Introduction
The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) in May 2016 has been regarded as a monumental step towards consolidating and amending the laws relating to insolvency and bankruptcy in India. It provides a comprehensive framework for the resolution of stressed assets and aims to promote entrepreneurship, balance the interests of all stakeholders, and improve the ease of doing business in India.1 The law catalysed a significant shift in the manner in which the cases of insolvency are dealt with. Prior to the enactment of IBC, there were multiple laws and forums dealing with this subject, leading to a fragmented and inefficient system. The IBC has introduced several key reforms, inter alia, the establishment of the Insolvency and Bankruptcy Board of India (IBBI), introduction of a time-bound resolution process, and the creation of a new class of experts called insolvency professionals (IP).
Meanwhile, Chapter 11 of the United States Bankruptcy Code2 is a process that allows financially distressed companies to reorganise their debts and operations under court supervision. It provides a framework for businesses to continue operations while they develop and implement a plan to repay their creditors over a period of time. Chapter 11 is applicable to all types of businesses, from small family-owned companies to large public corporations. The process is often initiated by the company voluntarily, but it can also be initiated by the creditors or other parties with a financial stake in the company. Despite its complexities, it has been considered to be a powerful tool for companies facing financial difficulties, as it paves the way for the companies to address debt and operational issues while preserving their value and that of their assets.
The Bankruptcy Reform Act of 19783 revamped the bankruptcy laws in the United States and introduced several significant changes, including the creation of Chapter 11, which replaced the previous corporate reorganisation provisions of the Bankruptcy Act of 18984. Since its inception, Chapter 11 has been amended several times to keep pace with the economy.
On similar lines, IBC has also had a significant impact on the economy since its enactment due to its greater focus on corporate governance and accountability. Although it has helped to promote credit discipline, the legislation has been amended five times in the last six years of its existence.
Background
Bed Bath & Beyond Inc. (the company) is an American chain of retail stores specialising in domestic merchandise. The company was founded in 1971 by Warren Eisenberg and Leonard Feinstein in Springfield, New Jersey. The first store was called Bed ‘n Bath and primarily sold bedding and bath products. Over the years, Bed Bath & Beyond expanded its product offerings to include house wares, kitchen and dining items, home decor, and more. As of February 2022, the company had over 900 stores across the globe with significant online presence in USA.5
Although, the company has faced major challenges in recent years, including increased competition from online retailers and changing consumer shopping habits. In 2019, the company announced a major restructuring plan aimed at streamlining operations and improving profitability6. Later, the company also announced that it would be closing approximately 200 stores over the next two years.7 While the COVID-19 Pandemic only made it worse by rattling the supply chain, along with giving rise to various other challenges. Bed Bath & Beyond Inc. was planning to raise USD 1 billion through an offering of preferred stock and warrants in a last-ditch effort after defaulting on loans from JPMorgan Chase Bank.8 However, failing to stave off bankruptcy the company appointed Holly Etlin, a bankruptcy expert, as Interim Chief Financial Officer and filed for bankruptcy under Chapter 11.9
In India, Go First (corporate debtor or airlines), formerly known as GoAir10, is a low-cost airline founded in November 2005 by Jehangir Wadia in Mumbai11. Over the years, GoAir expanded its operations and operated flights to over 30 destinations across domestic territories and abroad. However, GoAir has also faced several challenges and setbacks in its journey. The airline has been struggling with high operating costs and succumbing to the pressure of intense competition. Additionally, it faced several regulatory and operational issues, including delays in aircraft deliveries.12
In 2020, GoAir faced a major crisis due to the COVID-19 Pandemic, which severely impacted the aviation industry around the world. The airline was forced to suspend its operations for several months due to travel restrictions and plummeting demand. As a result, the airline faced significant financial losses and was unable to pay its debts and other obligations.13 In June 2021, the airline underwent a significant rebranding exercise and was renamed Go First. The rebranding was accompanied by several changes in the airline’s management and operations14 and an increased focus on cost-cutting measures and debt restructuring.
