GoFirst filed an application for voluntary insolvency under S.10 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT) on May 02, 2023. Post the filing, aircraft lessors issued lease termination notices to GoFirst. The application for voluntary insolvency was admitted by the NCLT on May 10, 2023 which initiated the corporate insolvency resolution process and a moratorium on litigations and enforcement measures was declared. Multiple lessors filed applications with the NCLT for restraining GoFirst from operating the aircraft on account of the lease termination. By way of its order dated July 26, 2023, the NCLT held that it has the power to invalidate “termination of contracts which … is motivated by insolvency proceedings of the Corporate Debtor and pertain to critical contract(s), the termination of which would prevent the corporate debtor from being run as a going concern”. The findings of NCLT, inter alia, include:

i.    The moratorium under IBC does not allow lessors to claim possession of aircraft which are in actual physical possession of GoFirst;

ii.   That the objective of the IBC is to revive an insolvent applicant and if the sole essence of the airline’s business i.e., the aircraft, are taken away it would result in corporate death of the airline leaving no scope for resolution of the corporate debtor airline;

iii.  That as DGCA has not yet deregistered the aircraft and till the time the aircraft are registered, they remain available with GoFirst to resume operations and can, therefore, be used for flying as part of the revival of GoFirst; and

iv.   That under law, the insolvency professional running GoFirst is required to maintain assets, which includes aircraft, at the highest level of efficiency/safety, and, therefore, no fruitful purpose would be served by allowing the lessors to inspect the aircraft, hence refused to allow lessors to inspect the aircraft as well.

NCLT concluded its order by providing interim relief to the lessors only to the extent of ordering GoFirst to protect and maintain the aircraft and engines. All other prayers by the lessors were dismissed. We would expect the lessors to appeal this decision at the National Company Law Appellate Tribunal.

The effect of this ruling is that clauses in lease agreements allowing lessors to terminate lease agreements on account of insolvency proceedings, usually termed as “ipso facto” clauses, are subject to scrutiny by Indian bankruptcy courts. This underscores the importance of the need to implement the insolvency provisions of the Cape Town Convention, 2001 and the Aircraft Protocol sooner than later whether by introducing a separate Bill (currently styled as the ‘Protection and Enforcement of Interests in Aircraft Objects Bill, 2022’) in Parliament or otherwise amending the provisions of the IBC with respect to airlines incorporated in India.

Please note that a separate set of proceedings are pending before the Delhi High Court, wherein lessors have filed writ petitions seeking directions against DGCA to de-register the aircraft basis their IDERA application. This matter remains sub-judice, and we shall keep you posted on further developments.