India took a crucial step towards aligning its aviation industry with global norms on October 3, 2023. The Ministry of Corporate Affairs (MCA) issued a Notification exempting aircraft, aircraft engines, airframes, and helicopters from the restrictions imposed by Section 14(1) of the Insolvency and Bankruptcy Code (IBC), citing the “Cape Town Convention on International Interests in Mobile Equipment and its Protocol on Matters Specific to Aircraft Equipment” (“Convention”) (“Notification”). While India became a party to this Convention in 2008, formal approval and ratification have been pending. Despite an attempt to ratify it through the Cape Town Convention Bill in 2018, parliamentary approval remained elusive. This Notification from the MCA represents a watershed moment in the treatment of aircraft-related assets within airline insolvency proceedings. It introduces a transformative shift with far-reaching implications, particularly for lessors. This article seeks to provide a comprehensive exploration of the contextual significance of this development, delving into its multifaceted implications and the potential industry-wide transformations it may catalyze.
Developments Behind Notification
The recent MCA announcement addressing the moratorium under Section 14(1) of the IBC is a watershed moment for India’s aviation industry. To truly comprehend its significance, one must first understand the particular geography of the Indian aviation sector.
According to Price Waterhouse Cooper’s 2021 Report on “Aircraft Leasing in India: Ready to Take Off”, 80% of India’s commercial aircraft fleet is leased, which is significantly more than the worldwide average of 53%. The widespread practice of leasing aircraft and engines in India offers a pivotal advantage as it ensures that airlines maintain a higher level of liquid operating capital. This, in turn, enables them to effectively manage operational expenses, ultimately translating into more affordable ticket pricing. In a price-sensitive market like India, this dynamic proves crucial in maintaining consistently high seat occupancy rates on flights. The ripple effect is not only augmented earnings for airlines but also the maintenance of ticket costs at levels that are likely to attract a growing number of passengers.
Despite these benefits, a slew of insolvency actions involving Indian airlines, ranging from Kingfisher Airlines to Jet Airways and, most recently, GoAir, revealed a major concern. The moratorium imposed by Section 14(1) put lessors in a dilemma, preventing them from repossessing high-value assets such as aeroplanes and engines. This prompted worries and fuelled speculation among lessors that airlines like GoAir, who chose voluntary insolvency under Section 10 of the IBC, were likely abusing the rules to avoid leasing commitments. The consequences of this scenario went beyond national bounds. The Aviation Working Group, a worldwide watchdog that monitors Convention compliance for contracting governments, reduced India’s compliance score to 2 from 3.5 out of a possible 5 and placed India on its blacklist in May 2023. The worry was that the moratorium, as defined in the IBC, would force lessors to charge an upfront premium to compensate for prospective losses in the event of lessee insolvency. This, in turn, might result in higher lease costs for Indian operators, compounding an already complicated situation.
In light of these circumstances, the release of this Notification holds paramount significance. It hopes to rebuild trust in the leasing business by exempting aircraft from the moratorium. This policy is expected to establish India as an enticing base for aircraft leasing, possibly changing the sector’s dynamics. It is worth noting, however, that the Notification does not specifically specify that it applies retroactively. As a result, its advantages will be seen only if courts decide to apply it retroactively. This prospective application could serve as a much-needed lifeline for lessors entangled in insolvency proceedings, underscoring the profound and wide-ranging impacts of this legislative pivot.
Existing Arrangement & Convergence with Insolvency
As a contracting state, India follows the Convention which includes cases in which a debtor acquires a foreign interest in an aircraft while in India, or when the aircraft is registered with the Directorate General of Civil Aviation (“DGCA”). Furthermore, India has expanded these restrictions to internal transactions under certain situations. A resolution professional gets jurisdiction over the debtor’s assets in the course of bankruptcy proceedings governed by the IBC. Section 14(1) places a moratorium on measures such as property recovery or re-possession by owners or lessors, as well as foreclosure or enforcement of security interests.
