Aviation lease agreements exempted from moratorium to rationalise future lease rates: Sr official

Aviation IBC

The Ministry of Corporate Affairs' (MCA) decision to exempt agreements relating to aircraft, aircraft engines, airframes and helicopters from the moratorium prescribed under the Insolvency and Bankruptcy Code, (IBC), 2016, was made to ensure rationalisation of future lease rates, a senior government official told Moneycontrol.

Section 14 of the IBC deals with the power of the adjudicating authority, the National Company Law Tribunal (NCLT), to issue a moratorium when admitting a company’s insolvency resolution process.

Once a moratorium is imposed, activities such as institution of suits, continuation of pending suits, execution of judgments, transferring/disposal of assets, like aircraft and helicopters, and recovery or enforcement of security interests are prohibited.

The official said that the civil aviation ministry sent the recommendation a few months ago, keeping in view India’s future ambitions in the aviation sector.

He said that the notification complies with the Cape Town Convention (CTC), which India signed in 2008, and that if the CTC’s protocols were not woven into India’s legislative scheme, the cost of leasing aircraft would go up by 25-30 percent in the future.

So, what changes now?

On October 4, the Ministry of Corporate Affairs (MCA) issued a notification stating that the provisions of sub-section (1) of Section 14 of IBC, 2016, would not be applicable to transactions, arrangements or agreements, under the Convention and the protocol relating to aircraft, aircraft engines, airframes and helicopters.

As a result of this notification, moratorium will not be applicable to agreements relating to aircraft, aircraft engines, airframes and helicopters, and aircraft, engines and helicopters leased.

The CTC was introduced to resolve the hindrances in obtaining aviation assets as they are not geographically bound. It lays down international practices to govern the relationship between a lessor and the airline.

In September 2023, Aviation Working Group (AWG), an independent industry body, cut India’s rating as far as compliance with the international laws and protocols on aviation were concerned.

It was speculated that the downgrade came because of the ambiguity in Indian laws on whether the lessors can take back their aircraft and engines if an airline goes under insolvency. Under the CTC, lessors can take back possession of aircraft leased to airlines.

While downgrading India, AWG had said: “This projected variable A downgrade is necessary as gaps in CTC primacy, notably in respect of bankruptcy legislation, have resulted in material non-compliance by India, with substantial losses to creditors.”

Go First, the Wadia Group-backed airline, had filed for voluntary insolvency at the NCLT on May 2 under Section 10 of IBC, 2016, blaming US-based engine maker Pratt & Whitney for its troubles.

The airline said it was forced to ground half of its fleet because of the faulty engines supplied by Pratt & Whitney.

On May 10, the principal bench of NCLT at Delhi admitted Go First's voluntary plea to initiate an insolvency resolution process, thereby admitting the airline to moratorium.

The airline's lessors are currently fighting an application at the NCLT asking to be exempt from the moratorium on the ground that they had terminated their leases with the airline, prior to the moratorium. While the NCLT passed an interim order holding that the airline can use leased aircraft, the tribunal is expected to commence final hearing.

Lessors such as Bluesky, Engine Lease Finance BV, Jackson Square Aviation, SMBC, DAE and others, based primarily in Ireland, had moved the NCLT.

The lessors have also moved the Delhi High Court seeking directions against the Director General of Civil Aviation (DGCA) to deregister their aircraft. The Delhi HC, however, restrained the airline from using the aircraft. While the case is currently ongoing, the HC has deferred the hearing to October 19 to analyse the effects of MCA’s latest notification on October 4.