Aditya Chhangani
(Legal Manager, Tata Capital Limited)
From being the third largest airline operator in India to being grounded, GoFirst formerly ‘GoAir’ has caused a lot of turbulence on the ground across the airline sector and in the tribunals, equally. On May 10, 2023, the National Company Law Tribunal (NCLT) admitted the plea filed by GoFirst (Airlines) for voluntary insolvency, and since then there has been a lot of back and forth regarding the insolvency proceedings of the Airlines. This situation has also shed some light on the unexplored areas of India’s insolvency laws as well as the lacuna surrounding litigation funding done by a foreign entity. The air surrounding the speculations will be cleared once the extensions regarding the proceedings come to a complete halt and a final decision is passed by the tribunal. NCLT, through their order dated October 15, 2024, has deferred the liquidation proceeding, sighting the ambiguity around (i) the appointment of a liquidator and (ii) questions regarding Third-Party Funding for an arbitration listed at the Singapore International Arbitration Centre (SIAC). The author aims to critically examine the issue of Third-Party Litigation Funding and how the decision on the GoFirst insolvency proceedings can be an important factor in shaping the jurisprudence surrounding Cross-Border Insolvency (CBI) and Third-Party Litigation Funding (TPF) in India.
The GoFirst Situation
The issues with Airlines started in 2022, reporting to numerous defaults to vendors, lessors, etc. This was reported pursuant to the operations being dormant. The cause of this activity and financial distress was linked to the inoperability of flights due to faulty engines developed by Pratt & Whitney (P&W) an American aerospace manufacturer. It was also pointed out that since the start of 2020, these issues started occurring and these engines were fitted into all 43 aircrafts operated by the Airlines.
The Airlines obtained an emergency arbitration award from SIAC, in February 2023 which obliged P&W to deliver new serviceable engines to the Airlines, this was met with non-compliance. Pursuant to this the Airlines also initiated enforcement proceeds against P&W in the jurisdiction where the assets of P&W were located, including the U.S. These events led to the further downfall of the Airlines due to its inoperability to utilize the aircrafts, most of which were dormant, resulting into a flood of claims by vendors, lessors, etc. unable to sustain the operation, these issues pushed the Airlines to file for voluntary insolvency. As highlighted above, the NCLT has sighted concern about the Airline's attempt to obtain foreign funding for their SIAC-listed arbitration at this stage of the proceedings.
Third-Party Litigation Funding
The Indian Context
To date, there is no law present in India that prohibits or regulates TPF, explicitly. However, historically the courts in erstwhile colonized India have allowed for such funding reasoned on ‘promoting access to justice,’ in 1876 the Privy Council through the judgement in Ram Coomar Coondoo v. Chunder Canto Mookerjee held that, “agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party, or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor.” This decision allowed maintenance and champerty agreements in India, limiting it to that such should not be “for the purpose of gambling in litigation”, which can be contrary to public policy.
In 2019, the Supreme Court in the case of Bar Council of India v. A.K. Balaji observed “In India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.) would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”
Basis the conclusion drawn from these judgements, it can be said that Indian laws are not averse to or against TPF. However, they have limited such funding to the extent i) that such funding should be done by non-lawyers, ii) any party providing funding should not be a party to that litigation in any capacity, and that iii) any TPF agreements should follow valid principles of the Indian Contract Act, 1872.
The Common Law Context
Most of the common law jurisdictions take a favourable approach when it comes to Third-Party Litigation Funding or litigation finance (alias). Australia had assumed a favourable position for TPF, which can be traced to as early as 1995 however, it was only limited to insolvency cases on the basis that legal claims were considered ‘corporate assets’ and which allowed administrators or bankruptcy trustees to enter into financing arrangements with third parties, in exchange for a percentage of proceeds. Since then, Australia has taken a pro approach to this concept. The High Court of Australia, through its decision from 2006, in the case of Campbells Cash and Carry Pty Ltd v. Fostif Pty Ltd allowed litigation funding in single and multi-party class action proceedings, holding that it is not against public policy and promotes access to justice.
