Turbulence: IBC and Insolvency Proceedings in the Indian Aviation Sector
(Third-year law student at National Law University, Delhi)
The Indian aviation market has positioned itself as one of the top-performing and fastest-growing sectors among other countries and is anticipated to handle around 1 billion journeys annually by 2023, indicating a promising future ahead. But, this is in stark contrast with the financial stress faced by the airline companies currently which is reflected from the cases of Kingfisher and Jet Airways. A mix of both market forces and government intervention factors are responsible for the same. In the former, factors such as rising fuel costs and the value of the Indian rupee are to blame, while in the latter, the establishment of a price cap on regional domestic flights has had unfavourable effects. As a result, only companies like Indigo are competing in the market, but this has cost many full-service airlines a substantial amount of money because they didn’t adopt a low-cost strategy for their business.
This research article examines the era prior to the passing of Insolvency and Bankruptcy Code (‘IBC’) 2016 and the manner in which the court has dealt with such insolvency proceedings cases like the major case of KingFisher Airlines (‘KFA’). Furthermore, it analyses the implications of the IBC Code in dealing with insolvencies in the aviation sector in India and for the same this article examines the case of Jet Airways which concluded a few months back. This article also analyses the insufficiency of IBC Code in dealing with the airline insolvencies and highlights the need for a comprehensive separate framework to implement the Cape Town Convention (‘CTC’). Lastly, the article in the end concludes by elaborating on some suggestions to ensure a justified conclusion of the insolvency proceedings in the airline industry with the changing times.
Problems faced by Aviation sector: Rising ATF Prices and VAT
India is currently the seventh largest civil aviation market worldwide and is expected to surpass UK to become third largest air passenger market by 2024. The competitive nature of the aviation sector has led to a significant rise in the ticket prices coupled with rising Aviation Turbine Fuel (‘ATF’) prices. Currently, ATF is not covered within the ambit of Goods and Services Tax (‘GST’) meaning that both central’s excise duty and state-level value-added tax (‘VAT’) are imposed on it. The ATF prices constitute around 40% of the total operating costs of the airlines and the fact that India derives almost 85% of its oil requirements through imports highlights the need to reduce the taxes on the fuel prices.
Earlier the ATF prices were decided through an Administered Price Mechanism (‘APM’) which ensured fixed profit margins of the Oil Marketing Companies (‘OMC’), but later with the burden of subsidies falling on the shoulders of the government, they passed the ATF price determination on the market forces i.e. the OMCs.
Currently the Indian carriers pay approximately 65% more than the international counterparts. Subsequently, one of the GST recommendations in 2020-21 has been to include ATF under the ambit of GST so as to ensure the benefit of input tax credit. But till the time these GST recommendations are being implemented, the aviation ministry has urged the states to lower the VAT taxes to 1-4% range. The same was bolstered with the fact that since VAT constitute just a miniscule part of the state’s revenue, thus the reduction in VAT taxes can lead to increase in aircraft movements without any negative impact on the revenue collection of the states. This increased aircraft connectivity will in turn help promote tourism, employment generation and output growth in the Indian aviation industry.
Pre-IBC Era: Insolvencies in Aviation Sector
In the last decade, there has been a series of bankruptcies in this sector, such as Kingfisher stopped its operations in 2012, cash crunch faced by Spice Jet 2014 and in the latest Jet Airways suspended its operation in 2019. Before the passing of the Insolvency and Bankruptcy Code, 2016 the insolvency proceedings in the aviation sector were dealt under Section 433 r/w Section 434 of the Companies Act (‘CA’) 1956 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (‘SARFAESI’) 2002.
In 2005 Kingfisher began its commercial operations but after the economic recession of 2008 it was caught up with massive outstanding dues such as airport fees, service tax, salaries to employees, debt owed to various banks. Unfortunately, its losses had mounted to a frightening 7,000 crores by 2012, prompting it to seek financial aid from the government, but it was rejected; instead, the Directorate General of Civil Aviation (‘DGCA’) terminated its licence, leading Kingfishers to cease operations in December 2012.
In Kingfisher Airlines Limited v. State Bank of India, the court revisited the decision given by the single judge bench. In this instance, the bankrupt lessee argued that because its lease included a buy option, it also possessed ownership rights. The DGCA also required a No Objection Certificate from the lessee before approving the lessor’s acquisition of the aircraft to this the Delhi High Court ruled that the DGCA erred in requiring a No Objection Certificate from the lessee and ordered deregistration.
As per a number of decisions, courts have historically been hesitant to accept de-registration by the aviation authority, creating bad precedents for aircraft leasing and discouraging lessors and the same has been worsened further by the courts’ preference for the non-consensual rights of government entities above those of lessors.
During the pre-IBC era, Indian courts relied on the provisions of the Convention on International Interests in Mobile Equipment (‘Convention’) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (‘Protocol’) on numerous occasions. In Ireland Ltd Ors. v. Directorate General of Aviation, the facts of the case were such that Spicejet Limited (respondent) defaulted on the payment of the rent as stipulated in the lease agreement and the petitioner demanded the re-delivery of the aircraft objects, placing its reliance on both the Convention and the Protocol.
