AVIATION BUZZ

THE GO AIR Story, Part 1

THE GO-AIR CRISIS - SIMPLIFYING THE HON. DELHI HIGH COURT JUDGEMENT

BACKGROUND OF THE GO AIR LEGAL CRISIS :

“A fault that led to defaults” contended Go First (formerly known as GoAir) (“the Airline”) in an application under section 10 of Insolvency and Bankruptcy Code (IBC) 2016 for initiation of Corporate Insolvency Resolution Process (CIRP), which was admitted by the NCLT bench at New Delhi on May 10, 2023 for default of Rs 2660 crores towards its lessors. After the initiation of CIRP, a moratorium under section 14 of IBC, 2016 was imposed. It was strongly objected to on the ground that it was a move to impose a moratorium on the third-party assets as the lessors applied for deregistration and export of aircraft at DGCA before the admission of CIRP. It is also the first case of a voluntary application under IBC by an airline. The lessors filed an appeal against the order dated May 10 at NCLAT, New Delhi, stating that a moratorium cannot be imposed on third-party assets and that the NCLT has erred in its judgement, which was further dismissed by the Appellate Authority.

Lessors at the Delhi High Court

The lessors of the 30 aircraft leased to GoAir approached the Delhi High Court with a writ petition to compel an action against DGCA for failure to deregister their aircraft, which is mandatory under Section 30(7) of the Aircraft Rules, 1937. A rejoinder to the Petition also contended that the aircraft had been grounded due to operational errors and default and that it requires constant maintenance and preservation so that the stakeholders in the asset do not run into losses. The Delhi High Court realised the hardships faced by the lessors of the aircraft. However, it could only allow for inspection and maintenance of aircraft and engines on grounded planes and did not interfere in the proceedings and moratorium imposed under section 14 of IBC, as it is the NCLT that has the authority to adjudicate matters of Go Air insolvency, as the Code has an overriding effect on every other law in force prescribed by section 238. The Delhi High Court refrained from commenting upon the immediate de-registration of the aircraft and decided upon an interim application that could only allow lessors to inspect their aircraft and directed the Resolution Professional (“RP”) of Go First to cooperate with the lessors in accessing their aircraft.

The lessors in September 2023, before the Delhi High Court, presented their inability to access and inspect the aircraft, including the non-cooperation by RP of Go First in providing the aircraft’s documents and parts for inspection. The lessors also accused Go First of cannibalising the aircraft, with pictures showing several crucial parts of the aircraft missing. The court directed the Go Air RP to put forth the inspection documents relating to missing parts of the aircraft and also asked the lessors to deploy 24-hour security to all 54 aircraft at their expense. The situation led to a suffocating environment for the lessor, followed by a drop in the International Ranking of India by the Aviation Working Group (AWG) for inconsistency within the Indian Aviation Laws in application of the Cape Town Convention to which India acceded in 2008; however, India has yet to develop codified legislation addressing the situation. The reform gained momentum and increased India’s rating in 2018 with the introduction of the IDERA mechanism, which again slipped into dust in 2023.

MCA notification on October 3, 2023.

While the matter was pending before the Hon’ble Delhi High Court for deciding upon the maintenance and handling of the aircraft as well as jurisdictional questions, the Ministry of Corporate Affairs (MCA) exercised its powers under Section 14(3) of the ‘IBC’ by issuing a notification dated October 3, 2023, excluding the aircraft, air engines, and airframes, which were expressly excluded from the ambit of Section 14(1) of the IBC, giving effect to Sections 30(7) and 3(28A) of the Aircraft Rules, 1937. This automatically waived the jurisdictional issue, allowing the lessors to effectuate their remedy before the Delhi High Court. Another issue that came up with the notification that was disputed by the RP of GoAir is whether the notification is prospective or retrospective. The DGCA submitted an affidavit stating that the notification can be applied retrospectively. The Court kept the matter to be decided along with the deregistration of leased aircraft.

