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Enhance Aircraft Lessor Rights in IBC

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• GS Paper 3 Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
• Tags: #IBC #CapeTownConvention #Aviation #CurrentAffairs #MintEditorial #UPSC

Why in the News?

The Ministry of Corporate Affairs in India has recently issued a notification exempting aircraft-related transactions from certain provisions of the Insolvency and Bankruptcy Code (IBC). This move aims to protect the rights of international aircraft lessors and ensure compliance with international agreements.

Aircraft Lessors Find Relief

• The Ministry of Corporate Affairs has exempted international aircraft lessors from the mandatory moratorium imposed by Section 14 of the Insolvency and Bankruptcy Code (IBC).
• This decision ensures that transactions, agreements, and arrangements related to aircraft, aircraft engines, airframes, and helicopters, under the Cape Town Convention and Cape Town Protocol (CTC), remain unaffected.
• The move provides international lessors with the confidence that their interests in leased assets to Indian operators are protected, as India is a signatory to these international agreements since March 2008.

Massive Aircraft Orders

• A recent Barclays report shows Indian airlines have placed substantial aircraft orders in recent years, with over 1,400 aircraft ordered between 2009 and 2022, along with IndiGo’s 500 and Air India’s 470 orders in 2023.
• This makes India one of the largest buyers in this period.
• However, about 75% of these planes are on lease, emphasizing the significance of aviation financiers and lessors.

Government’s Supportive Move

• To enhance aviation’s credibility and inspire confidence among financiers and lessors, the government introduced Rule 30(7) in the Aircraft Rules, 1937.
• This rule is in line with an international agreement called the Cape Town Convention. It gives aircraft lessors (those who lease aircraft) the right to ask for permission to take back their planes.
• This rule played a pivotal role in the Jet Airways case, where creditors utilized these rights to repossess aircraft.

Go Air’s Unfortunate Situation

• In the case of Go Air, aircraft lessors faced a difficult situation.
• The aviation authority hadn’t officially allowed the removal of aircraft when a legal process called the Insolvency and Bankruptcy Code (IBC) was initiated by National Company Law Tribunal (NCLT)
• This legal process included a temporary freeze on various actions, including the recovery of aircraft by lessors.
• So, even though lessors had the right to take back their planes, they couldn’t do so during this legal process.

IBC’s Precedence Over Rule 30(7)

• The IBC moratorium took precedence over all other statutes, including Rule 30(7), leaving lessors unable to recover their aircraft in Go Air’s case.
• Highlighting the paramount importance of the IBC in such matters.

IBC Freeze Upsets International Aviation-Finance

• India’s decision to prioritize the Insolvency and Bankruptcy Code (IBC) over the Cape Town Convention (CTC) obligations upset global aviation financiers.
• The Aviation Working Group (AWG), led by Airbus and Boeing, issued a warning for India.
• Potentially affecting Indian carriers’ ability to secure aircraft leasing and financing deals supported by Irrevocable Deregistration and Export Request Authorization (IDERA).
• Recently, India’s rating on the CTC Compliance Index was downgraded from 3.5 to 2 by AWG.

Special Rules for Aircraft Needed

• To fully reassure international aircraft lessors and creditors, a unique legal and regulatory system aligning with the Cape Town Convention (CTC) is required.
• India had initiated steps in this direction with the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022, but it didn’t proceed.
• The recent government notification is a positive move that can help regain trust from international aviation stakeholders.

Impact on Airlines

• While the restoration of IDERA rights for aircraft lessors is good for them, it might harm the aviation insolvency resolution system in India.
• If all leased planes are taken back by lessors when an airline defaults, it can make it hard for the airline to continue operations and might lead to its closure and liquidation, remaining planes could become unusable.

Lessors as Operational Creditors

• Aircraft lessors are currently classified as “operational creditors” under the IBC, which gives them less favorable rights in case of liquidation.

Lessors’ Ranking Clarity Needed

• Some lessors may choose to keep their aircraft with struggling airlines to support them.
• However, the current rules don’t clarify how these lessors will be paid during insolvency.
• To encourage them to stay, the IBC should be updated.
• It should prioritize timely lease payments to lessors over other expenses during the resolution process and treat them equally with other secured creditors.
• This would make it more appealing for lessors to stay with struggling airlines as stakeholders.

Balancing Lessors’ Rights and Incentives

• A small change in the IBC can strike a balance.
• It should legally recognize agreements between willing lessors and resolution professionals to give special rights to lessors.
• Firstly, timely lease payments to lessors should be a top priority during the resolution process.
• Secondly, their interests should be treated equally with other secured creditors.
• These changes will make it more attractive for lessors to support struggling airlines.

The government’s notification will apply to future cases. But lessors affected by previous cases may try to seek relief through the courts since the new rules are seen as helpful.

Source: Livemint

Mains Question

Explain the recent notification by the Ministry of Corporate Affairs regarding the Insolvency and Bankruptcy Code (IBC) and its impact on aircraft lessors rights.