India’s bankruptcy courts are indignant at being used by creditors as a tool to recover dues from companies that are not really bankrupt, and for wasting their time.
On 19 November, judicial member Mahendra Khandelwal of the Delhi bench of the NCLT (National Company Law Tribunal) pulled up Engine Lease Finance B.V., the engine lessor of budget airline SpiceJet, for keeping a settlement pending in the IBC forum to leverage settlements with the airline.
“Both the Ld. Counsels submitted that the parties are trying to settle the matter amicably therefore, sought time. Pleadings are complete. The adjournment on the similar ground was sought on the last date of hearing i.e. 08.10.2024. Last opportunity is given to the parties to either settle the matter, failing which the matter will be proceeded as per law,” the NCLT order stated.
Engine Lease Finance B.V. is among several lessors that have filed insolvency claims against SpiceJet.
Mint’s research reveals that as of November 2024, 16 insolvency claims have been filed against the airline, primarily by lessors and some service vendors. Of these, five claims have been withdrawn after settlements, two are in the process of being settled, seven remain pending with the insolvency tribunal, and two have been dismissed by the tribunal. None of the claims has advanced to full insolvency proceedings.
Emailed queries to SpiceJet remained unanswered till press time.
Improper leverage
Lawyers have pointed out that using insolvency proceedings in this manner for recovery is not the intended purpose of the IBC (Insolvency and Bankruptcy Code).
Dinesh Jotwani, co-managing partner at New Delhi-based law firm Jotwani Associates, noted that while financial creditors may turn to the NCLT as a last resort, the trend of operational creditors using the forum for recovery raises concerns.
Operational creditors include lessors, vendors and suppliers to an entity, and financial creditors are lenders including banks and other institutions.
“SpiceJet’s case highlights a growing trend where creditors use the IBC forum to pressure corporate debtors into settlement,” said Alay Razvi, managing partner at law firm Accord Juris. “Creditors are aware that initiating IBC proceedings can force corporate debtors into settling their outstanding dues. The IBC is meant to resolve genuine insolvency cases, not to serve as a tool for creditors to force settlements.”
Kalpit Khandelwal, partner at law firm Aekom Legal, noted that the airline business is unique because its liabilities often exceed its assets. “SpiceJet’s case is unusual, as multiple IBC proceedings have been filed against the airline by both operational and financial creditors in a short period,” Khandelwal said.
Last week, Ireland-based aircraft lessor Aircastle withdrew its insolvency case against SpiceJet after reaching a $5.6 million settlement. This marks another instance of the airline resolving disputes after raising ₹3,000 crore through a qualified institutional placement (QIP) this September.
Similarly, SpiceJet reached agreements with Celestial Aviation, Alterna Aircraft, and Raymach Technologies. Despite these settlements, SpiceJet still faces further insolvency claims.
In the last week of October, the NCLT issued notices regarding claims from lessors Sabarmati Aviation and JetAir 17, while Falgu Aviation Leasing Ltd filed an insolvency plea over an $8.1 million default. All of these entities are operational creditors.
Since the covid-19 pandemic, SpiceJet has struggled with legal and financial challenges. Its domestic market share has sharply dropped from 7.3% in January 2023 to just 2.3% in August 2024, and it currently has 36 grounded planes. Despite raising funds, experts warn that the airline’s situation remains fragile.
“The funds SpiceJet is receiving are being used to settle disputes, rather than for expansion, acquiring more aircraft, or launching new routes,” said Mark Martin, CEO of Martin Consulting.
The larger picture
While creditors have the right to withdraw insolvency claims under Section 12A, citing grounds such as settlement, the Supreme Court and NCLAT have repeatedly held that insolvency courts are not intended for debt recovery against solvent companies.
Last year, the NCLAT (National Company Law Appellate Tribunal) rejected an insolvency petition filed by Tricolite Electrical Industries Ltd. against Wipro Ltd., clarifying that bankruptcy law cannot be used to recover debt from solvent companies. The Chennai bench emphasized that the IBC is not intended as a recovery tool for creditors.
Though the SpiceJet case is unusual, experts note that the wave of insolvency claims against large, solvent companies is not a new trend. “This practice is not entirely new,” said Ayesha Rai, partner at law firm DMD Advocates.
Atul Tandon, an insolvency professional and director at NPV Insolvency Professionals Private Limited, pointed out that the fear of losing control over companies has prompted debtors to settle debts amounting to ₹10.22 trillion by March 2024, a figure three times the recovery made by creditors through resolution plans.
Mint earlier reported that India’s bankruptcy regulator, the Insolvency and Bankruptcy Board of India (IBBI), is considering mandatory mediation between defaulting companies and creditors before insolvency proceedings are initiated. This proposal, still under public consultation, aims to reduce the number of insolvency petitions filed, such as those seen in the SpiceJet case.
“With the proposed out-of-court settlement mechanism under the IBC, the tactic of using IBC proceedings as leverage may continue, especially in cases involving large corporate debtors,” said Smiti Tiwari, partner at law firm Khaitan Legal Associates. “Unless there are cases where NCLT/NCLAT take a strict view on malicious prosecution, this practice is likely to continue.”
Data from the Insolvency and Bankruptcy Board of India (IBBI) shows that about 80% of the out-of-court settlements, once bankruptcy proceedings were initiated, were for debts up to ₹10 crore. This includes 845 of a total 1,070 petitions that were withdrawn after being admitted for bankruptcy proceedings between October 2016 and March 2024.
