NCLAT gives a go signal to the Go Airlines insolvency application

– Neha Malu, Senior Executive & Tanay Dubey, Legal Intern | resolution@vinodkothari.com

Background

In India, airline companies prefer acquiring aircrafts through lease rather than buying them. According to a report released by PwC, as of 2018, around 80% of India’s commercial aircrafts are leased, much more than the global average of leased commercial aircrafts as compared to commercial aircrafts in use, 53%. According to the report, airlines prefer leasing aircrafts predominantly due to two reasons: first, the lower overall cost of leasing which allows the airlines company to spend available capital on giving price advantage to the price sensitive customers in India and; second, because of the shorter fleet replacement cycles, leasing aircrafts provides airlines an option to quickly increase or decrease the capacity, thereby keeping the fleet younger.

Go Airlines, an ultra-low-cost airline, possesses a fleet of 54 aircraft, with the majority obtained through leasing arrangements with different aircraft lessor companies. Unfortunately, the airline is currently facing financial difficulties caused by the non-delivery of engines from Pratt and Whitney (P&W), a US-based jet engine manufacturer. As a result, they have been compelled to ground over 50 planes. Due to concerns about the feasibility of the CIRP and the airline’s revival, the lessors want to recover their aircrafts from the airline.

Go Airlines (‘Corporate Applicant’) has been defaulting towards the aircrafts lessors, vendors, and financial creditors from 2022 onwards. In order to keep the company as a going concern and retain the possession of leased aircrafts, the Corporate Applicant filed an application under Section 10 of Insolvency and Bankruptcy Code, 2016 (‘IBC’). The umbrella of moratorium was opened for Go Airlines after its voluntary application for resolution under section 10 of IBC was admitted by the NCLT leading to a complete prohibition on transfer of any of the leased aircrafts which were in possession of Go Airlines as on the date of admission of the CIRP application. In the present case, though the lessors of the aircrafts had terminated the lease agreement days before the admission of the CIRP application by NCLT, the possession remained to be transferred to the lessor as on the date of admission.

An appeal was preferred by the lessors against the order of the NCLT contending that the said application was filed with fraudulent and malicious intent. Further, the lessors were not given the notice providing for an opportunity of hearing before admitting the application. In addition to this, given the fact that the lease agreement was cancelled by the lessor prior to the admission of CIRP application, the Corporate Applicant has no legal right to claim possession and moratorium under Section 14(1)(d) of IBC on the assets of the lessor.  

Questions before the NCLAT

The following were the prime questions before the Appellate Tribunal:

1. Whether a notice providing opportunity of hearing is mandatorily required to be given to the creditors before admitting a CIRP application under Section 10?
2. If the objectors to the CIRP application raise the contention that the application was filed with fraudulent and malicious intent, whether the opportunity to file a contending application u/s 65 be granted before admitting the CIRP application u/s 10?
3. If the lessors cancel the lease agreement with the corporate debtor before the application for initiating CIRP proceedings is admitted, will the moratorium u/s 14 also apply to the assets of the lessor yet to be transferred to the lessor from the corporate debtor?

Decision of NCLAT

The Appellate Tribunal in its decision dated 22nd May, 2023^[1], held that the Corporate Applicant under the Code or any regulations is not obligated to issue notice to the creditors before filing application u/s 10 of IBC for initiation of CIRP application. However, having said that, the NCLT, at the time of admission proceedings, has to hear the objectors and take an appropriate decision. Based on the above standing, the NCLAT rejected the contentions of the lessors on the grounds that the Corporate Applicant cannot be said to have vitiated the process by not providing a prior notice to its creditors and more so when the objectors were heard by the NCLT and thereby, the decision of the NCLT admitting the CIRP application against Go Airlines was upheld.

As regard the contention to hear and dispose of an application u/s 65 alleging malicious and fraudulent intention before admitting the CIRP application u/s 10 is concerned, the NCLAT took the stand that such application can also be filed after admitting the CIRP application. And as regards the facts of the present case, no malicious or fraudulent intent could be established. 

