The main objective behind enacting IBC was to realize the true and efficient value of assets of insolvent debtors but the provisions of IBC have deteriorated the worth of assets possessed by airline companies contrastingly in all practicality.
The period between 1980-91 witnessed multiple airline insolvencies in USA. In this context, it was said that the aviation industry of USA has successfully proven the oldest adage about aviation sector: ‘what goes up, must come down’ true. In 2017, Monarch Airlines of the United Kingdom was placed into administration with over lakhs of passengers stranded overseas and severely affecting about three quarters of a million people. Closer home, license of Kingfisher Airlines was revoked by Director General of Civil Aviation because of multiple allegations of willful default of loans. Some Advocates of ‘implication of a political economy on the law’ argue that this hastened the process to enact Insolvency and Bankruptcy Code, 2016 (IBC). Three years since the enactment of Insolvency and Bankruptcy Code, Jet Airways, another major airline was hit with the same fate. Jet Airways discontinued its operation on June 20, 2019 after the corporate Insolvency and Resolution Process of the company began. Jet Airlines was the first case of airline insolvency under the IBC and thus, brought various unique issues arising out of insolvency in aviation in India. This article aims at studying the issues arising out of insolvency of an airline company under the current provisions of IBC along with the overview to look forward.
ISSUES INVOLVED IN AIRLINE INSOLVENCY IN INDIA
Considering the nature of operations and the complexities involved in aircraft financing and asset preservation, various issues and difficulties arise in bringing aviation sector within the ambit of Insolvency and Bankruptcy Code.
A. CONFLICT WITH THE LESSOR’S CONTRACTUAL RIGHTS AND IBC
Aircrafts are the primary assets of any airline company but for most of the airlines, merely owning an aircraft is not feasible from an economic point of view. Thus, airlines often engage in multiple financial engagements with financial institutions and also with lessors. For instance, few airline companies enter into leasing agreements with lessors to acquire lease over aircrafts or related assets. They might also enter into financial agreements with banks to finance leasing of aircraft activities. However, the title of the aircraft may not pass to the airline depending upon the lease agreement. Therefore, in case of default it is likely that the lessor would claim its interest over the aircraft leased and obtain possession over it. But once moratorium under IBC is declared by the bankruptcy court recovery of any property by an owner or lessor (where such property is occupied by or in the possession of the corporate debtor) is prohibited under Section 14(1)(d) of the IBC for the duration of the moratorium period. Strictly, Section 14(1)(d) of the IBC only prohibits recovery and re-possession and makes no mention of termination of the underlying lease arrangement itself. This prohibition may further spoil the relationship an airline company has with its creditors and lessors.
B. LEGAL REQUIREMENT FOR RUNNING AN AIRLINE COMPANY
The aviation sector requires a niche set of skills, knowledge and training. Further, airline companies have to abide by various licensing rules and regulations. For instance, Aircraft Rules, 1937 mandates to have an Air Operator Certificate in compliance with its annexed schedule XI. To obtain such a certificate, airline companies are required to appoint Accountable Manager (AM) who exercises financial authority over the airline operations.
Since during Corporate Insolvency Resolution Process (CRIP), a Resolution Professional has complete authority, he/she also takes the post of AM and therefore has to assume all the corresponding risks, liabilities and regulations as stipulated by DGCA. Since RP may not have required expertise in this sector, it becomes necessary that the RP must persuade senior professionals and skilled staff of an airline company to ensure compliance with the DGCA rules in order to run the company. Any non-compliance with the legal rules and regulations may further attract legal liability for the airline company which is already going through tough times.
C. TREATMENT OF CLAIMS OF VARIOUS INTEREST HOLDERS
Apart from claims arising out of debt to financial creditors, operational creditors and lessors, a significant portion of claims against an airline company involves claims filed by consumers. During insolvency of Airline Company, consumers face financial loss as well as personal welfare loss. Therefore, assessing and entertaining such claims of each and every customer may become an onerous task for RP especially after considering the large volume of such claims filed by customers and possibility of duplications of claims. Moreover, incapacity of RP to handle and entertain claims of consumers may affect the relationship the company has with its consumers.
D. LONG TIMELINE FOR RESOLVING INSOLVENCY APPLICATION AND THE ISSUE OF ASSETS PRESERVATION
Under the current framework of IBC, time allotted for solving insolvency application is now 330 days. Since assets of the airline industry are capital intensive in nature requiring regular operation and maintenance expenditure, such long time period for solving insolvency petition aircrafts may not be feasible, causing the airline company to depreciate in value at a tremendous pace. Also, such a long time period under the IBC affects the job prospective of thousands of employees working in the Airline Company. In the example of Jet Airways, around 20,000 jobs were adversely affected. NCLT in Jet Airways also emphasized on the protection of the interest of the employees and considered it a matter of national importance.