In July 2021, Go First filed for an initial public offering (IPO) with the Securities and Exchange Board of India (SEBI), seeking to raise funds to support its expansion plans and pay-off its debts15 which subsequently failed16. Thus, due to the failing and faulty engines supplied by Pratt & Whitney (P&W) resulted in the grounding of 25 aircrafts, which accounted for a 50 per cent of its fleet as of 1-5-202317 compelling the airlines to file an application for corporate insolvency resolution process (CIRP).18 The airline filed for CIRP before the Delhi Bench of National Company Law Tribunal (NCLT) with the consent of Mr Abhilash Lal for insolvency resolution process (IRP).19
Comparison
Statutory provisions
Unlike most applications for CIRP, the current application has been filed by the corporate debtor itself under Section 1020 IBC. Similarly, the company has filed for bankruptcy under the Chapter 11 of the United States Bankruptcy Code (Code). However, despite the difference in the nature of proceedings, the primary objective remains the same i.e. a chance of revival through reorganisation or restructuring.
Who, when and where?
First and foremost, the corporation is allowed to file for bankruptcy only when it has defaulted on its loan in either of the jurisdictions for the purpose of reorganising or liquidating as a going concern, with reasonable expectation that the proceedings will maximise the value of the debtor’s estate for creditors.21 Similarly, the corporate debtor is the only eligible entity to file for CIRP in India under Section 10 IBC, whereas the bankruptcy proceedings under Chapter 11 of the Code can also be initiated by the creditors of the company (involuntary filing) in the United States of America (USA or America). Specifically, if the company had 12 or more creditors, then at least three of those creditors would have to mandatorily file jointly. Alternatively, if the entity has less than 12 creditors, a single creditor with a claim of at least USD 10,000 (currently USD 16,75022) may file the petition.23 Now, the debtor company in USA is restricted from submitting a petition to the bankruptcy court in the district where it is incorporated or where it has its principal place of business. However, the corporate debtor is mandated to file the application for CIRP before the adjudicating authority of the corresponding State of incorporation only.24
Moratorium and interim finance
While the management in both jurisdictions would assess the potential of the debtor company before filing the respective applications, it is important to discuss the factors constituting the insolvency resolution process in both these jurisdictions.
A. India
The corporate debtor would be required to pass a special resolution25 to initiate the CIRP under Section 10 along with the consent of an IP to be appointed as the interim resolution professional (IRP) for the corporate debtor upon admission of the application by the adjudicating authority (AA).26
USA
The management of the debtor company in USA would prepare the bankruptcy petition outlining the company’s financial situation, including assets, liabilities, and a list of creditors. The court shall grant an automatic stay upon satisfaction, which would halt all legal actions against the company by its creditors27. The Indian legislation enables a similar calm period for the corporate debtor known as moratorium upon admission of the application for CIRP by the AA28.
B. India
The IRP upon admission of the application is required to make a public announcement29 to invite claims against the corporate debtor to form the Committee of Creditors30 (CoC) who would control and manage the corporate debtor through the IRP.
USA
Whereas the bankruptcy court in USA would appoint a debtor-in-possession (DIP) to manage the company’s affairs. The DIP will have the authority to make business decisions on behalf of the company, subject to the court’s approval. The DIP is also required to file first-day motions31 before the bankruptcy court to continue running the operations in a specified manner during this calm period.
C. India
Interim finance32 is a crucial aspect of the insolvency resolution process, as it enables the debtor to continue its operations and preserves the value of its assets, which in turn increases the chances of a successful resolution. The amount of interim finance is determined by the resolution professional (RP) or the CoC, based on the corporate debtor’s requirements for the successful completion of the CIRP.
USA
Similarly, under Chapter 11 companies may often face liquidity challenges and may require additional funding to cover operating expenses, pay employees, and carry out their restructuring plans. Therefore, a company may use DIP funding or cash collateral to finance the expenses. DIP financing is the most common form of financing in Chapter 11 cases, which involves obtaining new loans or credit facilities from lenders who are willing to provide financing to the debtor company during bankruptcy. DIP financing33 is typically given priority status over existing creditors and is often secured by the debtor’s assets whereas in cash collateral34 the company can request court approval to use inventory or accounts receivable as collateral. This allows the debtor to access funds while providing adequate protection to the existing secured creditors.
