In a significant development, the National Company Law Tribunal (NCLT) ordered the liquidation of Go First Airways on January 20, 2025, following a request from the airline’s Committee of Creditors (CoC). After Jet Airways, Go First is the second major airline to go out of business in the recent years, raising concerns for the airline industry.
The inability to revive these airlines has also raised questions about the effectiveness of the Insolvency and Bankruptcy Code (IBC) in this sector. The effectiveness of the IBC in the airline industry is a concern because the industry operates differently from others.
Aircraft leasing is an important component of the aviation sector. It provides airlines with financial flexibility to manage high capital costs and maintain operational efficiency without large investments. The sale and leaseback model, where airlines purchase aircraft, sell them to lessors and lease them back, is commonly used to maintain younger fleets with lower maintenance costs. Currently, leased aircraft constitute about 86% of India’s total fleet, with significant reliance on foreign lessors like Avolon, GE Capital Aviation Services and DAE Capital. Challenges arise during airline insolvency, as lessors often seek the unrestricted right to repossess aircraft, which can hinder a distressed airline's ability to operate and recover.
The aviation industry in India has developed significantly in the recent years. However, this growth has also exposed the financial and legal challenges faced by airlines, as seen in the insolvency of Go First Airlines and Jet Airways. Such situations bring to light the operational difficulties faced by the sector, particularly when it comes to balancing the rights of aircraft lessors and airlines.
The IBC lays down the mechanism of Corporate Insolvency Resolution Process (CIRP) for the creditors of a corporate debtor. When an entity becomes insolvent, the IBC empowers financial creditors, operational creditors and the corporate debtors to file an application before the adjudicating authority (NCLT) for initiation of the CIRP. It states that the resolution process must be completed within 180 days, but the NCLT has the discretion to extend it to the maximum period of 330 days. Failure to do so will result in the liquidation of the company. India’s insolvency process has been plagued by delays in approving plans or deciding on liquidation when revival fails.
Once the CIRP begins, the moratorium takes effect, suspending any action against or by the corporate debtor. Under Section 14 of IBC, the moratorium prohibits the initiation or continuation of suits against the corporate debtor. During the moratorium, the transfer/disposal of assets is barred and no action can be brought against the corporate debtor for recovery of the property in its possession. Emphasising on the purpose of the moratorium, the Supreme Court in Swiss Ribbons Private Limited v. Union of India held that it creates a period of calm for business reorganisation.
The moratorium protects the assets of the corporate debtor from being attached by any competent court in any proceedings. The rationale behind protecting assets is the revival of a company because assets play a key role in running a business.
The Supreme Court has held that every possible effort should be made to revive an entity and liquidation must be the last resort. But the question arises: how can such revival be achieved if the lessors are allowed to lease back their aircraft carriers? This situation calls for a balance between the lessor’s interest and industry interest. The absence of legislation regarding repossession of aircraft not only affects the right of lessors, but also harms the aviation market.
The core of the issue lies in how India’s insolvency laws interact with international norms like the Cape Town Convention (CTC). The IBC is designed to help struggling companies restructure, includes a moratorium that temporarily stops creditors, including lessors, from taking back assets. In contrast, the CTC gives lessors the right to quickly repossess aircraft if payments are not made, ensuring timely remedies for creditors and enhancing their confidence in cross-border transactions.
The CTC and its Aircraft Protocol provide a detailed legal framework aimed at protecting the interests of lessors and financiers of high-value mobile equipment, including aircraft. India has acceded to the Convention, but has not ratified it yet. The CTC ensures that creditors and lessors have a clear and enforceable right to repossess assets in the event of a default by the lessee, thereby reducing risks in cross-border transactions.
The Aircraft Protocol further refines this by introducing specific remedies, such as Alternative A, which obligates countries to enforce the timely de-registration and export of aircraft within a fixed period (typically 30 to 60 days, after default). This approach creates an efficient environment for aircraft leasing and financing, which is essential for the global aviation industry as it reduces the risks associated with leasing aircraft to airlines, especially those operating in jurisdictions with weaker insolvency frameworks. The CTC aims to not only protect lessors, but also makes asset-based financing more appealing. This in turn facilitates lower leasing and financing costs for airlines.
However, giving lessors unrestricted rights to repossess aircraft during insolvency poses challenges. Without operational aircraft, an airline's ability to restructure is significantly hampered, affecting stakeholders such as passengers, employees, vendors and financial institutions. A balanced approach is crucial - one that protects lessors’ rights while also providing struggling airlines an opportunity to revive and restructure.
Many countries have adopted “Alternative A” under the CTC, which mandates the de-registration and export of aircraft after a set waiting period, generally thirty to sixty days, without lengthy court proceedings. This approach favours lessors by providing a clear timeline for repossession. For example, Singapore and the United Arab Emirates (UAE) enforce waiting periods of thirty and sixty days, respectively. In Australia, the courts have upheld the CTC’s provisions, ruling that the obligation to “give possession” requires removing legal impediments, such as stays under local insolvency laws, without making the debtor bear the costs of delivering the aircraft. The United States, while recognising the CTC's Alternative A, offers airlines the option to file for reorganisation under Chapter 11 of its bankruptcy code. This allows debtors to assume or reject certain leases and prioritise restructuring over immediate repossession. In contrast, the UK ratified the CTC in 2015, adopting Alternative A alongside the Corporate Insolvency and Governance Act of 2020. While this Act generally prohibits clauses allowing contract termination upon insolvency, it makes exceptions for aircraft leases to comply with the CTC’s sixty-day waiting period.
In contrast to these jurisdictions, India’s application of the Cape Town Convention remains limited, despite its significant reliance on aircraft leasing. Over 85% of India’s commercial aircraft fleet is leased from foreign lessors, highlighting the importance of an efficient leasing framework. Although India acceded to the CTC in 2008, it has not fully integrated its provisions into domestic law, leaving lessors exposed to significant risks during insolvency proceedings. To address this issue, India has introduced the Cape Town Convention Bill, which aims to conform its legal framework with the CTC’s provisions. The Bill seeks to codify remedies for lessors, including the right to repossess and de-register aircraft timely. In doing so, it seeks to reduce leasing costs and attract greater investment in the aviation sector.
The IBC was enacted to facilitate timely resolution, but to address airline insolvencies, its provisions need to be adapted. Amendments should be made to prioritise lessors and creditors, as outlined by the Cape Town Convention. To expedite resolution proceedings, the IBC framework should be implemented more rigorously. Also, debtors should be granted the power to temporarily retain assets in order to ensure operational continuity.
The Union Cabinet has approved the Protection and Enforcement of Interests in Aircraft Objects Bill, which seeks to ratify the Cape Town Convention and it will soon be placed before the Parliament for approval. The legislation is aimed at facilitating the financing and leasing of aircrafts. The law, if passed, would provide primacy to the provisions of the Convention over other municipal laws.
Syeda Bintul Huda and Mohd. Rehan Ali are fourth-year B.A.LL.B. students at the Faculty of Law, Aligarh Muslim University.