The lessors were deprived of the dues owed to them by the lessee; they were also deprived of their assets, which were leased out; and they also had to deploy mechanisms and security measures in place so that they may not face an irreparable loss due to poor maintenance and cannibalization of the aircraft. This turmoil has caused the leasing situation in India to deteriorate despite an IDERA mechanism developed to bring the lessee's fate in India in accordance with the Cape Town Convention. The tussle between the IBC and IDERA has continued despite several amendments to the Aircraft Rules, and despite an amendment, a stringent and rigid law such as the IBC has taken over the interests of the lessors through Section 238. Despite the notification bringing India internationally to the compliance positive outlook ranking by the AWG, several issues were constantly raised before the judicial forums in India, including questions of the application of the MCA notification, deregistration of the aircraft, impleadment of the COC, hardships to the creditors, and the corporate death of GoAir. NCLT also saw some movement in the resolution process of the respondent airline; however, no conclusion could be reached at that stage. India’s aviation ranking again dropped in 2024.

Indian Aviation Market and the fate of lessors in the matter:

The Indian aviation market has a huge growing capability due to the country’s economic development, infrastructure, labour surplus, and consumer influx, but the law is not adequate to provide smooth resolutions to the severe problems faced by aviation, acting as a hindrance to its development. When IBC was implemented in India, it was proven to be addressing a situation for the trapped domestic lenders to provide a room for them to breathe and recover whatever they can to mitigate their losses, but it was implemented as a measure favourable from the corporate and financial perspective, and it since then has constantly kept facing sector-specific challenges, leading it to be more adaptive to the amendments, focusing on mitigating sector-specific challenges to secure the best interests of creditors. However, when concerned with the corporate insolvency declared under Section 10 by the corporate debtor, the court has a special bent towards the debtor, and it aims at resolution rather than liquidation.

The present concern that has taken the situation by storm is the inclusion of the assets of a third party for the recovery of debts from lenders and financiers. It overlooks the third-party assets, and although it is in the airline's possession, it is owned by the lessors and needs to be handed over to them with due regard given to the termination clauses of the leasing agreement and the Aircraft Rules. An argument can also be put forth that the 2660 crore default is in respect of the dues payable, but that constitutes just part of the total lending of the airlines, which is more than 10,000 crore. Thus, utterly favouring just the lessors and returning the aircraft on which the loans have been offered and the charges were created would be unfair to the creditors if the aircraft were exported. However, there is still a remedy, a sigh of relief that they found under IBC, but the lessors have nowhere to go. The DGCA order for de-registration is the only way they can recover their aircraft and put it into operation. There is hope that India will harmonise the laws and regulations that see the collective interest of the lessors as well as other creditors and create a balancing environment so that India can attain the maximum benefits in the aviation sector and maintain its reputation across the international forum to create an investment-friendly scenario in aviation.

While the past year has been a roller coaster in the corporate revival of GoAir as well as deregistration issues that came up before the Delhi High Court, the court released its historical judgement on pril 26, 2024, in favour of the lessors. In its 141-page judgement, the court determined various issues placed before it, analysed the situation in great depth, and provided relief to certain lessors to deregister and export their aircraft. The issues analysed and addressed by the High Court collectively in several writ petitions are discussed below:

Brief Analysis of Delhi High Court Judgement in Writ Petitions Filed by the Lessors:

Implementation of COC: The Court observed that the committee of creditors comprising 5 major banks operating in India with an admitted debt by GoAir of 5117 crores would have a major impact on the Committee of Creditors (COC). Hence, be impleaded as a party to the petitions. The lessors contended that the writ petitions are filed against DGCA, and hence, the COC does not act as a necessary party, whom the RP of GoAir also represents.

Aircraft Rules and Aircraft Registration: Section 30(7) mandated compulsory deregistration of aircraft, and the petitioners had complied with the rule to deregister the aircraft belonging to them as per registration rule 5. Rule 5 mandates the registration requirement for aircraft bearing necessary conditions, such as obtaining a certificate of registration bearing the nationality of the state where it has been registered. Relying on the Civil Aviation Manual of 1998, paragraph 7.6, which states that the registration will be valid if the lease is in force,. Thus, the termination notice sent by the lessors under the contractual terms indicates the lawful termination of the leasing agreement.

IDERA and Cape Town Convention References:? All 54 aircraft were IDERA holders, which poses a mandatory obligation on the Government of India through DGCA to deregister the aircraft under rule 30 (7), applications for which were already made by the Lessors of the aircraft before the initiation of CIRP under section 10 of the IBC. The Cape Town Convention must be given due regard, and the courts cannot intervene as a matter of equity and protection based on its private business transaction law. Aircraft rule 30(7) makes the deregistration mandatory by using the word ‘Shall be cancelled’. Thus, it implies an obligation on the DGCA to exercise its authority, which is mandatory under the law and not discretionary.

