Interplay between IBC and MCA Notification: Balancing Lessors' Interests and Airline Revival

The aviation sector in India is pivotal to the country’s economy, contributing significantly to GDP and employment. However, it is also a capital-intensive industry, highly susceptible to financial instability. With the increasing dependence on leased aircraft from foreign leasing companies, insolvency cases of airlines such as Jet Airways and Go Air have highlighted the challenges of balancing the interests of aircraft lessors and the revival of distressed airlines. The interplay between the Insolvency and Bankruptcy Code, 2016 (“IBC”), and the Ministry of Corporate Affairs (“MCA”) Notification issued on October 3, 2023 (“Notification”), offers critical insights into this balancing act.

The Notification was essentially an ad-hoc solution, to bring India in line with the terms of the Cape Town Convention (“CTC”). The CTC is an international treaty, designed to safeguard lessors' rights with regard to repossession and deregistration in case of a payment default and includes within its ambit, aircraft, helicopters, and aircraft engines. India has been a signatory to the CTC since 2008 but is yet to implement it as municipal law. The Notification carves out an exception under Section 14 of the IBC, exempting lease agreements of aircraft and their consequent repossession and deregistration by lessors from the moratorium that is imposed under Section 14 when a company goes into the Corporate Insolvency Resolution Process (“CIRP”).

The Notification thus allows lessors to repossess and request deregistration of their aircraft in case of airlines defaulting on their payments to lessors. Under Rule 30(7) of the Aircraft Rules, it is mandatory for the Directorate General of Civil Aviation (“DGCA”) to deregister the aircraft if the requisite documentation as enlisted therein and the Irrevocable De-Registration and Export Request Authorisation (“IDERA”) is provided to the DGCA. IDERA operates under Article XIII of the Cape Town Protocol and provides that the lessor is the sole person entitled to procure the deregistration of the aircraft by the DGCA and, to procure and physically export the aircraft from India. There is no discretion with the DGCA for deregistration of an aircraft, nor is consent required from the airline.

This article explores the implications of the Notification on lessors’ rights, its impact on the insolvency resolution process under the IBC, and potential solutions for striking an equitable balance between lessors’ interests and the revival of distressed airlines.

The IBC provides a robust legal framework for resolving insolvencies while ensuring maximization of value for all stakeholders. Upon the commencement of the CIRP, a moratorium under Section 14 comes into effect. This moratorium restricts actions such as repossession of assets that are in the possession of the corporate debtor.  In the context of airlines, the moratorium restricts the termination of the lease contracts and consequent repossession of leased aircraft. Aircraft lessors, who depend on the ability to repossess their aircraft promptly in case of default, face significant challenges in doing so once an airline company is under CIRP. The insolvency of Jet Airways and Go Air before the National Company Law Tribunal (“NCLT”) exemplify these challenges.

In SBI v. Jet Airways (India) Ltd, the lessors moved an application seeking to deregister and repossess their leased aircraft during the CIRP. However, the Mumbai Bench of the NCLT held that the moratorium under Section 14 of the IBC applied to the DGCA, restricting it from deregistering aircraft. This decision underscored the primacy of the IBC in maximising the value of the assets of a corporate debtor to facilitate its resolution over sector-specific laws, limiting lessors’ contractual rights.

In GO Airlines (India) Ltd. v. Abhilash Lal, similar to Jet Airways, lessors faced obstacles in repossessing their leased aircraft due to the moratorium. The NCLT, while preventing the deregistration, emphasized that repossession of leased aircraft during CIRP would undermine the revival prospects of the airline, as aircraft are critical assets for the functioning and operations of the airline.

To address the challenges faced by lessors, the MCA issued a Notification in October 2023, carving out an exception in Section 14 of the IBC by clarifying that the moratorium under Section 14 of the IBC does not apply to transactions or agreements related to aircraft, aircraft engines, airframes, and helicopters to which the CTC applies. This Notification marks a significant shift, granting lessors the right to repossess their aircraft during CIRP and also positively impacts the dwindling confidence of lessors in the Indian aviation industry. The Notification aligns with the global best practices outlined in the CTC, boosting the confidence of foreign lessors in the Indian aviation industry. Further, it potentially lowers lease rental costs for airlines by reducing the risk premium associated with the lessor’s inability to repossess aircraft. Lessors now also have a clearer legal pathway to exercise their rights without being hindered by the IBC’s moratorium provisions.

