An Attempt to Align IBC with CTC: A Step in the Right Direction?

[Ishita is a student at National Law Institute University Bhopal.]

In a significant move that has sent ripples through the aviation industry, the Ministry of Corporate Affairs, Government of India (MCA), in its recent notification dated 3 October 2023, has excluded the application of the moratorium period under Section 14 of the Insolvency and Bankruptcy Code 2016 (IBC) to the corporate insolvency resolution process (CIRP) of aircrafts by exercising powers conferred under Section 14(3)(a) of the IBC. The moratorium period within the IBC functions as a fundamental facet in shielding corporate debtors (CD) from legal actions during insolvency proceedings in order to enable their status as a going concern.

While this is a welcome change in order to align the IBC with the Cape Town 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, there are certain loopholes that need to be addressed. This article seeks to analyze the rationale and implications of the change to the aviation sector through the lens of the IBC.

Background

The change comes against the backdrop of the decision of the National Company Law Tribunal (NCLT) in the Go Airlines (India) Limited case. On the admission of the insolvency petition of GoAir (CD), the NCLT imposed moratorium on the assets of the CD which disabled the aircraft lessors (creditors) from deregistering and repossessing their aircrafts from the CD. Moreover, the apex court in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs categorically noted that the objective of the moratorium is to keep the CD working as a going concern and without following the process as highlighted in the IBC, it would be difficult to label the same status to the defaulting aircraft lessee and accord them a reasonable chance to recover from the clutches of insolvency.

While many measures such as tax exemptions, Project Rupee Raftaar, etc., where taken to promote India as an aircraft leasing hub, the moratorium posed to be an impediment to the same.

The Conflict between CTC and IBC

The CTC is an international treaty primarily governing the rights of the aircraft lessors such as deregistration, repossession, preservation of value of aircrafts, etc. Article 11 of the CTC provides for two alternative remedies to the contracting states in the event of insolvency related to aircrafts whereas Article 30 gives the liberty to the contracting states to choose which alternative they shall be opting for. It would be pertinent to note that the CTC allows the enforcement of such rights not only at the commencement of the insolvency proceedings but also at the declaration of intention by the CD to suspend payments of the creditors. The rationale behind the incorporation of this principle is to protect the aircraft lessors from the clutches of the defaulting lessee and allow them timely deregistration and repossession of the aircrafts.

However, despite being a signatory to the CTC and declaring the intent to opt for Alternative A of Article 11 in accordance with Article 30, India still enforces the 180 days' moratorium period as highlighted in Section 14 of the IBC as against the 2-month period of the CTC thereby creating a tussle between the laws. This can be attributed to two factors, namely, (i) lack of aviation specific insolvency legislation to enforce the provisions of CTC, and (ii) non-obstante clause in Section 238 of the IBC.

This invited a lot of criticism from the aviation sector globally. India was labelled as a ‘risky jurisdiction for aircraft leasing’ by SMBC Aviation Capital in addition to being downgraded in compliance requirement by the Aviation Working Group, a non-profit organisation comprising major aviation manufacturers to assess the CTC compliance by countries. This necessitated the government to take immediate action to resolve the problem and hence introduce such a notification to instill confidence in the aircraft lessors and other creditors.

Intention and Consequences of the MCA Notification

While the current notification of the MCA comes as a relief to the aircraft lessors and is being hailed as a step in the right direction to the quandary of the creditors, it lacks a thorough enforcement mechanism to honor the commitments of the CTC. It must be noted that India is only a signatory to the CTC and has not yet received any ratification from the Parliament. For the effective implementation of the CTC and aligning its provisions with the domestic laws, the convention should be ratified and a special legislation relating to the insolvency of aircrafts which bridge the gaps between IBC and CTC should be enacted. While the MCA came up with the Protection and Enforcement of Interests in Aircraft Objects Bill 2022, it is to no avail as it has not been tabled in Parliament yet and does not address all the nuances relating to the enforcement of such provisions.

Secondly, while the notice clears the air regarding the non-application of the moratorium period to aircraft-related insolvencies, it has failed to address the fundamental question as to how would the claims of lessors other than aircraft lessors be treated as per the waterfall mechanism as highlighted in Section 53 of the IBC. It must be taken into consideration that the MCA notification has not afforded a blanket exemption to the lessors from moratorium but only certain agreements related to aircraft objects such as lease agreements, reservation agreements etc., have been exempted. It is therefore imperative that a separate set of guidelines be published delineating as to how the claims of those other than that of the aircraft lessors be treated under the waterfall mechanism within the four corners of the law without violating the principle of ‘equals shall be treated equally and un-equals shall be treated unequally'.

Thirdly, a comprehensive set of guidelines should be issued for the convenience of the insolvency resolution professionals to successfully carry out the CIRP of the CD especially when the moratorium would not be applicable on aircrafts when it is customary for most aircraft carriers to work on lease arrangements. This will help the process to not unjustifiably bend towards the lessors or potential creditors and afford a reasonable chance to the CD to navigate the process of insolvency.

Conclusion

It would be interesting to see how the Indian courts and tribunals deal with the repossession rights of the lessors while balancing the rights of the CD to be afforded a reasonable chance to go through a proper insolvency process within the four corners of the law while being treated as a going concern. However, the effectiveness of aligning the IBC with the CTC hinges on its ratification by Parliament and the enactment of a specialized legislation which seamlessly integrate its provisions with domestic laws. Moreover, the current notification, while relieving aircraft lessors, leaves some gaps which need to be addressed by issuing a comprehensive set of guidelines for ensuring a robust enforcement mechanism for its long-term success.