Column| Navigating The Turbulence In Aviation Sector Following MCA’s Moratorium Notification

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^[3]. 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^[4]. 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^[5].

Cape Town Convention

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.^[6] 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^[7] 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.

Implications

The notification has varied implications for both the Aviation Industry as well as to stakeholders, encompassing both positive and negative aspects. Primarily, the new regime will cut down the lease amount. Previously, the lessors charged huge amounts as rent from the Indian Carriers as there was no mechanism in place to help them to repossess the aircraft if there was any legal tussle. By carving away the applicability of moratorium in aircraft and helicopters would reduce the substantial lease rents that are charged over Indian operators by aircraft lessors. This would benefit the industry in the long run. Moreover, by aligning with the international conventions will give the perfect ecosystem for the outside players to flourish in the Indian Market, further reducing the rental rate. It is expected that the domestic aircraft will grow to 4.8 times that of 2018 levels by 2038 – the fastest for any sector in the world, with India set to become the third largest aviation market by the mid-2020s^[8]. this, coupled with a low rental rate, would add financial benefit to Indian carriers.

Secondly, it will increase the creditors' confidence. Previously, when a moratorium was declared, the lessors weren’t able to repossess the aircraft; however, with the new exclusion made, a blank moratorium will not be applicable. Thus, the lessors will be confident enough to engage in the Indian markets. Thirdly, the expansion of airline business coupled with reduced risk will invite more investors into this industry. This will boost employment opportunities and help in the development of the Indian economy as a whole. This is crucial for the aviation industry, especially considering the situation of the Indian companies which are on the verge of expanding their business.

While there are positive implications, we cannot ignore the negative aspects. The major problem with this amendment is that the IBC has got diminished power in matters related to the Aviation Industry. One of the main objectives of the IBC is to revive the companies rather than winding up. Regulation 33 of the Liquidation Regulation Process^[9] contains provisions related to the sale of the corporate debtor as a going concern, which means that the liquidator can sell the corporate debtor “as it is”. This allows for the survival of the corporate debtor, thus going in tune with the objective of IBC. In the current scenario, if an airline company undergoes liquidation and the airlines are repossessed by the lessors, the survival of the company is jeopardised. This will inevitably become a substantial problem in the IBC. In Sundaresh Bhatt, Liquidator of ABG Shipyard Vs. Central Board of Indirect Taxes and Customs^[10], it was observed that “One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under the statute.”^[11] Without the moratorium on aircraft, it would be really difficult to keep the assets together and complete the Corporate Insolvency Resolution process or liquidation as given in the Code. This would be one of the problems that will inevitably come before the Adjudicating Authority. At the same time, Adjudicating Authority can use the provision under section 14(2) of the IBC to classify the aircraft as essential goods or services for reviving the corporate debtor.

Analysis

It is true that the amendment is seen as a landmark decision in the Aviation sector. However, the amendment has a prospective application and will not be applicable to Go First Airline case, which was one of the reasons that prompted this development. The only way to bring the retrospective application of the notification is to file an application, which is done in this scenario by the lessors of Go First Airline. The applicability of the same will be considered by the court on October 19. If the Courts apply it retrospectively, it will have a huge impact on the Aviation industry, by completely changing the way in which it operates.

India follows the Dualist Approach, which means that an international treaty must be ratified by the parliament before it becomes the law of the land. In Jolly George Vergese v. Bank of Cochin, it was held that “until the municipal Law is changed to accommodate the [treaty], what binds the courts is the former, not the latter”. Moreover, in State of West Bengal v. Kesoram Industries, the Supreme Court has reiterated that India follows the “doctrine of dualism” and that “a treaty entered into by India cannot become the law of the land…unless Parliament passes a law as required under Article 253”.^[13] In the present scenario, the Government has only issued a notification stating that aircraft, engines and helicopters would be carved out of the moratorium period. However, the Parliament is yet to ratify the Cape Town Convention for it to become applicable in India and to consider it as the law of the land. As long as there is no conflict between IBC and CTC, the judiciary has the power to incorporate the same into our legal system, as seen in the case of Vishaka vs State of Rajasthan.^[14] If there is an inconsistency between CTC and IBC, IBC shall prevail till Parliament rectifies CTC and make changes accordingly.

Indian courts indeed have a history of applying the CTC and AEP before the enactment of IBC to allow repossession, as seen in Awas 39423 Ireland Ltd. v. Directorate General of Civil Aviation^[15] and Corporate Aircraft Funding Co. LLC v. Union of India^[16]. However, when the IBC was drafted, the same wasn’t added to it, thereby contradicting both the convention and protocol.

Conclusion

The notification issued by MCA opens a lot of arenas for the aviation sector. It gives a glimpse of hope for the Aviation industry, promoting stability and growth for the industry. At the same time, the amendment helps India to rebuild the Indian credibility among international aircraft lessor, thereby increasing the future prospects of the industry. Moreover, by adhering to the Cape Town Convention, it attracts the major aircraft lessors towards the Indian market.

Despite its positive impact, notification has challenges like non-rectification and issues related to going concerns. It is apparent that the notification had already made an impact in the global arena, which is evident from the improved rankings of India in the Aviation Working Group.

The need of the hour is to have a balanced approach that preserves the whole concept of the revival of companies in IBC while safeguarding the rights of the aircraft lessors as envisaged in the CTC. The parliament should rectify the convention and make necessary amendments to the IBC without destroying its objectives and spirit.

Dr. V. P. Agrawal is the Ex- Chairman and Managing Director of the Airports Authority of India and is currently contributing as a Principal Advisor, TLGS Consulting Group. Ms. Yogita Gupta is currently a Manager at TLGS Consulting Group and has 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.