Government mulls two-month asset freeze for bankrupt airlines

The government could stipulate a two-month moratorium rule for the aviation sector to ensure the aircraft of a bankrupt airline isn't taken away by lessors immediately after default paralysing its operations, said a person aware of the details.

The Ministry of Corporate Affairs (MCA) had in October exempted aircraft, helicopters and engines from moratorium under the insolvency law citing India's decision to adopt the Cape Town global convention that allows airlines to keep leased aircraft for at best 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 could pitch for a two-month moratorium on aircraft of insolvent airlines, if required, until the convention is formally adopted, the person told ET.


Under the Insolvency and Bankruptcy Code (IBC), once resolution proceedings are initiated, the transfer or disposal of assets of a stressed firm (in sectors that are not exempted) is effectively barred through a moratorium.

The issue of moratorium had come to the fore after Wadia-owned Go First declared voluntary bankruptcy in May. The case is now pending with the Delhi High Court.

Experts--including former chairman of the insolvency regulator MS Sahoo--have pointed out that effectively no moratorium exists now in the wake of the October exemption, as even the Cape Town provision is yet to be implemented.

"The intent behind the MCA's exemption under the IBC was clearly to facilitate the adoption of the Cape Town Convention, and not to allow lessors to take back aircraft immediately after an insolvency case against an airline is admitted," said the person quoted above. "Otherwise, it would paralyse operations of the airline and stop it from continuing as a going concern," he added.

In fact, the civil aviation ministry had approached the MCA for the exemption, arguing that its IBC moratorium rule would inflate the leasing costs of all airlines as foreign lessors would build such a risk into their pricing.

As for the Go First case, the National Company Law Tribunal (NCLT) had on May 10 ordered a moratorium on the airline's assets, which prevented lessors from repossessing aircraft. The lessors argued that since the aircraft were not the property of Go First, they must not be subject to the moratorium rule.

Subsequently, the lessors approached the Delhi High Court after both the NCLT and the National Company Law Appellate Tribunal did not give them any relief from the moratorium.

In an affidavit filed before the High Court, the Directorate General of Civil Aviation (DGCA) has said the MCA's October notification would apply with retrospective effect to pending cases as well. A verdict on the issue is awaited.