Aviation Industry’s Exclusion from Moratorium: A Catalyst for Change?

[By Rupakshi Sharma]

The author is a student of Symbiosis Law School, Pune

 

Introduction:

The present article analyses the exclusion of the Aviation Industry from imposition of Moratorium under S.14 of IBC,2016 w.r.t MCA Notification dt. 03.10.2023. It highlights the plausible advantages of this catalytic move while laying due emphasis on the enactment of CTC Bill, 2022 in light of the GoAir Fiasco. 

I. Moratorium under S. 14 of IBC, 2016:

It is well-founded in law that an application for initiating a Corporate Insolvency Resolution Process (CIRP) can be filed  either by a Financial Creditor (FC)/Operational Creditor (OC) or the Corporate Debtor (CD)itself. Once such application is admitted before NCLT, a ‘moratorium’ is imposed on CD under Section 14 of  the Insolvency and Bankruptcy Code, 2016. .

It is a ‘calm period’ where financial and operational creditors are barred from institution of new suits and proceedings or initiation of debt recovery actions against the CD during CIRP. All actions are suspended against the CD to preserve the status quo and revive the CD through a resolution plan. 2

Since the Insolvency and Bankruptcy Code, 2016 regulates insolvency matters in India, a time-bound moratorium period is imposed after admission of CIRP application by NCLT. Under the said section, clause (d) specifically bars an owner/lessor to recover/possess a property which is in the possession of a CD during CIRP as observed in the case of Maharashtra Industrial Development Corporation v. Santanu T. Ray, Resolution Professional & Anr.

II. The Juxtaposition of Aircraft Leasing and Imposition of Moratorium:

Aircraft leasing is a prevalent industry practice in the Aviation Sector as majority Indian Airline Operators have leased a significant number of aircrafts in their fleet. However, the overwhelming operational costs attached to the sector often poses a great difficulty for long-term sustainability of an airlines. This has a rippling effect on the creditors/lessors whose investment remain at stake due to challenges in aircraft reclaiming during insolvency.

Once an application for insolvency of an airline is admitted under IBC, there is a temporary freeze of all actions against the CD, including restriction on lessors’ rights to claim re-possession of their leased aircrafts.

This embargo adversely affects the progress of the Indian Aviation Sector as:

  1. it discourages lessor companies to lease their aircrafts to Indian Air Carriers;
  2. it leads to imposition of higher lease rent for instance, about an extra $1.2-1.3 bn is paid by Indian carriers because of hurdles faced in aircraft re-claiming;
  3. it levies stricter terms and conditions on the lessee, which is counter-intuitive for India’s endeavour towards a flexible aviation policy.
  4. Moreover, it is the customers who have to ultimately bear the brunt of high lease rentals in the form of high fares.

III. Exemption of Aviation Industry under S. 14 of IBC, 2016: A sweeping move by MCA

  • India’s Legal Position before MCA’s Exemption Notification:

It is widely known that India is a signatory to the Convention on International Interests in Mobile Equipment or Cape Town Convention (CTC), 2001 and Protocol on Matters Specific to Aircraft Equipment since 31.03.2008. Read and interpreted as a single instrument their primary aim is to address the challenge of obtaining opposable rights to high-value aviation assets, viz. airframes, aircraft engines and helicopters having no fixed location.

Alternative A, Clause (2) of Article XI of the instrument requires a contracting state to allow a lessor to re-possess an aircraft after expiration of waiting period as specified in the declaration of that State. Since India has declared a waiting period of 2 calendar months under Article XI, a resolution professional is required to either (i) cure all the defaults of a CD or (ii) give possession of the aircraft to the lessor, within 60 days from the commencement of CIRP.

Moreover, the Aircraft Rules, 1937 drafted under the Aircraft Act, 1934 under Sections 30(6)(iv) and 30(7) allows de-registration and re-possession of aircrafts by creditors after issuing an irrevocable deregistration and export request authorisation (IDERA) in the case of default by a debtor.

In Awas 39423 Ireland Ltd & Ors v. Directorate General of Civil Aviation & Anr., the Delhi High Court relied on Article IX of Protocol on Matters Specific to Aircraft Equipment and Rule 30(6)(iv) of the Aircraft Rules, 1937, thereby allowing deregistration of aircrafts of SpiceJet Limited.

However, enactment of the Insolvency and Bankruptcy Code in 2016 unintentionally sabotaged lessors’ right under CTC as it lacked formal ratification by the Indian Government in the form of a separate implementing legislation due to which the municipal law (IBC) was given precedence over India’s International law obligations w.r.t. CTC.

Realising drawbacks of an uncodified regime, an attempt was made by the Ministry of Civil Aviation by drafting Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 to implement the Cape Town Convention/Protocol and give primacy to its provisions assuring lessors de-registration and re-possession of their aircrafts, in case of default by the lessee. Reciprocal provisions under Section 15(1) and Section 19(5) & (7) were incorporated in the Draft Bill, 2022 with respect to de-registration and re-possession respectively. Moreover, the proposed bill had an overriding effect over any other Indian Law for the time being in force under Section 31(1).

