This blog examines the legal and practical challenges arising from the disconnect between India's Insolvency and Bankruptcy Code (IBC) and its commitments under the Cape Town Convention. By exploring the impact on aircraft lessors and the broader aviation sector, it highlights the urgent need for legislative clarity and harmonization to restore confidence in India's aviation leasing landscape.
I. INTRODUCTION:
In the past decade, airline companies, particularly in India, have been hitting the headlines for their declaration of insolvency. The latest addition is the Go-First airline, which on 3 May 2023 filed an insolvency petition in the National Company Law Tribunal ('NCLT'). The matter of fact isn't only the recurring declarations of insolvency by Indian airlines, which subsequently adversely affect India's reputation in the global market, but also the plight of the lessors of the aircraft (in this case, GoFirst).
The airline industry is characterized by its reliance on marginal profits and high operational volumes, with survival hinging more on managing costs than on generating significant profits. The Pandemic has further made matters worse. It is in this context, when airlines like GoAir go bankrupt, that it becomes a nightmare for lessors who are stuck waiting to get their planes back. That's where the Corporate Insolvency Resolution Process (CIRP) is supposed to help, but delays and legal hurdles often make things worse. The declaration of insolvency is followed by the imposition of a moratorium under Section 14 of the Insolvency and Bankruptcy Code, thus preventing any actions that could alter the status of the assets possessed by the Corporate Debtor ('CD'). Given that Go First's assets are predominantly leased, the imposition of the moratorium effectively prevents the lessors from reclaiming these aircraft, even though the Lease Agreements have been terminated. The implication is wider in its effect since it creates a chain reaction of effects among various stakeholders such as the financial institutions, airlines, and the regulatory authorities, in that each of them cannot repossess valuable assets in the course of the insolvency proceedings. Also, this scenario may have additional effects on industry practices, investment confidence, and regulatory changes. Although India had signed the Cape Town Convention back in 2001 to ease the procedure of aircraft repossession during insolvency, but it still hasn't fully brought it into law, leaving lessors in limbo and making policy reform more urgent than ever.
II. THE CURRENT STATE OF AIRLINE INSOLVENCY IN INDIA
Aircraft leasing has become a go-to strategy for airlines trying to stay afloat in a capital-heavy industry with thin profit margins. Instead of buying planes outright, many carriers lease them to cut costs and stay flexible, something especially useful during tough times like the COVID-19 pandemic. Indeed, almost 50 percent of the worldwide fleet was leased throughout the pandemic. Even India has attempted to drive leasing with initiatives such as UDAN and Project Rupee Raftaar, and by establishing centres such as GIFT City to compete internationally. Yet despite such ambitious activities, there exists one huge hitch: lessors still find it hard to repossess aircraft when airlines declare bankruptcy. Delays and legal hurdles make the Indian market risky for them, which defeats the whole purpose of making leasing attractive in the first place. If India wants to become a global aviation leasing hub, it needs to fix this disconnect between policy and practice.
Since the aviation industry is capital intensive and considering that the industry is greatly leaning towards leasing, there is a great necessity of having clear legislation that governs the process of repossession of aircraft in the event that the airline defaults or in cases where the airline becomes bankrupt. Leasing enables airlines to save on initial outlay and remain flexible in a notorious market, yet to lessors, the risk is unacceptable when there is no simple route to repossess their aircraft in the event of insolvency. In order to regulate this risk and coordinate repossession practices on the international level, the Cape Town Convention (CTC) was proposed. The Cape Town Convention is a multilateral treaty that seeks to simplify and standardise aircraft financing and repossession in multiple nations. India became a signatory to the Convention in 2008 and notified the IDERA mechanism under the Aircraft Rules, 1937; however, most of the essential provisions have not been incorporated into domestic legislation, and without an effective implementation of the Convention in practice, its practical value is minimal.
In India, the process of repossessing an aircraft usually has two stages: deregistration and export. Regular 30(7) and 32A of the Aircraft Rules allow a lessor to apply to have a lessee deregistered in the event of payment default, and once granted, the aircraft is supposed to be exported within five days. This process, however, is usually marred by bureaucracies in the form of demands of unnecessary documents, or controversies of unpaid dues, etc, making it difficult to carry out repossession in time. Such delays are even more significant in the case of insolvency proceedings. This is covered under Article XI of the CTC Protocol, namely, Remedies on Insolvency, which gives signatory countries two alternatives, namely, Alternative A and B. India had opted for Alternative A, which states that aircraft have to be returned within a 60-day waiting period, whether insolvency proceedings are pending or not. Unfortunately, this 60-day rule has no enforceability without a complete legal incorporation of the CTC. This legal gap was vividly observed in the Go First insolvency. The airline applied as a voluntary insolvency petition under Section 10 of the Insolvency and Bankruptcy Code (IBC) on May 2, 2023, which was admitted by the National Company Law Tribunal (NCLT) eight days later. Section 14(1) (d) of the IBC provided that a moratorium on attachments, and no lessor was allowed to repossess aircraft or any other property belonging to the airline. This, in effect, implied that lessors could not repossess aircraft until the Corporate Insolvency Resolution Process (CIRP) was concluded- a process which can take up to almost two years in India. Expecting a complication, many lessors had already filed IDERA requests with the Directorate General of Civil Aviation (DGCA) before the moratorium taking effect. However, the DGCA declined to process these on the grounds of IBC. This was taken to the Delhi High Court, where the decision of the DGCA was initially upheld. But the Court recently took a U-turn in this case and ordered DGCA to hasten the deregistration and export of the aircraft. Although this was a favorable ruling, this case shows the inherent conflict between the IBC and the CTC.
