Government may implement 2-month asset freeze of airlines under insolvency

To prevent immediate repossession of aircraft by lessors after default, the government is contemplating a two-month moratorium rule for the aviation sector

The government is considering implementing a two-month moratorium to ensure that aircraft of a bankrupt airline is not immediately taken away by lessors, the Economic Times (ET) reported on Wednesday.

The Ministry of Corporate Affairs (MCA) in October exempted aircraft, helicopters, and aircraft engines from moratorium under  insolvency law, citing India's adoption of the Cape Town global convention that allows airlines to retain leased aircraft for a maximum of two months in case of rental defaults. 

However, as the civil aviation ministry's planned Cape Town Convention Bill is yet to be introduced in Parliament, the MCA might advocate for a two-month moratorium on aircraft of insolvent airlines until the convention is formally adopted.

Under the current provisions of India's Insolvency and Bankruptcy Code (IBC), the transfer or disposal of assets of a stressed firm is barred through a moratorium once resolution proceedings are initiated. The issue of moratorium gained attention after Wadia-owned Go First declared voluntary bankruptcy in May, and the case is currently pending with the Delhi High Court.

According to ET, experts, including former chairman of the insolvency regulator MS Sahoo, have noted that there is effectively no moratorium in place following the October exemption, as the Cape Town provision is yet to be implemented.

The intent behind the MCA's exemption was to facilitate the adoption of the Cape Town Convention and prevent lessors from repossessing aircraft immediately after an insolvency case is admitted. The civil aviation ministry had sought the exemption, arguing that the IBC moratorium rule would increase leasing costs for all airlines.