This article is written by Rishabh Govila, pursuing Certificate Course in Insolvency and Bankruptcy Code from LawSikho. The article has been edited by Zigishu Singh (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).
Indian aviation and insolvency
The Insolvency and Bankruptcy Code, 2016 (“the Code”) is unique legislation that was enacted by the Government of India (“GoI”) in order to streamline the process of winding up, liquidation, and resolution of debt-ridden companies. This legislation has been an important development to further the mission of “Ease of Doing Business”.
The Code provides that on the occurrence of a default, the Creditors of the company can file an application in the Hon’ble National Company Law Tribunal which is the Adjudicating Authority (“AA”) under the Code. The applications under the Code can be filed under Section 7 of the Code by the Financial Creditors of the Company, under Section 9 of the Code by the Operational Creditors of the company and by the Corporate Debtor itself under Section 10 of the Code.
One of the important provisions of the Code is Section 14 which provides for the implementation of Moratorium once the said application against the Corporate Debtor is admitted by the AA. The period of Moratorium begins from the admission of the application by the AA till the completion of the Corporate Insolvency Resolution Process (“CIRP”) or the completion of 180 days, whichever comes earlier. During the moratorium, no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the Corporate Debtor. It is important to note that if a Resolution Plan is not received within the CIRP period, the AA shall mandatorily order the liquidation of the Corporate Debtor in respect of whom the application under the Code was filed.
The Indian Aviation sector is also covered by the Insolvency Laws in India. It must be noted that the Indian Aviation sector is also one of the most capital-intensive businesses which require the infusion of a huge financial capital with only marginal returns for the investors in case of efficient functioning.
In FY 2021, the domestic aviation industry witnessed a YoY(Year on Year) decline of ~73% in its capacity, as measured by the available seat kilometres (ASKM). Coupled with the restrictions on capacity deployment by the Ministry of Civil Aviation (MoCA) to contain the spread of the Covid-19 virus and various state-specific restrictions and quarantine regulations, this will result in a 60% YoY decline in domestic capacity in FY 2021.
It is also important to note here that one of the most important cost factors for the airline operators is the cost of leasing the airlines by the fleet operators. In India, almost 80% of the total fleet being operated by the airline companies are leased, with Avolon, GE Capital Aviation and BBAM being the top three fleet lessors in India.
The introduction of the Cape Town Convention Bill and its effect on insolvency
The Convention on International Interests in Mobile Equipment and Protocol on Matters Specific to Aircraft Equipment was ratified by India on 1st July 2008. Subsequently, on 8th October 2018, the draft of the proposed bill, i.e., the Cape Town Convention Act, along with the Cape Town Convention and Protocol was uploaded on the website of the Ministry of Civil Aviation inviting comments from the general public.
The explanatory notes for the proposed bill define the legislative intent behind proposing the draft bill. It states that one of the objectives of introducing the bill is to achieve efficient financing of various equipment like engines, helicopters, and airplanes. It is clear from this statement that the main intention to ratify the above convention and propose the draft bill is to reduce the overall cost of airline financing, which means, to reduce the cost of leasing the aircraft and other equipment like engines and helicopters.
One of the major issues faced by the Indian Aviation Industry is the huge amount of lease which needs to be paid to the lessors. This cost is related to the risk which the lessors undertake in order to lease equipment to the airline’s operators. According to the Insolvency and Bankruptcy Code, 2016, the lessors of any property are prohibited from recovering such property from the possession or occupation of the Corporate Debtor during the CIRP. This provision of the IBC has led to a major roadblock for the lessors from being able to de-register the aircraft and equipment from the possession of the operators which consequently leads to a high depreciation of the equipment.
The Cape Town Bill gives a respite to all the stakeholders from the negative impact of the Code. The bill also contains some basic default remedies such as deregistration and export of aircraft back to the lessors even during the moratorium period as a measure of speedy interim relief. Hence with the introduction of the bill, the lessors of the aircraft and other mobile equipment will involve lower risks as a result of which, the amount of lease charged by the lessors will be lower and the benefits of these lower costs will finally be transferred to the passengers or the end-user of the product.
