Is Pre-Pack the Way Forward in Airline Insolvency?

[Amritanshu and Shreya are students at National Law University Odisha.]

Jet Airways was India’s 2^nd largest airline in 2016. However, that happiness did not last long. The failed acquisition of Air Sahara coupled with heavy competition from low-cost carriers like Indigo led to losses exceeding INR 1,300 crores. It ultimately went into liquidation after the Supreme Court quashed the sole resolution plan submitted by the Jalan-Kalrock Consortium. In a separate instance earlier this year in January, the National Company Law Tribunal (NCLT) ordered the liquidation of Go First Airways following a request from the airline’s committee of creditors. Considering the fact that the core objective of the Insolvency and Bankruptcy Code 2016 (Code) is to ensure revival and continuation of the corporate debtor’s (CD) business, the trend of insolvent airlines going into liquidation in India is at the same time concerning and contrary to the stated objectives of the Code.

The main issue with airline insolvency in India lies in the interaction of the Code with international conventions like the Cape Town Convention (CTC), given the unique nature of the airline industry. In this piece, the authors analyze the uniqueness of the airline industry, examine the current framework for airline insolvency in India, draw comparative perspectives and suggest how the pre-pack mechanism under the Code can be used to revive failing airlines.

Why is Insolvency Different for Airlines?

Insolvency in the aviation sector presents a distinct set of challenges that conventional insolvency frameworks like the Code were not designed to handle. The core reason lies in the ownership and operational structure of airlines, where most aircraft are leased rather than owned. Majority of airlines, especially those that operate on a low cost, tend to lease aircrafts instead of purchasing them.[i] This helps the airline to substantially reduce capital expenditure as the cost gets amortized over the entire lease period.

The general practice here is that an airline would buy an aircraft from the manufacturer and then close to the delivery date, sell it to the lessor. It would then lease it back from the lessor. This helps the airline to operate younger flights with low maintenance costs, and also benefits from leasing back the aircrafts. In India, leased aircrafts account for 86% of the entire fleet. Indigo, one of India’s leading low cost carriers, once disclosed that “out of its total debt of INR 448,542 million, operating lease liability amounted to INR 415,477 million.”

When an airline goes insolvent, it leads to conflicting claims by the airline under the Code and the lessors under the CTC. Let us delve into the details of the clash in the next section of the blog.

The Problem with the Current Framework

The primary problem of airline insolvency in India arises from a fundamental clash between the Code and the international framework for the aviation business. The Aviation business is not restricted to a particular nation and usually transcends geographical borders. As discussed previously, most of the airlines don’t own their fleet, but rather depend on foreign lessors for financing their aircraft. The CTC protects these foreign lessors in case the airline goes into default.

The primary aim of the CTC is to resolve the problem of “obtaining opposable rights to high-value lessors, guaranteeing a quick repossession remedy.” The Convention and Protocol intend to reduce the risk for creditors and the borrowing costs to debtors, in turn encouraging the grant of credit for the aviation business. India has been a signatory to the CTC since 2008, however, its incorporation in the domestic law has been slow.

The CTC makes it binding on the state to permit repossession by debtors within a short waiting period of around 60 days, even if domestic insolvency proceedings have commenced. As a signatory to CTC, India must provide aircraft lessors the right to deregister and repossess an aircraft in the event of a lessee default, unless the corporate debtor cures all default and agrees to perform the lease obligations.

Initially, Indian courts gave primacy to the moratorium under Section 14 of the Code over international aircraft laws. This effectively limited CTC’s presence on paper, meaning lessors could not enforce their CTC rights concerning repossession of aircrafts during airline insolvency. What this also meant was aircrafts were treated as assets in possession of the debtor and swift repossession of aircrafts was not allowed. 

The problem first presented itself with the Go First insolvency, where requests under Irrevocable De-registration and Export Request Authorization (IDERA) were refused by the Directorate General of Civil Aviation (DGCA) citing the moratorium. This occurred once again, when Jet Airways entered into insolvency and the holder of IDERA sought re-registration of aircrafts to recover possession, the action was held as  not maintainable due to the moratorium under Section 14 of the Code.

To deal with this glaring issue,  the Central Government issued a notification in 2023, conveying that provisions of Section 14(1) of the Code would “not apply” to transactions, arrangements or agreements under the CTC. The Delhi High Court (DHC) in Accipiter Investments Aircraft 2 v Union of India observed that the 2023 notification was issued to “cure a lacuna” in the existing law that will benefit the aviation community. The DHC went on to say that this lacuna was brought forth by the insolvency of Go Air, which led to the Central Government to issue the notification to bring India in line with its treaty obligations under the CTC.