Further, with respect to the applicability of the moratorium to lease agreements that were terminated before the application was admitted u/s 10 is concerned, NCLAT left it to the NCLT to address the issue of the lessors claiming possession of the aircrafts, based on the appropriate remedy sought by the appellants.

Precedents and analysis

The legislative intent behind moratorium under section 14(1)(d) of IBC is to bar the recovery of the assets by owner or lessor and  ensure retention of the property in possession of the corporate debtor so as to ensure the going concern status of the corporate debtor.

In Gujarat Urja Vikas Nigam Limited v. Mr. Amit Gupta & Ors., Hon’ble Supreme Court has held that if a contract is terminated solely because a company has entered into insolvency proceedings which may lead to demise of the corporate debtor then such termination must not be permitted. A distinguishable factor in the present case is that the lease agreements were terminated before the initiation of CIRP against the Corporate Applicant even though the same was done considering the probable initiation of insolvency proceedings and subsequent effectuation of moratorium under Section 14.

The intention of lessors in terminating the lease agreements is evidently to avoid their aircraft being trapped with the Corporate Applicant as a result of the moratorium. It is pertinent to note that physical possession of the aircraft remains with the Corporate Applicant and the DGCA (Directorate General of Civil Aviation) has not yet effectuated the de-registration of aircrafts in favour of the lessors.

In Schweitzer Systemtek India Pvt. Ltd v. Phoenix ARC Pvt. Ltd. & Ors., NCLAT held that moratorium is applicable only to the properties ‘owned’ by the corporate debtor and cannot go beyond the properties beyond the ownership of the corporate debtor. Similarly, the NCLAT in Alpha & Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd. & Ors., limited the applicability of moratorium to the properties of the corporate debtor alone.

Relying on the Apex Court’s decision in P. Mohanraj & ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., the Hyderabad Bench of NCLT in Gandavarapu Radhakrishna Reddy v. M/s. Meenakshi Energy Ltd. held that Section 14(1)(d) doesn’t extend to properties which are not in rightful possession of the corporate debtor as the same would result in unjust enrichment.

In light of these facts and precedents, the question that needs to be answered by the NCLT is whether the Corporate Applicant has any right or beneficial interest vested in the aircrafts for it to continue enjoying the possession of the same during the moratorium.

Conclusion

According to established legal precedent and statutory provisions, if the NCLT is convinced that there is a debt and default, and if the Corporate Applicant has fulfilled the requirements mentioned in Section 10(3), the NCLT is bound to admit the application. The Corporate Applicant is not required to send notice to creditors and provide them with an opportunity to raise their contentions to the NCLT before the application is admitted. Therefore, the NCLAT has appropriately upheld the order of the NCLT.

The crucial issue regarding the Corporate Applicant’s status revolves around whether it will be able to retain possession of the aircraft that had their lease agreements terminated prior to the moratorium taking effect. It is important to clarify this matter as it could have an impact on the credibility of lease agreements in India, particularly in the aviation industry. The insolvency proceedings of Go Airlines has already started to show its effects on the aviation industry as recently, the lessors of SpiceJet have approached the DGCA to reclaim their five aircrafts because the airline company has been defaulting on provident fund and TDS payments for several months. If this trend continues, it will pose difficulties for airline companies to remain in operation and conduct regular business.

Outcome of the tussle between the lessors and the corporate applicant in the insolvency proceedings of Go Airlines is expected to have significant implications on the aviation industry as well as on the working of IBC. It is crucial to find a middle ground that respects the lease agreements as well as ensures the ‘going concern’ status of the corporate debtor because while resolving the vulnerable state of an insolvent debtor, the creditor should also not be deprived of its rights over the property.

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^[1] SMBC Aviation Capital Ltd. & Ors. vs. Interim Resolution Professional of Go Airlines (India) Ltd., Abhilash Lal, Company Appeal (AT) (Insolvency) No. 593 of 2023.