The court in the aforementioned case held that Article 51(c) of the Indian constitution when read in consonance with Article 26, 27, 31 of Vienna Convention the contracting State is obviously obligated not only to stay bound by the provisions of a treaty entered into by it, but also not to invoke internal law (read municipal law) as a rationale for failing to execute its obligations under a treaty. They clarified the process of creditors seeking recourse before the DGCA under Article IX of the Protocol, and asserted that the court cannot prevent the de-registration process on the tenuous grounds of equity because it would violate the prerequisites of the Convention and Protocol to which India is a signatory.
The Delhi High Court recognised the required character of Rule 30(7) of the 1937 Aircraft Rules and affirmed the DGCA’s responsibility to deregister an aircraft based on an irrevocable deregistration and export request authorization. Thus, this case law has dealt extensively with India’s foreign duties under the Cape Town Convention and Protocol, as well as deregistration; however, no court has directly addressed the actual export of an aircraft from India under the convention and protocol.
Post IBC Era: Insolvencies in Aviation Sector
Jet Airways halted operations in 2019 and has been undergoing a resolution procedure under IBC almost two years now. The majority of Jet’s planes have been repossessed by leasing firms, and starting with the few planes that remain in India will be a tough and costly process. The Resolution Plan prepared by the consortium of Mr Murari Lal Jalan and Mr Florian Fritsch, is hereby accepted and will be binding on the Corporate Debtor, its workers, members, creditors, guarantors, and any stakeholders engaged in the Resolution Plan, including the Central Government, any State Government, or any local body to whom a debt originating under any legislation in effect is owed.
The court declined to interfere with the order of admission of application filed by the ‘State Bank of India’ against ‘Jet Airways (India) Limited’ under Section 7 of IBC Code, and thus the joint ‘Corporate Insolvency Resolution Process’ will continue in accordance with IBC. According to the insolvency resolution plan, Jet Airways plans to resume international operations and run all of its historic domestic slots in India. However, recently the lenders and resolution applicants have been at odds on the resolution plan’s implementation and have expressed their disapproval regarding the same. According to official reports, the Kalrock Capital-Murari Lal Jalan consortium is planning to file a Supreme Court appeal against a decision by India’s National Company Law Appellate Tribunal (‘NCLAT’) directing it to settle unpaid provident fund and gratuity dues of Jet Airways employees. Thus, it remains to be seen what more developments will happen in the current case, especially given the disagreements over the Resolution Plan as the same could not be modified as that would be in breach of Section 31 of IBC Code.
In the post-IBC period, there is considerable doubt as to whether the court will use the Convention/Protocol or Section 14(1)(d) of the IBC; because the CTC bill has not yet been approved as a ‘Act,’ the courts will depend on the IBC law to make judgements. Given that operational leasing agreements account for the majority of lease transactions in India, lessors in these agreements would be considered as ‘operational creditors’ under IBC. This will limit their decision-making and bargaining power with the Committee of Creditors (‘CoC’) during the bankruptcy proceedings or the adoption of the resolution plan.
Section 14(1)(d) specifically stipulates that during the moratorium, the lessor may not recover any property in the ownership of the corporate debtor. Furthermore, Section 14(2) of the IBC Code prohibits the suspension of essential goods and services while the Corporate Insolvency Resolution Process (‘CIRP’) is under progress. Hence, there is difference regarding the moratorium period and suspension of essential goods and services in both IBC and CTC convention.
Also worth noting is that both the CTC law and the IBC Code have non-obstante clauses, which are clauses that override the impact of other legislations, meaning that there is a disagreement about which legislation is superior to the other. The case of Solidaire India Ltd. settled this quandary and established the precedent rule that in such a circumstance, the legislation containing the latter non-obstante phrase, in this case the Cape Town Bill, would take precedence over the earlier non-obstante clause, namely the IBC. This would imply that, in the event of a default, the debtor cannot claim for the continuation of the leasing agreement during the CIRP process, even under the guise of it being an important service, because the terms of the moratorium under IBC would be superseded by Article XI of the Bill.
Insufficiency of IBC in dealing with Aviation Insolvencies
Though India is a signatory to the Cape Town Convention (‘CTC’), there is a lack of local legislation to give effect to its provisions, thus other Indian laws, like the IBC Code apply for the time being. The CTC Bill, 2018, was passed in Parliament with the objective to carry out the CTC requirements and to override any conflicting provisions of other laws, such as the IBC and its moratorium provisions. There is some uncertainty about the handling of financial leases because Section 36(4)(a) of the IBC Code states that assets held by third parties and retained by the debtor do not form part of the liquidation estate.
