Bahram Vakil and Gausia Shaikh*

The period between the 1980s and 1991 saw multiple airline insolvencies in the United States of America (US). Referring to the time, it has been said that the US air carrier industry had conclusively proven the oldest adage of aviation: ‘what goes up, must come down‘. 1 On October 2, 2017, Monarch Airlines of the United Kingdom (UK) was placed into administration with over 1,10,000 passengers stranded overseas, and more than 3, 00,000 bookings for future holidays lost, affecting a further three quarters of a million people. 2 Closer home, Kingfisher Airlines discontinued its operations in 2012 and 2013 saw its licenses being revoked by the Directorate General of Civil Aviation (DGCA), with multiple allegations of willful default of loans against the promoters. Advocates of the implication of a political economy on the law of the land argue that this hastened the enactment of the Insolvency and Bankruptcy Code, 2016 (Code). Three years since the enactment of the Code, we have another major airline in insolvency. On April 17, 2019, Jet Airways (India) Limited (Jet Airways) announced that it would cease its operations and on June 20, 2019, the corporate insolvency resolution process (CIRP) of the company began. This is the first airline insolvency under the Code and is bound to bring forth unique issues arising out of an insolvency in the aviation sector.

In this article, we look at some of these issues, observe the treatment of such insolvencies in other jurisdictions such as the UK and the US and analyse the Indian scenario to give an overview of the way forward.


The airline industry in India is a major contributor to the Gross Domestic Product (GDP). It presently contributes USD 72 billion to GDP.3 A 20-year forecast made by the International Air Transport Association (IATA) suggests that the growth of the Indian aviation industry will surpass the UK and India will become the third largest aviation industry with 278 million passengers in 2026. The IATA has further predicted that by the year 2035, the Indian aviation industry will have to cater to 442 million passengers. 4 These predictions seem believable when we see that India has already seen a 14.1 per cent growth in passenger traffic in the last five years.5

Further, the central government has also introduced the RCS – UDAN (Regional Connectivity Scheme – Ude Desh ka Aam Nagrik), which proposes to connect 27 currently served airports, 12 currently underserved airports and 31 currently unserved airports while also setting an airfare cap of Rs. 2500 for approximately one hour of flying. Flights have already commenced from 28 airports under the scheme. Despite the above, India is among the costlier places in the world to run a fleet of planes because of higher taxes, aviation turbine fuel charges and airport charges. 6 Added to the fray, is the growing competition of low-cost airlines which further erodes the margins for full service airlines. Not only have low-cost airlines led to increased demand for air travel but have also compelled full service carriers to provide competitive pricing while incurring significant costs. In the past few years, researchers such as Kolte et al. (2017) have used the Altman Z Score Model to predict airline insolvencies in India and have found Kingfisher Airlines and Jet Airways to be the airlines which were most likely to go bankrupt. 7 The Code, like most cornerstone commercial legislations like the Companies Act, 2013, Indian Contract Act, 1872 or the Sale of Goods Act, 1930, has been designed to be a generic law applicable to all industries (barring financial service providers) across the board. However, as companies in diverse sectors enter the insolvency process, the flexibility and adaptability of the CIRP is being tested. Meeting the strict timelines under the Code, running of an airline business as a going concern during the CIRP or dealing with the multitude of lessor claims arising out of such insolvencies have posed new questions of law before the Code.


Be it the nature of operations or the complexities of aircraft financing and asset preservation, multiple issues contribute to the difficulties in dealing with insolvencies in the aviation sector. In this section, we discuss some of these issues.

Aircraft Financing

The primary assets of an aviation company are aircrafts. However, owning an aircraft is often not economically feasible for such companies. This leads to airlines engaging in rather complicated financing arrangements not only with financial institutions, but also with the aircraft manufacturers themselves. 8 Being at the shorter end of the deal, airline companies tend to provide heavy collateral to the financiers in such arrangements thereby adding to the encumbrances on its limited assets. The other method of acquiring aircrafts is through leasing. Such leases may either be financial leases or operational leases. The title to the aircraft may or may not pass to the airline company upon entering into a financial lease, depending upon the terms of the lease agreement. Therefore, it is likely that upon default, the lessor would exercise its proprietary interest over the aircraft and obtain possession of such aircraft, thereby further limiting the scope of assets available with the airline.

Further, when the company is undergoing CIRP, there is also the issue of categorising claims under such leases as financial and operational debt and verifying claims which may include accelerated payment of rent. There is also a lack of clarity as to the treatment of costs, expenses and future losses when dealing with such claims. During the CIRP, all claim amounts are admitted as on the insolvency commencement date. However, this may be in conflict with contractual rights of the lessors and the question remains as to whether the Code will override contractual rights of the lessors.