III. THE DICHOTOMY BETWEEN CTC AND IBC
India's implementation of Alternative A under the Cape Town Convention (CTC), which requires returned leased aircraft to be returned to lessors within 60 days of an insolvency event, has not been fully enforced. Going into effect, the lessors would have been able to reclaim the 53 leased aircraft of Go First two months after the moratorium came into effect. Rather, over eight months after the commencement of proceedings, they had not yet been able to take possession. Indian courts have in the past used the provisions of CTC to help effect repossession, but the entry of the Insolvency and Bankruptcy Code (IBC) in 2016 has confused the situation, with IBC provisions frequently prevailing over those of the Convention.
A blanket moratorium on reclamation of aircraft by lessors, which otherwise would occur under English law during an insolvency regime against reclamation of aircraft by lessors, is found in Section 14(1)(d) of the IBC, which generally lasts up to 270 days. This is a direct contradiction of the 60-day rule of CTC. Because IBC is a national legislation, and it contains an overriding clause in Section 238, it prevails, which poses tremendous disappointment to lessors. Consequently, India has slipped in its compliance rating by the Aviation Working Group, which is a red flag to international lessors and investors.
India partially converted its Aircraft Rules in 2015 and 2017 to be consistent with the CTC and introduced IDERA for deregistration and export. Nonetheless, execution is yet to be coherent, and timeliness is still a problem. There is a lot of money at stake- lessors that lease narrow-body aircraft such as Airbus A320s are losing half a million dollars a month per aircraft. Having about 50 aircraft affected, the aggregate loss is overwhelming ,and lessors are insisting on tougher lease conditions and higher rentals, which might as well hurt both Indian airlines and the consumers.
The Ministry of Corporate Affairs recently notified an aircraft transaction exemption to the IBC moratorium in a bid to close the gap. Although this will come as a reprieve to lessors, it will pose a danger of faster liquidation and weakening of distressed airlines such as Go First. Nothing is more pressing than the need for comprehensive legal reformation.
IV. CONCLUSION
India is facing consequences for the prevalent dichotomy between the CTC and IBC. This dichotomy has not only led to ambiguity and inefficiency in aircraft repossession but also tarnished India's reputation in the Indian Aviation Market, which in turn adversely impacts the Indian Economy. In order to clear the air, the government should distinguish whether CTC provisions are retroactive or not and improve the simplification of repossession proceedings by ensuring the proper use of IDERA. At the level of DGCA, procedural efficiency is paramount in order to prevent delays in deregistration and export. IBC reforms must include special aircraft leasing provisions, which will enable more rapid repossession in an insolvency. The full alignment of domestic laws with the CTC will offer a higher level of legal certainty, boost investor confidence, and establish India as a more exciting leasing center. Development of predictable dispute resolving mechanisms, frequent consultation with the industry stakeholders, and training of the regulatory bodies will ensure operations run smoothly. Such measures would be necessary to help India reform its insolvency regime to make the country competitive in aviation finance globally.
References:
1. Aditya Kalra & Aditi Shah, India Stalls Lessors' Requests to Reclaim Go First Planes Due to Asset Freeze,
REUTERS, May 30, 2023, available at https://www.reuters.com/business/aerospace-defense/india-aviationwatchdog-puts-jet-repo-request-go-first-lessors-hold-2023-05-30/
2. BUSINESS STANDARD, Delhi HC Tells DGCA to Clarify Stand on MCA Notification on Moratorium, October 19, 2023, available at https://www.business-standard.com/india-news/delhi-hc-tells-dgca-to-clarify-stand-onmca-notification-on-moratorium-123101901157_1.html ,
3. THE ECONOMIC TIMES, Moratorium Notification Will Apply Prospectively: G First, November 4, 2023, available at https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/moratoriumnotification-will-apply-prospectively-go-first/articleshow/104952258.cms?from=mdr
4. THE ECONOMIC TIMES, Go First Crisis: What's the Cape Town Convention? Why Do We Need It?, May 15, 2023, available at: https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/go-firstcrisis-whats-the-cape-town-convention-why-do-we-need-it/articleshow/100252409.cm
5. Neha Singh, India: 20 Years Of Cape Town Convention - Indian Perspective on Aviation's Lynchpin Framework, Mondaq, July 27, 2023, available at https://www.mondaq.com/india/aviation/1119112/20-years-of-cape-townconvention---indian-perspective-on-aviations-lynchpin-framework
6. DVB Aviation Finance Asia PTE Ltd v. Directorate General of Civil Aviation, WP (C) 7661/2012
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