The Moratorium Notification: a panacea for lessors’ maladies?

Introduction

India’s aircraft leasing industry has long grappled with challenges stemming from the country’s insolvency framework under the Insolvency and Bankruptcy Code, 2016 (IBC). However, a recent notification¹ from the Ministry of Corporate Affairs (the ‘Notification’) has brought long-sought relief by exempting transactions involving aircrafts and equipment under the Convention on International Interests in Mobile Equipment (CTC) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (jointly referred to as the ‘Convention’).

While this Notification addresses a pressing concern, it only scratches the surface of the issues faced by aircraft lessors in India. This article suggests that for a comprehensive solution, India should enact the Protection and Enforcement of Interests in Aircrafts Objects Bill, 2022 (the ‘Bill’), aligning itself with other signatories to the Convention and giving legal force to the Convention.

By analysing the current legal framework of the IBC and the Bill’s provisions, this article highlights the gaps needing closure to protect aircraft lessors’ commercial interests more effectively. It suggests moving beyond the IBC’s one-size-fits-all approach, especially in sectors like aviation.

Indian aviation market and the aircraft leasing community

Despite the impediments faced during Covid-19, the aviation industry is one of the most promising sectors in India. Apart from being the third-largest domestic aviation market in the world, India is on track to become the third-largest air passenger market globally in the next decade.² In order to cater to the enormous demand, airline companies in India have been increasing their aviation fleet, which is expected to result in significant growth in the sector.³ A distinctive characteristic of the Indian airline industry is its preference for acquiring aircraft through leasing, particularly via the ‘sale and leaseback’ model. This approach is favoured for several reasons, including appealing interest rates, capital efficiency, the flexibility to scale fleet size in response to demand changes, and the ability to circumvent obsolescence, among others. Interestingly, around 80 per cent of India’s commercial fleet is leased, compared to the global average of 53 per cent.⁴

However, apart from the commercial benefits, the lessor community has growing concerns over the legal framework concerning the aviation sector. Despite the Aircraft Rules, 1937 (the ‘Aircraft Rules’), which lays down detailed provisions regarding deregistration and export of aircrafts, the possession of aircrafts by lessors faces deterrents due to ongoing proceedings against airline companies. The primary reason being that the IBC is a later legislation with a non obstante clause that supersedes older statutes/regulations such as the Aircraft Rules.⁵ As a result, despite complying with the deregistration and export requirements of the Aircraft Rules, lessors have been impeded from taking possession of aircrafts and forced to intervene in the ongoing insolvency proceedings to seek possession from the insolvency tribunals in India, that is, the National Company Law Tribunals (NCLT).

The Moratorium Notification: A panacea for the leasing community?

The challenges faced by lessors in deregistering and repossessing aircraft due to ongoing insolvency proceedings have been exemplified by recent insolvency proceedings concerning Jet Airways Ltd and Go Airlines (India) Ltd (‘GoAir’). In the proceedings concerning Jet Airways, the NCLT prevented the Directorate General of Civil Aviation (DGCA) from deregistering the leased aircraft due to the ongoing moratorium under the IBC.⁶ Despite admitting the lessor’s claims to the insolvency proceedings, the same remained unpaid.

The lessors of GoAir, which is undergoing insolvency, face similar issues as those faced by the lessors of Jet Airways about four years ago. With huge outstanding dues in terms of the respective lease agreements, all attempts to deregister aircraft have been thwarted by the DGCA, citing the moratorium imposed by the NCLT under the IBC.⁷ For the past year, the lessors of GoAir have been unsuccessfully attempting to obtain possession of leased aircrafts in various forums. The non-coherence between the IBC and the Convention has led to higher borrowing costs for Indian airline companies, consequently necessitating more stringent leasing terms to airline companies in India to safeguard the interests of lessors contractually.⁸

Perhaps taking a cue from this, the Ministry of Corporate affairs, vide the Notification, notified that moratorium provisions of the IBC shall not be applicable to any transactions, arrangements or agreements under the Convention, which includes aircrafts, aircraft engines, airframes and helicopters.⁹ The lessors now have a remedy to repossess a leased aircraft and to enforce their security interest on aircraft and the machineries regardless of an ongoing insolvency proceeding under the IBC. While this Notification marks a significant step forward for lessors, it falls short of fully addressing the requirements for a lessor-friendly jurisdiction.

