Contributed by Ananya Sinha

Once a thriving and coveted airline, Go First has encountered rough skies of late, leading to its decision to seek insolvency under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Company seemed to have been struggling with engine troubles for a long period, which has led to the grounding of a large number of its aircraft. It ultimately resulted in a large amount of losses and unpaid credit. A Special bench of the National Company Law Tribunal (NCLT), New Delhi admitted the insolvency application filed by Go Airlines (India) Limited (Go First) and the National Company Law Appellate Tribunal (NCLAT) went on to uphold the NCLT’s order. This created a stir among the aircraft lessors as they had the allowance to file applications in the NCLT under Section 65 of the IBC for a declaration in regard to the application of the moratorium on the aircraft leases, which were to be terminated before the initiation of the CIRP process.

The recent MCA (Ministry of Corporate Affairs) notification in this regard gave a fresh breath of hope to the lessors, as all the transactions, agreements and arrangements related to the aircraft, airframes, engines, and helicopters were exempted from the applicability of the moratorium clause under 14(1) of the Insolvency and Bankruptcy Code, 2016. The article aims to discuss the effects of the moratorium on the lessor’s rights under the Code given the recent MCA notification, the position of India concerning the Cape Town Convention, (henceforth, CTC) and the position of the laws related to insolvency procedure around the world in cases of aircraft leasing.

Effect of the moratorium on the lessor’s rights under the Insolvency and Bankruptcy Code, 2016 amidst the recent MCA notification

India holds the title for the world’s largest aviation market, experiencing a faster growth rate compared to several other jurisdictions. The percentage of leased aircraft is higher when it comes to Indian aviation enterprises. Go Airlines is an airline that operates 54 aircraft, the majority of which are leased from several aircraft lessor companies. Previously, the effect of the insolvency moratorium meant that the aircraft would not be repossessed by the lessors for the six months of the insolvency period and it was subject to extension for nine months.

The notification dated October 3, 2023, was in accordance with the obligation under the CTC, which created a time-bound mechanism for the lessors to be able to claim their possession over the aircraft and specified a minimum guarantee that the acceding governments had given to the lessors of the aircraft. The aircraft lessors view Go Airlines ongoing insolvency resolution as a significant relief, as it might give them the opportunity to retrieve their leased aircraft, which is currently in the possession of the corporate debtor due to the moratorium that the National Company Law Tribunal (NCLT) granted while admitting the application under the corporate insolvency resolution process (CIRP) under section 10 of the IBC. The question as to whether the corporate debtor has legitimate rights in the aircraft, which allows it to maintain possession during the moratorium according to Section 14, remains an unsettled arena, which was raised in the case of SMBC Aviation Capital Ltd. v. Interim Resolution Professional of Go Airlines (India) Ltd.

By using its authority under section 14(3) of the IBC, the MCA has effectively given the aviation sector an exemption from the moratorium provision. The CTC presents a significant obstacle to the aviation industry’ resolution procedure because the Parliament has not ratified it. The first situation in such a case could be that IBC could lose its power in insolvency matters, which is related to the aviation industry. A company debtor’s assets, particularly airplanes, are not subject to a moratorium, which makes it very difficult to continue operating an airline that is facing insolvency.

The second contention to the issue arises that an insolvency framework which is defined in the CTC, cannot go ahead with the implementation unless it is ratified by the Parliament, as the convention cannot be implemented until it is accommodated in the municipal laws, especially in cases where there is a treaty obligation which requires alterations to the present domestic laws. This aspect of the treaty law was held by the Supreme Court in the case of Jolly Varghese v. Bank of Cochin. The present case scenario calls for immediate action on the ratification as the provisions of the IBC and the CTC are not working cohesively.

Although the lessors may not be able to claim exemptions from the moratorium clause under Section 14(1) of the IBC, as the notification cannot pave the way to the retrospective action of law, the notification is seen as a relief for the lessors of aircraft in the Go Airlines insolvency proceedings. Nevertheless, it is a positive move towards strengthening India’s commitment to the CTC, as the notification was in accordance with India’s obligation under the CTC. These frameworks have evolved through a desire to enhance the level of protection to creditors lending in connection with or leasing aircrafts. It will boost the confidence of the aircraft lessors in the Indian market, which was shaken in the recent past due to the bankruptcy of the major Indian airlines. The notification however does not seek to provide relief against the insolvency or similar proceedings with regards to Companies Act, 2013 which is the kind of hurdle the other airline is facing.

The position of India vis-à-vis the Cape Town Convention

The Cape Town Convention is a global treaty, which aims at guaranteeing the rights of the lessors to repossess the lease of high-value equipment such as aircraft, helicopters, and engines in case of defaults in payment. Due to the interaction of multiple jurisdictions in cross-border leasing, CTC offers an efficient structure to safeguard lessors in different jurisdictions throughout bankruptcy proceedings. It plays a crucial role in recognizing insolvency proceedings to be in the best interests of all. Although the government has consistently worked to ratify the convention by introducing the Cape Town Convention Bill, 2018, the Parliament has been unable to pass it. India has acceded to the CTC but has not yet ratified it. This led to the precedence of the Indian domestic legal framework, including the Insolvency and Bankruptcy Code, of 2016 over the other international agreements. 

The absence of ratification by the Parliament poses serious challenges. The provisions of the conventions, although proven to be beneficial are not in tandem with India’s insolvency legislation. The current notification also brings the position of IBC in handling such insolvency situations related to the aviation sector into uncertainty. The current Go First insolvency case underscores the necessity for India to expedite the process of ratifying and integrating the Cape Town Convention into its legal domestic framework. 

The position of the insolvency procedure followed in the world with respect to aircraft leasing

The specific situation does not seem to be unique to India; countries have gone ahead to adopt specific laws related to leasing aircraft, while some have gone ahead with the general bankruptcy law. In the US, Chapter 11 of the US Bankruptcy Code has specific provisions related to vessels and aircraft. It also provides the provision of automatic stay, which prevents creditors from terminating leases or repossessing aircraft or vessels. There are sanctions and damages available to the debtors in case of violation of the stay. The provisions of the US Code are a bit more stringent than expected under CTC.

The UK went on to ratify the CTC and the Aircraft Protocol in the year 2015 and incorporate certain provisions of the convention into the UK law. The UK domestic insolvency laws apply in tandem with the CTC insolvency proceedings. The bankruptcy of Avianca Brazil is one of the case that demonstrates the tension between the CTC and regional bankruptcy rules. In this case, the Court ultimately decided in favour of the moratorium, preventing the lessors from repossessing the aircraft. This highlighted the limitations of the CTC in cases where a conflict arises with the local bankruptcy laws.

Way Forward

India’s obligations under the CTC are in line with the exemption from the moratorium clause granted to the aviation sector under the IBC. There are a number of challenges that arise from the Parliament’s failure to ratify the CTC. The best possible way to address this range of complexities is to deal with the insolvencies in the airline sector in a more balanced way. There should be a strong urge for the ratification of the CTC by the Parliament to balance the international convention with the domestic legal framework. This would be a great move in possessing the trust of the aircraft lessors and instilling confidence and predictability in the international financing and the leasing of aircraft in the Indian markets. It will also provide for a smooth insolvency resolution process.