Traversing Turbulence During Airline’s Insolvency

Is the re-possession only solution during insolvency?

The aviation sector has always been a challenging landscape due to a range of factors such as exorbitant aviation turbine fuel prices, high cost of infrastructure, shortage of workforce, and formidable competition from low-cost carriers. In this intense market environment, efficient navigation of the insolvency process of a debt-ridden airline is a critical aspect for the airline and its stakeholders.

In 2016, the Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced in India inter alia to consolidate and amend the laws relating to reorganization and insolvency resolution in a time bound manner for maximization of value of assets and balance the interest of all stakeholders. However, despite the overarching objectives of IBC, it presents specific challenges when applied to airline insolvencies.

As it stands, the current version of IBC does not include provisions specifically designed to tackle industry-specific challenges. This can be witnessed from GoAir’s insolvency, which is the first insolvency under IBC specifically dealing with the issue of repossession of aircrafts by the lessors¹.

Cape Town Convention: Is India aligned?

While the efforts have been made by the Government of India to completely implement the Cape Town Convention and its Protocol (“CTC”) acceded by India way back in 2008, the process is yet to be completed. In India, international laws are required to be integrated into the domestic legal framework to be effective. The Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 (“Bill”) was introduced in the Indian Parliament to implement CTC. However, the Bill is yet to be approved by the Indian Parliament. It is expected that after the general elections (scheduled in May this year), the Bill will be passed to completely implement CTC.

The October Notification: a progressive step

The necessity for industry-specific insolvency provisions in the aviation sector became evident after GoAir voluntarily filed for insolvency. GoAir’s lessors initiated the process of deregistration and re-possession of their aircrafts. Nevertheless, Indian courts, invoking section 14 (1) (d)² of IBC, dismissed the lessors’ request for repossession.

The court’s decision faced widespread criticism and sparked significant uncertainty among global stakeholders. As the CTC provisions are not fully implemented, the provisions of IBC were primarily applied by the court to reject the plea of the lessors of re-possession.

To streamline the insolvency process, the Ministry of Corporate Affairs enacted a significant amendment to IBC by issuing a notification dated 3 October 2023 (“Notification”). This amendment eliminated the applicability of section 14(1) of IBC to transactions, arrangements, or agreements, under the CTC relating to aircraft, aircraft engines, airframes, and helicopters. The Notification represented a substantial shift in perspective as India aimed to establish a more favorable atmosphere for the lessors. Immediately after the Notification, the Aviation Working Group, on 5 October 2023, changed the compliance outlook of India to ‘positive’.

As a result of this Notification, going forward, the provisions of section 14(1) of IBC will not apply to aircraft assets, and the lessors would be able to repossess aircrafts if an insolvency is initiated against an airline. However, whether the Notification will apply retrospectively giving liberty to the lessors of GoAir to repossess aircrafts is still questionable and is pending adjudication before the Writ High Court.

Is revival under insolvency feasible?

While repossession of aircrafts is always an option in case of insolvency, a lingering question that remains unanswered is whether there is a possibility to revive an airline under insolvency. However, this may not be possible if aircrafts are re-possessed by the lessors, as aircrafts are the core assets for an airline to maintain its ‘going concern’ status. In such a situation, the only option would be liquidation of an airline.

In our view, in case of insolvency, prior to re-possession of aircrafts, the lessors may consider doing a cost-benefit analysis to assess whether airline revival could potentially lead to better recovery for the lessors. This may be possible specifically in a scenario where the insolvency administrator is able to arrange interim funds to operate and maintain aircrafts after commencement of insolvency proceedings and has adequate licenses to run the airline. During this period, the lease rentals are payable in priority.

The Notification has been implemented and the Bill will also be enacted shortly. Once the Bill is enacted, if the insolvency administrator fails to do the aforesaid, the option to repossess aircrafts will anyways be available for the lessors after a waiting period³, and no court permission is necessary for re-possession at the conclusion of the waiting period.

Further, it may be noted Alternative A of CTC (also acceded by India) provides that that in case the insolvency administrator is able to preserve the aircraft object and uphold its value during the waiting period and if the administrator rectifies all defaults during this waiting period, the lessors are prevented from repossessing the aircraft. A similar provision⁴ has been included in the Bill as well. Therefore, in such a scenario, the insolvency administrator may also consider exercising this right as it allows the administrator to utilize aircrafts, maintaining the airline as a going concern while strategizing for its revival or restructuring.

Interestingly, Alternative A also bears a resemblance to section 14(2A) of IBC which provides that a critical supplier is prohibited from terminating, suspending, or interrupting its services during the moratorium period, except when the debtor/ insolvency administrator fails to settle the dues of such supplier.

International precedence

Delta Airlines, a US based airline, filed for bankruptcy in 2005 under Chapter 11⁵. Delta announced that it will keep flying while trimming its operations, to minimize the impact on flyers. After 19 months of restructuring, Delta airways emerged from bankruptcy in 2007⁶ and is currently one of the largest airlines.

Successful restructurings under IBC

As per the Annual Report published by Insolvency and Bankruptcy Board of India on 31 March 2023, restructuring plan for 6787 companies have been approved under IBC. These companies are from varied industry verticals and have been successfully revived after commencement of their insolvency under IBC.

Our View

The lessors could potentially consider alternatives to re-possession as it could be beneficial for them from a long-term perspective, and it may also lead to revival of the airline. The collaborative approach involving creditors, regulatory bodies, and industry stakeholders will ensure a comprehensive and sustainable recovery, ultimately benefiting the entire aviation ecosystem. Further, it may lead to saving of cost and effort of the lessors required in redeployment of aircraft to another lessee.

Disclaimer – The content of this article is intended to provide a general guide to the subject matter and the views of the authors are personal. Specialist advice should be sought in case of specific circumstances.