This article has been published by BW Legal World at:
https://www.bwlegalworld.com/article/go-air-to-jet-airways-lessons-not-learned-548671
The aviation sector in India has been in the spotlight recently, as India became the third largest domestic aviation market in the world. This has been enabled by India’s Regional Connectivity Scheme – Project UDAN (Ude Desh ka Aam Nagrik).
However, the rise of aviation sector in India has also exposed the limitations of the Insolvency and Bankruptcy Code (“IBC”) in addressing the unique needs and challenges of the aviation industry as seen from the recent liquidations of Jet Airways and Go Air. The existing IBC framework is not adequate for the revival of stressed airlines given that the aviation sector is characterised by its capital-intensive nature, reliance on leasing and fluctuating operating costs.
Recently, the NCLT, upon request made by the Committee of Creditors (“CoC”) of Go Air, ordered its liquidation in the absence of any viable resolution plan after its fleet of aircraft was deregistered and repossessed by the respective aircraft lessors. Similarly, the Supreme Court was constrained to sanction the liquidation of Jet Airways owing to the successful resolution Applicant (“SRA”) failing to honor the first tranche of payments envisaged under the resolution plan. While doing so, the Supreme Court made several observations as to the shortcomings of the IBC which led to the eventual liquidation of Jet Airways. It made corresponding suggestions and urged the Ministry of Finance and the Insolvency and Bankruptcy Board of India to consider the same. Yet, the Supreme Court missed some of the core issues in IBC which make it incompatible with the aviation industry, resulting in repeated failure in the revival of airlines once insolvency proceedings commence.
Why IBC Fails Airlines
Airlines rely on a leasing-based business model wherein a majority of the fleet is leased from aircraft lessors. When an airline hits financial and operational turbulence, the lessors are keen on repossessing their high-value leased aircraft considering the uncertainty around the airline’s revival.
Internationally, the Cape Town Convention (“CTC”) and its Aircraft Protocol (“Protocol”) safeguard lessors’ rights to retrieve assets, including aircraft, in such scenarios. India is a signatory to both. Under the CTC and the Protocol, in ordinary circumstances if an airline defaults in making lease rental payments, a lessor may make a request for deregistration and repossession of the aircraft which must be honored within five days of acceptance of the request. This provision has been implemented in India vide Aircraft Rules, 1937.
In the event of an insolvency, India’s obligation under the CTC and its declaration under the Protocol entitling lessors to repossess their aircraft within sixty days are yet to be statutorily recognised in India, since the Draft Cape Town Convention Bill, 2018 and Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 (“CTC Bills”) have not seen the light of the day.
This has created a difficult situation for aircraft lessors, who have to then navigate the moratorium period of 180 days, extendable by another 90 days, under IBC if an airline is admitted into insolvency in India. Due to this legislative gap, the aircraft lessors in India, as seen in the Go Air case, were prevented from repossessing their aircraft, which made them view India as a risky market for aircraft lessors.
IBC provisions are therefore at loggerheads with the obligations under the CTC and the Protocol, which are aimed at securing interests of the aircraft lessors and expediting the repossession of aircraft to minimise losses and give legal certainty. Since airline assets are susceptible to rapid depreciation when grounded, timelines under the IBC fail to preserve the value of such assets, thereby defeating the goal of value maximisation. In the meanwhile, the costs of running the corporate debtor airline as a going concern (including parking charges for aircraft, airport space lease charges, landing and take-off slots etc.) keep accruing.
Moreover, corporate insolvency resolution process (“CIRP”) under the IBC tends to get delayed beyond the prescribed timelines. This is one of the issues that has been highlighted by the Supreme Court in the Jet Airways judgment too as the airline could not be revived even after 5 years of passing of the resolution plan. The IBC provides for penal consequences in case the SRA does not implement the resolution plan, however, the IBC fails to provide a commercially sensible solution or action plan to deal with such non-implementation or delays. Delay in cases of airline insolvency is a fatal blow to the possibility of getting an airline back in the air.
The MCA Notification
In light of the Go Air fiasco and the legal hurdles faced by the aircraft lessors, the Aviation Working Group (“AWG”) downgraded India in the CTC Compliance Index. This led to an apprehension of estimated losses of approximately $1.3 billion to Indian airlines due to increased risk perception while increasing the chances of the lessors stipulating stricter lease conditions and increasing lease rents.
To counter this negative perception, the MCA hastily issued a notification (“Notification”) which exempts “…agreements, under the Convention and the Protocol, relating to aircraft…” from the purview of the moratorium provision under Section 14(1) of the IBC. Though this Notification did not specify whether it applied prospectively or retrospectively, the Delhi High Court has ruled that the Notification applies retrospectively.
While this Notification was hailed as a progressive step towards the implementation of the CTC and the Protocol in India, it has still not been able to provide a solution for the problems plaguing the aviation industry in India. Though the Notification temporarily yielded the results desired by the government as the AWG swiftly upgraded India to “positive” watchlist under the CTC Compliance Index as of 06 October 2023, the same was short-lived as India has yet again been downgraded in the rankings in December 2024.
