MCA’s Latest Move – Inconsistency with the Insolvency and Bankruptcy Code, 2016

[By Uravi Pania]

The author is a student of National Law School Of India University, Bengaluru

 

Introduction

In May 2023, the National Company Law Tribunal (hereinafter the ‘NCLT’) admitted Go First’s insolvency plea with regards to default of around Rs. 2660 crores to its aircraft lessors and of Rs. 1202 crores to its vendors. The National Company Law Appellate Tribunal (hereinafter the ‘NCLAT’), on an appeal contending that the plea of insolvency was malicious, upheld the NCLT’s order and presently, the airline company is undergoing the Corporate Insolvency Resolution Process (hereinafter the ‘CIRP’), with Shailendra Ajmera as the resolution professional. Post the NCLT’s order, a moratorium mandated by section 14 of the Insolvency and Bankruptcy Code 2016 (hereinafter the ‘Code’) was imposed, which prohibited the initiation of any proceedings, transfer of assets or legal rights, foreclosure of securities or, recovery of any property of the Corporate Debtor (hereinafter the ‘CD’).

 A major question arose in the midst of the matter regarding the rights of the aircraft lessors, who faced a bar on recovering the same due to the imposition of a moratorium under section 14 of the Code. The Ministry of Corporate Affairs (hereinafter the ‘MCA’) and the Ministry of Civil Aviation appeared to be in support of differing positions regarding the aircraft lessors’ rights vis a vis the moratorium. However, the MCA via a notification dated October 3, 2023, exempted the application of s.14 moratorium on transactions, arrangements or agreements, relating to aircraft, aircraft engines, airframes and helicopters.

This post analyses the exemption notification vis-a-vis the aims of the Code to highlight its inconsistency. It argues that the notification violates principles of insolvency process in India and, that the utilisation of a notification route leads to an inadequate adoption of the Cape Town Convention (hereinafter the ‘CTC’). India being a signatory to the Convention, planned to ratify it through the Cape Town Convention Bill, which has not been introduced yet.

Not only is this mechanism of implementing provisions of the Convention procedurally deficient as the CTC has not been ratified yet, but it also principally goes against the Insolvency and Bankruptcy Code. The scope of this post is limited to the latter proposition. Firstly, the exemption of lessors from the moratorium goes against the underlying principles of the Code, which includes not just credit recovery but also managing and sustaining a stressed firm’s operations and helping its resolution. Secondly, by utilising the notification route, the government has brought in inadequate application of the CTC, making the present Code incompatible with it—though the Convention provides for a gradual and balanced approach, the same cannot be incorporated into India’s insolvency proceedings without an amendment of the Code.

Aviation Industry’s Demands

India’s aviation market consists of a large share of 80% leased aircrafts as compared to purchased ones due to its cost-efficiency, enabling airlines to provide low-cost airline services too. However, with Go First filing for insolvency, its market share declined, leading to a surge in market shares as well as the prices of its competitors. Additionally, on the admission of the insolvency application by the NCLT, Go First’s aircrafts entered the protection of the moratorium period as provided by section 14 of the Code. The lessors of Go’s aircrafts filed interlocutory applications before the NCLT, to which the Tribunal held that the recovery of the leased aircrafts couldn’t be made due to the moratorium. Thus, section 14 prohibited the aircraft lessors from initiating any proceeding to recover the leased aircrafts. However, with the MCA notification, the moratorium would be exempted and, aircraft lessors would be able to recover their aircrafts.

Disagreement with IBC Principles

The Code’s inception in 2016 brought in a streamlined procedure to deal with reorganisation of assets in a time-bound manner and aimed to balance and maximise multiple stakeholders’ interests. The Supreme Court noted the object of the Code to be discerned by the Preamble of it—that it is “first and foremost a code for reorganisation and insolvency resolution of corporate debtors”. It also observed that IBC seeks to ensure revival and continuation of the CD from its own management as well as from a corporate death through liquidation. This view has been consistently argued and affirmed by various Courts and Tribunals. Protecting assets of a CD is significant towards treating it as a going concern, which is also another important objective of the legislation.

