By Deepanshi Gupta & Rajat K Mittal

On October 3, 2023, India took an imperative move to align the aviation industry with international standards. The Ministry of Corporate Affairs (“MCA”) released a notification exempting aircraft, aircraft engines, airframes and helicopters from the purview of moratorium under section 14(1) of the Insolvency and Bankruptcy Code (“IBC”) in view of the Cape Town Convention (“MCA Notification”). This move has set the stage for a seismic shift in the treatment of aircraft objects (assets) during the insolvency resolution process of airlines, thereby reshaping the position of lessors and unleashing a wave of opportunities for stakeholders, especially lessors. This article, therefore, intends to elucidate the significance and implications of this transformative development.

To understand the international interests and their treatment under the Convention on International Interests in Mobile Equipment and the associated Aircraft Protocol (collectively referred to as “Cape Town Convention” or “CTC”) comprehensively, read our article ‘What does the Cape Town Convention entail for Airlines’ Insolvency?’ Now, let us elaborate on the remedies that are available to lessors of aircraft objects under CTC.

REMEDIES AVAILABLE UNDER CTC IN INSOLVENCY PROCEEDINGS OF CORPORATE DEBTOR

Where the primary insolvency jurisdiction (i.e., the Contracting State where the debtor’s main interests are located, typically determined by its statutory seat or place of incorporation, unless proven otherwise) has made a declaration under Article XXX(3) of the Protocol, remedies for insolvency-related events in case of airlines are determined by Article XI. While Article XI provides options (Alternatives A and B) for how to handle insolvency-related events involving aircraft objects, Article XXX(3) allows a Contracting State to declare which alternative it will apply along with the waiting period required under Article XI. To date, except Mexico, every Contracting State has declared Alternative A.

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It is interesting to note that the CTC allows certain rights to be exercised during an ‘insolvency-related event’, i.e., not only at the commencement of the insolvency proceedings; but also, during the declared intention to suspend or actual suspension of payments by the debtor where the creditor’s right to institute insolvency proceedings against the debtor or to exercise remedies under the Convention is prevented or suspended by law or State action;

Remedies/ Lessors’ rights entailed under Alternative A (as declared by India) are as follows:

* Timely re-possession: The possession of the aircraft object must be given to the creditor no later than the earlier of (a) the end of the waiting period (India has declared the waiting period to be two (2) calendar months from the date of commencement of insolvency proceedings); and (b) the date on which the creditor would be entitled to possession of the aircraft object if Article XI(2) did not apply (i.e. if earlier date is prescribed under national law excluding the effect of CTC). This timeline needs to be strictly adhered to. Possession of the aircraft object may be retained where all defaults, other than those constituted by the opening of insolvency proceedings, have been cured within the above period and all future obligations have been agreed to be performed as under the agreement. However, a second waiting period would not apply if there is a default in the performance of such future obligations and in case of such future default, the lessor is entitled to obtain a Court (NCLT) order for repossession of the aircraft object.

* Preclusion from court interference: Courts cannot extend deadlines for payments or other actions.

* Preservation of value of aircraft object and interim relief: Until the creditor can repossess the aircraft object, the insolvency administrator or debtor must ensure the aircraft is maintained and its value is preserved according to the agreement. The creditor is also entitled to any other form of interim relief. This requirement is a higher standard than the asset protection requirement under IBC.

* De-registration and export: Additionally, if a Contracting State chooses Alternative A, the authorities responsible for aircraft registration and relevant administrative bodies must make de-registration and export of the aircraft available quickly (within five working days), in line with aviation safety laws.

Now, considering an array of rights, as discussed above, are available to aircraft lessors, let us now understand the contextual background and implication of the MCA Notification.

TRUE IMPORT AND INTENT OF THE MCA NOTIFICATION

Interestingly, as per Article 30 of the Convention, rules of insolvency procedure relating to the enforcement of rights to property under the control or supervision of an insolvency administrator under national laws (for example, rules which restrict enforcement of a security interest, such as a moratorium) are not affected unless the Contracting States have declared Alternative A. However, in disregard of its accession to CTC and declaration of Alternative A, Indian courts continued to apply the general moratorium period (exceeding the 2-calendar month waiting period under India’s Alternative A declaration) provided under section 14(1) of the IBC to the aircraft objects. This can be attributed to two primary factors— (i) first, there is a lack of specific legislation enacted by the Indian Parliament to implement the CTC in India, resulting in no legal framework for its application; (ii) second, the presence of a non-obstante clause, as outlined in Section 238 of the IBC, may also play a role in non-adherence to the CTC.