Resolution plan
USA
DIP refers to the business entity or individual that has filed for bankruptcy and manages assets during the reorganisation process including operations. The debtor in possession is required to act as a fiduciary and manage the business in the best interests of all stakeholders including filing periodic reports with the bankruptcy court. However, the bankruptcy court is authorised by law to replace management of the debtor’s assets with a trustee if it determines that the debtor is not capable of fulfilling its responsibilities as a fiduciary, or if there is evidence of fraud, mismanagement, or other misconduct. The concept of a DIP is central to Chapter 11 bankruptcy as it allows the debtor to maintain control while it develops a plan to restructure its debts and operations.35 The creditors are allowed to file claims before the bankruptcy court which would be identified as post-petition claims.
Now, the DIP is required to negotiate with creditors to create a new reorganisation plan which may involve negotiating new payment terms, reducing the amount owed, or converting debt to equity and secure the support of the creditors for the final plan or rescue plan (which takes the pre-petition and post-petition claims into consideration).
India
Meanwhile, in India, the RP is required to prepare the information memorandum (IM) and the evaluation matrix to invite potential resolution applicants (PRA) to file expression of interest (EOI) to access the IM. The prospective resolution applicants (PRA) take time to formulate a resolution plan and submit it to the RP for approval from CoC. Upon securing CoC’s consent by sixty-six per cent36, the RP files the resolution plan before the AA for the final approval before implementation. A similar process is followed in America after receiving approval from the creditors for the reorganisation plan. It is presented before the bankruptcy court for approval as it reviews the plan to ensure that it is fair and feasible. Once the reorganisation plan has been approved by the court, the company is required to implement the plan. This may involve selling assets, renegotiating contracts, or restructuring the business in other ways.
Contents of a rescue plan
India
The resolution plan37 outlines the proposed restructuring of the debtor’s affairs i.e. how it intends to repay creditors or revive the business. While there is flexibility in the contents of a resolution plan38, there are certain mandatory elements such as—
(a) Identification of the resolution applicant.
(b) Statement of the resolution plan: It should provide a clear roadmap for the revival and restructuring of the business.
(c) Implementation and timelines: The plan should specify the steps required for implementing the resolution, including the timeline for achieving various milestones and objectives.
(d) Treatment of creditors and stakeholders: The plan must detail how the claims of different classes of creditors and stakeholders will be treated.
(e) Financial projections: The plan should provide estimates of revenue, expenses, cash flow, and profitability.
(f) Implementation mechanism: The plan should outline any regulatory approvals or clearances required for the successful implementation of the plan.
(g) Compliance with statutory requirements: The plan must demonstrate compliance with all applicable statutory requirements, including laws related to taxation, labour, environment, and any other relevant regulations.
(h) Protection of stakeholder interests: The plan should ensure that the interests of all stakeholders, including employees, suppliers, and shareholders, are adequately protected and their rights are respected.
(i) Feasibility and viability: It should provide evidence or supporting information to substantiate the claims made in the plan.
USA
A rescue plan, also known as a reorganisation plan, is a critical component of the bankruptcy process. The plan outlines how the debtor intends to restructure its affairs, repay creditors, and emerge from bankruptcy as a viable and sustainable entity. While there is flexibility in the content of a rescue plan, there are several mandatory elements that must be included such as classification of claims and interests, treatment of classes, disclosure statement, acceptance and voting procedures.39
Avoidance transactions
USA
In the USA, fraudulent conveyance, also referred to as fraudulent transfer, is the transfer or disposition of assets by a debtor with the intent to hinder, delay, or defraud creditors. The bankruptcy court closely examines and scrutinises transactions that may be deemed fraudulent conveyances. But under IBC, the RP is required a “form an opinion” within 75 days from insolvency commencement and “make a determination” within 115 days from the same.40 The bankruptcy trustee, creditors’ committee, or individual creditors can initiate fraudulent conveyance actions in Chapter 11 cases to protect their rights and maximise the recovery. Since the purpose is to prevent debtors from improperly transferring assets out of their estate to avoid paying creditors.