However, the Notification also poses a more challenging pathway to the revival of stressed airlines. Firstly, airlines will have to deal with the loss of critical assets as allowing lessors to repossess aircraft during insolvency can significantly diminish an airline’s ability to continue operations, reducing its chances of revival. Consequently, the Notification also has the potential to increase stakeholder conflicts as other stakeholders, including employees, passengers, and financial creditors, may be adversely affected if the airline’s operational viability is compromised.

Notably, the Delhi High Court in Accipiter Investments Aircraft 2 Ltd. v. Union of India, while adjudicating the deregistration requests filed by GoAir’s lessors, held the MCA Notification to be retrospective in nature. The Hon’ble High Court reasoned that international treaty obligations are required to be followed strictly, and the legislative intent behind the Notification was to cure a lacuna in the law that had been highlighted by the GoAir insolvency.

Striking a balance between the interests of lessors and the revival of distressed airlines is crucial. An overly lenient approach towards lessors can lead to the collapse of airlines, while excessive protection for airlines may deter foreign lessors from engaging with the Indian market. A balanced framework is necessary and could be achieved in a variety of ways:

1. Conditional Repossession Framework

The government could introduce a framework allowing repossession subject to specific conditions such as lessors being able to repossess aircraft only if the airline fails to present a credible resolution plan within a defined timeframe (e.g., 60-90 days). During this period, the airline must maintain the aircraft’s condition to safeguard the lessor’s interests.

2. Priority-Based Asset Allocation

The resolution framework could prioritize operational debts, such as dues arising from aircraft, as essential for the airline’s survival. Lessors could receive higher priority in the waterfall mechanism under IBC in exchange for temporarily allowing the airline to retain possession of aircraft. This will repose some confidence in lessors in the entire CIRP.

3. Bespoke Insolvency Regime for Airlines

A provision may be introduced in IBC putting the dues of lessors at par with the CIRP cost, thereby making sure that any resolution applicant has to necessarily clear all the dues of lessors. This allows the airline to be run as a going concern, as this prevents repossession of the aircraft by the lessors, and further provides a take-off point for any resolution applicant from which revival of an airline company can be done.

Further, given the unique challenges of the aviation sector, a separate legislative framework tailored to airline insolvencies could be established. This regime could provide for expedited resolution timelines and special protections for lessors while ensuring continuity of operations.

4. Adoption of ‘Alternative A’ Under ‘CTC’

India has been a signatory to the CTC since 2008, and committed to adopting Alternative A of the CTC, which mandates a "waiting period" of 60 days, during which the debtor must either cure defaults or surrender the aircraft. However, India is yet to implement the same.

Article XI (2) under Alternative A of the CTC provides that upon the occurrence of an insolvency related event, the Resolution Professional shall give possession of the aircraft to a creditor at the end of the waiting period or the date on which the creditor would be entitled to take possession of the aircraft if this Article did not apply, whichever is earlier. This approach provides lessors with predictability while giving airlines a limited window to renegotiate leases or secure financing.

5. Aircraft Lease Backed Securities

Aircraft leases require regular lease payments. Through securitization, an airline or a leasing company can bundle these leases into a financial instrument, such as an Asset-Backed Security and sell them to investors. This provides immediate cash, which can be used for debt repayment or operational expenses.

When an airline securitizes its aircraft leases, the debt tied to these aircraft moves to a Special Purpose Vehicle (“SPV”). This improves the airline’s balance sheet by reducing direct liabilities for the airline. For leasing companies, securitization reduces exposure to an airline's potential bankruptcy. The SPV holds ownership of the aircraft leases and collects lease payments independently. If the airline enters insolvency proceedings; the leases remain valid and investors continue receiving payments from lessees and the SPV may repossess and re-lease the aircraft.

6. Encouraging a Local Aircraft Leasing Market

Developing a robust domestic aircraft leasing market within International Financial Services Centres (“IFSC”) such as GIFT City could reduce dependency on foreign lessors. Local lessors may be more amenable to renegotiation during insolvency proceedings.

The MCA Notification is a step in the right direction for aligning India’s insolvency framework with international norms. However, its blanket exemption of aircraft-related transactions from the IBC’s moratorium provisions risks undermining the revival potential of distressed airlines.

A balanced approach is necessary to ensure lessors’ rights are protected to maintain their confidence in the Indian market while at the same time provide distressed airlines a realistic opportunity for revival, safeguarding broader economic and stakeholder interests. By adopting a nuanced framework that considers the unique dynamics of the aviation sector, India can create a win-win scenario where both lessors and airlines thrive. This will not only strengthen the country’s aviation industry but also reinforce its position as a global economic powerhouse.

About the authors: Ishaan Pratap Singh is an Associate and Mohit Goel is a Partner at Sim and San.

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