Go First’s foreign funding push to test India’s insolvency framework

The New Delhi bench of the National Company Law Tribunal (NCLT) has yet to make a final decision, expressing initial reluctance. But the case has already sparked a larger debate about third-party funding in India, where insolvency laws remain untested for such scenarios.

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“Foreign funding can provide additional financial resources, which might help in settling debts more effectively and potentially increase the value recovered by creditors," said Vishwanathan Iyer, partner at Anand Sharma and Associates.

A $20 million gamble

In early September, Go First formally filed for liquidation, citing a lack of assets and a viable revival plan.

Having exhausted all moratorium extensions under the Insolvency and Bankruptcy Code (IBC), the airline’s resolution professional (RP) sought the court’s approval to secure $20 million from Burford Capital, a US-based litigation finance firm. The funds will be deployed to pursue an arbitration case in the Singapore International Arbitration Centre, where Go First is claiming over $1 billion in damages.

The airline attributes its downfall to Pratt & Whitney’s faulty engines, which grounded its fleet in May 2023 and disrupted operations beyond repair.

Under the terms of the agreement, the loan from Burford Capital will only be repaid if Go First wins the arbitration.

With creditors refusing to extend additional funds—having already invested ₹160 crore—the RP turned to Burford, arguing that the arbitration is the airline’s sole remaining asset capable of unlocking any recovery for lenders.

According to its insolvency filings, Go First owes at least ₹11,463 crore collectively to banks, international lessors and vendors. Of this, at least ₹6,000 crore is owed to financial creditors, including Central Bank of India, Bank of Baroda, IDBI Bank and Deutsche Bank. The airline had hoped to restart with an interim financing from these lenders, but its aircraft lessors objected saying their dues should be cleared first.

For Go First’s creditors—Central Bank of India ( ₹1,934 crore), Bank of Baroda ( ₹1,744 crore), and IDBI Bank ( ₹75 crore)—this arbitration is now their last hope for recovering dues from the defunct carrier.

Legal and regulatory stakes

Allowing foreign litigation funding would set a new precedent in India’s bankruptcy system. While third-party funding is common in the US, the UK, and Australia, in India, this concept is still relatively unfamiliar, with only a handful of cases reported so far.

As part of the practice, financiers cover the legal fees and costs associated with commercial lawsuits, arbitration, or shareholder disputes in exchange for a portion of the settlement or award from a successful case.

The first known example of litigation finance in India under the IBC involves LegalPay, a start-up specializing in litigation and interim financing. In 2021, LegalPay successfully exited an interim finance deal with Yashomati Hospitals, generating a pre-tax internal rate of return (IRR) of over 26% for its investors in less than nine months.

Yashomati Hospitals was dragged into insolvency proceedings by Pegasus Assets Reconstruction in March 2021, following its default on payment obligations.

Legal experts believe the NCLT’s ruling could pave the way for structured regulations governing litigation finance.

More here | Reviving Go First won’t be easy. Here’s why

“Go First’s application for foreign funding for litigation is unprecedented, particularly following an unsuccessful insolvency that appears to create additional liability for the bankrupt company," said Yogendra Aldak, Partner at Lakshmikumaran & Sridharan. “It remains to be seen whether the NCLT’s observations will pave the way for third-party funding regulation in India. Such regulation could address this gap in commercial litigation and enhance India’s position as a global hub for commercial dispute resolution."

However, if the arbitration fails, the consequences could be severe.

“If they lose the arbitration and assuming the company has no other asset to monetize, given the decision to liquidate it, Go First would be wound down and dissolved. Creditors would lose the claims they have not been able to recover but may pursue claims under any guarantees or assurances provided by promoters or third parties," said Bikash Jhawar, senior partner at Saraf and Partners.

The NCLT has also expressed concerns about approving foreign litigation funding. During the hearing, the tribunal questioned whether the IBC allows for such foreign loans and asked Go First’s RP to cite precedents. The judges cautioned that approving this request could set a precedent, encouraging other distressed companies to rely on similar foreign financing and complicating insolvency resolutions.

“Go First’s application for foreign funding for litigation is unprecedented, particularly following an unsuccessful insolvency that appears to create additional liability for the bankrupt company. It remains to be seen whether the NCLT’s observations will pave the way for third-party funding regulation in India. Such regulation could address this gap in commercial litigation and enhance India’s position as a global hub for commercial dispute resolution," says Yogendra Aldak, Partner at Lakshmikumaran & Sridharan.

Who will lead liquidation?

Beyond litigation finance, the airline has also petitioned the NCLT to allow Shailendra Ajmera, its current RP, to continue as the liquidator. While RPs previously managed both roles under the IBC, a July 2023 circular issued by the Insolvency and Bankruptcy Board of India (IBBI) now discourages RPs from becoming liquidators in the same proceedings.

“(T)he IBC doesn’t explicitly bar RPs from transitioning to liquidators," said Aldak, “If the NCLT allows this, it could establish a precedent for corporate debtors and creditors’ committees (CoCs) to retain RPs in liquidation."

Deep Roy, managing partner at Equilex, added that creditors often prefer retaining the RP for liquidation, as it ensures continuity. “(T)he RP is already familiar with the company’s accounts and business, making the transition to liquidation smoother," he said.

Also read | Why are creditors going after bankruptcy professionals now?

The NCLT has signalled resistance, warning that an approval could create a flood of similar petitions, potentially complicating bankruptcy management. The outcome of this issue will be closely watched, with the next hearing set for 8 November.

The long road to recovery

Grounded since 3 May 2023, Go First has struggled to stay afloat after its parent, the Wadia Group, filed for voluntary insolvency, citing engine delays from Pratt & Whitney. With ₹6,200 crore in debts hanging in the balance, lenders are now pinning their hopes on the arbitration award to recover their dues.

Allowing foreign funding could inject much-needed liquidity into the process, but it raises broader questions about the evolution of India’s bankruptcy regime.

Advocate Amir Bavani, founder of AB Legal, noted that India’s codified insolvency laws still lack the flexibility to address such unique cases.

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“The move to allow foreign funding is a firm step toward maximizing the value of a debtor’s assets, though the lack of specific provisions under the IBC might present challenges," said Bavani.