Answer By law4u team
The aviation industry is a capital-intensive and globally regulated sector. When an airline becomes insolvent, resolving its financial distress is more complicated than in many other industries. This is due to international leasing arrangements, regulatory oversight, cross-border operations, and essential services tied to public convenience. The Insolvency and Bankruptcy Code (IBC) has been used in cases like Jet Airways and Go First, but these cases have exposed serious systemic and legal hurdles.
Key Challenges in Resolving Aviation Insolvency
1. Cross-Border Nature of Operations
Airlines operate in multiple countries, often leasing aircraft from foreign entities.
Resolving insolvency requires coordination with international creditors and adherence to foreign laws and treaties (e.g., Cape Town Convention).
India has not fully implemented cross-border insolvency laws, complicating foreign asset repossession and cooperation.
2. Aircraft Leasing Complexities
Most airlines do not own aircraft; they lease them from global lessors.
Lessors demand repossession upon default, but IBC’s moratorium clause restricts recovery during CIRP.
This creates tension between IBC and international aviation laws, often discouraging foreign lessors from engaging with Indian airlines.
3. Lack of Sector-Specific Framework
IBC is a general insolvency law. It lacks provisions tailored to the aviation industry’s needs, such as regulation of flight slots, route licenses, safety clearances, and bilateral flying rights.
These assets are non-transferable and cannot be monetized easily during CIRP.
4. Regulatory Approvals and Compliance
Insolvent airlines require ongoing approval from the Directorate General of Civil Aviation (DGCA) to operate.
During CIRP, delays or denial of critical permissions can halt revival efforts.
DGCA and other bodies are not always aligned with NCLT processes.
5. High Fixed Costs and Poor Asset Recovery
Airlines have high recurring costs—fuel, staff, parking, leasing—even when grounded.
Tangible recoverable assets are minimal; aircrafts are leased, and brand value drops quickly.
6. Employee and Union Issues
Mass layoffs, unpaid salaries, and disrupted benefits often lead to labor disputes during CIRP.
Employees are treated as operational creditors, who have lower priority in recovery.
7. Operational Disruption
Insolvency usually leads to grounded fleets, loss of customer trust, and flight cancellations.
Resuming full-scale operations after CIRP is rare due to loss of licenses and infrastructure.
Legal and Policy Challenges
IBC Moratorium vs. Lessors’ Rights
Under Section 14 of IBC, lessors cannot take back leased aircraft during CIRP.
This contradicts global leasing norms and creates legal uncertainty.
Absence of Cross-Border Insolvency Law
India has not yet adopted the UNCITRAL Model Law on Cross-Border Insolvency.
Courts and tribunals face difficulties recognizing and enforcing foreign judgments.
Long Delays in CIRP
The mandatory 330-day timeline is often exceeded in complex aviation cases.
In the Jet Airways case, CIRP lasted more than 2 years with no clear resolution.
Consumer and Stakeholder Impact
Passengers face canceled flights, no refunds, and booking confusion.
Employees suffer delayed wages and job insecurity.
Airports and oil companies remain unpaid, adding to their financial stress.
Investors hesitate to enter or revive an airline with unresolved regulatory and legal risks.
Consumer Safety and Recovery Tips
Passengers should book flights only with reputed airlines or through credit cards to ensure refund eligibility.
Employees must register unpaid dues with IRP during CIRP.
Lessors and lenders should seek legal protection clauses in leasing contracts referencing IBC conflicts.
Policymakers should push for sector-specific insolvency rules and adopt cross-border cooperation mechanisms.
Example
Imagine an airline operating 50 aircraft under lease from international lessors. Due to high fuel prices and weak demand, it defaults on lease payments and staff salaries. The company files for CIRP.
Steps and challenges in the resolution:
Lessors seek aircraft repossession, but IBC’s moratorium blocks it.
DGCA hesitates to renew air operator permit, halting operations.
NCLT appoints an Interim Resolution Professional, but finds no serious bidders due to liabilities and license complications.
Employees file claims as operational creditors for salary arrears.
After prolonged litigation, only a partial resolution plan is accepted, and aircraft are returned only after significant depreciation.
