It is exactly two months to the day that Jet Airways ceased operations as India’s second largest airline by passengers. And as news came in on Monday evening about the lenders finally taking Jet to the insolvency and bankruptcy (IBC) process, there seemed little chance of the airline flying ever again.

Jet owed its lenders, led by the State Bank of India (SBI), more than Rs 8,000 crore before it ceased operations. It owed suppliers and vendors much more. Some estimates have put the total dues to vendors, lessors, other suppliers and creditors at well over Rs 20,000 crore.

The lenders’ consortium had first promised emergency funds of about Rs 1,500 crore to keep the airline flying but the money was never given. Jet eventually ran out of funds to even buy fuel and had to cease operations on April 17. Since the airline had begun floundering some months before that fateful April day, the lenders’ consortium had been saying repeatedly that it will resolve the Jet mess outside the IBC process.

The consortium felt that under IBC, aircraft lessors can invoke lease agreement clauses to take possession of the aircraft and this would mean returns for lenders would diminish. Jet was in the service industry and apart from aircraft, brand name, airport slots etc, there wasn’t much else for lenders in terms of assets to seek returns from. Whatever assets there were, were best protected by avoiding the IBC process all together – this, the lenders continued to harp on.

But now, these same lenders may recover next to nothing and may have to actually take a very substantial haircut since the IBC process has been delayed and not much is left of the airline. So why did the lenders continue attempts to revive the airline outside the IBC process till now and why have they finally agreed to defer to the IBC?

A person close to developments explained that state owned banks have been wary of agreeing to large haircuts which potential investors have been seeking. They do not want the charges they faced during the Kingfisher debacle to resurface. During the KFA debacle, fingers were raised over the manner in which banks kept advancing debt and their inability to recover much after that airline was grounded.

This person confirmed that potential investors into Jet (companies which wanted to rescue the airline after it was grounded including Etihad Airways and the Hinduja group) had sought up to 97% haircut from lenders. This clearly meant the banks would recover next to nothing of their money, which is when the lenders’ consortium decided to approach the National Company Law Tribunal (NCLT) for putting jet under IBC. This way, that large haircut would be “legalised” and bankers can defend their actions.

This person also said that under the IBC, “Only sustainable debt would be left with Jet before any potential investors agrees to come forward. If Jet restarts with a new investor at a smaller scale, with say 20 aircraft, sustainable debt should not be more than Rs 2,500-3,000 crore. Everyone will have to take a haircut — lessors, vendors, banks”.

So the inevitable reference of Jet to the IBC was delayed by the state-owned banks to prevent allegations of any wrongdoing. But in the process, whatever value could have been realised from the airline has been destroyed. An analyst said only “liquidation” value would now be recovered at best from Jet under the IBC process and added that any revival for the airline was out of the question.

SBI had said in a statement last evening that “a meeting of lenders was held today to consider the way forward in respect of Jet Airways. After due deliberations, lenders have decided to seek resolution under the IBC since only a conditional bid was received and the requirement of the investor for SEBI Exemptions and resolution of all creditors is possible under IBC.”

Remember, despite inherent problems within the IBC framework, it has offered resolutions in some high profile cases, and lenders in these instances have got some return on their investments, which may otherwise have gone bad. Take the case of Bhushan Steel, which owed a whopping Rs 56,022 crore to its lenders. Under the IBC, lenders recovered 63.5% of their money, taking a haircut of just about a third of their loans.

Lenders have not been as successful in other instances but the point is, there is a due process instituted for lenders to get at least some returns.

After delaying the inevitable interminably, the lenders’ consortium now not only faces a substantial haircut, it may have already been outmaneuvered. A Dutch court has already ordered bankruptcy proceedings against Jet Airways and is making moves to repossess whatever aircraft of Jet it can.

“There is already an order of insolvency passed by a Dutch court against Jet Airways and a trustee appointed. The NCLT will have to consider if two orders of insolvency can be passed against the same company and a resolution professional can be appointed when a trustee is already in place. Without resolving this issue, the process will be disruptive and uncertain,” insolvency expert Sumant Batra said.

The Dutch court believes Jet’s aircraft parked all over the world can still be possessed. In some cases, creditors have attached aircraft, in others, lessors have ceased possession but the Dutch believe these aircraft can be retrieved by taking orders from the court. Another insolvency professional said that most of the enterprise value for Jet had been eroded and there would be little resolution under IBC for lenders.

Meanwhile, under the IBC provisions, any prospective suitor to Jet may be allowed to skip the mandatory open offer. This was a key demand of Abu Dhabi carrier Etihad Airways and may be met under the IBC. Skeptics still wonder why would any investor want to acquire just the Jet Airways brand, sans assets like airport slots, pilots and other licensed crew and deal with creditors too? It would be far simpler and economical to start another airline from scratch in India.

So all said and done, lenders’ inordinate delay in taking Jet to the IBC process has meant that not only will they lose most of their money, the airline may also never fly again. It is time that India’s state-owned banks, struggling under the weight of their own bureaucratic sloth, wake up and face the music. Their dilly-dallying may have saved their backsides, but much of the public money invested through them in Jet would surely be sunk.