Govt notifies bankruptcy code changes to make aircraft recovery easier

New Delhi: The ministry of corporate affairs (MCA) on Wednesday notified that some provisions of the Insolvency and Bankruptcy Code (IBC) would not apply to aircraft, engines and related parts, in a development that will significantly influence the ability of bankrupt Go First airline to take to the skies again.

In a 3 October notification, the ministry declared that the provisions of Section 14(1) of IBC, which imposes a moratorium upon the admission of an insolvency plea, shall not apply to transactions, arrangements, or agreements related to aircraft, aircraft engines, airframes, and helicopters. The moratorium prohibits the transfer of any assets by a corporate debtor and bars recovery of any property by an owner or lessor where such property is occupied by or in the possession of the debtor.

Lawyers said the new provision could prompt aircraft lessors to exercise their right to reclaim leased planes, affecting the grounded airline’s revival plan, which hinges on aircraft availability.

“The notification has created a carve-out specifically for the convention to keep the aircraft, aircraft engines, airframes and helicopters of the lessors out of the ambit of moratorium provisions under IBC. Consequently, the moratorium will not extend to the aircraft and aircraft engines leased to Go First by the lessors, who are covered under the convention.

The lessors of Go First can be expected to invoke this carve-out and seek repossession of their aircraft and aircraft engines,” said Dhiraj Mehtre, a partner at Khaitan Legal Associates.

A text message sent to Go First bankruptcy resolution professional Shailendra Ajmera remained unanswered.

Lessors of 45 aircraft leased to Go First are engaged in legal battles in the Delhi high court and bankruptcy tribunals to secure permission to deregister, enabling them to repossess their aircraft now idling at airports across India.

Lessors failed to secure favourable orders as bankruptcy laws provide a six-month moratorium on the transfer of assets of the company once it’s admitted for insolvency.

In the case of Go First, which filed for insolvency on 3 May, a court stated that the moratorium applied to leased aircraft and engines.

The changes to IBC will facilitate asset recovery even when airlines file for insolvency in India, addressing previous challenges faced by lessors in reclaiming aircraft and engines.

India has faced criticism for being a signatory to the Cape Town Convention Bill, which protects lessors’ rights on leased aircraft, but failing to ratify it. Several such instances have prompted lessors to increase lease rentals for Indian airlines, crimping their profitability.

Lessors said lease rentals would rise by up to 25% for Indian carriers after Go First was referred to bankruptcy courts and a moratorium imposed.

Also, the Aviation Working Group, a global watchdog representing aircraft makers and leasing firms, downgraded India’s compliance score last month, citing delays in the Go First insolvency proceedings that prevented lessors from repossessing their aircraft. The global body had also put India on a watchlist with a negative outlook in May this year, stating that India failed to comply with international aircraft repossession norms after Go First was granted protection under the insolvency proceedings.

Indian airlines heavily depend on foreign lessors to finance plane purchases due to the booming demand for air travel.

According to a report by Primus Partners, India has about 800 commercial aircraft, of which 80% are leased.