In the United Kingdom, litigation financing picked up the pace more in the form of different fee arrangements, which allowed the financers to offset the risk (if any) and realise profits from their investments. These arrangements were mainly exercised in the form of either Conditional Fee Agreements or Damages Based Agreements. In 2005, through the decision in Arkin v. Borchard Lines Ltd, the ‘Arkin cap’ was introduced which capped the amount of funding in an adverse cost ruling, allowing the growth of the litigation finance market. This Arkin cap was further discussed in length through the 2019 decision in Davey v. Money and others, the Court held that the applicability of the Arkin cap should be applied in a discretionary manner with an apportion power to be left with the court to decide on adverse costs between a funder and claimant.
Cross-Border Insolvency
As known, the Insolvency & Bankruptcy Code, 2016 (IBC) primarily governs insolvency and bankruptcy in India. However, there lies a lacuna when it comes to the framework on CBI. There has been an attempt by the Insolvency Law Committee on Cross-Border Insolvency (ILC) to bring the current framework in line with international standards and harmonise the international insolvency processes which is yet to come to fruition.
Meanwhile, sections 234 and 235 of IBC provide some respite in terms of assisting in CBI disputes to an extent, where it empowers the Central Government to enter into bilateral agreements with foreign jurisdictions and to issue letters of request to courts of such jurisdictions.
These sections only allow the facilitation of CBI to an extent since the focus is limited to securing the assets of the debtor located in a foreign jurisdiction. The first judicial recognition in this regard was brought to light through the Jet Airways dispute, where an National Company Law Appellate Tribunal (NCLAT) appeal allowed the Dutch Court Administrator to continue being involved in insolvency proceedings, making it the first ever insolvency proceeding instituted and continued parallelly in a foreign jurisdiction against an Indian company. With certain caveats on how both jurisdictions can navigate the issue in harmony, NCLAT made sure that the company remains a going concern and that the confiscated assets should not be sold off by the Dutch Court Administrator.
The need to discuss the CBI framework becomes of much more importance in the current scenario, in the case of GoFirst, since the decision can impact the course of international insolvency jurisprudence in India. As observed through the facts, the aircraft engines in this scenario are being held by P&W in foreign jurisdictions, which have been the focal disruptors in the daily business operations of GoFirst. It is also imperative to note that harmonising the mechanism for CBI can also pave the way for litigation funders by entrusting more confidence in them while financing the companies going through the insolvency process.
Conclusion
The Indian Aviation sector is going through a major change, from the Tata Air India-Vistara merger (one of the largest mergers in the Indian aviation sector) to the fall of another domestic airline Jet Airways, which has been recently liquidated post order by the Supreme Court. A whole list of suggestive reforms to the IBC has also been laid down in the same order. Being a capital-intensive sector with a variety of stakeholders involved, including vendors, financers, lessors, etc. and with the amount of traction it has been gaining, it might pose more complex issues in the time to come.
The NCLT’s decision can be a breakthrough in deciding the fate of the sector as a whole rather than just impacting GoFirst’s fate. As observed through the fall of major players in the aviation sector, it has highlighted visible loopholes present in the insolvency framework. In such a scenario, a market-positive approach towards giving a definitive green light to TPF and providing suggestive reforms to the CBI framework can instil trust and can be seen as a welcoming move for investors and stakeholders to contribute to this important sector. Though a voluntary insolvency application was filed in this scenario, it would be interesting to note how the GoFirst decision upholds the intention behind the whole process of insolvency, i.e. to keep the company a going concern.
Understandably, since the IBC is relatively new and is ever-evolving. It is equally important to keep up the pace through amendments to tackle the issues that require imminent attention, which would help shape the course of the national insolvency framework and bring it to par with international standards.
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