The Murky Case of Aviation Insolvency in India

[Nikhil Gupta is a 5th year BA-LLB (Hons.) student at the National University of Advanced Legal Studies, Kochi]

The Jet Airways crisis primarily occurred due to the default in the unpaid lease amounts owed to several aircraft lessors. Jet’s fleet consisted of around 119 Boeing planes out of which about 100 were leased from lessor companies such as Avolon, GE Capital Aviation Services and Aercap Holdings. After the grounding of the airline, many such lessors have applied to the Directorate General of Civil Aviation (DGCA) for de-registration and repossession of the grounded aircraft to recover their unpaid dues. Once the planes are de-registered, they can be exported out of the country by the lessors to be leased to other airlines. This entire process gets adversely affected once insolvency proceedings strike in and a moratorium sets into effect, jeopardizing the stake of international lessors and making them wary of entering into further leasing arrangements with Indian airlines.  

This post examines the conflict that would arise between Insolvency and Bankruptcy Code, 2016 (IBC) and the Cape Town Convention/Aircraft Protocol once it gets implemented in its present form. It also highlights the importance of the Convention/Protocol’s ratification and the overhaul it would bring to aviation insolvency in India.

The Cape Town Convention and the Aircraft Protocol

The Convention on International Interests in Mobile Equipment, popularly known as the Cape Town Convention (CTC) and the Protocol thereto on Matters Specific to Aircraft Equipment (Aircraft Protocol), 2001 are essential tools under the international aviation framework to safeguard creditors’ or lessors’ interest in case of default by the debtor or lessee. The principal objective of the CTC/Protocol is to achieve efficient financing of high-value aviation assets in order to make the operations as cost-effective and affordable as possible. To further this objective, various provisions (Article XI- Remedies on Insolvency) are provided under the CTC/Protocol for efficacious remedy to the creditor in cases of default, which includes de-registration and export of aircraft, as a measure of interim relief. 

In light of the above, the Ministry of Civil Aviation, introduced the Cape Town Convention Bill, 2018 on 8 October 2018 in order to implement the CTC/Aircraft Protocol in India with a view to discharging the treaty obligations and to avail benefits of the Indian accession to the treaty. But, the Bill is yet to see the light of day as it remains pending in the corridors of the Parliament.

Implementation of the Bill: The need of the hour

India’s aviation industry is growing at an enormous rate, registering double-digit growth figures for the past three years and is touted to be one of the fastest-growing aviation industries in the world. Indian carriers have been placing large orders for aircraft in order to achieve ambitious expansion plans, resulting in an increase in the number of leasing arrangements. In this underlying scenario, building creditor or lessor trust in the domestic aviation industry assumes utmost significance, which is ensured by the CTC/Protocol. It provides for speedy interim remedies available to the creditor such as de-registration and export of aircraft in case of default by the debtor on lease rental dues. This reduces the risk element for such creditors or lessors leading to “reduction in the cost of aircraft financing/ leasing and eventually to a reduction in the cost of operation,” ultimately benefitting the consumers.  

Further, the Organisation for Economic Cooperation and Development (OECD) has laid down a norm that the airlines of the States that adopt the CTC and the Protocol would be eligible for availing 10 percent discount on export credit premiums. For example, it was calculated that the adoption of the CTC would enable Australian airlines to save $330,000 on the purchase of a new ATR 72 and $2.5 million on the purchase of an Airbus A380. In all, the implementation of the Bill would provide a major boost to the development of the aviation atmosphere in India.

IBC’s bane effect over the Indian aviation industry: The case of apparent conflict

Aviation assets are not the same as other assets. They are capital-intensive and grounding them for long not only causes financial losses but also, results in massive maintenance expenditure. The moratorium under the IBC intensifies this situation by casting its shadow over the leased aviation assets for a period of 6 months, causing their value to deteriorate significantly, in contravention to the provisions of the CTC/Protocol.