While, the Notification bolsters the confidence of aircraft lessors, as intended by the government, it drastically reduces the chances of a successful resolution of any airline admitted into insolvency, since its chances of surviving without its assets are nil. Considering the volatility of the aviation market, this tilts heavily in the favor of aircraft lessors while diminishing the chances of revival of a stressed airline. One cannot overlook that AWG is merely a lobby of powerful aircraft lessors, manufacturers and financers chaired by individuals from Airbus and Boeing,[15] whose stance is naturally to further the interest of the lessors. Evidently, the outlook of AWG and the interests of aircraft lessors cannot form the sole consideration in formulating the policy for aircraft leases in India. While easy and economical availability of aircraft is essential for running a successful airline, it is essential to consider the interests of airlines, passengers, and all other stakeholders.
The Socio-Commercial Conundrum of Aircraft Leasing
The increased risks and cost for lessors in repossessing aircraft can percolate to other stakeholders as the lessors are likely to charge higher rents and stipulate stricter terms of lease. This can make the airline unfeasible as airlines often run on wafer-thin margins and even the slightest increase in cost may be difficult to cover and prove fatal. Such additional costs will trickle down to affect the passengers since it will lead to an increase in ticket fares. Also, AWG’s outlook on India directly decides whether Indian airlines are eligible for additional concessions on processing fee for aircraft acquisition loans. Currently, India is ineligible as per AWG as it is not CTC compliant, thus already leading to increased costs for Indian airlines.
On the flipside, if lessors’ interests are pandered to, as has been done vide the Notification, it will mean that repossession of aircraft is given on a much shorter timeline, leaving no time to even attempt a resolution. The failure of an airline drives the already sparse Indian aviation market towards an increasingly monopolistic position, which is perceived as a major blow to Project UDAN.
Insofar as the Notification is applicable, the repossession must be granted within 5 days of raising the de-registration request, notwithstanding the IBC or the CTC since the former has been precluded by the Notification whereas the latter has not been implemented in India yet. However, even in the purported best-case scenario advocated for by many, wherein the CTC is properly implemented in India, a strict timeline of 60 days will be followed, after which the aircraft will be repossessed by the lessors. The average timeline for CIRP was 541 days in the first quarter of the fiscal year 2024. This reflects the status quo in terms of infrastructure and capability of the present IBC regime. Unless systemic changes are brought, it is no more than wishful thinking to expect any progress in a complex CIRP such as that of an airline in 60 days.
Thus, both the scenarios, i.e. the Notification and the CTC, are not suitable for resolution of an airline or maintaining it as a going concern, particularly, considering the fluctuating Indian aviation market. Neither the immediate repossession under the Notification nor the repossession within 60 days under the CTC provide a fair chance at resolution of a stressed airline.
In Go Air, after the Notification and the intervention of the Delhi High Court, the lessors were able to take repossession immediately while the efforts for resolution were ongoing. This led to all lessors pulling their aircraft back, making Go Air’s operation as a going concern impossible and pushing it towards inevitable liquidation. On the other hand, in Jet Airways case, the resolution process was dragged on and extended for years which heavily impacted the assets and cost of the airline during the resolution. In such a scenario, as rightly noted by the Supreme Court, “…timely liquidation is indeed preferred over an endless resolution process.”
An Elusive Balance
The issues highlighted above demonstrate that a fine balance needs to be struck between the lessors’ interests and the possibility of reviving a stressed airline. While safeguarding lessors’ interests and facilitating quick repossession may douse all hopes of reviving the airline, dragging the resolution process and keeping the lessors hanging may lead to depreciation of valuable assets, negative lessor outlook and overall increased costs for airline and consumers in the long run. A balance between the two is almost elusive. What one can say for sure is that neither the Notification nor the CTC achieves this balance.
A two-pronged strategy may be helpful. Firstly, the CIRP for airlines must be streamlined. The resolution process can be fast-tracked for airlines so as to minimize losses due to depreciation and accumulation of charges. This will be in line with the Supreme Court’s judgment in the Jet Airways case, which highlighted the importance of a time-bound resolution. However, this is easier said than done. As noted above, the CIRP under the current IBC regime takes two years or more on average. Merely specifying a stricter timeline will not necessarily fructify into the implementation of such timeline. Systemic changes must be brought. Special benches may be constituted for urgent sector-specific insolvencies such as airline insolvencies. A sectoral/aviation expert may be included as support personnel or as technical member in such benches. While technical members on regular benches bring in a wealth of commercial expertise, they may not be well-versed with the technicalities of a hyper-specialized domain like aviation. For example, in Go Air insolvency, complications arose because of the supply of faulty engines by engine suppliers while the fuselage was supplied by other entities. Moreover, engine leasing and fuselage leasing have entirely different business models and maintenance requirements, the nuances of which may be difficult to grasp without aviation-specific expertise.[ Thus, it is high time for expertise and efficiency to be incorporated into the CIRP of airlines.
Secondly, provisions must be put in place to safeguard lessors’ interests while CIRP is underway. The lessors’ interest lies in proper maintenance and minimum depreciation of their assets during the CIRP period. Thus, it may be helpful to allow the lessors to inspect and carry out maintenance of their aircraft during this period, as has been demonstrated in the Go Air case. It may further be helpful to put interim measures in place during this period to prevent tampering or mishandling of the aircraft.Such measures must be made a norm and sanctioned through specific provisions, so that the lessors do not have to run from pillar to post for courts to grant such protections on a case-to-case basis. The need of the hour seems to be adopting a holistic approach to ensure that lessors’ confidence is maintained while allowing effective revival of stressed airlines.