Secured creditors or lessees with registered interests may obtain possession of aviation products during bankruptcy proceedings under the Convention, after a two-month waiting period from the start of proceedings, without requiring judicial intervention. It is significant to note that the range of bankruptcy procedures under the Convention is greater than that of the IBC, embracing both corporate insolvency resolution and liquidation. During this time, the debtor or insolvency professional has the option of keeping the aircraft products by resolving past defaults and committing to future obligations. Nevertheless, a payment moratorium imposed during the corporate insolvency resolution process may preclude this alternative. If the default fails to be resolved during the waiting time, the secured creditor obtains the right to seize or control the aviation products, as well as begin de-registration, export, and physical transfer from India. An “Irreversible De-Registration and Export Request Permission” (“IDERA”) verifying the discharge of earlier registered interests is required for this process. The debtor or insolvency administrator must also guarantee that the aircraft object’s worth is preserved and maintained during this period, without obstructing its usage for this reason. During this period, creditors may also seek interim remedies under relevant law.
The amendments made to India’s Aircraft Rules in 2015 included Rule 30(7), which requires the cessation of an Indian-registered aircraft’s registration within five working days after receiving a de-registration application from an IDERA holder. This application must be supported by the specified paperwork, and de-registration does not impact the government’s rights to unpaid dues. Later, in 2017, Rule 32A was added to facilitate export after registration cancellation under Rule 30(7). The DGCA must ensure outstanding dues are paid and safety regulations are followed. The DGCA also issued an “Aeronautical Information Circular” providing guidelines for creditors post-de-registration. While these changes eased the process for aircraft creditors, complexities and legal proceedings still arise. Despite these developments, the procedure for aircraft creditors remained difficult, resulting in judicial conflicts observed in cases like “DVB Aviation Finance Asia PTE Ltd. v. Directorate General of Civil Aviation” and “Wilmington Trust SP Services (Dublin) Limited v. Directorate General of Civil Aviation”. These issues are addressed in the proposed Cape Town Convention Bill.
In a pivotal case involving GoAir, the National Company Law Tribunal imposed a moratorium, effectively preventing lessors from reclaiming aircraft and engines. This decision underscored the precedence of the IBC over international conventions. In response, the Delhi High Court granted permission for periodic inspections and maintenance activities on aircraft and engines located at various airports under existing law, a decision later affirmed by the Supreme Court. These contrasting legal frameworks intersect in complex ways, necessitating a nuanced approach to navigating insolvency proceedings within the aviation sector. These legislative amendments, coupled with updates to Aircraft Rules, signal a sustained endeavour to strike a harmonious balance between domestic bankruptcy regulations and international obligations, providing both creditors and debtors with clearer guidance in such scenarios.
Concluding Thoughts
The recent Notification by the MCA represents a pivotal moment in the resolution of airline insolvencies, particularly in the context of aircraft-related assets. It signifies a significant leap towards aligning India’s aviation sector with global standards, potentially redefining the landscape for aviation stakeholders. However, the question of its retrospective application casts an intriguing light on its practical implications. The MCA’s decision comes at a critical juncture, offering a beacon of hope for lessors currently grappling with the challenges imposed by the existing moratorium, as exemplified in GoAir’s insolvency case. This situation now stands as a litmus test for the Notification’s real-world impact. It underlines the necessity for a nuanced approach in implementing this policy shift. In essence, this development, combined with the ongoing endeavours to harmonize international conventions with domestic legislation, underscores India’s dedication to creating a more conducive environment for the aviation industry. The ripple effect of this move is poised to be far-reaching, ultimately reaping benefits for all stakeholders involved. This Notification not only addresses immediate concerns but also sets a precedent for a more progressive and globally integrated aviation landscape in India.
This article is written by Mr Aayush Akar & Mr Aditya Gautam, students of NLU Odisha.
Author Bio
