Author name: CBCL

[By Arushita Singh] The author is a student of National Law Institute University, Bhopal.   Introduction On October 3, 2023, a notification was issued by the Ministry of Corporate Affairs, invoking their authority under Section 14(3) of the Insolvency and Bankruptcy Code 2016 (IBC/Code), through which exemption has been granted to the transactions, arrangements, or agreements governed by the Convention and the Protocol pertaining to aircraft, aircraft engines, airframes, and helicopters from the moratorium provision within Section 14 of the Code. In this article, the author endeavours to examine and analyze the government’s decision to grant an exemption to aircraft deals from the moratorium provision of IBC. This significant development followed a protracted struggle involving financial creditors and lessors of GoFirst Airlines, which had garnered international attention and criticism. It became evident to the government that India could ill afford to jeopardize its reputation in the aircraft leasing and financing market, given its critical role in the sustenance of the aviation industry. The aviation industry holds substantial sway over the nation’s economic landscape, and any disruption therein would have far-reaching consequences. What Prompted the Move by the Government? The NCLT’s green light for Go First’s insolvency plea and the ensuing moratorium raised valid concerns for both lessors and creditors. This moratorium put a blanket ban shielding the airline and created an environment where aircraft lessors found themselves unable to repossess planes and other leased assets during the resolution process. Furthermore, it restrained the Directorate General of Civil Aviation (“DGCA”) from entertaining any applications for the de-registration of aircraft from lessors. Amidst this turbulence, SMBC Aviation Capital, a globally renowned aircraft lessor, raised strong objections to the ruling by the NCLT. It was asserted that each lessor possesses the inherent right to regain possession of their aircraft, coupled with the discretion to either export or re-lease these aircrafts to other operational carriers, and that the NCLT’s decision curtailed such rights of leasing entities to reclaim their aircraft from Go First. It was thus clear that the incorporation of aircraft within the moratorium’s scope blatantly disregarded not only the provisions of the CTC but also India’s own commitments in this regard. The ramifications of the NCLT’s decision began to reverberate throughout the aviation market, injecting an element of uncertainty and unsettling overall market confidence. Numerous applications for the dergistration of other aircrafts, like SpiceJet.   Prior instances of airline failures such as Kingfisher Airlines and Jet Airways had already cast a shadow over the reputation of the Indian aviation sector. These collective episodes contributed to the perception that India might be a potentially risky environment for aircraft leasing, eroding the confidence of international stakeholders in the aviation sector. India’s heavy reliance on leased commercial aircraft, with a staggering 80% of its approximately 800 aircraft operating under lease agreements, is a stark reality. Leased aircrafts are prominent fixtures in the fleets of major airlines like IndiGo, Go First, SpiceJet, and Vistara. Hence, the perception of India as a risky jurisdiction for aircraft financing and leasing could have driven up risk premiums for domestic airlines, ultimately resulting in higher lease costs and potentially increased ticket prices for passengers. Experts feared that these developments could also hinder the ambitious “Project Pukaar” of the Government to transform the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC) into a thriving hub for aircraft leasing. CTC Compliance and the Economic Rationale The CTC and its Aircraft Protocol, also known as the Protocol on Matters Specific to Aircraft Equipment 2001 (“Protocol”), constitute a comprehensive international framework designed to protect the interests of lessors when lessees default on high-value aviation assets, such as aircraft, engines, and spare parts. The Protocol is strategically crafted to ensure secure financing for these assets, reducing risks for lessors and providing procedural remedies, particularly through Article XI (Remedies on Insolvency), which offers effective measures for creditors