The Turbulence of GoFirst: Unriddling the Insolvency Puzzle and Implications
[Satwik is a student at National Law University Odisha.]
The idea of leasing aircrafts is appealing to airlines. This offers them a lot of operational flexibility and cashflow benefits. In India alone, around 80% of the commercial fleet is leased, compared to 53% globally. India has been trying to bring the business for aircraft leasing from abroad to India by introducing projects like ‘Project Rupee Raftaar’, which is aimed at developing leasing and financing structures in the country and providing incentives for registering aircraft leasing in Gift City, Gujarat. This sheds light on how important aircraft leasing is to India. It is against this backdrop, the ruling of the National Company Law Appellate Tribunal (NCLAT) has raised distress signals for the international lessors.
The NCLAT, in the case of SMBC Aviation Capital v. Interim Resolution Professional of Go Airlines (India), Abhilash Lal, upheld the order of National Company Law Tribunal (NCLT) admitting the application under Section 10 of the Insolvency and Bankruptcy Code 2016 (Code) which gives the defaulter the power to initiate voluntary insolvency. Furthermore, the NCLT also imposed a moratorium. This judgement has wide ramifications on aircraft leasing in India. The author has analyzed the tribunal’s verdict from the point of view of aircraft lessors and discussed varied implications.
Go Airlines (India) Limited (renamed to GoFirst), the corporate debtor (CD), was engaged in low-cost airline business. The CD has defaulted in the payment towards aircraft lessors to the tune of INR 26,000 crores.
This led the CD to file for a voluntary insolvency application under Section 10 of the Code before the NCLT. The aircraft lessors, who make up operational creditors (OC), resisted the application on the ground that the application for voluntary insolvency has been filed by the CD with fraudulent and malicious intent. Furthermore, no notice was issued to the creditors to object to the current application.
The NCLT in its order held that there is no expressed provision which states that notices have to be issued to the creditors while filing an application for voluntary insolvency. Furthermore, while adjudicating on the question of challenging the application under Section 65 of the Code which deals with fraudulent initiation of insolvency, the NCLT concluded that the same could be dealt with post initiation of the corporate insolvency resolution process (CIRP). In consequence, the CD came under the ambit of the moratorium imposed under Section 14 of the Code.
This order was challenged by the lessors before the NCLAT on various grounds. First, it is necessary to issue notice to OC before admitting a Section 10 application. Second, NCLT must give opportunity to OC to file application under Section 65 of the Code before admission of an application for voluntary insolvency. Furthermore, the OC contended that the moratorium imposed via the NCLT’s order is not applicable on the aircrafts leased by the lessors as the lease agreement has already been terminated prior to the admission of the application under Section 10 of the Code and pursuant to the termination, the lessors are entitled to claim possession of the aircraft.
The NCLAT ruled that there is no obligation on the part of CD to issue any notice to the creditors. Furthermore, the bench observed that it is open to the creditors to file an application under Section 65 of the Code as has been granted by the NCLT.
Moreover, the NCLAT opined that the remaining issues must be addressed by the NCLT and granted the lessors the liberty to file applications under Section 60(5) of the Code. The NCLAT further upheld the order passed by the NCLT.
Understanding Aircraft Leasing and Its Interplay with Insolvency
Aircraft leasing involves a lot of cross-border transactions and for this, there are in place principles which protect the right of the lessors. The Convention on International Interests in Mobile Equipment, also known as the Cape Town Convention (CTC), is one such convention which is specific to aircraft leasing.
The CTC has provisions relating to insolvency. The provisions include acknowledgement of insolvency proceedings in various jurisdictions, and an insolvency administrator who oversees the assets of the debtor. Furthermore, the Convention further provides for a waiting period, ranging from 30-60 days, during which the creditors cannot exercise rights. Additionally, the Article XI of Aircraft Protocol of CTC provides two alternatives to creditors, i.e., either to take back the possession of the aircraft after the expiration of the waiting period or allow the insolvency administrator to decide to either give up the aircraft or continue using it while making lease payments under the lease agreement. Moreover, the debtor or the administrator has to preserve the value of the equipment. These provisions are put in place to safeguard the rights of the creditors and does not include any order or action which might delay the remedies exercisable by the creditors.
Currently, India has merely acceded to CTC and not ratified it. The insolvency and bankruptcy regime, i.e., the Code takes primacy.
Analyzing the Verdict
The initiation of CIRP leads to initiation of moratorium. The intent behind imposition of moratorium is to safeguard the assets of CD and to stop any recovery of the asset by the creditors or the lessors. This approach was also followed by NCLT while admitting application of voluntary insolvency by the CD. However, this has wide implications.
Imposition of the moratorium says that the lessors cannot take possession of the aircrafts for a minimum of 6 months, which may also extend further. Additionally, there are a lot of delays in resolution of debt-ridden companies. Such a delay could depreciate the value of aircrafts. Moreover, the aircrafts will stay on the ground unused instead of being leased to a stronger airline. Furthermore, it is a settled position that delay in resolution diminishes the value of the CD’s asset and hinders successful resolution. Additionally, creditors apart from the lessors might seize the aircrafts to recover their dues. There also exists apprehension about receiving a huge haircut. According to Care Ratings’ Report (November 2022), lenders have been taking haircuts of around 70% implying a low recovery rate of 30.8%.
The idea of the lessors to terminate the lease agreement is to repossess their aircraft before the airline gets into insolvency. The precedent that has been set by the Supreme Court in Gujarat Urja Vikas Nigam Limited v. Amit Gupta is that termination of a contract with a CD which would lead to the death of the CD is impermissible. There have been requests from lessors to deregister 45 aircrafts from the 57 in the fleet of the CD. Such a move will severely hamper the resolution of the CD. On the other hand, moratorium is not applicable on the assets of the CD of which they are not in rightful possession. It is against this backdrop that NCLT must resolve this conundrum.
It is pertinent to note that the confidence of international aircraft lessors has taken a hit after imposition of moratorium. The aviation leasing watchdog, Aviation Working Group (AWG), has put India on watchlist with a negative outlook because of non-compliance with aircraft repossession norms. Furthermore, this could translate into higher risk premiums and higher lease rentals for airlines. Additionally, this could put a dent in India’s progress in the leasing sector.
The main issue which revolves around the insolvency of GoFirst is the possession of aircraft. The decision will play a huge role in shaping the aircraft leasing sector. The NCLT while admitting the application of insolvency should have taken a middle road, where both the rights of the lessors and lessee are protected. Alternatively, there could have been arrangements that allowed half possession of leased aircraft with the lessors, allowing them to generate revenue by leasing the aircrafts to other airlines and the other half could have stayed with the CD. Furthermore, provisions can be made to pay the lessors the amount that is due on a current basis during moratorium as has been done in the case of Rave Scans Private Limited.
Additionally, the current insolvency regime is at crossroads with the CTC, especially when it comes to moratorium. It seems to have unintentionally contradicted the agreed position on the convention, depriving the aircraft lessors of some important rights. In other jurisdictions, like that of the USA, the UK and Qatar, the insolvency regime runs parallel to principles set out in the convention. This essentially plays a huge role in promoting confidence among the lessors and provides uniformity. With India trying to bring aircraft leasing business to India, it is imperative that they must ratify CTC and align it with the current laws. There have previously been efforts to put in place an Cape Town Convention Act which will reduce risks related to assets and further assist in financial leasing. However, with the case of SpiceJet, Jet Airways and now GoFirst, India needs to fast track the process.