Evaluation and Analysis of Judgment of NCLAT on Voluntary Insolvency Process

National Company Law Appellate Tribunal (‘NCLAT’) while disposing of the appeals filed by 4 aircraft lessors (“Aircraft Lessors”) by its order dated 22 May 2023 upheld the order dated 10 May 2023 passed by the National Company Law Tribunal (‘NCLT’). By way of the 10 May order, NCLT admitted the application filed by Go Airlines (India) Limited (“Corporate Applicant”) seeking initiation of voluntary Corporate Insolvency Resolution Process (‘CIRP’) under Section 10 of Insolvency and Bankruptcy Code, 2016 (“Code”) by Go Airlines (India) Limited (“Corporate Applicant”). In this order, NCLT also declared the period of moratorium under Section 14(1) of the Code providing protection to the Corporate Applicant.

The Corporate Applicant was engaged in the business of running a successful low-cost airline for the last 17 years, although, from 2022 the Corporate Applicant underwent financial distress owing to the faulty engines supplied by Pratt & Whitney (“P&W”), 34% of the Corporate Applicant’s aircrafts were grounded, and resultantly, the Corporate Applicant started defaulting towards payments to its vendors and Aircraft Lessors. It's worth noting that there was no default towards the Financial Creditors [Company committed default of ₹11.03 crore towards interest dues of the Financial Creditors]. Further, the Corporate Applicant had also filed for an emergency arbitration against P&W before the Singapore International Arbitration Centre (“SIAC”), which adjudicated in favour of the Corporate Applicant. Failing compliance with the orders of SIAC by P&W, the Corporate Applicant subsequently initiated enforcement proceedings against P&W in the relevant jurisdictions. In this backdrop, an application under Section 10 of the Code was filed.

The Aircraft Lessors opposed the admission of the application for initiating CIRP on the ground that a prior notice was required to be issued to the creditors, awarding them an opportunity to object to the CIRP application. Further, the Aircraft Lessors objected that they intended to file an application under Section 65 of the Code challenging the said admission.

The NCLT noted that unlike the applications filed under Sections 7 and 9 of the Code by Financial Creditors and Operational Creditors respectively, Section 10 applications are filed by the Corporate Debtor itself and do not provide for the impleadment of the Creditors as respondents. Therefore, as stipulated under the Code, issuance of notices to the creditors is not mandatory at pre-admission stage. Further, the Hon’ble NCLT relied on the judgment of the Hon’ble Supreme Court which held that the principles of natural justice are not rigid, hence, a realistic approach must be applied by the courts and should not be confined to a straight jacket formula. Moreover, the proceedings under the Code are time-bound and if each and every creditor is given an opportunity to object to the CIRP application, it can cause an inordinate delay in the conclusion of the said proceedings, defying the whole intent of the Code. Therefore, considering the exposure of risk to the assets of the Corporate Applicant and the public interest at large, issuance of notice at the pre-admission stage cannot be claimed as a matter of right.

It was opined by the NCLT that as per Section 65 of the Code, a penalty can be imposed on a person who initiates CIRP fraudulently, yet, no distinction has been made regarding the pre-admission or post-admission stage of CIRP. Therefore, the NCLT held that an application opposing the CIRP proceedings may be considered at any stage, including during the CIRP or even during liquidation.

Having resolved these issues, the NCLT examined the Section 10 application on its merits. It observed that all the necessary requirements under Section 10 were fulfilled, including the presence of debt, occurrence of default, completeness of the application, and the Corporate Applicant's eligibility. Consequently, the NCLT admitted the Section 10 application, imposed a moratorium under Section 14(1) (a), (b), (c), and (d), and appointed an Insolvency Resolution Professional (“IRP”) to oversee the CIRP.

Apropos to the issues regarding issuance of notice to the creditors before admission of Section 10 Application and giving the opportunity to the creditors for filing application under Section 65 before such admission, the NCLAT concurred with the NCLT, and confirmed that unlike applications made for initiation of CIRP by creditors, Section 10 does not provide for mandatory issuance of notice to the creditors, hence the order of the NCLT does not violate the principles of natural justice.

Further, the NCLAT held that there is no mandate to set aside a Section 10 application whenever an objection is raised against it and that there exists no bar for the NCLT to entertain a Section 65 application after the admission of Section 10 application.

Furthermore, the NCLAT awarded liberty to the Aircraft Lessors and the IRP to file appropriate applications before NCLT with respect to the allowance of moratorium over the aircrafts whose leases were already terminated prior to the admission of Section 10 application and to claim possession of such aircrafts.  

The NCLAT’s judgment glues strongly to the letter and spirit of Section 10 of the Code. The objective of an expedient admission of Section 10 applications is to facilitate the effective and efficient CIRP of any a financially distressed company who is in dearth of working capital funds and has successfully proved before the adjudicating authority of its perturbed position existing in the previous financial years leading to the defaults in the debts it owed. Further, the Committee has only recommended that the intimation of initiation of CIRP under Section 10 of the Code must be made to all stakeholders by notifying the same on its official website or on the website designated by the Insolvency and Bankruptcy Board of India for this purpose and no such recommendation for issuance of notice by the adjudicating authority has been made by the Committee.

It is imperative to note that the rationale behind the non-issuance of a notice to all the stakeholders at the pre-admission stage is to expedite the process of admission of Section 10 application. Since entertaining each and every objection raised at this stage negates the intent of Code. Alternatively, such stakeholders may file their objections before the Adjudicating Authority, under Section 65 which stipulates the penalty for initiating a fraudulent or malicious of proceeding by the corporate applicant.

Glancing at the position of insolvency laws in the UK, the voluntary insolvency process under the Insolvency Act 1986 varies from the provisions under Section 10 of the Code. Unlike India, the applicant in the UK is required to contact its creditors and enter into a Company Voluntary Arrangement (‘CVA’) with them which is then approved by the Court. The insolvency procedure is majorly overlooked by an insolvency administrator which is akin to an IRP, who aims to rescue the company as a going concern by maximizing its assets. Further, such administrator is dutybound to publish a notice of its appointment and simultaneously send the same to the company and the creditors, without undue delay.

This judgment is bound to impact the Indian Aviation Industry which is a booming sector with manifold increase in travelers and aircrafts. In India, the ratio of leased aircrafts to that of owned ones is much higher than the global trend.

Therefore, the rise in number of the leading Indian airlines facing bankruptcy, with the recent addition of Go First airlines joining the bandwagon has made stakeholders including investors, consumers, lessors anxious.

Moreover, Aviation Working Group (AWG), a UK-based entity that monitors leasing and financing laws, has placed India on its radar quoting that India had failed to comply with international aircraft repossession norms after Go First was granted bankruptcy protection. They’ve already downgraded India’s rating by 2 notches. Given the heavy reliance on leased aircrafts in India, the resultant panic caused by NCLAT’s decision will lead to cautious lessors, forcing them to impose stringent financial leasing terms and higher risk premiums ensuing costlier air travel fare.

This will not only be detrimental to the aircraft employees who shall face the wrath of the financial crunch but also to the travelers who will have to face the music due to such price hikes.

Apoorva Misra is a Partner, Nischala Maruvada and Nishant Rewalia are Associates at Ahlawat & Associates.