The National Company Law Tribunal (NCLT) recently gave its nod for the liquidation of Go First Airways.1 This airline company is the second major airline that had to liquidate in the recent past, significantly affecting the airline industry. Go First Airways aimed to provide affordable air travel to the common middle class, a laudable move that gave it early success, but it could not handle the weight of its financial capabilities, leading to its insolvency. The aviation industry in India today is majorly dominated by Indigo and Air India and ranks third globally in terms of its size.2
The Indian aviation industry is a concentrated market, and therefore competition is cutthroat. In such a market, the exit of one player leads to further concentration of the market, thereby lessening the chances of revival from insolvency. Moreover, the sector is highly dependent on aircraft leasing, a mode of operation where the airline company need not purchase aircraft; instead, it leases them from foreign companies to reduce costs. While this move is appreciable, it has led to problems between airline companies and aircraft lessors, which have been spanning ever since Jet Airways shut down.
Go First's Collapse: CTC v. IBC Clash
In 2023, Go First voluntarily entered insolvency invoking the IBC.3 Once the CIRP was initiated, the moratorium was imposed, which the aircraft lessors opposed, as this stopped them from repossessing their aircrafts according to international aviation laws, primarily the "Aircraft Protocol" and the "Cape Town Convention" (CTC). India became a signatory to the CTC in 2008 but is yet to implement legislation to formally implement it. The CTC seeks to protect the rights of aircraft lessors and allows them to repossess their aircraft even when a moratorium has been imposed on a company undergoing insolvency proceedings.
Meanwhile, the IBC was enacted to help companies maintain their status as a going concern by providing them an opportunity to revive. But with the CTC in place and the notification of the Ministry of Corporate Affairs4 exempting aircraft lessors from the ambit of section 145, it seeks to challenge the very notion of the IBC. The Delhi HC, in an important judgment, pointed out that India's rating under the Convention has dropped from 3.5 to 2 out of 5. which affects the viability of the aviation industry for future leasing, and iterated that the aircraft leased by Go First were not its assets as they were not owned by the airline and that the moratorium is not applicable to it as the lease agreement was terminated prior to the commencement of the insolvency proceedings.6 This ruling is significant as it upheld the rights of the lessors and allowed them to repossess their aircraft while acknowledging the importance of upholding international treaty obligations.
Balancing Interests
Although the provisions of the CTC are not legally binding in India, it is imperative to uphold its principles as India has signed it. While the Convention does not seek to supersede municipal law, the ministry, via its notification, clarified the exemption under the IBC, providing a major win to the lessors and maintaining the leasing viability of the Indian aviation sector. India, in its declaration under the Convention, has chosen Alternative A of the Aircraft Protocol7 Alternative A provides for a 'waiting period' and gives the contracting states the autonomy to choose the period, which India has chosen to be 60 days, conflicting with the 180-day moratorium period. Instead, India could increase the waiting period to 180 days without any extension, post which, if the airline company is unable to repay the debts or agree to perform all future obligations, the aircraft lessor can be allowed to repossess their aircraft.
Lessors of aircraft leasing agreements are considered to be operational creditors under the IBC; therefore, they are not given the first priority when it comes to clearing the debts from the assets of the company. Thus, to seek the repossession of their aircraft, they would require the written consent of the financial creditors according to the Aircraft Protocol8 But this raises further conflicts, which is why a better alternative, like allowing the aircraft lessor and airline company to enter into a 70-30% profit-sharing agreement, proves beneficial. This way, if the insolvent company is unable to fix the default caused by the insolvency proceedings9 but is allowed to retain possession of the aircraft and is allowed to run their business while they are going through CIRP and consents to a profit-sharing agreement, then the lease payments would be paid off, and the airline would also get a chance to revive. This way both the CTC and IBC can be in harmony. But if the parties are unable to reach a consensus on the profit sharing, then the lessors should be allowed to repossess their aircraft.
Lastly, a better solution to avoid this entire conflict is to allow only those airline companies to enter the market who at least own 50% of the aircraft and hold the capacity to bear the costs associated with it. Only when this capacity is proved could they be allowed to go into leasing aircraft.
While the Delhi HC came to the rescue of the aircraft lessors, the helpless airline companies continue to go insolvent; this raises a need to implement new legislation to solely deal with airline insolvencies, as the functioning of this industry is predominantly different from other industries. The "Cape Town Convention Bill, 2018" is a promising move to resolve this issue and is predicted to bring good outcomes if passed, as it will assist in the insolvency process of the airline companies and also provide confidence among aircraft financiers to provide India with a broader platform to lease aircraft. By the passage of this bill, India can also make use of the "Cape Town Discount" set by the "Organisation for Economic Cooperation and Development."
Footnotes
1 Tazeen Ahmed, 'NCLT New Delhi Orders Liquidation of Go Airlines (India) Limited Live Law (24 January 2025) https://www.livelaw.in/ibc-cases/nclt-orders-liquidation-of-go-airlines-india-limited-281883?fromIpLogin=88179.98929250828 accessed on 26 February 2025
2 Thejas Velaga & Aastha Gupta, 'Airline Insolvency in India: Balancing Interests between the Insolvency and Bankruptcy Code and the Cape Town Convention' [2024] 17 NUJS L. Rev. 1.
3 The Insolvency and Bankruptcy Code 2016, s 10.
4 Ministry of Corporate Affairs Notification (2023).
5 IBC 2016, s 14.
6 Accipiter Investments Aircraft 2 Limited & Anr v. Union of India, through the Ministry of Civil Aviation & Ors [2024] SCC Online Del 3125.
7 Aircraft Protocol, Art. XI.
8 Ibid, Art. IX(1), (2).
9 Ibid, Art. XI(7).
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