According to the declaration lodged by India under the Aircraft Protocol, it has vowed to apply Article XI, Alternative A, of the Protocol in its entirety to all types of insolvency proceedings and the waiting period for that alternative shall be two (2) calendar months.

Article XI titled “Remedies on Insolvency” mentions Alternative A as:

Upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor, as applicable, shall, subject to paragraph 7, give possession of the aircraft object to the creditor no later than the earlier of:

 (a)  the end of the waiting period; and

 (b)  the date on which the creditor would be entitled to possession of the aircraft object if this Article did not apply.

Under the Indian insolvency framework, section 14(1)(d) of the IBC places a bar on the recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor.

On a perusal of the two provisions, it becomes evident that Alternative A’s “waiting period” is in direct conflict with the moratorium under section 14, which provides for a period of 180 days, extended further by 90 days, during which any enforcement of security or repossession of aircraft or aviation equipment by the creditors or lessors is prohibited, as opposed to the Protocol’s Alternative A, which grants the right of repossession of aircraft after the expiry of the “waiting period” of 60 days, if the defaults remain unsettled during such period.

Further, the Cape Town Convention Bill, 2018 contains an overriding provision, which shall afford primacy to the provisions of the Bill over any conflicting law. Similarly, section 238 of the IBC has an overriding effect over any inconsistent existing law. In light of this apparent conflict, it becomes utterly crucial that legislative or judicial intervention is needed to settle the issue of supremacy of one legislation over the other. In the author’s view, the CTC/Protocol shall take precedence over IBC and should be drawn as one of the exceptions to the applicability of moratorium, in order to safeguard the broader interests of creditors and the aviation industry.

Realization of unpaid rentals arising out of the lease agreement: the IBC route or repossession under the Aircraft Protocol?

Since the lease agreement is for provision of services in the form of aviation equipment, rentals arising out of the same shall be treated as operational debt under the Code. Therefore, aircraft creditors or lessors shall constitute operational creditors and would fall at the bottom of the hierarchy in terms of priority of payment according the 2019 Amendment to the IBC granting primacy to financial creditors in terms of payment of dues. On the contrary, once the Bill is implemented, filing an application before the Director General of Civil Aviation (DGCA) for de-registering the aircraft for repossession by invoking Alternative A would seem more feasible to the aircraft lessors.

Weighing the two options, it becomes abundantly clear that aircraft creditors or lessors would take the latter recourse of law. But, once moratorium sets in, this becomes a distant reality as explained above. However, lease rentals can also be paid during the continuation of insolvency as has been held in Navbharat Castings LLP. v. Moser Baer India Ltd.. that a moratorium does not bar the payment of lease rentals by the insolvency resolution professional from the cash flows of the debtor. But it would inevitably result in a diminution of the value of aviation assets in the form of aircraft, since they remain grounded for a long period under the effect of moratorium defeating the very objective of IBC, viz., the maximization of the value of assets. 

Jet Airways’ Insolvency and the Aircraft Protocol

Much is awaited in the ongoing matter concerning Jet Airways’ insolvency, where the claims of operational creditors (OCs) is twice that of the financial creditors (FCs), amounting to a total of approximately rupees 15,000 crores. Recently, a Dutch company had moved an application for de-registration of a Boeing 777 before the DGCA, which it had seized for recovery of dues. The application was rejected as the moratorium is in effect. As the CTC/Protocol remains unratified, the aircraft lessors are left with no option but to resort to the insolvency regime in India to recover their dues as operational debts, which would be a nominal value, as such is the predicament of the OCs as per the latest amendment to the IBC.

Way Forward

The Government’s intention of not implementing the Cape Town Convention Bill any time soon and keeping it in the pipeline may prove fatal for the aviation industry in India as aircraft creditors or lessors would be dismayed to be not able to recover the maximum value as possible under the CTC/Protocol. At present, it becomes imperative to implement the Bill with necessary amendments in the IBC to set up a harmonious interaction between the two frameworks. The implementation of the Bill would be a major overhaul in the aviation industry.

Nikhil Gupta

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