Ratification and enforcement of the Cape Town Convention

The explanatory note to the draft Bill released by the Ministry of Civil Aviation raises the issues faced by the aviation industry due to the absence of legislation giving force to the Convention. Currently, India lacks an electronic international registry for registration of international interests in aircrafts and objects which is universally accessible to lessors. These ‘international interests’ include security-type interests contemplated in security agreements, lease agreements or title reservation agreements. Moreover, in the absence of such a directory, there is no international recognition among the contracting states. Lastly, the default interim remedies for the creditor, such as de-registration and export of aircraft as contemplated under the Convention, is amiss in absence of domestic legislation.

Although the Notification is a welcome move to free the leased aircraft/equipment from the strongholds of the IBC, there is a dire need for enactment of the Bill to synchronise the Indian legal framework with the legal framework of other signatory countries which have enforced the Convention. The Bill allows the debtor or the resolution professional to maintain possession of the aircraft, subject to rectification of pre-insolvency breaches of the agreement and commitment to fulfil all future obligations under the agreement.¹⁰ The Bill, in consonance with Articles 2–7 of the CTC, gives effect to the creation of international interest in relation with aircraft objects. It also ensures that such interest is exempt from the registration of charges requirement under the Companies Act 2013.¹¹ The Bill also provides the rights of the charge to de-register and export an aircraft to the territory in which it is situated. In addition to de-registration and export, the Bill enables a creditor to seek preservation, possession, immobilisation, management or sale from a civil court.¹² There are numerous provisions under the Civil Procedure Code, 2008, Companies Act, 2013 and Specific Relief Act, 1963 which create a charge or additional liabilities over the aircraft/equipment. The Bill contains a non-obstante provision that supersedes every other statute in existence on the day of its enactment.¹³ This ensures that the Bill does not face the same fate as the Aircraft Rules and its enforcement is without any procedural impediments.

The insolvency framework in the United Kingdom vis-à-vis the Bill

In the event that the Indian legislature chooses to enact an aviation-specific legislation in the near future, it may consider the hurdles faced by other contracting states that have enacted a domestic law in furtherance of the Convention. The UK enacted the ‘International Interests in Aircraft Equipment (Cape Town Convention) Regulations, 2015’ which incorporate principles of the Convention directly into UK municipal law. An Airline Insolvency Review Committee (the ‘Committee’) was constituted by the Secretary of Transport to prepare a report¹⁴ to analyse the airline insolvency framework.

In its analysis, the Committee highlighted several instances where the interests of the consumers were deeply affected due to the insolvency proceedings. Therefore, the primary objective outlined in the report was to sustain airline services using existing fleets to safeguard the interests of passengers. This focus on consumer protection was due to significant events such as the collapse of Monarch Airlines in October 2017, which led to passengers being stranded overseas and the cancellation of thousands of bookings. The winding-up of Thomas Cook Group companies in September 2019 also led to similar issues. Both these incidents prompted the UK government to provide repatriation and refund the aggrieved passengers using the taxpayer’s money.¹⁵ In the same vein, the Bill, as it stood in 2022, lacked provisions regarding consumer protection or any discretion to the adjudicating authority to ensure that the interests of passengers are protected. If the legislature moves ahead with presenting the Bill, it must take note of the problems faced by UK and ensure that the Bill is amended accordingly.