Fraudulent transfer can be divided into (i) actual fraud; and (ii) deemed fraud. When a debtor intentionally transfers assets or property without receiving reasonably equivalent value in return, with the intent to defraud creditors is known as actual fraud. The court looks for evidence of fraudulent intent, such as transfers made shortly before filing for bankruptcy, transfers to insiders or related parties, or transfers that deplete the debtor’s assets whereas constructive fraud does not require a showing of fraudulent intent. It refers to transfers made by the debtor without receiving reasonably equivalent value when the debtor is insolvent or becomes insolvent as a result of the transfer. The bankruptcy court can “avoid” or set aside the fraudulent transfer, treating it as if it never occurred. The assets or property transferred may be brought back into the bankruptcy estate and made available for distribution among creditors. The court may allow the bankruptcy estate or a creditor to recover the transferred assets or the value of the transferred assets from the recipient of the fraudulent transfer.
An unauthorised post-petition transfer under Section 54941 of the Code refers to transactions that the debtor undertakes without obtaining court approval. The debtor may transfer assets or property to a third party without court permission. If the bankruptcy court discovers an unauthorised post-petition transfer, it may set aside the transfer and recover any assets or property transferred along with sanctions or penalties. Under Section 54742, a preference is defined as a transfer of the debtor’s property to or for the benefit of a creditor, made within a specified period before the bankruptcy filing. The period is generally 90 days but can extend up to one year if the recipient of the transfer is an insider (such as a relative, partner, or affiliate of the debtor). Furthermore, the transfer must allow the creditor to receive more than it would have received under Chapter 7 liquidation.
India
The Insolvency and Bankruptcy Code, 2016 provides for preferential, undervalued, fraudulent and extortionate transactions under Sections 4343, 4544, 4945 and 5046 respectively. IBC also empowers “applications for avoidance” under Section 2647. Alike American legislation, preferential transactions refer to transactions or transfers of assets made by a debtor that give preference to certain creditors over others before the commencement of the insolvency resolution process while undervalued transactions pertain to transactions where a debtor transfers assets for a value significantly lower than their actual worth before the commencement of the insolvency resolution process under Sections 43 and 45 respectively. The relevant time period for these transactions is two years preceding the insolvency commencement date.48 Meanwhile, extortionate transactions under Section 50 encompass transactions where the terms and conditions imposed on a debtor in connection with a loan or advance are oppressive or unconscionable whereas fraudulent transactions involve transfers of assets by a debtor with the intent to defraud or deceive creditors under Section 49 IBC. Like the bankruptcy courts, the AAs can also issue similar orders for avoidance of transactions under Sections 4449, 4650 and 5151.
Liquidation and distribution of assets
USA
If the reorganisation plan fails, the debtor company may either carry out a liquidation sale or convert Chapter 11 to Chapter 7 to liquidate its assets and dissolve the business. A liquidation sale under Chapter 11 is a process by which a bankrupt company liquidates its assets in order to pay off its debts to creditors. The company may choose to reorganise and continue operations, or it may choose to sell off its assets and go out of business. The liquidation sale is typically conducted through an auction process, in which interested buyers bid on the company’s assets. The proceeds from the sale are then distributed among the company’s creditors, in accordance with the priority established by bankruptcy law. A liquidation sale may allow the company to generate some value from its assets, rather than simply going out of business with nothing to show for it.
India
Similarly, under the Indian regime, if the CIRP fails the RP becomes the liquidator and attempts to arrange a settlement under Section 23052 of the Companies Act, 2013 or sell the business as a going concern as per Regulation 32-A53 or carry out any other form of sale as per his/her discretion and dissolve the corporate debtor. While liquidation is generally considered a last resort, it can be a viable option for companies that are unable to reorganise successfully or continue operations profitably. If the company chooses to liquidate, it will typically hold a sale of its assets, which could include inventory, real-estate, and equipment.
Section 5354 IBC lays down the priority of distribution of proceeds from a sale, also referred to as the waterfall mechanism. The proceeds from liquidation are used to pay the CIRP costs in priority followed by secured creditors. Workman dues and dues of unsecured creditors take priority after that. Then, the government dues and dues of preference shareholders follow in the same order. In the USA, creditors who hold valid liens or security interests on the debtor’s assets are generally paid first, and administrative expenses incurred during the process take priority after secured creditors. These expenses include costs such as professional fees, trustee fees, and other expenses necessary for administering the bankruptcy estate. However, priority claims have a higher priority than general unsecured claims and include certain unpaid employee wages, contributions to employee benefit plans, and certain tax claims. General unsecured creditors are typically the last in line to receive distribution from the proceeds of the liquidation. They include suppliers, trade creditors, unsecured bondholders, and other creditors who do not hold collateral or have priority status.