The MCA notification exempts section 14 from “transactions, arrangements or agreements, under the Convention”. The Convention allows for the possession of the aircraft to be returned to the creditor on occurrence of an “insolvency related event”. Such allowance goes against the very essence of section 14 of the Code as section 14(2A) of the Code provides that an Interim Resolution Professional (IRP) or the Resolution Professional (RP) can prevent such return if the supply of such goods or services is critical for value of the CD or to manage its operations. It is evident that aircrafts would be critical to preserve the value of an airline business as well as to manage its operations.

The Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, considering an ipso facto clause in a power purchase agreement (PPA), held that the “going concern” status of the debtor would be nullified if the PPA was terminated. The PPA would be the “sole basis for the CD’s existence” and its termination would affect the going concern status of the CD. The Court considered section 14(2) and 14(2-A) to maintain the status of a CD as a going concern and that it should not be hampered on insolvency.

A similar reasoning can be extended to the essentiality of the aircrafts for airline corporate debtors. Aircrafts are the sole basis of airlines and termination of aircraft leases on insolvency will affect the going concern status of such CDs. This violates the existing jurisprudential reasoning of section 14 of the Code, as employed by the NCLT tribunal while considering Go First’s lessors’ pleas as well. The tribunal observed that the aircrafts were the essence of the CD’s business and essential to its status as a going concern. Therefore, applying principles from Gujarat Urja, it is evident that since leased aircrafts are so critical to the airline debtor—being the very essence of their business. Leasing being the major mechanism of usage of aircrafts, revocation of the same would be detrimental to the corporate debtors’ business to be run as a going concern.

Inadequacy of the Notification—Incompatible with Section 18 of the Code

The MCA by opting for a notification route has also failed to first bring in adequate changes into the Code itself, which presently, makes it incompatible with its own as well as with the Convention’s objectives. Article XI of the CTC provides that on occurrence of an insolvency-related event, the insolvency administrator (IA) has two alternatives—A and B. India’s declaration, as per the requirement of Article XXX(3) of the CTC, provides that India has opted for Alternative A, which provides that the IA shall give possession of the aircraft to the creditor either at (i) the end of the waiting period of 2 months or, (ii) the date on which the creditor would have been entitled to such possession, whichever is earlier. The IA, after curing defaults and agreeing to fulfil future obligations, can retain the aircrafts beyond the waiting period too.

The rationale for the waiting period is to allow the IA to manage operations of the debtor and ensure an aspect of continuity. This provides for a balanced approach as it prioritises aircraft recovery but also provides the insolvency administrator a chance to manage the leased aircraft, in interests of the debtor. Such a balanced approach can be applied in the Code too, which could provide for a time period or waiting period of functioning with the moratorium, so as to keep intact the leased aircraft as it is critical to the debtor’s business operations. However, the Code presently, has provisions which prevent this balanced approach procedure.

Section 16 of the Code provides for appointment of an IRP and under section 18, specific duties of the IRP are listed, including to “monitor the assets of the CD and manage its operations”—again in pursuance of the objective of running the CD’s business as a going concern. Their powers broadly include managing affairs of the CD, executing operations and taking actions towards resolution of the CD’s insolvency.  However, section 18(g)(a) provides that the term “assets” shall not include “(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment”. Undoubtedly, the lease of aircrafts would be deemed a “contractual arrangement” between the airline corporations and the lessors and thus, would fall under the ambit of section 18’s exception. Hence, section 18 bars the IRP from taking under its management, assets in possession but owned by third parties, arising out of contractual arrangements—which would include leased aircrafts.

Preventing a Balanced Approach

The current mechanism prevents the application of the waiting period mechanism envisaged under the Convention. The waiting period can be significant to the CD’s interests in continuing as a going concern by offering better chances of asset maximisation as well as chances of revival. Moreover, the present situation also deprives the CD of the ‘second-chance’ option to pay defaults and agree to fulfil future obligations by allowing the IRP to manage operations of the CD, as provided under the CTC. The present notification doesn’t fulfil the objectives of the Code and also fails to incorporate the Convention in its spirit. Without due amendment to the Code, it cannot function in a balanced manner with the Convention.

Given that the MCA has previously, utilised the notification route for exempting petroleum assets from the purview of a moratorium and had earlier considered the same in respect of spectrum grants, studying this notification is necessary. Allowing the MCA to routinely create such exemptions would set a bad precedent, violating the fundamental principles and objectives of the Insolvency and Bankruptcy Code.

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