in cases of defaults, including interim relief like aircraft de-registration and export. The CTC primarily serves to safeguard the interests of creditors and lessors by establishing a global framework that eases financing for valuable aviation assets that lack a fixed location. Its importance becomes evident in unfortunate circumstances, such as when defaults occur in loan or lease agreements or when an operator encounters insolvency, prompting the financier or lessor to pursue the repossession of the aircraft. Compliance with the CTC, especially with swift enforcement of Article XI, Alternative A of the Protocol (Alternative A), substantially reduces the risk for lenders in aircraft financing. Shortening the global aircraft repossession delay to two months can lower the loss-given default by 25-30%, resulting in reduced risk spreads and increased confidence of the lessors in aviation financing and leasing. Malta, ranking highest in the CTC Compliance Index, showcases the economic advantages of such compliance. Adhering to the Convention enhanced its reputation as a secure aviation financing hub, attracting investors and financiers. Additionally, the Organisation for Economic Cooperation and Development (OECD) standards offer airlines from CTC-implementing countries a 10% reduction in export credit insurance costs. India’s Bumpy Ride with CTC Compliance While India signed the Convention in 2016, it has yet to enact a legislation in compliance with the Convention. This gap has posed challenges for lessors and creditors in swiftly repossessing aircraft assets in cases of airline insolvencies. In accordance with India’s declaration submitted under the Protocol, it has committed to applying Article XI, Alternative A, to insolvency proceedings, which includes a special provision of a “waiting period” of two calendar months. In the context of India’s insolvency framework, Section 14(1)(d) of the Code enforces a moratorium provision, which restricts the owner or lessor from reclaiming any property or asset that is in the possession of the corporate debtor during this period. A careful examination of these two provisions reveals a fundamental contradiction between the “waiting period” stipulated in Alternative A of the Protocol and the moratorium provision detailed in Section 14(1)(d) of the Code. Section 14(1)(d) enforces a 180-day moratorium, extendable by an additional 90 days, during which creditors and

[By Ayush Mathur] The author is a student of National Law School of India University, Bangalore.   Introduction As a penultimate step towards incorporating the amendments in the Insolvency and Bankruptcy Code (IBC), the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper for comments on the proposed amendments. The 28th of November marked the deadline for these comments, and now the Ministry of Corporate Affairs is a step closer to deciding on the amendments to the code. The proposed amendments largely concern the real estate insolvency process, which has gained attention due to concerns expressed by the courts, promoters, and homebuyers regarding the scope and interpretation of sections related to real estate insolvency. There are 5 amendments to the code , including the one where the Committee of Creditors (CoC) will be allowed to invite separate plans for each project. However, while this project-wise CIRP is suggested, the Amendment overlooks Reverse CIRP. This analysis focuses on the absence of Reverse CIRP in the proposed Amendment. The author advocates for its incorporation, providing a structured framework and supporting rationale. Reverse CIRP Reverse CIRP, introduced by the NCLAT in Flat Buyers Association Winter Hills v Umang Realtech Pvt. Ltd., is initiated when project homebuyers apply for CIRP through the project’s funding bank. The project’s promoter submits a resolution plan, ensuring timely project resolution, requiring external funds infusion as a lender. The CoC, comprising homebuyers and banks, assesses the plan’s viability. Unlike regular CIRP, Reverse CIRP doesn’t invite third-party resolution plans. After successful project completion, the Resolution Professional (RP) applies for CIRP application disposal under Section 7 of the IBC. If delays or funding issues arise, the RP resorts to regular CIRP. The Court designed Reverse CIRP to address the lack of homebuyer expertise, ensure project continuity, achieve quicker resolution, and