However, the very structure of financial leases allows the lessee to build ownership in the asset through lease instalment payments. Furthermore, there are a number of issues that a lessor confronts while attempting to re-possess an aircraft, such as the risk of lien, which is a lien of the tax authority, airport, or other entity about unpaid taxes, landing costs, or other types of unpaid penalties or charges.
Furthermore, there is an inherent contradiction between the moratorium period specified in the IBC and that specified in the Convention/Protocol, with the former mandating a moratorium of 180 days (extendable up to 270 days) during which aircraft owners, lessors, and financiers are prohibited from enforcing or repossessing their security. On the other side, India agreed to apply Article XI (Alternative A) to all insolvency proceedings, allowing the security interest holder to reclaim their secured asset after the waiting period, which is 60 days.
The provision of 60 days stated in the CTC is more effective since the security holder can reclaim the asset considerably sooner, resulting in lower losses for creditors with interests in capital assets than in the event of the 180-day waiting period stipulated in the IBC Code. Thus, the need of the implementation of the CTC Bill arises since the IBC Code proves to be incapable to dealing with such complex and time vested insolvencies in the aviation sector.
In the current scenario, owing to the significant influence of COVID-19 on the aviation industry, there is a need in India to have an uninterrupted supply of products and services like aircraft, which is a market trend to be rented by airlines due to its high costs and is mostly done in India from foreign countries. As a result, the authors believe that, while the Cape Town Act appears to be in conflict with the IBC at first glance, a broader understanding of its application reveals that both statutes are in harmony and, if passed, will help to achieve their common goal of making India an investor and investor destination on a global scale.
Analysing the Bill’s application holistically, particularly in the context of other existing laws, it is recognised that its passage would have myriad great outcomes on the aviation industry, not only assisting the insolvency process but also gaining confidence in aircraft financiers to play an active role in the leasing process by providing incentives such as the Cape Town Discount. If the Bill is enacted, the multiple timetables established in the several statutory instruments relevant to the Aviation industry would be reduced and replaced, thereby making the process of aircraft purchase less complex. As a result, it is considered that the Cape Town Convention Bill, 2018, which makes major changes to India’s aviation insolvency legislation, should be reintroduced into the spotlight in order to expedite the resurrection of the Indian airline industry.
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 Press Trust Of India, ‘No Decision on reduction in Tax on ATF to bring down prices: Report’ (New Delhi, 25 May 2022) <https://www.business-standard.com/article/current-affairs/no-decision-on-reduction-in-tax-on-atf-to-bring-down-prices-report-122052501443_1.html> accessed 27 December 2022.
 Federation of Indian Petroleum Industry, ‘GST Recommendations 2020-21’ (FIPI.org, 2021) <https://www.fipi.org.in/assets/pdf/pre-budget-memorandam/GST_Recommendations2020-21.pdf> accessed 27 December 2022.
 ‘Rationalize taxation on aviation fuel: Jyotiraditya Scindia writes to 22 States/UTs’ (Livemint.com, 25 August 2021) <https://www.livemint.com/news/india/rationalise-tax-on-aviation-fuel-jyotiraditya-scindia-writes-to-22-statesuts-11629905962963.html> accessed 27 December 2022.
 Sushma Verma, Samik Shome, The Financial Landscape of Emerging Economies: Assessing Airline Bankruptcy in India (Springer 2020) ch 10.
 Arundhati Barman Roy & Bhoomi Shah, ‘Cape Town Convention and Insolvency in the Aviation Industry: A Global Study’ (2021) 8 RGNUL Fin & Mercantile L Rev 118.
 Ludwig Weber, Public and private features of the Cape Town Convention, 4(1) CAPE TOWN CONVENTION JOURNAL 61 (2015).
 AWAS 39423 Ireland Ltd. & Ors. v. Directorate General of Civil Aviation & Anr., 2015 SCC OnLine Del 8177.
 The Constitution of India 1949, art 51(c) (COI).
 Nitin Sarin, Vinamra Longai, ‘India: Aviation Finance Comparative Guide’ (Mondaq, 15 November 2022) <https://www.mondaq.com/india/transport/1118654/aviation-finance-comparative-guide> accessed 29 December 2022.
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 IBC, s 31.
 IBC Code, s 14(2).
 CTC Bill, s 5; IBC Code, s 238.
 Solidaire India Ltd v. Fair Growth Financial Services Ltd, (2001) 3 SCC 71 110.
 COI, art 253.
 N. Narayanan, Unwinding the Vicious Loop of Aircraft Finance Lease (2013) (Issues Aviation L. & Pol’y, vol. 13, no.1) 57.
 Insolvency and Bankruptcy Code 2016, s 12(3) (IBC).
 Protocol to Convention on International interests in mobile equipment on matters specific to aircraft equipment, art XI (Protocol); Proposal for enactment of the Cape Town Convention Act, 2018 for implementation of the Cape Town Convention/Cape Town Protocol in India- Circular, Ministry of Civil Aviation AV.11012/1/2014-A dated 08 October 2018.
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