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Up in the Air: India’s Evolving Aviation Insolvency Landscape

Anindita Roychowdhury and Sushrut Garg of AZB & Partners discuss the recent developments and the complexities surrounding the aviation insolvency landscape in India.

Published on 15 November 2023
Anindita Roychowdhury, AZB, EF
Anindita Roychowdhury
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One might criticise the National Company Law Tribunal (NCLT) for admitting the insolvency application filed by Go Airlines (India) Limited (“Go Airways”), while completely disregarding the re-possession rights of aircraft lessors and owners. However, the NCLT is bound by legislation, and operates within the scope and intent of the Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) when it comes to insolvency and bankruptcy cases. Given the limitations imposed by the Code, the NCLT’s refusal to grant special rights to aircraft lessors and owners might not be wholly misplaced. Numerous judgments have aimed to delineate what falls under “property” and what constitutes “assets”, as referenced in Section 14 and Section 18 of the Code, respectively. The NCLT also has the difficult task of doing what is necessary to maintain the going concern status of a debtor company. This is crucial for pegging and subsequently realising value in the event of a resolution, with the bulk of it naturally going to financial creditors. In simple terms, without assets, a successful resolution is unfeasible.  

Judicial Balancing Act

While the NCLT may have its own constraints, it is the lawmakers who need to be mindful not only of the rights of third-party asset owners, but also of various international conventions and protocols to which India may be a signatory, whether ratified or not. Alongside this, there is a need to align various special statutes with the Code and to empower NCLTs to issue directives or orders in appropriate cases. This would enable a more commercially wise and pragmatic approach in situations that demand less theoretical and pedantic reasoning.

In the past, the Hon’ble Supreme Court and the Hon’ble High Courts have had to step in to protect the legitimate rights of third parties who were directly affected due to insolvency proceedings of a debtor company and one such example was the Hon’ble Supreme Court stepping in to protect “homebuyers” despite there being no provision in the Code. This led to a swift amendment to the Code, and now homebuyers have a say in insolvency proceedings. In the case of Go Airways, the Delhi High Court has already provided limited relief to owners and lessors, including the right to inspect and maintain assets. This, in turn, was also relied upon by the National Company Law Appellate Tribunal (NCLAT), which aligned itself with the Delhi High Court’s directives.

The fact remains that the NCLT, NCLAT, and Hon’ble Delhi High Court, have all grappled with the challenge of delivering justice, balancing equities, and upholding the legitimate rights of third parties, all while hoping to maintain the airlines’ “going concern” status. The unfortunate message sent globally by the Go Airways insolvency case is that India is a jurisdiction where domestic law can override the rights of aircraft owners and lessors. Added to this is the apprehension arising from uncertain timelines for potential resolutions. The aviation sector’s turbulent history, marked by the travails of Kingfisher Airlines, Jet Airways, and subsequently SpiceJet, only exacerbates these uncertainties.

Too Much Turbulence?

The challenges often seem insurmountable. On one side, you have asset owners and lessors; on the other, banks and financial institutions. Then there is the agonising situation facing employees.

“The joint efforts of the MCA, courts, NCLAT and NCLT bring much-needed clarity and consistency”.

The Notification issued by the Ministry of Corporate Affairs dated 3 October 2023 (“IBC Notification”) is certainly a step in the right direction, especially where it attempts to align with the Convention on International Interests in Mobile Equipment, commonly known as the Cape Town Convention. However, it is prospective in nature, leading one to argue that the government should have been proactive rather than reactive.  The question of the repossession of aviation assets, including aircraft, remains unanswered, particularly as no de-registration has occurred, preventing lessors and owners from reclaiming their assets under other domestic laws. Another lingering question is the appropriate timing for contract termination to rightfully reclaim one’s assets. If a contract is terminated before an application for insolvency is filed, in line with contract terms, then that termination should stand, and assets may be recovered/repossessed subject to applicable law. If termination occurs after the insolvency application but before admission into the Corporate Insolvency Resolution Process (CIRP), the motive behind such a move could be scrutinised. As to whether contracts can be terminated once CIRP has been initiated, this has already been clarified by the Hon’ble Supreme Court in two decisions: Gujrat Urja Vikas Nigam v. Amit Gupta and Tata Consultancy Services Limited v. SK Wheels Private Limited.

Conclusion: Striking the Right Balance

The IBC Notification exempting transactions, arrangements or agreements under the Cape Town Convention and the Protocol to the Cape Town Convention on Matters specific to Aircraft Equipment from the moratorium under Section 14(1) of the Code offers some relief to aircraft owners and lessors (pending clarification on whether the IBC Notification will have retrospective effect). The broader message is that India continues to be a jurisdiction that supports the ease of doing business, which fundamentally includes timely exits and loss mitigation.

The joint efforts of the MCA, courts, NCLAT and NCLT are groundbreaking, bringing much-needed clarity and consistency, and harmonising international conventions and protocols with domestic law. Importantly, these efforts also construct a narrative that safeguards the interests of lessors, insurers, and aircraft owners. This comprehensive approach fosters a more secure and predictable legal landscape for all stakeholders involved.

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