acknowledge the need for debtor management assistance. In real estate insolvency cases, Reverse CIRP is deemed more suitable than the original CIRP. No Circumventing Section 29A Without Amendment It is often argued that Reverse CIRP allows the promoter to act as a financial creditor. This defeats the purpose of section 29A of IBC, which was inserted to prevent defaulting promoters from gaining unauthorized re-entry to their companies by submitting a resolution plan through a back-door route. It is contended that the principle of reverse CIRP goes strictly against the section’s aim and scope. The author of this section elaborates on the same with case precedents and highlights the importance of the incorporation of Reverse CIRP in the code, as without finding this principle in the book, the existence of this essential legal principle remains uncertain. In the case of Chitra Sharma v. Union of India, the Supreme Court declined to create an exception that would enable promoters to assume control of the resolution. The Court expressed the view that Section 29A was enacted with the broader public interest in mind and to enhance corporate governance. Allowing promoters to engage in the resolution process, according to the Court, would undermine the positive objectives and intent of the IBC. Despite its potential benefits, the Court held that such an allowance could compromise the fundamental purpose of the IBC. In ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta, the Supreme Court advocated a balanced interpretation of Section 29A, emphasizing its purpose. The court directed the business owner (promoter) not to directly participate in the CIRP, and act only as a lender. While the order lacks clarity on ‘stays out of the CIRP,’ it implies an independent person (IRP) will oversee the process, even if the business owner contributes funds. Payments must be authorized by check, ensuring proper fund usage, and the business owner must cooperate. Despite efforts to limit their involvement, the order recognizes the business owner’s expertise in decision-making during resolution, a departure from regular proceedings where management powers are fully suspended. Although the court order includes safeguards, it permits the business owner some managerial involvement during the resolution process. It’s important to highlight that the Reverse CIRP procedure described in the Order is specifically tailored to the details of the case, making it inappropriate as a general model for other real estate insolvency situations. The decision to use or bypass Reverse CIRP depends on the unique circumstances of each case. Essentially, Reverse CIRP acts as a trial resolution process, and if it doesn’t work, the NCLAT then resorts to the regular CIRP process. This emphasizes the need to not leave this decision solely to the court’s discretion. If done so then uniformity in court’s decision cannot be achieved. As demonstrated above, in Chitra Sharma case the court refused to allow promoters a stage in the insolvency process while in Arcelor Mittal case a middle ground was specifically made by the court. Therefore, the status quo underscores the necessity for the legislature to include this principle in the code, creating an exception to Section 29A and specifying the conditions under which the court can utilize this legal tool. Reverse CIRP: Urgency for Amendments and Strategic Implementation It is important to note that the principle of Reverse CIRP is nowhere to be found in the code de; if anything, it is often argued that it lies against both the scheme of the code de and particularly against section 29A of IBC. Incorporating the principle of Reverse CIRP into the code is crucial due to the delicate future standing of this principle. An amendment could contribute significantly to achieving uniformity in the application of reverse CIRP. In Winter Hills case, the NCLAT addressed the challenges faced by homebuyers within the CIRP framework, acknowledging the inadequacy of the IBC in providing the desired remedy for allottees as Financial Creditors. While praised for adapting to the unique concerns of homebuyers, the decision in Winter Hills raises concerns about deviating from the established CIRP process under the IBC, as the NCLAT’s decision lacks a solid foundation within the IBC provisions or even under its inherent powers outlined in Section 11 of the NCLAT Rules 2016.