Conclusion
According to S&P Global, over two hundred thirty American companies have declared bankruptcy as of April 2023. While many of these businesses recover from bankruptcy, the increase in cases is a sharp indication of the increased pressure that businesses are currently under.55 Chapter 11 filings are rarely successful unless careful planning is done in advance. Unlike India, several reputed corporations such as — Marvel Entertainment (1996), Apple (1997), and Sbarro (2011 and 2014) have a history with Chapter 11. Similarly, after the somewhat successful voluntary corporate insolvency resolution process of Aircel Limited, the market is keeping a close watch on the developments in the Go First case. Like the telecom sector, the airline sector has also been under stress due to environmental and policy factors. After the unpopular decision of the Government to disinvest, Air India found new management and is attempting to make a steady comeback meanwhile SpiceJet has taken advantage of the Government’s Emergency Credit Line Guarantee Scheme (ECLGS) to borrow INR 400 crores to revive its grounded aircrafts56. Furthermore, due to the novelty of the Indian laws on insolvency, there is a lot of “noise” in the market amongst retail investors regarding the success of the CIRP along with the capabilities of the IRP appointed by the airlines due to the previous association of the firm in the Jet Airways case.
The major difference between the jurisdictions is society’s perception and the market’s sentiment towards cases of insolvency. While American corporations prefer to take up Chapter 11 filing as a step forward, Indian companies tend to ignore the obvious and wait until they become too big to be ignored by creditors and regulators. Thus, after analysing the provisions of the Indian Code with the American Code, one can draw parallels in procedure and similarities in the outcomes.
Brief summary of the CIRP and reorganisation process
|
USA |
India |
|
|
When to file? |
Defaulted or plans to reorganise or liquidate as a going concern in order to maximise the value of the assets. |
Default. |
|
Who can file? |
Any creditor (suppliers, employees, landlords, etc.) or debtor company. |
Debtor company only. |
|
Where to file? |
Bankruptcy court of the state of incorporation or place of business. |
Adjudicating authority i.e. NCLT of corresponding state of incorporation. |
|
Why file? |
To reorganise or liquidate or dissolve. |
To restructure or liquidate and dissolve. |
|
How? |
Reorganisation plan formulated by DIP. |
Resolution plan prepared by the successful resolution applicant (SRA). |
|
What next? |
The debtor company will either continue operations under new management or the business will be dissolved upon payment of all outstanding dues. |
The debtor company will either continue operations with a new business structure or dissolve the business upon payment of all outstanding dues. |
† Advocate, Bar Council of India and enrolled in the Graduate Insolvency Programme at the National Law Institute University, Bhopal (2022-24) Author can be reached at panda.biswaksen@gmail.com.
1. Insolvency and Bankruptcy Code, 2016.
2. United States Code, T. 11, Ch. 11.
3. Bankruptcy Reforms Act, 1978 (US).
4. Bankruptcy Act, 1898 (US).
5. Number of Bed, Bath and Beyond Stores Worldwide from 2015 to 2022 (statista.com, 27-7-2022).
6. “Bed Bath & Beyond Inc. Announces Extensive Changes to Leadership Team” (bedbathandbeyond.gcs-web.com, 17-12-2019).
7. Jazmin Goodwin, “Bed Bath & Beyond Plans to Close 200 Stores over the Next Two Years” (cnn.com, 8-7-2020).
8. Noor Zainab Hussain, Mike Spector and Jessica DiNapoli, “Bed, Bath and Beyond Moves to Raise $1 bln to Avoid Bankruptcy” (reuters.com, 7-2-2023).
9. “Bed, Bath and Beyond Moves to Raise $1 bln to Avoid Bankruptcy” (cnn.com, 6-2-2023).
10. “Go Air becomes Go First” (flygofirst.com, 13-5-2021).
