Airline insolvencies in India – Part 1

While Covid-19 has highlighted the need to balance various stakeholder interests generally, some adversely impacted sectors (like airline companies) might also need to engage with insolvency procedures. In a forthcoming book chapter, I along with Hitoishi Sarkar, have detailed airline insolvency cases in India before and after the IBC and provided an overview of legal developments that can be expected in the area. In a two-part series, we will discuss legal issues and developments regarding airline insolvencies in India. This first part briefs the chapter.

Airline insolvencies are more complex than insolvencies in other sectors because of the international mobility of assets and passenger interests. As has become all too clear in the aftermath of Covid-19, when an airline becomes insolvent, travel tickets that passengers might have paid for become worthless; and there are additional welfare costs when such passengers are stranded abroad. Thus, more specific solutions than what we have under the general insolvency framework might be required.

The Cape Town Convention and the Aircraft Equipment Protocol establish an international legal system for security interests in aircraft equipment and is aimed at easing asset-based financing in the aviation sector. Although the primary aim of these legal instruments is to ease secured asset-based financing in the aviation industry, they also have insolvency-related provisions incorporated into them to deal with situations where the debtor turns insolvent. Though India is a signatory to the Cape Town Convention, there is no local legislation that gives effect to the provisions of the Cape Town Convention, and thus the repossession of the aircraft from India is subject to extant Indian laws. Insolvency proceedings in India, including those in the aviation sector, are governed by the IBC. On 8 October 2018, the Indian government proposed the enactment of the Cape Town Convention Bill, 2018 (Bill), which when enacted will give primacy to the provisions of the Convention on International Interests in Mobile Equipment (Convention) and Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol). The proposed enactment is designed to override any conflicting provision contained in any other law in force, especially the IBC and its moratorium provisions. This is a welcome change as it will align the Indian position with that of the Convention and Protocol to which India acceded in 2008.

Another area that needs attention is cross border insolvency law. As the Jet Airways case shows, a cross-border framework is important and more so for airline companies. Cross-border insolvency protocols are something that could work on a case to case basis but a legislative framework will provide certainty to both Indian companies and overseas creditors and suppliers working with Indian companies. The Indian government released draft guidelines on this in 2018 and it is expected that this will be an area of ongoing interest in the post-Covid-19 time with corporate insolvencies surging across the world.

The string of pre-IBC cases we discuss in the chapter also speaks to the promise that an informal restructuring regime can bring to the airline insolvency sector. The aviation sector features prominently in the list of  26 sectors selected by the KV Kamath Committee (set up by the RBI to make recommendations on the one-time restructuring of loans hit by Covid). However, as our chapter outlines, a restructuring regime even beyond Covid-19 will be useful generally, and for the aviation industry specifically.

Finally, it would be useful for India to think about the position of airline customers in the event of an airline insolvency. This will be explored in more detail in Part II of this two-part series on airline insolvencies in India.

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