GoAir Insolvency Conundrum: A Wake Up Call for the Indian Aviation Sector
Go Airlines insolvency application before the National Company Law Tribunal (hereafter referred to as NCLT) has turned out to be a cry wolf among the aircraft lessors operating in India. In pursuance of a petition filed by Go Airlines (India) Limited, the special bench of NCLT, reported at (2023) ibclaw.in 199 NCLT has instructed the Resolution Professionals to safeguard the assets in possession and take control of Go Airlines in the light of Section 25(1) of IBC, 2016. The direction has been passed in response to an application filed by the lessors of the Aircrafts, who expressed concerns about the necessity for prompt maintenance and service of the aircraft engines.
The aviation industry has shown a pressing growth in a dynamic environment. India has been a significant player in the international aviation sector in recent years, thanks to low regulatory standards. Among the airline companies in India, acquiring aircraft through lease is the new normal. As of 2018, around 80% of India’s commercial aircrafts are leased. One such airline company is Go Airlines, which majorly obtained its aircrafts through leasing arrangements with different aircraft lessor companies.
Section 10 of the IBC deals with the initiation of the Corporate Insolvency Resolution Process (hereafter referred to as CIRP) by the corporate debtor. It allows a corporate debtor, which can be a company or a limited liability partnership, to voluntarily initiate insolvency proceedings against itself. Thus, Section 10 provides an opportunity for a financially distressed corporate debtor to take proactive measures to resolve its insolvency issues and potentially avoid liquidation. Accordingly, M/s Go Airlines (India) Limited filed an application before NCLT under Section 10 in order to initiate the CIRP against it, as the Corporate applicant had been in default with respect to the lessors, suppliers, and financial creditors of the aircraft since 2022.
As soon as the voluntary application for resolution was admitted by NCLT, the scheme of “moratorium period” came into picture by way of Section 14 of the IBC. As a consequence, during this time, the company seeking insolvency resolution cannot be the subject of any other lawsuits or legal actions. The scheme led to a blanket embargo on the transfer of any leased aircraft that Go Airlines had in its possession from the moment the CIRP application was admitted. Meanwhile, the lease agreement between the lessors and Go Airlines was terminated before the admission of the CIRP application by NCLT; however, the possession remained with Go Airlines. The story paved the way to appeals filed against the impugned order of NCLT before the National Company Law Appellate Tribunal National (hereafter referred to as NCLAT).
Bone of Contentions before the NCLAT
One of the prime questions before the appellate body was if there is any impact of termination of Lease agreement on the applicability of scheme of Moratorium to the leased assets. The leased assets, that have not yet been transferred to the lessor from the corporate debtor, will be subject to a scheme of moratorium even if the lease agreement was terminated before the admission of the CIRP application by NCLT.
The counsel for the appellant contended that the lease agreement was terminated before the admission of Section 10 application, and thus the aircraft are no longer the assets of the corporate debtor, and the appellate is entitled for the possession of the impugned aircrafts. Above this, it was contended that impugned assets need prompt maintenance and service. In addition to this, it was also contended that corporate debtors have no ownership rights over the aircrafts, and thus they cannot be taken by the Interim Resolution Professional (IRP) and rather the lessor is entitled to take the possession.
On the other hand, the counsel for the IRP contended that the appellant is proscribed from recovering the assets considering the scheme of moratorium by way of Section 14 of the code. Further, relying on the fact that Section 14(1)(b) does not use the word “legal possession”, it was contended that the Section 14(1)(d) of the code protects any kind of possession.
The NCLAT affirmed the NCLT order initiating CIRP against the Corporate Debtor vide order dated 22.05.2023, reported at (2023) ibclaw.in 326 NCLAT. Interestingly, the IRP and the lessors are free to file applications to the NCLT with regard to their concerns against the leased aircraft. The NCLAT opined that the adjudicatory authority has not yet considered the concern that is raised in the appeal, as a consequence, the authority has not adverted to the issue. The NCLAT insisted that the Adjudicating Authority shall take appropriate decisions in accordance with law when it comes to any application filed under Section 60(5). In the light of above reasoning, the NCLAT granted liberty to both the parties to make an application before NCLT under Section 60(5) and let the NCLT to answer the question first.