11. Sakshi Dhakre, “Go First Airline Insolvency: Why did the Company Crash” (insider.finology.in, 3-5-2023).
12. Yaruqhullah Khan, “MC Explains: Why are GoFirst Operations Hit and What Next” (moneycontrol.com, 17-11-2022).
13. Forum Gandhi, “GoAir Auditors Raise Going Concern Doubts as Net Worth Erodes in FY20”, The Hindu BusinessLine (thehindubusinessline.com, 31-12-2020).
14. “Go Air becomes Go First, Embraces the Ultra-Low-Cost Airline Approach” (flygofirst.com, 13-5-2021).
15. Sakshi Dhakre, “Go First Airline Insolvency: Why did the Company Crash” (insider.finology.in, 3-5-2023).
16. “Explained: Why SEBI Put GoAir IPO Application on Hold”, India Today (indiatoday.in, 29-6-2021).
17. “Go First Airways files for insolvency, blames Pratt & Whitney engines”, Business Standard (2-5-2023).
18. Nandan Mandayam, “Factbox: India’s Go First Seeks Insolvency Resolution as Engine Trouble Grounds Fleet” (reuters.com, 2-5-2023).
19. Ashwin Mohan, “Go First Proposes Insolvency Professional Abhilash Lal’s Name in Bankruptcy Plea” (moneycontrol.com, 4-5-2023).
20. Insolvency and Bankruptcy Code, 2016, S. 10.
21. Integrated Telecom Express, Inc., In re, 384 F3d 108 (3rd Cir 2004).
22. United States Code, T.11, Ch.1, S.104.
23. United States Code, T.11, Ch. 3, S. 303(b)(2).
24. Insolvency and Bankruptcy Code, 2016, S. 60(1).
25. Companies Act, 2013, S.114(2).
26. Insolvency and Bankruptcy Code, 2016, S. 10(3).
27. United States Code, T. 11, Ch. 3, S. 362.
28. Insolvency and Bankruptcy Code, 2016, S.14.
29. Insolvency and Bankruptcy Code, 2016, S.15.
30. Insolvency and Bankruptcy Code, 2016, S. 21.
31. United States Code, T. 11, Ch. 1, S. 105 and Ch. 3, S. 361.
32. Insolvency and Bankruptcy Code, 2016, S. 5(15).
33. United States Code, T. 11, Ch. 3, S. 364.
34. United States Code, T. 11, Ch. 3, S. 363.
35. United States Code, T. 11, Ch. 11, S. 1101(1).
36. Tata Steel Ltd. v. Liberty House Group Pte. Ltd., 2019 SCC OnLine NCLAT 13.
37. Insolvency and Bankruptcy Code, 2016, S. 5(26).
38. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regn. 37.
39. United States Code, T. 11, Ch. 11, S. 1123.
40. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regn. 35-A.
41. United States Code, T. 11, Ch. 5, S. 549.
42. United States Code, T. 11, Ch. 5, S. 547.
43. Insolvency and Bankruptcy Code, 2016, S. 43.
44. Insolvency and Bankruptcy Code, 2016, S. 45.
45. Insolvency and Bankruptcy Code, 2016, S. 49.
46. Insolvency and Bankruptcy Code, 2016, S. 50.
47. Insolvency and Bankruptcy Code, 2016, S. 26.
48. Insolvency and Bankruptcy Code, 2016.
49. Insolvency and Bankruptcy Code, 2016, S. 44.
50. Insolvency and Bankruptcy Code, 2016, S. 46.
51. Insolvency and Bankruptcy Code, 2016, S. 51.
52. Companies Act, 2013, S. 230.
53. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, S. 32-A.
54. Insolvency and Bankruptcy Code, 2016, S. 53.
55. Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch and Ephrat Livni, “Corporate America Faces a Bankruptcy Boom”, The New York Times (nytimes.com, 18-5-2023)., Sarah Kessler, Michael J. de la Merced, Lauren Hirsch and Ephrat Livni, “Corporate America Faces a Bankruptcy Boom”, The New York Times (nytimes.com, 18-5-2023).
56. “Amid Go First Insolvency, SpiceJet to Borrow 400 Cr to Revive 25 Grounded Flights” (fortuneindia.com, 3-5-2023).
