On October 3, 2023, the Ministry of Corporate Affairs issued a notification ("MCANotification") that exempted arrangements relating to aircraft, aircraft engines, airframes and helicopters from the moratorium under Section 14(1) of the Insolvency and Bankruptcy Code, 2016 ("IBC"). This notification comes in the aftermath of the international aviation community's widespread criticism of the insolvency proceedings of Go Airlines (India) Limited ("Go First"), where aircraft lessors complained that the moratorium under the IBC was inconsistent with their rights under the Cape Town Convention/Protocol (defined below). This article discusses the context of the MCA Notification and its implications for airline insolvencies going forward.
The CapeTownConvention/Protocol
The Convention on International Interests in Mobile Equipment, together with Protocol on Matters Specific to Aircraft Equipment (collectively, the "Cape Town Convention/ Protocol") was adopted by the International Civil Aviation Organization and the International Institute for the Unification of Private Law in November 2001. Its purpose is to provide a common legal regime for leasing and financing of high value aviation assets, including the creation of an international registration system to protect such assets. The Cape Town Convention/Protocol also specifically provides remedies for creditors and lessors of aircraft in case of defaults or an insolvency event of the lessee/debtor. In an industry particularly dependent on leased assets for the provision of services, the Cape Town Convention/Protocol aims to reduce the risks to prospective creditors and lessors, which in turn is expected to lower the costs of aircraft financing and leasing, and eventually lead to a reduction in operational costs.
India acceded to the Cape Town Convention/Protocol on March 31, 2008; however, it does not currently have the force of law in India as Parliament is yet to pass implementing legislation to give effect to all of India's obligations under the Cape Town Convention/Protocol. In 2018, when the Cape Town Convention Bill was tabled (but not enacted) in Parliament, the government clarified that there was a need for a separate legislation as certain provisions of the Cape Town Convention/Protocol were in conflict with the provisions of other laws, such as, the Civil Procedure Code, 2008, the Specific Relief Act, 1963, the Companies Act, 2013 and the IBC. More recently, the draft Cape Town Convention Bill, 2022 was circulated for public comments, but is yet to be tabled in Parliament.
Moratorium under the IBC and the MCA Notification
A significant difference between the Cape Town Convention/Protocol and the IBC relates to the rights of the creditor/lessor to repossess the leased aircraft upon the lessee/debtor's insolvency. The moratorium that comes into effect upon a corporate debtor being admitted to insolvency under the IBC prohibits various actions, including actions to enforce security or repossess the corporate debtor's assets, during the corporate insolvency resolution process ("CIRP") that can last for upto 330 days. Specifically, Section 14(1)(d) of the IBC does not permit any asset in the possession of the corporate debtor (including a leased asset) to be repossessed during the moratorium period. On the other hand, under the Cape Town Convention/Protocol, read together with India's declaration at the time of accession, the administrator or debtor is required to give possession of the aircraft object to the lessor within two calendar months or 60 days of the occurrence of the insolvency related event.1 This difference raised serious concerns among Go First's foreign lessors, who were unable to repossess their aircrafts, following Go First's admission to insolvency.
The MCA Notification was issued pursuant to Section 14(3) of the IBC, which permits the Central Government to notify any transaction, agreement or arrangement to which the moratorium will not apply. As a result of the notification, aircraft lessors will now be able to repossess a leased aircraft and creditors will be able to enforce their security interest on aircraft, aircraft engines, air frames and helicopters, even after an airline has been admitted to insolvency under the IBC.
It is important to note, however, that the MCA Notification is not entirely consistent with the Cape Town Convention/Protocol, which provides for a 60-day waiting period before a lessor can repossess the aircraft. In addition, under Article XI of the Protocol, the aircraft may be retained by the debtor if the defaults (other than the default constituted by opening of insolvency proceedings) are cured within the 60-day period and the debtor commits to meeting its future payment obligations to the lessor. By contrast, the total relaxation from the moratorium under the IBC would mean that aircraft lessors could repossess their leased aircrafts immediately upon an airline's insolvency.
Implications Going Forward
The MCA Notification sends a clear message to the international aviation community that India intends to comply with its obligations under the Cape Town Convention/Protocol. Soon after the notification was issued, the Ministry of Civil Aviation announced that "thisprovisioncreatesasense of confidenceinthemindsof aircraftlessors", and the Aviation Working Group, the international aviation watchdog that had downgraded India's compliance rating in the wake of Go First's insolvency, reversed India's outlook from negative to positive. While aircraft lessors and creditors might be the obvious beneficiaries of this change, airlines in India are also expected to benefit from the lower leasing and financing costs that would result from lessors and creditors having greater confidence in the Indian legal regime to protect their interests.
However, some new issues have emerged post the MCA Notification. First, it is unclear if this exemption applies to ongoing insolvency proceedings where the moratorium is already in effect. Soon after the MCA Notification was issued, Go First's lessors approached the Delhi High Court for deregistration of their aircrafts and also asked that the Directorate General of Civil Aviation ("DGCA") provide an affidavit clarifying its interpretation of the notification.2 However, no authority, including the DGCA, has so far clarified this question and it looks like the amendment's applicability to ongoing proceedings might be left for the courts and tribunals to decide.
Second, excluding aircraft, air frames and helicopters from the scope of the moratorium has important implications for airline insolvencies going forward. Without the protection of the moratorium for the airline's most important asset, it would be next to impossible for an insolvent airline to operate as a going concern during the CIRP. This in turn would make it very unlikely for creditors or debtors to consider using the IBC for resolution of a distressed airline. In some respects, this may be viewed as a positive development as the IBC framework has not been considered ideal for airline insolvencies. Some unique features of the airline industry, such as the high costs of preserving and maintaining the aircraft during CIRP, and the fact that the corporate debtor often does not own the asset that is most critical for providing its services, have made resolving airline insolvencies through the IBC challenging. However, it raises the question of whether an alternate regime is required for distressed airlines, with the recognition that the IBC's largely sector-agnostic approach may not work for certain industries. It also remains to be seen if the Government will take the next step of enacting implementing legislation to harmonize domestic laws with the Cape Town Convention/Protocol as the change brought about by the MCA Notification only addresses a part of the problem.
Footnotes
1. Protocol on Matters Specific to Aircraft Equipment, Article XI, Alternative A.
2. ACG Aircraft Leasing Ireland Ltd. v. Union of India & Ors., Delhi High Court, October 12, 2023
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