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A MISSING INCENTIVE FOR AVIATION LESSORS UNDER THE EXEMPTION OF SECTION 14 OF THE IBC

[Vrinda Gaur is a third-year law student at Dr Ram Manohar Lohiya National Law University, Lucknow]


Introduction


As the aviation sector in India continues to grapple with numerous challenges, including the global economic downturn; the imposition of moratoriums has become a critical issue as airlines incur mounting debts and losses. Initially, creditors, mainly aircraft lessors, were sceptical about leasing out their aircraft to Indian airline companies, considering the recent tragedy of Go First Airlines under Section 14 of the Insolvency and Bankruptcy Code (IBC) imposed a moratorium on the assets of the company, making it unlikely for the lessors to repossess their aircraft from the Directorate General of Civil Aviation (DGCA).  Further, the excess discretion vested with the DGCA to reject deregistration applications made under the Irrevocable De-Registration and Export Request Authorisation (IDERA) added to their plight.

 

In the backdrop of such challenges, the government has exempted aircraft-related agreements and transactions from the moratorium provision under Section 14 of the IBC. This means that lessors can repossess their aircraft even after the initiation of insolvency proceedings.


The aim of this article is to dissect the dichotomy between section 14 and the provisions of the Cape Town Convention (CTC), the legal implications of such a change and scrutinize the impact of the exemption on the hierarchy of creditors, in addition to other pertinent implications.

 

A Legal Biopsy Of The Recent Amendment And Its Impact On The Airline Industry

 

A Peek into The Cape Town Convention


It came as a blow to aircraft lessors of Go Air specifically and the Indian aviation sector in general, when the National Company Law Appellate Tribunal (NCLAT) imposed a moratorium under section 14 of the IBC, depriving the lessors of the relief to repossess their assets from the lessee.


Fortunately, India's recent changes to the law align with its obligations under the CTC and is a move to reconcile domestic law with international best practices. The CTC, formally known as the "Convention on International Interests in Mobile Equipment," is an international treaty that aims to standardize transactions involving movable property, with a particular focus on high-value assets like aircraft and aircraft equipment. The treaty includes protocols specific to different types of equipment, and one of them is the "Aircraft Protocol," which deals specifically with the aviation industry. India became a signatory of the protocol in the year 2001.


The recent notification of the government stated that the provisions of sub-section (1) of section 14 of the IBC shall not apply to transactions, arrangements or agreements under the Convention and the Protocol relating to aircraft, aircraft engines, and helicopters.


The Dichotomy Between Section 14 and the Convention


In the context of insolvency proceedings under the IBC in India, the resolution professional is given the authority to control and take possession of any assets that belong to the debtor during the corporate insolvency resolution process (CIRP).


Section 14(1) of the IBC enforces a moratorium, which means certain actions are temporarily prohibited, including (i) Owners or lessors cannot take back or repossess any property that is currently being used or occupied by the troubled company in insolvency and (ii) Creditors are not allowed to enforce any security interest they hold over the debtor's property through foreclosure or recovery.


Under the domestic regime, the DGCA is given sufficient discretion to reject the application made by the lessors for the deregistration of the aircraft object, thus defying the norm of IDERA under the CTC.


The CTC, on the other hand, strives to provide greater safeguards to lessors when the debtor goes insolvent. Article XI of the Aircraft Protocol provides for two alternative rights for creditors during the insolvency proceedings of the debtor, of which India has adopted the first alternative.


 “Alternative A” offers a standard solution for creditors, giving them the ability to assume control of the aircraft asset once the waiting period of 60 days has passed, given that they meet specific requirements. If the debtor doesn't rectify their defaults or agree to alternative arrangements, creditors can also seek prompt legal remedies from the courts.

The Convention further provides for deregistration of the aircraft and making arrangements for the aircraft object to be exported and physically relocated from its current location in the event of default by the debtor to settle claims within a period of two months. It imposes an obligation on the Registry Authority i.e. DGCA, in our case, to complete the deregistration process within five working days from the submission date of the deregistration request, thus providing greater safeguards to creditors/lessors.