Recently, in May 2023, SMBC Aviation Capital, one of the largest aircraft lessors, cast a shadow of doubt over the Indian Aviation Industry by labelling it as a ‘risky jurisdiction’. This was triggered by the decision of the National Company Law Tribunal (“NCLT”) admitting Go Airlines (India) Limited, the Wadia group-owned airline, into insolvency resolution under section 10, IBC and restricting leasing companies from repossessing Go First planes. Major leasing giants including Bluesky Leasing Company Limited, Jackson Square Aviation Ireland Limited, SMBC Aviation Capital, and Engine Lease Finance B.V even preferred separate applications before NCLT to seek re-possession of aircraft engines and restrain the Go First airlines from operating aircraft for its commercial use, however, their pleas were dismissed by NCLT on account of the effect of the moratorium which bars lessors from recovering their aircraft during insolvency resolution period.

These decisions were frowned upon by leasing companies and demotivated foreign aircraft lessors from leasing aircraft in India due to the heightened risks associated with aircraft leasing in India. Observing this plight of lessors due to non-compliance with the international standards on aviation leasing, on 25 September 2023, the Aviation Working Group (“AWG”), a global aviation watchdog, that assigns its aircraft leasing compliance outlook, downgraded India’s compliance score on variable A from 3.5 to 2 and on variable B from 3 to 2 under the compliance index formula and changed the overall compliance category from medium to low and changed the overall compliance category from medium to low. Such downgrade was attributed to the: (i) non-compliance of CTC in the absence of an express CTC primacy legislation, notably in respect of bankruptcy legislation, with substantial losses to relying on creditors; (ii) prolonged failure to make remedies, including re-possession and de-registration, available to creditors upon the expiry of the Alternative A waiting period; and (iii) failure in assuring asset maintenance and value preservation in compliance with CTC. Further reductions were apprehended, given ongoing events. With such a negative outlook for CTC compliance in India, the said MCA Notification was a dire need. Consequent to the MCA Notification, while raising the outlook for India from negative to positive on 05th October 2023, AWG observed that with the said MCA Notification, a significant gap in CTC primacy in India would be resolved in a manner compliant with India’s obligations under CTC.

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Hence, the move is intended to impart greater confidence among foreign aircraft manufacturing and leasing companies and other potential creditors in terms of risk reduction associated with asset-based financing and leasing transactions. The risk reduction notably would bring lower cost of credit and lease rentals, which would ultimately boost the aviation industry. Further, airlines would wish to offer back to their customers in terms of affordable fare prices.

It is to be further noted that the MCA Notification must not be mistaken as a blanket exemption, from moratorium, for the aviation companies currently undergoing or likely to undergo Corporate Insolvency Resolution Process (CIRP). Rather, the notification has only excluded the transactions, arrangements or agreements (i.e., security agreements, lease agreements, or title reservation agreements) relating to aircraft objects (i.e., aircraft engines, airframes and helicopters) from the operation of moratorium under IBC.

CONCLUDING REMARKS

While legislation ensuring the primacy of CTC over potentially conflicting national laws (IBC) continues to be necessary, the moratorium exclusion under the MCA Notification addresses a critical provision within IBC 2016 by reducing the instances of material non-compliance with India’s Alternative A waiting period within insolvency proceedings. Though India remains on the AWG watchlist, the upgrade to a positive outlook offers a glimmer of hope.

With the clear distinction now being established between aircraft lessors and other lessors in the context of IBC, a crucial question lingers: ‘How will their claims be treated in the waterfall mechanism of insolvency proceedings?’ Considering that lessors, other than lessors of aircraft objects, such as those of immovable property are not entitled to re-possession of their leased assets under moratorium, should their claims be given any priority over the claims of lessors of aircraft objects on the principle of ‘equals (and not unequals) shall be treated equally’?

Moreover, it will be interesting to see how resolution professionals of airlines under insolvency will navigate the operation of the corporate debtor as a going concern, especially after handing over the possession of leased aircraft to lessors, when indisputably most airlines function on a leasing model rather than owning their aircraft.

The MCA Notification does not stipulate retrospective application, indicating its prospective implementation. It will be noteworthy to see if the Indian Courts would give effect to this notification, which now implements the spirit of CTC, in the Go First Airlines insolvency case where a moratorium is already in place and lessors are grappling to enforce their re-possession rights under CTC.

Addressing the issues outlined above would be instrumental in paving a clearer course for the aviation industry’s future within the Indian insolvency landscape for the aviation sector.

ABOUT THE AUTHORS:

Deepanshi Gupta is an Advocate and Company Secretary with a focus on IBC, M&A and corporate transactions. She is the recipient of the Former President’s Gold Medal. Explore her published works at https://orcid.org/0000-0001-6598-642X or reach out to her at deepanshigupta228@gmail.com.

Rajat K. Mittal is an Advocate, specialising in corporate and commercial laws and project-finance deals. He can be reached at rajat.m1999@gmail.com.

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