Opinion
Re-tweak the IBC to better secure aircraft lessor rights
Summary
- This week’s IBC rule carve-out aims to protect the rights of aircraft lessors and financers under international pacts but closing other gaps could deliver even better aviation outcomes.
The ministry of corporate affairs through a notification has decided to make the mandatory moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) inapplicable to “transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters." This comes as a breather to international aircraft lessors, which had leased assets to Indian operators safe in the belief that their interests were secure under two international multilateral arrangements, commonly known as the Cape Town Convention and Cape Town Protocol (CTC), which provide for the recognition of international interests in aircraft by the aviation regulators of contracting states. India became a signatory in March 2008.
A recent Barclays report reveals that Indian carriers ordered more than 1,400 aircraft in the 2009-2022 period. Add to this Indigo’s 500 and Air India’s 470 aircraft ordered in 2023, and it makes India one of the largest buyers in this period. Almost three-fourths of the planes used by Indian carriers are on lease. To inspire confidence among aviation financiers/lessors and boost Indian aviation’s credibility, the government added Rule 30(7) to the Aircraft Rules, 1937, for synchrony with the CTC, giving the right to apply for aircraft de-registration and re-export permission to holders of Irrevocable Deregistration and Export Request Authorization (IDERA)—or lessors. This came in handy for creditors of Jet Airways that used these rights to repossess its aircraft. However, lessors of Go Air were not that lucky, as before the Directorate General of Civil Aviation (DGCA) could order de-registration, the National Company Law Tribunal (NCLT) had admitted Go Air’s insolvency resolution application as a corporate debtor and ordered an IBC moratorium, including on the repossession of aircraft by lessors. Had the IBC’s freeze not held precedence over all other statutes, Rule 30(7) would have provided lessors adequate protection, as it would have entitled unpaid lessors to recover their aircraft in Go Air’s case as well.
Naturally, the freeze did not go down well with international aviation-finance stakeholders, as it amounted to India reneging on its obligations under the CTC. The Airbus-Boeing led Aviation Working Group (AWG), a non-profit group of aircraft makers, financiers and lessors, issued a watch-list notice for India, which could have hurt the ability of Indian air carriers to secure IDERA-backed leasing and funding deals. Last week, it downgraded India’s rating score from 3.5 to 2 on the CTC Compliance Index.
There has been a general consensus that nothing short of a sui-generis legal and regulatory regime for enforcement of international interests in aircraft objects in line with the CTC will fully reassure international lessors and creditors. India’s government had indeed exhibited some earnestness in that direction, and had published the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022. Somehow, it did not progress further and was not enacted. The latest notification by the government, however, will definitely work to redeem India’s position.
Now that the efficacy of the IDERA rights of aircraft lessors has been restored, as their transactions are exempt from application of a moratorium under the IBC, it can potentially adversely affect the aviation insolvency resolution ecosystem in India. As most aircraft are usually leased, if upon default all such planes are de-registered and repossessed by lessors, it can lead to the civil death of an airline company, as there would be little left in it for revival as a going concern and such a firm will likely face liquidation as a certain outcome. The fleet’s remaining aircraft in disuse would be rendered fit only for cannibalization.
Presently, aircraft lessors are recognized as ‘operational creditors’ under the IBC, which have inferior rights in liquidation vis-à-vis secured financial creditors.
Also, even if some lessors are generous and agree not to de-register their aircraft to help the airline stay afloat, there is currently a lack of clarity over the ranking of their right to receive their respective lease amounts during the course of the insolvency resolution process. So, while it was necessary to extend unrestricted right to IDERA holders to de-register and repossess their aircraft, it is equally desirable to make provisions in the IBC to entice these lessors to stay put in insolvent airlines as stakeholders.
By a small amendment, a balance between IDERA holders’ rights on one hand and incentives to keep their leases alive on the other can be achieved. The IBC should see another churn to statutorily recognize an agreement between willing lessors and resolution professionals to bestow the following special rights in the lessors’ favour. One, timely payments on leases to lessors should get priority in the resolution process over all other operational costs. Two, such lessors’ interests should be reckoned as pari-passu vis-à-vis other secured financial creditors. Such changes will go a long way in keeping a lessor interested in an ailing airline.
The Centre’s notification is prospectively effective, it appears. However, affected lessors may still test the system by approaching appropriate judicial fora for early relief (in terms of aircraft release), since the move is in the nature of a beneficial sub-legislation.
Mukund Santhanam contributed to this article.
