Go First Case Will Have A Lasting Impact On The Aviation Industry
The recent order by the NCLT may end up undoing many good works that the government has done in the past.
The government’s biggest success has been the reassurance to the market that their interest will not be sacrificed due to legal uncertainty. The government’s approach to infusing market confidence through proactive legislation, such as GST and IBC, have made India an attractive destination for investment. But the recent order by the NCLT, in the case of Go First Airlines, may end up undoing many good works that the government has done in the past. It has shown that the judiciary will always remain an Achilles heel in India’s progress.
The case of Go First was a simple case of default on existing commercial obligations towards the lessors. The airline had dried off its liquidity and was facing liquidity and profitability issues in business. In such case, it would be ideal that corporate debtor writes to creditors and lessors and renegotiate their contract upfront and then, if required, propose moratorium. However, the voluntary liquidation filed under Section 10 of the IBC seems to have been done to merely isolate the possessions of the aircraft from the clutch of the lessors, an act which is in breach of the obligations of the corporate debtor towards its creditors.
Consider the case of SMBC Aviation. Go First must pay $4.2 million per month, including maintenance and lease. Despite the contract between SMBC Aviation Capital Ltd. and Go First, and despite the alleged legal possession of their aircraft before the insolvency process started, there is now litigation which will only erode the value of the aircraft.
The NCLT order is against the legislative intent, which is clear through the proposed Cape Town Convention Bill. India deposited the Instruments of Accession with the depositary (UNIDROIT) in March 2008 along with the Declarations and became a Party to the Cape Town Convention/Protocol on July 1, 2008, in accordance with Article 49 of the Convention and Article XXVIII of the Protocol.
The Convention and the Protocol are designed to fulfill the objectives of, among others, to provide for the provision of certain basic default remedies for the creditor, such as de-registration and export of aircraft as a measure of speedy interim relief and creation of a legal regime, which is applicable universally and administers justice to both parties in case of a dispute; and by these means, to reduce the level of risk for the intending creditors/lessors, leading to a reduction in the cost of aircraft financing/leasing and eventually, to a reduction in the cost of operation. It is hoped that the benefits of these provisions will finally be passed on to the end user i.e. the passenger and/or shipper.
The Ministry of Civil Aviation has already carried out the exercise of updating the provisions of the Aircraft Rules under the Aircraft Act, 1937, relating to the de-registration and export of aircraft in line with the provisions of the Convention/Protocol.
This shows a clear intent of the government to align the domestic rules with the obligations under the protocol. In its letter inviting the comments of stakeholders, the Ministry noted that inputs they had received from the industry had revealed that for achieving full implementation of the Convention/Protocol in India, there is a need for separate legislation as there are certain provisions of the Convention/Protocol that are in conflict with the provisions of some other laws, which fall outside the jurisdiction of the Civil Aviation Ministry—such as the Civil Procedure Code, 2008; the Specific Relief Act, 1963; the Companies Act, 2013; and the Insolvency and Bankruptcy Code, 2016.
In fact, the Ministry acknowledged that a separate legislation is necessary as the international financial institutions are not giving due weightage to accession to the Cape Town Convention/Protocol by any country, unless it is accompanied by implementing legislation.
This was pushed by the fact that the Organisation for Economic Cooperation and Development has set a norm that a 10% discount will be given in the processing fee for a loan to acquire aircraft to airlines of any country party to the Cape Town Convention/Protocol, provided implementing legislation has been passed by that country. Thus, adopting full measures of the convention was in the interest of business, the market, the government, and the passengers who will gain from the smooth flight.
Under the proposed Bill, the government intends to given full force to the Convention through the domestic law. The Bill contained a provision that will accord primacy to the provisions of the Convention/Protocol in case of conflict with any other law., including IBC.
Plain perusal of the Cape Town Bill clearly states that the right of possession of the aircraft is of the lessor. It notes that any remedy given by the Convention, in relation to an aircraft object, shall be exercised in a “commercially reasonable manner”. A remedy shall be deemed to be exercised in a commercially reasonable manner where it is exercised in conformity with a provision of the agreement. The Convention provides that the authorities shall expeditiously cooperate with and assist the creditor in the exercise of such remedies in conformity with the applicable aviation safety laws and regulations.
In light of the above Bill, the order of admitting the petition by the NCLT is against business as well as national interest. It defeats the legislative intent of the government, causing lasting impact on India’s judicial system that is known for its overarching nature .There are already rumours that investors have started seeing India as a risky jurisdiction.
Last December, Air India had purchased 150 Boeing aircraft, which was celebrated across the nation as it showed that India’s aviation industry is set to rise. Cases such as Go First impact the confidence of business in dealing with Indian counterparts. Given that the Cape Town Convention was already in progress, which would have allowed the lessor to repossess the aircraft, NCLT should have allowed that to happen. It is only logical to assume that grounding 26 aircraft increases the leasing cost and will lead to rise in fare, thereby defeating consumer interest. If at all, NCLT had to accept the case under IBC, especially Section 10 , it should have been accepted only after a plan is submitted by the corporate debtor. This would show good faith on behalf of the corporate debtor.
Commercial transactions are premised on good faith and mutual trust. Any case of default by the corporate debtor should push them to inform their creditors as noted in the convention, renegotiate if need be and not abuse the legal system to escape their liability. After all, the law does require that one come with clean hands.
The courts need to show more pragmatism and ensure that the law is not abused or misused. In the instant case, they could have requested the lessors to hold off repossession for a specific period, say two weeks within which the corporate debtor would need to propose a turnaround plan. Admission would be contingent on presentation of such plan. This would reduce uncertainty and may result in a better outcome as against what we have seen in cases like Jet Airways where the enterprise value was destroyed due to delays.
The cost of such abuse will be paid by the industry and the country which will lose reputation and potential investment in the future, a cost that India would certainly not like to pay while it marches towards becoming a $3 trillion economy.
Abizer Diwanji is Head-Financial Services at EY, India. Dr Neeti Shikha is a lecturer at School of Law, University of Bradford, U.K.
The views expressed here are those of the authors, and do not necessarily represent the views of BQ Prime or its editorial team.