Govt may clarify prospective clause of IBC exemption for aviation

The High Court has asked the government for its response to a plea by a Gofirst lessor

The Ministry of Corporate Affairs (MCA) is likely to clarify to the Delhi High Court that the recent amendment to Insolvency and Bankruptcy Code (IBC) regulations, which exempts aircraft, engines, and related assets from the moratorium clause, is intended to be prospective and apply to future insolvencies, according to official sources.

The high court had sought the government’s response to a plea by a Go First lessor.

On October 3, the MCA provided a major relief to aircraft lessors by exempting all transactions and agreements relating to aircraft, aircraft engines, airframes, and helicopters from the moratorium under Section 14 of the IBC. This move may deter airlines that end up in insolvency but bolsters lessors’ business.

The MCA's notification aligns with the Cape Town Convention Bill introduced by the Civil Aviation Ministry in 2018. The Bill assures lessors that their assets, such as aircraft, will not be seized if a company becomes insolvent. This has been a concern in the case of Go First, which is currently undergoing insolvency proceedings.

A senior government official told Business Standard that the law's intent is to exempt leased engines and aircraft in future insolvencies and not where the insolvency process has already begun. In Go First's case, lessors had applied for deregistration of 45 aircraft prior to its admission of insolvency. These applications were put on hold following the commencement of the moratorium.

 Legal opinion is divided on whether Go First's lessors can use the new provision to regain control of their assets from the stressed airline. Lovejeet Singh, partner at Chandhiok & Mahajan, said: "This is a major development and will provide protection to lessors going forward. It takes India one step closer to its commitment under the Cape Town Convention. However, it may not provide relief to Go First's lessors as the notification is not applicable retrospectively."

Many believe that clarity on this issue will come once the Delhi High Court pronounces its order.

Earlier in June, the MCA granted a similar exemption for petroleum assets leased out by a company undergoing insolvency proceedings. The aim was to ensure that national assets in the petroleum sector do not remain idle.

 The ministry’s notification on October 3 said: “The central government hereby notifies that the provisions of Sub-section (1) of Section 14 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), shall not apply to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes, and helicopters.”

Section 14 of the IBC declares a moratorium on proceedings, transfer or disposal of any of the assets of the company from the date of commencement of its insolvency.