Legal Requirements for Running the Company as a Going Concern

The aviation industry requires a niche set of skills, training and knowledge. This has, in turn, led to the development of licenses, rules, regulations and other requirements essential for running an airline as a going concern. For instance, the Aircraft Rules, 1937 (Aircraft Rules) requires an airline to obtain an Air Operator Certificate subject to compliance with Schedule XI of the Aircraft Rules.

This certificate may be cancelled by the DGCA, in its discretionary powers, when the aircraft stops operating. The airline cannot operate without such certificate. Further, for continuing to be eligible to hold such certificate, the airline requires the appointment of an Accountable Manager (AM). The AM is a person who has full financial authority over the airline. During CIRP, since the Resolution Professional (RP) has such authority, she becomes the AM and has to take over the corresponding risks and liabilities as stipulated by the DGCA. The AM is also required to have a team of skilled, specialised and qualified personnel who must be appointed during CIRP if they cease to provide their services upon commencement of CIRP. It is critical for the RP to have access to a team of skilled professionals and ensure compliance with all applicable laws and regulations to perform its duty of running the Company as a going concern. Very often, the RP or the firm she is associated with may not have in-house expertise in this sector at which stage it becomes critical for the RP to be able to persuade senior management of the airline company to continue to be in employment of the entity so as to ensure regulatory compliances.

Assets Preservation

The most critical assets for an airline are its aircrafts, airport slots and traffic rights. There are various concerns with respect to each of these assets which must be dealt with for preservation of their value.

For instance, every aircraft is required to be registered with the Central Government for it to operate. The primary concern with respect to such aircrafts during the CIRP is the issue of deregistration during the CIRP. Under Rule 30(7) of the Aircraft Rules, registration of the aircraft may be cancelled within five working days, without seeking consent or any document from the operator of the aircraft or any other person, if an application is received from a holder of an Irrevocable Deregistration and Export Request Authorization (IDERA). It is essential for the courts to conclusively decide whether the exercise of such an IDERA would fall within the scope of prohibition under the moratorium under the Code.

In respect of the other assets of the airline, slots and traffic rights are allocated to an airline company pursuant to a fixed process and are not owned by the airline company as such. Once the operation of the airline ceases, there is a risk of these slots and traffic rights being allotted to competing healthy airlines. The civil aviation rules currently do not provide for a due process for reversion of those rights to the restructured airline. Therefore, the RP is required to initiate discussions with the DGCA, the Ministry of Civil Aviation and airport authorities for preservation of such slots and traffic rights on an ad hoc basis. If a viable business plan is plausible for the airline company then the Ministry of Civil Aviation and DGCA are more likely to consider protecting these assets of the airline company. However, the unavailability of these assets during the CIRP and related uncertainty may discourage potential resolution applicants and may adversely affect the resolution of the airline company. It is, therefore, a circular problem where the possibility of asset preservation depends on the preservation of the asset in the first place.

Treatment of Claims

In addition to the claims arising out of debts owed to financiers and lessors, a major portion of the claims against an insolvent airline company are claims of consumers. In the event of insolvency of airline business, consumers face two types of losses – (a) financial loss (because they have paid for tickets that become worthless); and (b) personal welfare losses if they are left stranded abroad (this could be on account of delay and disruption, discomfort, anxiety and stress, and in some cases even health and employment problems).9 A consumer may suffer further loss basis her specific circumstances. Further, in terms of filing of claims one must look at the source of purchase of the ticket to verify and examine such claims. There are two ways for a consumer to purchase an airline ticket – (a) purchase of a ticket from the airline itself through its physical counters or its website / mobile application; and (b) through a travel agency. If a consumer has purchased a ticket from the airline itself, the consumer will herself have a claim against the insolvent airline company. However, if the consumer has purchased a ticket through a travel agency, it may seek a refund and compensation for loss from the travel agency (subject to the cancellation policy of the travel agency). In such a case, the travel agency will, in turn, file a claim with the airline company for the amount claimed by the consumer. In addition to the above, travel agents in India also have the option of seeking a refund from the IATA. IATA settlement service between airlines and travel agents (known as the BSP or Billing and Settlement Plan), may allow IATA10 to reimburse travel agents for monies submitted to the airline, depending on the national bankruptcy legislation and the specifics of the airline’s participation with IATA. IATA may then file a claim against the airline company. Another entity from which the consumer may claim refund / compensation is the credit card company, if she has purchased the ticket using a credit card. The credit card company may then file a claim with the airline company.

Assessing the scope, nature of debt and amount of such claims may prove to be an onerous task for the RP under the Code, especially in view of the sheer volume of such claims and of the possibility of duplication of claims for the same transaction.

