Cape Town Convention: Rationalising the Interests of Aircraft Lessors during Moratorium under IBC
C A P Sai Srinivas
4th Year, B.com LL.B(Hons.), School of Law Lovely Professional University
Introduction
The Insolvency and Bankruptcy Code (IBC) 2016 is a consolidated social legislation enacted with inclusive features of time-bound resolution with a single-window clearance mechanism, providing representation and relief to the creditors and respite to the corporate debtor in the form of moratorium during the insolvency proceedings. The application for initiation of Corporate Insolvency Resolution Process (CIRP) against the corporate debtor can be filed by the financial creditor, operational creditor, and corporate debtor, itself, after the admission of the application by the Adjudicating Authority i.e, National Company Law Tribunal, moratorium comes into effect followed by a public announcement as prescribed under Section 13 of the IBC.
The Ad rem of Moratorium
The bare reading of the Moratorium under Section 14 of the IBC means a temporary suspension of the court deliberations. It imposes a “stay” on the legal proceedings for recovery, enforcing any security interest, or execution of a decree against the corporate debtor. One of the objectives of this code is to restrict the action of collection of debts by the creditors (including lessors) against the corporate debtor(including lessee) during the resolution process and to enable a standstill period for negotiation between them. At this outset, the moratorium is vital for safeguarding the interests of the corporate debtor.
In matters of Innovative Industries Ltd v. ICICI Bank Ltd. (2017) ibclaw.in 02 SC the apex court held that the moratorium comes into effect on the date of admission of application and to provide a breathing space for the suffocating corporate debtor surrounded by the legal entanglements and the opportunity for reorganizing the business in order to continue and operate the same during the moratorium.
Status quo of aircraft lessor under IBC
As such, no express provision defined the term lessor under the IBC Code 2016, but the judicial precedents have set the notion to cover the lesser under the ambit of the operational creditor. In the matters of Pramod Yadav & others v. Divine Infracon Ltd, the Delhi high court in order to determine operational debt, applied a litmus test based on goods and services that were provided by the lessor as part of input in producing the output or rendering of services by the lessee in course of business.
It further signifies the direct nexus with the business operation of a lessee in relation to the goods and services provided by the lesser. The appropriation of input-out test in the purview of aircraft leasing as the aircraft engines, crew, maintenance and insurance collectively known as (ACMI ) services by the lessor has invariably formed an explicit connection with that of the lessee. The lessee was obliged to pay the hourly, daily, monthly, and yearly payments to the lessor and any default to the same has been termed as an operational debt under Sec 5(21) of IBC.
Cape Town protocol vis a vis Moratorium
The CapeTown “ Convention on International Interests in Mobile Equipment” the protocol being its transnational applicability acting as a guiding direction for the contracting states to align the domestic laws on secured creditors, and lessors in accordance with the protocol. Interalia the preamble connotes the contracting states to facilitate and finance the equipment of aircraft in harmonizing the international interest by clearing the dark clouds cast due to the predominance of domestic legislation as a disregard in securing the rights of aircraft lessor in dealing with high-value assets of aircraft.
The moratorium under the IBC 2016 subsists during the initiation of the Resolution Process. Consequently, it restricts the lessor from repossessing the aircraft for a period of 180 days which can be extended up to 270 days in the context of formulation of resolution plan. The long-standing period of withholding the rights of the aircraft lessors has transboundary effects in relation to the interest of the lessors. The pretext to understand the stressed implication of a moratorium on the aircraft lessors can be adduced with the prevailing conditions in the aviation industry.
The aircraft leasing business is significantly capital intensive in addition to this the upfront costs of labor, maintenance, and depreciation impose a financial burden on the aircraft lessor. According to S&P Global ratings during FY 2018-19, the average debt-to-equity ratio of the top four aircraft leasing companies stands at 2.53%, which signifies the majority of the leasing companies opt for higher leverage in terms of acquisition, and financing of the aircraft. The sustenance of lessors is directly dependent on the flow of profits arising from the leasing activities and various other factors that are intertwined with the industry including fluctuations in aviation fuel costs, and seasonal demand for aircraft make the sector more fragile and shaky to the leasing companies.
Prioritizing the Interests under Cape Town Convention.
Article XI of the convention states the remedies on the insolvency to the lessor; it provides for the inclusion of two Alternatives namely; Alternative “A” and Alternative “B”.India has adopted Alternative “A” in accordance with it provides a span of two calendar months notably 60 days from the date of commencement of insolvency proceedings by bridging a time gap in lieu of a moratorium of 180 days which can be extendable up to 270 days under the code. The ratification of the convention by the parliament recognizes the rights of lessors by emphasizing their obligations arose due to the leasing activities in terms of costs related to the maintenance, depreciation, and fulfillment of the longstanding debt obligations.
Considering the issues on the management of the aircraft it shall be the duty of the debtor or administrator in this case resolution profession to undertake the responsibility of preserving the value of the asset. Further, it balances the interests of the debtor with a condition that such lessor must be positioned to cure all his defaults except the cost of the insolvency and agree to the performance of the future obligations in such case there exists no second waiting period.
Contrary to the above if the debtor fails to cure the default within the waiting period of 60 days then the convention paves the way for the lessor to entitle and repossess the aircraft and it will become freehold to sell, lease, modify for the benefit of lessor. The matters confined to the deregistration and the export remedies have been enshrined under Article XIII of the protocol whereupon the authorized party (the aircraft lessor) submits consent for the deregistering of the aircraft from the recordation and proposes for the physical transfer from the contracting state.
The process of deregistration as amended under Rule 30(7) of Aircraft Rules 1937 provides a stipulated time for deregistration within 5 days from the date of receipt of the application. In relation to the export of aircraft under Rule 32(A), five working days are provided or the DCGA ( Director General of Civil Aviation ) to facilitate the process of transfer. In the matters of the Super tech the Delhi High Court called the impugned order of DCGA for deregistration stands suspended for the period of two months on the basis of an agreement by the petitioner to repay the outstanding rental payments if the petitioner refuses to do so will automatically revive the process of deregistration.
Way forward
India’s accession to the treaty and the absence of an insistent legislative framework in formulating an enactment by the adoption of CTC protocol have led to the general applicability of the provisions related to the moratorium under the domestic insolvency proceedings thereby hampering the interest of the aircraft lessors entangling them with the longstanding waiting periods which inadvertently affect the market conditions in the realm of asset-based financing.
The efforts in channeling India’s commitment to the CTC protocol will address the concerns related to safety and positioning the lessors by reducing the barriers to exit in an investor-friendly ecosystem. There exists scope for the initial challenges relating to the adoption of the protocol as some of the provisions may be in conflict with the domestic law, but mitigating the same with prevailing conditions and follow-up of best practices in the outer world may lessen the aggravation of the initial hick-ups.
The balance of approach by upholding the interests of the lessors and the debtor in matters relating to the insolvency thereby providing a suitable framework for the revival of the debtor in light of the moratorium will enable a win-win situation and a wider scope in legislating with due public consultation, deliberations with industry experts will reveal the industry implications and taking proper legislative measures by keeping potentiality alive in the Indian aviation market.
