[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 lessors are prevented from enforcing security or reclaiming aircraft or aviation equipment. In contrast, Alternative A allows for the repossession of aircraft after a 60-day “waiting period” if the defaults persist during this time. This conflict in timeframes poses a significant issue The moratorium hinders aircraft owners, lessors, and creditors from reclaiming their assets for a relatively prolonged period.
Furthermore,under the Convention. if a lessor has invoked the Irrevocable De-registration and Export Request Authorisation (“IDERA”), then the concerned plane has to be deregistered. The same has to be done within five working days but due to the NCLT imposing a moratorium under insolvency proceedings, lessors cannot take back their aircraft and assets as swiftly.
The Predicament of Aircraft Lessors as Operational Creditors within the IBC
Within the framework of the IBC, aircraft lessors find themselves categorized as “operational creditors,” a distinction that carries its own set of challenges. The standing of operational creditors raises several concerns stemming from their disenfranchisement, exclusion from the committee of creditors, and their relatively low ranking in the hierarchy of debt clearance. As per a statistical analysis, the composition of the Committee of Creditors “CoC” has disproportionately disadvantaged operational creditors. Their financial stakes are susceptible to being eclipsed by the preferences of other creditors, as observed in the case M/s. Genius Security & Allied Services v. Mr Shivadutt Bannanje & Ors. Here, it was established that a resolution plan sanctioned by the CoC, even if it proposes NIL payment to operational creditors, holds legal validity.
Hence, the CoC-approved corporate insolvency resolution process “CIRP”, in its current form, may not serve the best interests of aircraft lessors as operational creditors in the scheme. The imposition of a moratorium further exacerbates their predicament, denying them rightful possession of their aircraft and associated assets. In essence, the current IBC framework may inadvertently prolong the agony of aircraft lessors, leaving them grappling with an unfavourable resolution plan.
Conclusion: The First Step in the Right Direction
The recent notification exempting aircraft deals from the moratorium provision of the Code marks a significant stride towards restoring the confidence of aircraft lessors and creditors in India. The Aviation Working Group responded positively to this development, projecting an increase in the score of India. By such resolution of complications in the repossession of assets by lessors during the insolvency proceedings of airlines, it is expected that there would be potential cost savings for Indian carriers, estimated at approximately $1.2-1.3 billion in lease rentals.
However, there remains an imperative need for specialized legislation tailored specifically for airline insolvencies, a framework that adeptly tackles the complexities of the surrender and return obligations of lessee airlines, safeguards passenger interests, manages cross-border insolvencies, implements early warning mechanisms, and more. Also, a prevailing concern regarding the insolvency resolution process within the IBC framework is the languid pace of resolving distressed companies. As of June 2023, over 65% of the ongoing insolvency resolution cases have surpassed the 270-day threshold, underscoring the protracted nature of these proceedings. In response to this challenge, the introduction of a pre-pack regime emerges as an enticing prospect. Such a regime promises a smoother, more predictable process, offering greater certainty to airlines and their stakeholders.
The Parliament, vested with authority by Article 253 of the Constitution, is empowered to enact laws to give effect to international treaties, agreements, or conventions. Given India’s commitment as a signatory to the CTC, it is imperative to promptly enact legislation. This not only establishes a predictable legal framework in aviation-related insolvency but also upholds the principle of pacta sunda servanda, emphasizing India’s dedication to honouring international agreements.