Discussing the Jurisdiction: The Delhi High Court observed that Section 60(5) of IBC would be applicable solely in matters “relating to or arising out of insolvency,” whereas the lessors have questioned the authority of DGCA by ‘Writ of Mandamus’ regarding the inability to exercise their legal duty under Section 30(7) to deregister the aircraft vide letters dated May 12, 2023, May 13, 2023, and May 19, 2023, to deregister some of the lessor’s aircraft within 5 working days, thus bringing their action under the scrutiny of the process of judicial review and administrative action. NCLT has no authority to adjudicate on matters relating to judicial review of administrative actions. It is only the writ courts who have the authority to intervene in such matters to decide the legality of a public law and exercise of authority under articles 32 and 226 of the Constitution of India.

Addressed the Nexus between deregistration and insolvency: The Court while referring to the Gujarat Urja Case and Arcellor Mittal Case, held that section 60 (5) can only be exercised when the reason for the termination of the lease agreement was the insolvency of the Corporate Debtor. In the case of GoAir, the termination of the lease was due to defaults and demand for deregistration, which happened before the CIRP initiation; thus, there is no nexus between the two events. The defaults occurred since 2020 and several notices to cure defaults were sent to GoAir, Failure to cure such defaults led to the deregistration and export of the aircraft. The de-registration demanded lessors from DGCA and the authority’s inability to exercise its duty are in the larger public law domain, wherein a question of international application of the aircraft rule is contended by the Lessors. The deregistration was due to defaults that occurred by GoAir in payment of lease rentals, not an event being the result of insolvency.

No Inconsistency between IBC and Cape Town Convention: Section 238 disputed by the RP of GoAir having an overriding effect on the Aircraft Act and Rules were contended by the Lessors to be applicable only if there exists inconsistency between the provisions of the act and IBC, Section 14 (3) (a) specifically bars the section from its applicability to transactions, agreements and arrangements notified by the Central Government in consultation with appropriate authorities. The Ministry of Corporate Affairs has already notified the exclusion of moratorium on Aircraft, aircraft frames, and related aircraft objects willing to harmonise the Aircraft Rules with Cape Town Convention and IBC. India acceded to the Cape Town Convention in 2008 and made every effort to ratify the same into law. The Cape Town Convention, under ‘Alternative A’ of its Protocol, has specified remedies for leasing situations and insolvency. Thus, a harmonious interpretation of the law for global interest needs to be made. Thus, the court concluded that there is no inconsistency among the provisions of IBC section 14 and Aircraft Rules and that the deregistration is not contrary to insolvency proceedings.

Applicability of MCA notification determined by Court: The court analysed the fact that the MCA notification is to be given retrospective application based on the fact that the notification includes Aircraft, aircraft frames, and related objects that fall under the purview of section 14 (3) of the IBC. Since India acceded to the Cape Town Convention in 2008 and “Alternative A” of the protocol for matters arising out of insolvency proceedings has to be applied and efforts have been made to incorporate the same under the Aircraft Rules, the court believes that the notification is retrospective and applies retrospectively to the matters since 2016 when section 14(1) of the IBC came into effect. This contention was put forth before the Delhi High Court by the DGCA as well as the Union of India, which held that it was in the larger national and public interest and that it was a necessary adjunct to the application of the convention.

Deregistration of aircraft to be decided by DGCA: Section 18 of the IBC specifically bars the assets owned by a third party under a contractual agreement to be collected by the insolvency resolution professional to determine the corporate debtor’s financial position. The lease agreement was not in effect when the moratorium over such assets was imposed. ?It had been terminated by the lessors following the default by the corporate debtor and deregistration notices sent to DGCA from May 2, 2023, to May 5, 2023. Thus, the deregistration request began before the moratorium could be imposed, enabling the right of the lessors under the agreement to repossess, deregister and export their aircraft. It was a lawful termination of the agreement, which remained undisputed from the RP of GoAir and hence the moratorium cannot be imposed on the lessor’s aircraft and the DGCA had the obligation to have a timely deregistration of the same.

