[Opinion] NCLAT Gives a Go Signal to the Go Airlines Insolvency Application

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?

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