Cross-Border Implications

The very nature of the business of an airline company leads to a situation where the assets of the company may be located in more than one jurisdiction. In such case, it may be possible that insolvency proceedings are initiated in more than one jurisdiction. Such is the case in the insolvency of Jet Airways. If the jurisdictions involved have a legal framework for dealing with cross-border insolvency, it is easier to ascertain how such issues will be dealt with. However, this will be subject to the mutual relationship between such jurisdictions. Where a legal framework for cross-border insolvency is itself not available in either of the jurisdictions, the proceedings rely heavily on voluntary cooperation between the RPs /administrators/judicial fora of such jurisdictions. Matters further complicate when aircrafts of the airline are lying in either jurisdiction. In such case, not only are the operations of the company adversely affected but there is also a possibility that the creditors of the jurisdiction where the aircraft is grounded obtain returns from the proceeds of sale/ auction of such jurisdiction while the estate of the insolvent vis-à-vis the other creditors diminishes.

Sensitive Timelines

Aircrafts depreciate rapidly if not operated and maintained regularly, they lose value at tremendous speed. Further, pilots as skilled workmen with niche technical knowledge have high demand in the market and delays in resolution may cause these pilots to be hired by competing airlines. Both these elements of operating an airline are likely to adversely affect the value of the company from the perspective of potential resolution applicants. Therefore, protection of these two vital elements of running an airline business must be the top priority of all stakeholders. In addition to the above, data suggests that 8 million jobs are supported by the aviation industry. 11 Protection of interests of such employees should also be prioritised during CIRP. If we look at the example of Jet Airways itself, 20000 employees have been adversely affected by the insolvency of the company. The National Company Law Tribunal (NCLT) has also observed this to be a matter of national importance. 12In view of the above, it is imperative that a decision to resolve /liquidate an airline is taken expeditiously.

Identifying the unique issues mentioned above, various jurisdictions have developed or are in the stage of developing legal provisions focused specifically on dealing with insolvencies in the airline sector. In the next section, we look at the legal framework and practice in some of these jurisdictions.13


US and Protection of Secured Creditors

The US Congress identified that the great expense of transportation equipment combined with the relative financial instability of the transportation industry justified greater protection for secured creditors and lessors of aircraft. 14Consequently, section 1110 of the Federal Bankruptcy Code (US Code) forces debtor airlines to make decisions very early in their reorganisation efforts regarding their most important asset – their aircraft.15 The section also covers aircraft engines, propellers, appliances, or spare parts.16 It states that the right of a secured party with a security interest in the aircraft and other equipment as mentioned above, or of a lessor or conditional vendor of such equipment, to take possession of such equipment in compliance with a security agreement, lease, or conditional sale contract, and to enforce any of its other rights or remedies, under such security agreement, lease, or conditional sale contract, to sell, lease, or otherwise retain or dispose of such equipment, is not limited or otherwise affected by any other provision of the US Code, 1978. 17 The exception to such exercise of rights by the secured creditor is the fulfilment of all obligations by the airline company under the security agreement, lease or conditional sale contract, within 60 days of the order for relief under the US Code.

UK and Treatment of Consumers

Post the Monarch airline debacle, the UK constituted an Airline Insolvency Review (Review) to assess consumer protection in the event of an airline or travel company failure.18 As discussed above, insolvency of an airline causes loss to consumers who have purchased flight tickets in advance. The final report of the Review makes recommendations seeking, among other things:

  • establishment of a formal repatriation protection scheme to protect any air passenger whose journey began in the UK, and who has a ticket to return on an airline that becomes insolvent while they are already overseas;
  • improvement of the availability of rescue fares and enhancement of passengers’ ability to claim them;
  • the introduction of a more complete regulatory toolkit which would provide for, among other things:
    • Annual certification to confirm financial fitness of the company;
    • Development of repatriation plans and access to data as required;
    • Requirement for the Board of a UK airline to notify the Civil Aviation Authority when there is a material adverse change in its financial situation; and
    • Ability to grant a temporary special purpose license to enable an airline to conduct a repatriation operation, even where the airline does not have a future.
  • enhancement of existing refund protection by increasing consumer awareness and uptake of refund protection; minimising unnecessary duplication of protection; and helping passengers to make a claim swiftly and easily.

While the recommendations have not yet been transposed into law, India may derive from the observations made in the Review when dealing with consumer claims.