Further, the Protection of Interests in Aircraft Objects Act 2025 (2025 Act) was brought in to provide for the protection of interest in aircraft objects and to implement the “Convention on International Interests in Mobile Equipment” and the “Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment.” With this act, India has directly adopted the Convention and now applies Article XI, Alternative A, in its entirety for airline insolvencies.

Despite the 2025 Act, the exercise of repossession and deregistration rights is still under the regulation of the DGCA, and creditors have to coordinate with insolvency proceedings under the Code. Therefore, while the 2025 Act substantially strengthens lessor protections and aligns India with international standards, the CTC does not function in isolation.

This transition marks the beginning of another problem. India’s stance on airline insolvency is now inclined in favour of the creditors. But for airlines, losing possession over their fleet means no opportunity of revival whatsoever, undermining IBC’s core objective of giving an opportunity for revival. Thus, in trying to bring a solution, the transition only changes the locus of the problem, without giving a meaningful solution.

Therefore, the conflict between enforcement by the creditors under the CTC and the objective of revival by the debtor under the Code continues to exist even after the adoption of Alternative A itself.

So what approach have other countries adopted to address this? In the next section, we examine the framework in the US, where multiple distressed airlines have utilized it to avoid liquidation.

The Debtor-in-Possession (DIP) Model: Lessons from the US

Chapter 11 of the US Bankruptcy Code provides a framework for distressed debtors, including airlines, to reorganize their businesses and restructure their debt while continuing operations. Through the DIP model, the airline retains control of daily operations. It triggers an automatic injunction that stops most lawsuits and collection efforts by creditors, preventing them from seizing assets (like aircraft) while the airline reorganizes. Chapter 11 further enables an airline to reorganize its fleet by getting rid of burdensome aircraft-related debt obligations and exercising rights to purchase aircraft on favourable terms.  Airlines can obtain DIP financing, which is a specialized form of funding that takes priority over existing debt, helping them maintain operations during the bankruptcy process.

The US Chapter 11 process is particularly attractive to international airlines due to the worldwide recognition and enforcement of the automatic stay and other court orders, provided the airline has a minimal US asset or presence. In recent years, US based airlines like American Airlines and Delta Airlines, and even international carriers like SAS Scandinavian Airlines, have all successfully utilized Chapter 11 to bounce back from insolvency, while avoiding liquidation.

Is Pre-Pack the Answer?

The President of India promulgated an ordinance in 2021 to introduce pre-packaged insolvency resolution process” (PPIRP), targeted specifically for micro, small and medium enterprises (MSMEs). PPIRP allows MSMEs to negotiate and finalize a resolution plan with creditors before insolvency proceedings, which is then submitted to the NCLT for approval. It combines the flexibility of informal workouts with the legal certainty of formal insolvency under the Code.

As previously discussed, the airline industry is a unique industry in itself. Because of the exclusive nature of the industry, there are generally not too many prospective resolution applicants who have the inclination or the capability to submit resolution plans for an airline company. To remedy this, the benefits of PPIRP should be expanded to airline companies..

In the US, debtors and creditors usually negotiate settlements before filing for insolvency, enabling quicker resolutions. However, in India, such pre-pack methods are limited to MSMEs, leaving larger entities like airlines unable to use this streamlined process. The insolvent airline should be allowed to submit a ‘base-resolution’ plan to the creditors. If all the parties are in consensus, then the plan may be sent for approval by the Adjudicating Authority by way of a formal insolvency resolution process.

Additionally, even if the lessors want to renegotiate the terms of their leases with the CD post completion of the standard insolvency resolution process, they are left in a state of uncertainty. This is because in a standard insolvency resolution process there is a lack of clarity regarding which resolution applicant will assume management and control of the airline company’s operations. Extending the benefit of PPIRP to airlines would now give the lessors clarity that the current promoters will retain management of the CD. This will provide the lessors a safety net while renegotiating the lease agreements.

Conclusion

The airline insolvency framework in India is still in need of a solution. The evolution has been more of a trade of one problem for another. In this landscape of faltering airlines, India needs a model that balances the rights of creditors with those of debtors to bring in practical solutions that primarily aim at revival. The pre-pack mechanism can be seen as this path which caters to the interests of all stakeholders. A tailored pre-pack framework that is customized to suit the Indian airline insolvency problems could therefore be the way forward.

[i] Dipesh Shah and Pawan Kumar Chugan, Aircraft Financing and Leasing in India Challenges & Opportunities: An Exploratory Study of Developing Aircraft Financing and Leasing in India, in Business, Economy and Environment: Corporate Perspectives 282-290 (2019).