorganize operations and comply with the statutory employment requirements.

All of these situations evidenced trends in troubled asset M&A:

1. The legally binding nature of the resolution plans backed by tribunals is an essential factor that will appeal to investors to deploy capital.
2. CoC regulation provides fair treatment of creditors while being compliant with the law.
3. Moratoriums and avoidance provisions are used to ensure operational continuity, and value erosion is avoided throughout the resolution process.

Through the examples, it has been observed that troubled asset acquisitions of IBC are not buyouts, but rather structured deals with a combination of corporate law, insolvency concepts and business approach into legally binding M&A solutions.

Legal Analysis and Implications

Legally, the IBC M&A of distressed assets presents a number of considerations that are critical. Under Section 30, the structure of the submission of the resolution plan is put in place putting more emphasis on commercial viability, statutory compliance and approval by creditors. Section 31 imposes obligations on all the stakeholders upon the NCLT having approved a plan and in effect provides investor rights against the post-approval litigation on the part of the dissenting creditors.

Section 14 moratorium provisions play an important role in safeguarding the assets and ongoing business of the target company during the CIRP to avoid enforcement or even attachment of company assets by outside creditors. The avoidance mechanism provided in Section 43 helps in protection against preferential deals that would affect the equitable treatment of creditors so that previous dealings of the debtor do not result in prejudice to new investors.

Also, in the case of large-scale acquisitions, Competition Commission of India (CCI) consent under Section 6(4) of Competition Act, 2002 might be needed in order to ensure that market dominance is not created inadvertently. In the case of operationally vital businesses, such as airlines, adherence to industry-specific laws (DGCA in the case of the airlines, SEBI with listed business enterprises) is also part and parcel.

The compounding impact of these statutory provisions is that they do establish a very structured M&A environment where investors are able to determine risks as far as legality, operation and financial issues are concerned. It also offers a precedent to be followed when acquiring distressed assets in future across the sectors, making strategic investors willing to engage in the turnaround options without the need of legal uncertainties.

Forward-Looking Insight

The growing rate of distressed asset M&A in India indicates an emerging investment culture, in which IBC is playing a facilitative role in intermediating insolvency law and strategic corporate acquisition. The legal mechanisms, especially the resolution plans under Section 30 and 31, the moratorium provisions and the avoidance provisions allow the investors to arrange acquisitions to a significant extent of certainty and secure the interests of the creditors.

These cases reflect the necessity of further development of policies that address minority creditor protection, standards of operational continuity and timelines of the procedure to be followed by policymakers and legal practitioners. To the investors, the lesson is obvious: due diligence, statutory compliance, and proper design of resolution plans are important to make distressed asset acquisitions achieve sustainable value.

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