Cape Town Convention and Opposable Rights to High-Value Aviation Assets

The Convention on International Interests in Mobile Equipment was concluded in Cape Town on November 16, 2001 (CT Convention), as was the Protocol on Matters Specific to Aircraft Equipment (Protocol). 19 The primary aim of the Convention and the Protocol is to resolve the problem of obtaining certain and opposable rights to high-value aviation assets, namely airframes, aircraft engines and helicopters which, by their nature, have no fixed location. 20 Since these assets have no fixed location, there is negligible predictability of outcomes for the financier / lessors in terms of the enforcement of their rights to such assets. Owing to the differences in laws pertaining to leases and security interests across the globe, the enforcement of rights by such financiers / lessors may depend on multiple factors such as (a) where the asset is located; (b) where the insolvency proceedings are conducted; and (c) what is the level of coordination of proceedings between the jurisdictions where the asset is located and the insolvency proceedings are being conducted, if not conducted in the same place. These uncertainties hamper the provision of financing for such aviation assets and increases the borrowing cost. 21

The CT Convention read with the Protocol permits chargees to enforce the following remedies:

  • take possession or control of any object charged to it;
  • sell or grant a lease of any such object;
  • collect or receive any income or profits arising from the management or use of any such object;
  • procure the de-registration of the aircraft (to the extent that the debtor has at any time so agreed and in the circumstances specified in the CT Convention); and
  • procure the export and physical transfer of the aircraft object from the territory in which it is situated (to the extent that the debtor has at any time so agreed and in the circumstances specified in the CT Convention).

65 countries are parties to the CT Convention and are adopting its provisions by way of legislation. While India is also a signatory of the CT Convention, it has not yet adopted its provisions in the domestic law.


In terms of changes in the laws dealing with airlines post the CT Convention, the Ministry of Civil Aviation decided to make suitable changes in the Aircraft Rules, 1937 in line with the provisions of the CT Convention and Protocol. These changes provide for deregistration and export of aircrafts in accordance with the provisions of the CT Convention/Protocol. 22 Further, owing to some conflict between existing laws and the CT Convention and Protocol, the Ministry of Civil Aviation has also proposed the enactment of the Cape Town Convention Bill. However, while the Bill was proposed in 2018, it has not yet been passed. As discussed above, the Code is sector agnostic which poses its own set of challenges. Each passing day in the CIRP of Jet Airways is likely to raise issues in the context of insolvencies in this sector and there is a need to devise specific solutions to some of these issues. Consultations with stakeholders and the resolution professional dealing with the insolvency of an airline may be helpful to the policy and law makers in deciding whether this sector requires any specific insolvency related legislative framework like the US or as contemplated in the UK for dealing with the issues unique to the aviation sector. However, what is critical is the need to appreciate the unique nature of this sector. The Code contains a non-obstante clause which clarifies that to the extent there is any conflict with any other law, then the Code shall prevail.

However, perhaps for the aviation sector there is a need to go beyond the non-obstante clause and there is a need for amendments to civil aviation rules and regulations to ensure that an airline is able to continue trading as a going concern even during insolvency proceedings.


1Sabino, A. (1992), Flying the Unfriendly Skies: A Year of Reorganizing Airlines, Aircraft Lessors, and the Bankruptcy Code, J. Air L. & Com. 57, 841

2 Department of Transport, London, Airline Insolvency Review, (March 2019) .

3 National Investment and Promotion Facilitation Agency, (August 2019)

4International Air Transport Association, Realizing India’s Aviation Potential (October 21, 2016)- Press Release No.: 63.

5 Economic Diplomacy and States Division, Ministry of External Affairs, India Surging Ahead, (August 2019) .

6Kingfisher – King of Good Times Forced to Leave the Sky Castle, MarketLine (2014).

7Kolte et al. (2017). Predicting Financial Distress of Firms. A Study on Bankruptcy of Kingfisher Airlines, 10th Annual Conference of the EuroMed Academy of Business, euroMed Press.

8 Ripple, G. (2002). Special Protection in the Airline Industry] The Historical Development of Section 1110 of the Bankruptcy Code, 78. Notre Dame Law Review. 281.

9 Supranote2.

10 Airline Bankruptcy and Passenger Protection (2018). International Air Transport Association

11Supra note 5.

12State Bank of India v. Jet Airways (India)Limited, C. P. 2205 (IB)/MB/2019.

13This section only covers legal provisions / recommendations for legal provisions to be made specifically in the context of airline insolvencies.

All other provisions of the existing insolvency and bankruptcy laws which are not specific to the airline industry have not been described.

14Supra note 8.

15Supra note 8

16 Section 1110(3), US Code.

17 Section 1110(1) of the US Code.

18 Supra note 2

19 International Civil Aviation Organisation (ICAO) and International Institute for the Unification of Private Law (UNIDROIT) (2001), Cape Town Convention and Protocol,

20 Ibid.


22Ministry of Civil Aviation. Proposal for enactment of the Cape Town Convention Act, 2018 for implementation of the Cape Town Convention/Cape Town Protocol in India (October 08, 2018)


*(Mr. Bahram Vakil is a Partner at AZB & Partners and Ms. Gausia Shaikh is an Associate at AZB & Partners)

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