Corporate affairs ministry exempts aviation from IBC's moratorium clause

Section 14 of the IBC declares a moratorium on proceedings, transfer or disposal of any of the assets of the company from the date of commencement of its insolvency

In a major relief to aircraft lessors, the Ministry of Corporate Affairs (MCA) on Wednesday exempted all transactions and agreements related to aircraft and their engines from moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC).

The MCA’s notification will allow lessors to promptly take their planes back from airlines. Aircraft lessors have been unhappy for the past few months after the National Company Law Tribunal (NCLT) in May barred them from repossessing their planes from Go First. Go First stopped operating flights on May 3 after filing an insolvency application with the tribunal.

With this notification, the Indian government has officially adopted the Cape Town Convention (CTC), an international treaty that offers time-bound solutions for lessors to repossess aircraft, thereby reducing their inherent risks. Lessors have advocated for the implementation of this treaty, which will grant precedence to the CTC over insolvency laws in India.

The aforementioned Section 14 of the IBC declares a moratorium on proceedings, and transfer or disposal of any of the assets of the company from the date of commencement of its insolvency.
 

 The MCA notification dated October 3 is in line with the Cape Town Convention Bill, which the civil aviation ministry had first introduced in 2018. The Bill assures lessors that their assets, such as aircraft would not get stuck if a company becomes insolvent, as has happened in case of Go First.

 In Go First’s case, lessors had applied to the Director General Civil Aviation (DGCA) for deregistration of 45 aircraft prior to its admission of insolvency. These applications were put on hold following the admission of the insolvency plea  and commencement of moratorium.

 “This is a big boost to the business of aircraft lessors, which are being wooed to set shop in India. But for Indian aviation companies, which are struggling with financial issues, this may compound their worries as lessors may pull out their assets,” said Anshul Jain, partner, PwC India.

 In September, the Aviation Working Group (AWG), a global aviation leasing body comprising major planemakers and lessors, downgraded India after lessors could not repossess their planes from Go First more than four months after the carrier filed for insolvency.

 Legal opinion, however, appears to be divided on what may follow next. “With this notification, lessors should be able to claim their assets from Go First but they would have to go to court,” said Nitin Sarin, managing partner, Sarin & Co.

 According to some legal experts, the move may not provide relief to the Go First lessors because the notification is not applicable retrospectively; the NCLT will now have to take a call. “The lessors will definitely claim that the moratorium relief that Go First had been enjoying will not be applicable going forward. Whether the notification will apply retrospectively to cases already instituted will be up for interpretation before the tribunal,” said Rohit Jain, managing partner, Singhania & Co.

 The leasing cost stands as a prominent expense for Indian airlines. In its second watch list notice issued in September, AWG said that the actions and inactions in the Go First insolvency proceedings are developments that materially and negatively implicate CTC (Cape Town Convention) non-compliance in India.

 In 2008, India signed the CTC. Lessors have been urging the Indian government to pass a parliamentary Bill to implement this treaty.

 The MCA’s notification said: “The Central Government hereby notifies that the provisions of sub-section (1) of Section 14 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), shall not apply to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters.”

 In June this year, the MCA granted a similar exemption to petroleum assets leased out by a company undergoing insolvency proceedings. The idea was to ensure that national assets in the petroleum sector do not lie idle.

 The ministry, according to official sources, has also received a similar request from the telecom ministry to exempt spectrum from moratorium under the IBC.
 

 The draft telecom Bill released by the Department of Telecommunications (DoT) for public feedback in September 2022 had sought to clear the air over the ambiguity of spectrum owned by a telecom service provider (TSP) undergoing insolvency.

 The Bill stipulates that spectrum ownership remains with the government and implies that value of spectrum cannot be sold by creditors under the IBC. Section 20(3) of the draft Bill clearly states that if the insolvent TSP fails to comply with these conditions, the assigned spectrum shall automatically revert to the government's control.

Lovejeet Singh, partner, Chandhiok & Mahajan, told Business Standard: “This (notification) is a major development and will provide protection to lessors going forward. It takes India one step closer to its commitment under the Cape Town Convention.”

“However, in my view, it may not provide relief to the lessors of Go Air as the notification is not applicable retrospectively,” Singh added.

Ajay Shaw, Partner, DSK Legal, said, "The notification issued by MCA on October 3, 2023 can be used to negate the moratorium claimed by corporate debtors (lessors) going forward with respect to transactions covered under the notification."

"This will impact the airline's resolution as the aircraft can be repossessed and consequentially resolution of the airline company will become very difficult," Shaw added.