 

Impact Of The Change

 

Though this recent move is a celebrated one and would remedy India’s reputation in the sector, it comes with certain vices and implications that need further deliberations.

 

The Affirmatives


On the affirmative side of the amendment, it is highly likely that the Aviation Working Group (AWG) will be successful in restoring the positive status that was previously compromised. The rating had dropped from 3.5 out of 5 to 2 due to the Go Air insolvency proceedings when lessors were disallowed from carrying out minute inspections after the imposition of a moratorium. If the AWG rating is upgraded, it is likely that leasing and lending rates will decrease, making India an attractive destination for aircraft lessors.

 

Next, previously, lessors had to approach courts and get a court decree in their favour for recovery of their aircraft objects and the DGCA was bestowed with absolute discretion to reject any application for deregistration filed by the lessor, trembling their confidence in the Indian market. This notification will ensure the recovery of aircraft in a time-efficient manner by withdrawing from the prolonged procedural norm of judicial approval.


Additionally, it will now be obligatory for  DGCA to grant deregistration within 5 days of such request made by the creditor or the lessor preventing depreciation of assets in the process of allowing the airline to function as a going concern.

 

It also stands undisputed that when delegated legislation does not mention the retrospective applicability of the law, an assumption is made in favour of the prospective application. In the present case, though the lessors of Go Air may fail to reap absolute safeguards under the new regime, any other concerns raised henceforth will be adjudged, giving due weight to the new enactment. Hence, there is still a ray of hope for the lessors of Go Air and other airlines going through insolvency as we await more judicial clarity and contemplation.

 

Contemplating the Vices


Though the law is a breather in certain aspects, there are certain implications that require scrutiny from a domestic viewpoint. It is certain that lessors are now going to apply immediately for deregistration on the commencement of insolvency proceedings and fly off their assets at the first opportunity. This will make it difficult for the airline to function as a going concern under Section 20 of the IBC, which is otherwise fruitful from the perspective of other creditors, to recover their dues from the proceeds of such an operation.


The aim should not only be to make it feasible for lessors to repossess their assets but also to instil confidence in the Indian aviation sector, which would motivate lessors to keep their aircraft with the struggling company while they operate as a going concern for the recovery of the amount to dispose of debts.

 

For a lessor to confide in the system, it needs   to promise them a secure and priority position in the hierarchy of creditors. Currently, they are regulated as “Operational Creditors”, and the IBC places such lessors at the bottom of the hierarchy of creditors, under which the classification for payment of dues is on a priority basis. An effort at their end to stay with the struggling airline while it operates as a going concern is unlikely to reap any incentive for them as the amount accumulated from such operations is to be invested in paying off debts of secured and unsecured financial creditors first. Generally, the amount owed to them is so heavy that until the operational creditors turn for collection of dues arrives in the hierarchy, the sum accumulated through the going concern tactic is often exhausted to pay off creditors who rank above operation. 


In such a scenario, it becomes imperative to give due regard to such operational creditors and settle their claims on a priority basis, which can be achieved by a liberal interpretation of Section 53 of the IBC that lists the order of repayment amongst creditors.

 

Conclusion


The alignment of domestic laws with international best practices is a positive step for aircraft lessors. It acknowledges and supports their interests, ensuring a prompt recovery of aircraft assets. This alignment is likely to address the tarnished image of the Indian aviation sector, which has seen consecutive instances of major airlines going bankrupt and creditors grappling with complicated legal procedures to repossess their aircraft.

 

Looking ahead, the priority should be to guarantee that lessors are given precedence among other creditors if they choose to remain with struggling airlines and assist in their continued operation as an “ongoing concern”. This can be achieved by adopting a more lenient interpretation of the IBC, particularly concerning Section 53 of the code.

 

While opting to reclaim their aircraft and moving on may be a tempting option for lessors, it is essential to create incentives that encourage them to stay committed to the recovery and revival of the airlines.

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