[By Shubham Singh] The author is a student of National Law University, Odisha.   Introduction Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC) establishes a waterfall mechanism for the distribution of assets in liquidation, with secured creditors having the highest priority and equity shareholders having the lowest priority. The waterfall mechanism is designed to ensure that the most important creditors are paid first and that all creditors are treated fairly. It also helps to protect the interests of workers and other vulnerable stakeholders. Government dues are treated after all other creditors and before the shareholders of a company. However, the ruling of the Supreme Court in State Tax Officer (1) v. Rainbow Papers Limited, placed government dues on par with secured creditors and mandated their inclusion in the resolution plan. Given the Rainbow Papers ruling’s deviation from the established principles of the IBC, subsequent litigation concerning Government dues was a predictable consequence. There have been different and conflicting rulings by the Supreme Court regarding the government dues to this date. In this article, the author will delve into those different rulings by Supreme Court post rainbow papers and their reasoning, while critically analysing them and their effect on the present Indian IBC scenario Supreme Court Rulings The reasoning behind the Rainbow Papers ruling was provided by the two-judge bench of the Supreme Court. They stated that a statutory charge can be considered a form of security, and according to the definition of a “Secured Creditor” under the IBC, the government can be classified as a secured creditor if it holds a statutory charge. This technical perspective adopted by the court, treating statutory charge as security and using that security to treat government dues as secured creditors contradicts Section 53 of IBC which specifically puts government dues below in the waterfall mechanism. The Rainbow Papers judgement goes against the legislation. However, In July 2023, the Hon’ble Supreme Court of India, in the case of Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited & Ors, ruled that the Rainbow Papers judgment overlooked Section 53 of the IBC, which grants priority to secured creditors in liquidation proceedings. This ruling is significant because Rainbow Papers primarily dealt with the resolution process rather than liquidation. Nevertheless, it’s important to note that this judgment was delivered by a single-judge bench, and it cannot ultimately overturn the Rainbow Papers decision. Interestingly, a review petition was filed against the Rainbow Papers judgment in front of a two-judge bench in October 2023, in the case of Sanjay Agarwal v. State Tax Officer. The review petitioner heavily relied on the Paschimanchal Vidyut Vitran case and argued that the court in Rainbow Papers failed to consider all relevant IBC provisions and cases, including the “waterfall mechanism” discussed in the Rainbow Papers decision. However, the court dismissed the petition However, once again, in October 2023, a two-judge bench in the case of Principal Commissioner of Customs V. Rajendra Prasad Tak & Ors. stated that tax and customs dues must be paid following the “waterfall mechanism” outlined in Section 53 of the IBC. The ongoing disparity in judicial interpretations raises critical questions about the alignment of these rulings with the legislative framework of the IBC. The Game Show – Analysis of Rulings While analysing the judgment in the Rainbow Papers case (Supra), the decision in the case of Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. was cited, but it was considered in the context of a resolution plan. However contrary to Rainbow papers, In the Ghanashyam Mishra case, the Supreme Court ruled that all types of government dues would be classified as operational debt and could be extinguished if they were not included in the approved resolution plan. Rainbow Papers was judged by a two-judge bench, and Ghanashyam Mishra’s case was judged by a three-judge bench. However, the ruling in the review petition in the Sanjay Agarwal case (Supra) feels like a conundrum in itself. In the Sanjay Agarwal case, the court stated that Rainbow Papers analyzed the cases and provisions cited in Rainbow Papers correctly. The review was denied, citing the practice that a bench of equal authority cannot critique decisions made by another bench citing cases like Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others, which stated the same. The bench in this case was also a two-judge bench In the Ghanshyam Mishra case, the ruling was provided from the perspective of the legislative effect of the IBC. In contrast, the Rainbow Papers case was approached from a technical standpoint, neglecting the examination of why Government Dues are placed lower in the waterfall mechanism, contrary to its legislative intent. The analysis of the Ghanshyam Mishra case was confined to the resolution plan in Rainbow Papers, and the assertion in the Sanjay Mishra case that everything was correctly analyzed in Rainbow Papers seems questionable. This doubt arises not only from the perspective of the Ghanshyam Mishra case but also considering the provisions of the IBC. However, the main argument of this article pertains to the treatment of the Ghanshyam Mishra case. Even if one argues that there may be a different perspective in the Ghanashyam Mishra case and the Rainbow Papers case, and the analysis is correct, the reasoning in the Sanjay Agarwal case, emphasizing the importance of the bench in a judgment, raises a question  Why was the ruling in the Ghanashyam Mishra case, asserting that government dues are not a priority with secured creditors, not embraced in Rainbow Papers, considering that the Ghanashyam Mishra case was decided by a larger bench then rainbow Papers and a larger bench always prevails over a shorter bench? In the Rajendra Prasad Tak (supra) case, an order was passed which stated that the dues of the Central Board of Indirect Taxes & Customs must adhere to the specific hierarchy outlined in Section 53 of the IBC. This judgment emphasizes the importance of following the structured hierarchy for the fair treatment of creditors and