The NCLAT order upholding the NCLT order has raised an alarm among the aircraft lessors operating in India. In this regard, it is also important to note the ruling by the NCLAT that moratorium under Section 14 of the IBC applies only to properties owned by the corporate debtor. Thus, the properties should be in the rightful possession of the corporate debtor for the moratorium to be applicable. However in the present case, as is evident, the aircrafts are owned by the lessors and not by GoAir.
Looking at the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipments (2001)
To deal with such insolvency related matters in the Aviation industry, India needs to ratify the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipments (2001), first signed in Cape Town (hereafter referred to as Convention). It is necessary to provide clarity and instil trust in Aircraft Leasing companies vis-à-vis the insolvency framework of India. As per Article XI, Alternative A of the Convention, once the insolvency proceedings have been initiated, the insolvency administrators or debtors are empowered to handle the aircrafts operated by the debtor for curing the defaults subsisting against the latter, within a given waiting period. However, once the waiting period or the date on which the lessor is otherwise entitled to take back the possession of the aircraft ends (whichever is earlier), the lessors of aircrafts can apply for deregistration or regaining possession of aircrafts from the debtors. The countries that adopt the Convention have the discretionary power to determine the waiting period for their respective jurisdictions. The prescribed waiting period in most jurisdictions like UK and Ireland is 60 days, whereas in Brazil it is 30 days.
Cape Town Convention must have primacy over other legislations
The countries that have adopted the Convention give it an overriding effect over all other laws. The UK being one of countries to ratify the Convention makes it clear vide para 55 of Schedule 1 of the Corporate Insolvency and Governance Act, 2020 that the moratorium requirements enshrined in it do not override the Convention. Therefore, in the UK, the moratorium on lessors after the initiation of insolvency proceedings for airlines companies is only 60 days.
India too, should ratify the Convention so that the aircraft lessors can take back the possession of their aircrafts within 60 days as opposed to facing a long 180-day moratorium (which is further extendable upto 90 days) as per Section 14 of the Insolvency and Bankruptcy Code, 2016. This long period of inaction will have far-reaching consequences on the airline industry. It will force the lessors to demand for higher deposits and increased monthly rents on the aircrafts leased by them. This will in turn lead to higher ticket prices thereby making Indian airlines companies less competitive in the market.
Recently, the Hon’ble Delhi High Court in Accipiter Investments Aircraft 2 Ltd. Vs. Union of India & Anr. (2023) ibclaw.in 491 HC has in a welcome step allowed the lessors access to the aircraft for maintenance and repair work, however it falls short of granting physical possession to the lessors and allowing them to remove parts from those aircrafts. The DGCA must deregister a flight once condition imposed under Section 30(7) of Aircraft Rules(hereinafter Rules) have been fulfilled. However, in the present case the DGCA refused to deregister the aircraft citing moratorium imposed by the NCLT order dated 10th May 2023. The Delhi High Court also mentions in its order that in view of the Cape Town Convention and Section 30(7) of the Rules, the DGCA must act accordingly without any requirement for the permission of lessee before taking any action. The Court also held that lessors had the right to file an writ of Mandamus under Article 226 since the DGCA had failed to comply with its duties.
In light of the NCLT order, some of the biggest international aircraft leasing companies have labelled India as a “risky jurisdiction” for leasing aircrafts. Furthermore, the UK-based Aviation working Group assigned a “negative outlook” to India because of “DGCA’s failure to process deregistration application for aircraft whose leases were terminated prior to the intimation of the moratorium” and also retained India in the “CTC Compliance Watchlist”. All these events do not bode well for the aviation sector of India and it is high time that the Parliament takes initative to ratify the Convention to which India became a signatory in 2018.
Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.