Conclusion

The enactment of the Notification has ensured that the lessors will not face the same impediments as the lessors of Jet Airways and GoAir and will obtain possession of their leased assets. This move has been wholeheartedly welcomed by the lessor community. The Aviation Working Group, which had earlier downgraded India to ‘negative’ from ‘positive’ after the GoAir fiasco, has reversed and issued a positive watchlist notice in their CTC compliance index.¹⁶ However, this is only the first step towards creating a lessor-friendly jurisdiction with a legal framework in line with the international Convention. The Bill, as introduced in 2022 (and in 2018), provides a comprehensive framework of laws that cater to every stakeholder of the aviation industry and ensures that there is no hindrance from other legislations.

It should not be the case that due to India’s divergence from international conventions, airline companies in India suffer as the cost of aircraft leasing increases, which in turn results in higher air fares.

Enacting specific legislation would not only resolve legal inconsistencies but also instil confidence among potential lessors as well as investors to invest in the Indian aviation sector. This boost in confidence would make asset-based financing and leasing less risky, leading to better terms of leasing, lower costs for aviation credit and, ultimately, benefit everyone involved in the Indian aviation sector. The key would be to align India’s domestic laws with global standards to realise the economic potential of India’s aviation industry.

This article first appeared in the May 2024 issue of Insolvency & Restructuring International (Vol 18, No 1), and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

Notes

1. Notification dated 3 October 2023, Ministry of Corporate Affairs, Government of India. ↩︎
2. ‘India Aviation Industry’ (IBEF) www.ibef.org/industry/indian- aviation accessed 28 February 2024 ↩︎
3. Ibid.
 ↩︎
4. ‘Aircraft leasing in India: Ready to take off’ (PWC, February 2021) www.pwc.in/assets/pdfs/research-insights/2021/aircraft-leasing-in-india-ready-to-take-off.pdf accessed 28 February 2024 ↩︎
5. Rule 30(7) of The Aircraft Rules, 2017 ↩︎
6. NCLT, Mumbai Bench, Order dated 5 July 2019 in State Bank of India v Jet Airways (India) Ltd https://ibbi.gov.in/webadmin/pdf/order/2019/Jul/5th%20July%202019%20in%20the%20 matter%20of%20Jet%20Airways%20(India)%20Ltd.%20C.P.%20(IB)- 2205(MB)-2019_2019-07-16%2011:37:58.pdf accessed 28 February 2024 ↩︎
7. Suryash Kumar, ‘NCLT grants additional 60 days to finish Go First insolvency process’ (The Economic Times, 14 February 2024) https://economictimes.indiatimes.com/industry/transportation/ airlines-/-aviation/nclt-grants-additional-60-days-to-finish-go-first- insolvency-process/articleshow/107669914.cms?from=mdr accessed 28 February 2024 ↩︎
8. ‘Go First’s insolvency flight leaves trail of concerns for aircraft lessors’ (The Economic Times, 15 May 2023) https://bfsi.economictimes. indiatimes.com/news/banking/go-firsts-insolvency-flight-leaves-trail- of-concerns-for-aircraft-lessors/100237552 accessed 26 February 2024 ↩︎
9. Notification dated 3 October 2023, Ministry of Corporate Affairs, https://ibbi.gov.in/uploads/legalframwork/8273e42bb4de11d3 9f37ab81f96f93ec.pdf accessed 28 February 2024 ↩︎
10. Section 19(5) of the Protection and Enforcement of Interests in Aircraft Objects Act, 2022 ↩︎
11. Section 7(10) of the Protection and Enforcement of Interests in Aircraft Objects Act, 2022 ↩︎
12. Section 17 of the Protection and Enforcement of Interests in Aircraft Objects Act, 2022 ↩︎
13. Section 31 of the Protection and Enforcement of Interests in Aircraft Objects Act, 2022 ↩︎
14. ‘Airline Insolvency Final Report’ https://assets.publishing.service.gov.uk/media/5cd1a8c940f0b6332070f283/airline-insolvency- review-report.pdf accessed 28 February 2024. ↩︎
15. Ibid ↩︎
16. ‘AWG places India with positive compliance outlook in CTC compliance index’, Ministry of Civil Aviation, https://pib.gov.in/ PressReleaseIframePage.aspx?PRID=1965009 accessed 28 February 2024 ↩︎