Overriding effect of the Cape Town Convention Bill
For the effective implementation of new legislation, it is important that some necessary changes are also made in other effective laws in the country which impact the same industry. The implementation of the Cape Town Bill would require India to make changes in other laws like; Code of Civil Procedure, 1908, The Companies Act, 2013, The Insolvency and Bankruptcy Code, 2016 etc that impact the functioning of the aviation sector. Interestingly, the provisions of the Cape Town Bill have been given an overriding effect over the provision of other laws which impact the functioning of the Aviation Industry, which is important because once the bill is implemented, Section 14 of the IBC, as discussed above, could prove to be a major hindrance in achieving the purpose of the Cape Town Bill.
While ratifying the Cape Town convention along with the Protocol, India has chosen to apply the first alternative, i.e., alternative A of Article XI of the Cape Town Convention. India will apply Article XI, Alternative A, of the Protocol in its entirety to all types of insolvency proceedings, and that the waiting period for the purposes of Article XI(3) of that Alternative shall be two (2) calendar months. (General declaration under Article XXX(3) in respect of Article XI providing for the application of Alternative A in its entirety to all types of insolvency proceeding). In the given alternative, during the CIRP of a Corporate Debtor, the Resolution Professional shall, either cure all the defaults of the Corporate Debtor as per the agreement prior to the commencement of the CIRP or give back the possession of the aircraft to lessor within 60 days() from the commencement of CIRP or on any such date when the Lessor becomes liable to such possession of the aircraft or the aircraft object as per the agreement, whichever is earlier. It is pertinent to mention here that if the defaults of the corporate debtor other than a default constituted by the opening of insolvency proceedings have been repaid by the Corporate Debtor within 60 days from the commencement along with the undertaking to diligently perform all the future obligations that may arise then a second waiting period shall not apply in respect of a default in the performance of such future obligations.
The Cape Town Bill brings relief to the lessors and owners of the fleet which are leased to the Indian airline companies. Aircraft and other equipment that are used by the industry are expensive due to which it is important that such assets are utilized in the most optimum manner by the lessees. However, with the introduction of the Code, once an application under Section 7, 9 or 10 was admitted by the AA, it is next to impossible for the lessors or the owners to regain possession over such equipment due to the moratorium in effect under Section 14 of the Code. This leads to high depreciation of that costly equipment as the lessees or the Insolvency Professional, as the case may be, are unable to maintain the equipment and ensure optimum utilization of the assets. The Cape Town Bill, once it is implemented by the GoI, will ensure that lessors either receive the amount due to them by the Corporate Debtors within a period of 60 days from the date of commencement of the CIRP or rightfully de-register the aircraft or any other equipment leased and take possession of such aircraft or equipment. The overriding effect which is given to the bill over current laws will ensure that the provisions of the Bill override the provisions of the Code and hence, it will nullify the effect of the moratorium period over the airline equipment leased by the Corporate Debtor and thus it will ensure effective implementation of the bill post its introduction.
References Kunal Godhwani, Moratorium under the Insolvency and Bankruptcy Code, 2016 – Impact on Pending Proceedings.  Indian Aviation Industry, Industry to report a net loss of ~Rs. 210 billion in FY2021; to require additional funding of Rs. 350-370 billion over FY2021 to FY2023, December 2020.  Pg. 12, PWC, Aircrafts leasing in India: Ready to take off.  Explanatory note for the proposal for enactment of the Cape Town Convention Act, 2018 for implementation of the Cape Town Convention/Cape Town Protocol in India.  Section 14(1)(d) of the Insolvency and Bankruptcy Code, 2016.  Explanatory note for the proposal for enactment of the Cape Town Convention Act, 2018 for implementation of the Cape Town Convention/Cape Town Protocol in India.  Point 6, Explanatory note for the proposal for enactment of the Cape Town Convention Act, 2018 for implementation of the Cape Town Convention/Cape Town Protocol in India.  Paragraph 7, Article XI-Remedies on Insolvency, Protocol to the convention on international interests in mobile equipment on matters specific to aircraft equipment.
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