Written by V. P Agarwal, Yogita Gupta and Meghana S S
In a significant move, the Ministry of Corporate Affairs (MCA) on 3rd October 2023 issued a notification [S.O.4321(E)] under Section 14(3)(a), exempting all transactions, arrangements and agreements of aircraft, aircraft engines, airframes and helicopters from moratorium under Insolvency and Bankruptcy Code of 2016. This notification aims to open up the aircraft leasing industry in India. This should be seen as one of the strategic decisions of the government in strengthening the Aviation industry, which is already crippled by the legal tussle of Go First Airline (Formerly known as Go Air) and the downgrade of India’s compliance rating by Aviation Working Group which is a Global Aviation watchdog.
The notification states that the provision of Section 14(1) under Chapter II of the Code, pertaining to the declaration of the moratorium, will not be applicable to transactions, arrangements or agreements, relating to aircraft, aircraft engines, airframes and helicopters, thereby addressing a significant issue that was faced by the aircraft lessors in India. Section 14(1) of the code envisages the power of the adjudicating authority to declare a moratorium. Once a moratorium is declared, all the assets will be frozen, thus preventing the recovery of any property by an owner or lessor where such property is occupied by or is in possession of the corporate debtor. The same can only be recovered after the expiration of the moratorium period, which extends till the completion of insolvency resolution process. Therefore, prior to the enactment of this notification, if a moratorium was declared, the aircraft lessors were unable to repossess the airlines that they leased out to the corporate debtors.
Moreover, one of the concerns consistently raised by aircraft lessors was India’s non-compliance with International Conventions, notably the Cape Town Convention (CTC), to which India is a signatory. After the insolvency of Kingfisher Airlines and subsequent hikes of lease rent coupled with the reluctance of aircraft lessors to enter into Indian markets, the government tried to align IBC with the international regime by allowing repossession of the aircraft by filing a request within five days before the Directorate General of Civil Aviation (“DGCA”). However, the ongoing Go First Airline case has indicated its ineffectiveness in handling the assets recovery.
The present move made by the government through this notification is said to help the aircraft lessors regain their confidence in the Indian aircraft lease market by creating a favourable operating environment. The notification ensures that the lessor will not be placed in a disadvantageous position because of the moratorium. Most importantly, it is believed that this would encourage more international participation in the aircraft lease market. According to a recent report, India has about 800 commercial aircraft, out of which 80% of the country’s commercial fleet is leased, compared to 53% globally. At present, Ireland, Singapore and Hong Kong are few among the active participants in the Indian aircraft leasing market. The amendment is expected to open up more secure and reliable business opportunities in the aviation sector, thereby helping India to emerge as an aircraft leasing hub, which is one of the goals of the 2023-24 Budget.
Through this amendment, the government has adhered to the commitments given under the Cape Town Convention (CTC) and the Aircraft Equipment Protocol (AEP). CTC, a global treaty, was adopted under the International Civil Aviation Organisation (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT) in Cape Town in 2001. It gives the right to the lessors to repossess the leased equipment, such as aircraft, engines, and helicopters, in case of payment defaults. Article 10 of the Convention expressly provides that in the event of default under a lease agreement, the lessor can terminate such agreement and take possession or control of the object to which the agreement relates Moreover, it outlines a time-bound manner to reclaim the leased airlines.
The notification carving out aircraft and helicopters from the moratorium process can be seen as a stepping stone for India in aligning with the internal convention and protocol. This move will not only give legal clarity but also strengthen the aviation industry to soar into the future.
Dr. V. P. Agrawal is the Ex- Chairman and Managing Director of the Airports Authority of India under the Government of India.
He is currently contributing as a Principal Advisor, TLGS Consulting Group. (https://tlgs.consulting/people/)
Ms. Yogita Gupta is currently a Manager at TLGS Consulting Group, and is a lawyer who graduated from the Dr. Ram Manohar Lohiya National Law University, Lucknow.
Ms. Meghna S.S is currently an intern at TLGS Consulting Group, and is a law student from the National University of Advanced Legal Studies in Kochi.