The maxim Dura Lex Sed Lex: Referring to a principle upheld in Popat Bahiru’s Case, “Law, no matter how harsh, must be complied,” what seems to be a derivative of the Austinian theory may be interpreted in the following context: the deregistration of the aircraft may cause hardship on the corporate debtor but the court is under the obligation to enforce it with no exception. The hardship of one party cannot be overlooked considering the impact of the leasing situation on other Indian Airlines, the decline in international compliance ratings (2/5), and the increase in rental premiums charged by the Lessors to other commercial airlines. The present case may have a chain of reactions on the overall growth of the aviation sector in India at the global level.

Directions of the Delhi High Court in Lessors vs. GoAir.

The Delhi High Court, in its judgement dated April 26, 2024, passed the following direction:

?? The deregistration decline letters by DGCA dated 11, 12 and 19, 2023 were set aside

?? The DGCA was directed to deregister the aircraft within five working days under section 30(7) of the Aircraft Rules, 1937.

?? Till the deregistration process is underway, the lessees and their authorised representatives are tasked with the maintenance activities relating to the aircraft.

?? The court has issued directions that DGCA and AAI shall aid and shall grant the lessees or its employees, agents, officers, and/or authorised representatives access to the aircraft for which the judgement has been passed.

?? Also restrained the RP of GoAir from intervening in any matter relating to the operating or flying of aircraft and also restrained them from further cannibalization of the related parts of the aircraft.

?? The RP of GoAir is directed to provide all the necessary documents relating to the aircraft, including the records relating to several parts, including the missing ones, as well as storage, technical, and historical records of the aircraft.

?? The lessors were also granted relief to get their aircraft exported from the country.

?? The DGCA was directed to submit the pending dues of the lessors within three working days from the judgement and provide the certificate of airworthiness, flight ferry permit, and all documents necessary to ensure compliance with sections 30(7) and 32A of the Aircraft Rules.

The court also dismissed the impleadment of the COC request in the matter of deregistration and export.

Conclusion:

The present case was crucial in determining the complexities of the leasing situation in India. It also determined that aviation as an industry is a complex one with several stakeholders involved, including international participation. It is no longer a matter confined to domestic interest and jurisdiction. India acceded to the Cape Town Convention almost a decade ago, but the developments in legal processes have been quite slow. This has resulted in complex insolvency situations in several cases, like the Kingfisher and Jet Airways insolvency cases. It is high time now that India needs to enact laws in consonance with international standards and conventions since the industry is global and a huge economic impact can be seen if the industry is affected. It was also well-analysed by the Delhi High Court in the above case that international ratings for compliances under the Cape Town Convention have fallen from 3.5/5 to 2/5 despite India being the third largest aviation market in the world. This indicates that the demand for air travel and carriage for passengers has increased in recent years, specifically in the post-COVID era. However, if we see the legal developments in the aviation industry compared to those of the U.S., China, and the European Union, we still lack regulations. Leasing is one of the major expenses of an airline, amounting to almost 16% of that of fuel. If the market is restricted by floating legislation and major challenges owing to the recovery of aircraft fueled by the insolvency of the airlines, there will be less market entry into the Indian aviation industry, with most lessors trying to recover their expenses by increasing their airfares as well as taxes. There is a dire need to harmonise the Cape Town Convention with the domestic aviation laws in India as it addresses the complexities and specific situations relating to aviation.

The judgement by the Hon. Delhi High Court has paved the way for revolutionary development in the Indian aviation industry, easing out the suffocating environment created by the legislation that may have severely affected the interests of the lessors in their assets.

#aviation #Indigo #Airbus #boeing

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This article was written by Avialaz Consultants team with Sanjay Lazar and Shraddha Pandey

Avialaz Consultants an aviation consultancy and research organisation, founded by Sanjay Lazar, an author and Harvard Law Professional with 37 years’ experience in aviation, law, public speaking, and leadership coaching.

He is available at @lazar1 on Linked-In & @sjlazars on X (formerly Twitter)

Shraddha is an advocate and is currently doing her LLM at MNLU Mumbai and is researching at Avialaz.

Sanjays book ‘On Angels’ Wings — Beyond the Bombing of Air India 182' is a number 1 #Bestseller available on Amazon.in

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