However, as no concrete steps have yet been taken for its enforcement, the insolvency code will have an overriding effect under Section 238 until the enactment of the Bill.

  • India’s Legal Position after MCA’s Exemption Notification:

Taking into the consideration the adverse effect of mandatory imposition of moratorium on aircraft lessors which had corollary consequences on air-carriers due to increased lease rentals and pass-through effects on end-users (air-passengers), the Ministry of Corporate Affairs in its Notification S.O. 4321(E) dated 03.10.2023 notified exemption of aviation industry from application of moratorium provisions under Section 14(1) of the Insolvency and Bankruptcy Code, 2016.

It stated that as  India has ratified the Cape Town Convention and its Protocol, any transactions, arrangements, or agreementsrelating to aircraft, aircraft engines, airframes and helicopters under it shall be exempted from the application of Section 14(1) of the Insolvency and Bankruptcy Code, 2016. An exception has been carved out in furtherance of Section 14(3)(a) of IBC, 2016 to give effect to the notification.

  • Extant Provisions v. International Obligations: The Go Air Insolvency Fiasco

The Wadia-group led GoAir filed for insolvency on May 2nd, 2023, citing financial losses to the tune of ₹10,800 crore in revenue loss and additional expenses due to faulty engines supplied by Pratt & Whitney. The move resulted in immediate imposition of ‘moratorium’ u/s 14 of IBC, 2016, thereby prohibiting recovery of GoAir planes by the lessor.

Since the Directorate General of Civil Aviation (DGCA) has not taken into consideration the IDERA filed by lessors for re-registration of GoAir aircrafts, NCLT has ordered for resumption of operations by the airlines using these aircrafts. Moreover, monthly-inspection and maintenance rights of lessors granted by High Court of Delhi in Go Airlines India Limited v. SMBC Aviation Capital Limited and Ors. were also transferred to the interim resolution professional as he is the sole protector and preserver of the assets of the corporate debtor.

The ongoing insolvency proceeding of GoAir has brought into limelight the dilemma faced by the judicial and quasi-judicial authorities to grant supremacy to the domestic laws or adhere to obligations under international conventions and treaties. Currently as there exists no discrete legislation in pursuance of Cape Town Convention and Protocol, the insolvency code is given precedence over the lessors’ rights guaranteed under CTC. However, with issuance of the Notification dt. 03.10.2023, favourable judgments for lessors are expected.

IV. Exemption of the Aviation Industry: The Way Forward

The Aviation Industry has been exempted from the application of S.14 of the Insolvency and Bankruptcy Code, 2016 as per the Notification issued by the Ministry of Corporate Affairs on October 3rd, 2023. This sweeping move was made in the wake of the ongoing GoAir Insolvency debacle which brought into limelight the plight of aircraft lessors who bear the brunt of mandatory freezing of assets during moratorium.

  • The exemption is a progressive step towards realising the objectives of the Cape Town Convention and Protocol which guarantees lessors’ rights of de-registration and re-possession during insolvency.
  • Such immunity guarantees lessors’ the right to apply for de-registration of their leased aircrafts in event of violation of a lease agreement by the corporate debtor. Once de-registered, the CD will be disentitled to utilize aircrafts for their ongoing operations and lessors will be authorized to initiate repossession proceedings under the extant provisions.
  • Due to risk-reduction, leasing companies will continue to offer assets at discounted rental rates and flexible terms and conditions, therefore lessening the burden of corporate debtors. As a corollary, the soaring air travel costs borne by the consumers will also be reduced.
  • Moreover, such dispensation will also provide a conducive environment for foreign direct investment as majority leasing companies are foreign-based.

A beginning has been made by carving out an exception under S.14(3)(a) of IBC, 2016 which exempts imposition of moratorium on “such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority”. Relying on the said notification r/w extant aircraft rules, lessors will be entitled to favourable judgements from courts.

It is often said that ‘a work well begun is half done’ but issuance of a notification with no retrospective effect to exempt aviation industry from application of moratorium will only act as half-measure towards guaranteeing of lessors’ right of de-registration and re-possession during insolvency.

Thus, to eliminate any chances of “insolvency and bankruptcy code” having an overriding effect on the lessors’ rights, enactment of the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 is the clarion call. Once implemented, a foolproof protection shall be granted to aircraft lessors to de-register and re-possess their aircrafts, thereby allowing them to export them for further lease to other airlines while simultaneously receiving unpaid lease rentals during insolvency proceedings.

Keeping the Bill in the pipeline will only delay added advantages available to Indian Airlines in the form of a 10 per cent discount on export credit premiums provided by OECD to States adopting CTC. Moreover, it will adversely affect the country’s credibility in the CTC Compliance Index which was cut down by Aviation Working Group (AWS) from 3.5 to 2.

Thus, a comprehensive legal framework ratifying the provisions of CTC is the need of the hour for a flourishing Indian Aviation Industry.

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