CAPE TOWN CONVENTION AND THE CASE OF APPARENT CONFLICT
Cape Town Convention (CTC) and Aircraft Protocol form the international aviation framework addressing various issues including protection of the interest of creditors and lessors in case of default by an airline (debtor). The principal aim of CTC/ Aircraft Protocol is to achieve efficient financial realization of the highly valued aviation assets. The convention also provides for ‘Remedies on Insolvency’ under Article XI involving cancelling registration of aircraft and export of aircraft as a measure of interim relief. CTC/Aircraft protocol provides for speedy and interim relief to creditors and aircraft lessors and reduces the risk element for such creditors and aircraft providers which ultimately leads to a reduction in the cost of leasing and financing of aircraft and in the end benefitting the consumers.
65 countries have signed and adopted the provisions of this convention by way of legislation. India is also one of the signatories of this convention. However, it has not adopted the provisions of this convention in its domestic laws as it has not ratified the treaty. In the light of this, Ministry of Civil Aviation introduced the Cape Town Convention Bill, 2018 in order to give effect to the provisions of CTC/ Aircraft Protocol by making relevant amendments in Aircraft Rules, 1937 but the bill was not passed by the Parliament.
However, there exist real conflicts between the existing Insolvency Code and the provisions of this Convention and Protocol once the Cape Town Convention Bill is passed by the Parliament. For an instance, Under Article XI of CTC, the insolvency administrator or debtor is required to give possession of aircraft to the creditor before the end of a waiting period of 60 days. However, this waiting period is in direct conflict with the moratorium granted under section 14 of IBC which provides for a period of 180 + 90 days and during this time period, possession of aircraft/equipment or enforcement of any security by the creditor is prohibited.
Lease agreements involving lease of aircrafts and aviation equipment are considered provision of services, hence, these are treated as operational debts and the lessors as operational creditors. Thereby, operational creditors would be comparatively lower in hierarchy in terms of payment as compared to the claims of financial creditors. Further, Cape Town Convention Bill contains an overriding provision which overrides the other existing provisions of law. Section 238 of IBC also affords primacy to the provisions of IBC over other conflicting laws, thus signifying the apparent conflict between the two legislations. Thus, it is still unclear as to which piece of legislation will prevail and which piece of legislation will govern transactions taking place in Indian territory and transactions and agreements taking place overseas.
Aviation assets are the unique assets involving large financial leases, credit agreements and huge investments. However, the value of these assets gets severely affected by the current framework of IBC code. The main objective behind enacting IBC was to realize the true and efficient value of assets of insolvent debtors but the provisions of IBC have deteriorated the worth of assets possessed by airline companies contrastingly in all practicality.
From the analysis of the provisions of the Code, it appears that Insolvency Code is ambiguous, posing new sets of challenges for the aviation sector. Many provisions in the Code ignore the unique framework in which a new airline company operates and conducts its operation. It becomes necessary to have a dialogue with the relevant stakeholders in order to decide whether the aviation sector requires any new specific insolvency law. A similar practice is followed in USA and UK to deal with the unique issues arising in aviation. Lastly, after identifying the unique issues appearing in the insolvency of an Airline Company, it is imperative that there should be a separate insolvency framework for the aviation sector in order to protect the interest of creditors, lessors and maximize the realization value of aviation assets of the airline industry.
 Sabino, A, Flying the Unfriendly Skies: A Year of Reorganizing Airlines, Aircraft Lessors, and the Bankruptcy Code, J. Air L. & Com. 57, 841.
 Department of Transport, London, Airline Insolvency Review, (March 2019) available at <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/800219/airline-insolvency-review-report.pdf>.
 Notre Ripple, Special Protection in the Airline Industry: The Historical Development of Section 1110 of the Bankruptcy Code, 78 Dame Law Review 281 (2002).
 Sec 78, Part XI, Aircraft Rules, 1937.
 Sec 11B, Aircraft Rules, 1937.
 Bahram Vakil & Gauisa Shaikh, Insolvency in Aviation Sector, Insolvency and Bankruptcy Code, A Miscellany of Perspective (2019).
 Sec 12, Insolvency and Bankruptcy Code, 2016.
 State Bank of India v. Jet Airways (India) Limited C. P. 2205 (IB)/ MB/ 2019.
 Article XI, Alternative A, Aircraft Protocol, 2001.
 Nikhil Gupta, The Murky Case of Aviation Insolvency in India, India CorpLaw, available at <https://indiacorplaw.in/2019/08/murky-case-aviation-insolvency-india.html>.