The Corporate & Commercial Law Society Blog, HNLU

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  • Insolvent Airlines, Invisible Assets: India and Global Norms

    Insolvent Airlines, Invisible Assets: India and Global Norms

    BY AADITYA VARDHAN SINGH AND MANYA MARWAH, THIRD- YEAR STUDENTS AT IIM, ROHTAK

    INTRODUCTION

    The insolvency of the jet airways has impacted the economy of India and has it slowed down. The resolution plan of Jet Airways could only realise nearly Rs. 400 crores whereas the claims of the financial creditors amounted to almost Rs. 8000 crores. While the physical assets such as upside on Aircraft sales, ATR inventory, etc. were well taken into account, the intangible assets that the airline held, failed to serve the interests of the creditors and could not reap the return of the money lent.

    What went unrealised were almost 700 intangible assets in the form of airport slots which could have satisfied a significant amount of the creditors’ claims. These intangible assets are the airport slots: which are powerful operating rights, defined as a permission granted by the airport operator to use their infrastructure essential to arrive or depart at a level 3 airport on a specific date and time.
    The standard mechanism for allocating slots in India partially follows the Worldwide Airport Slot Guidelines (‘WASG’) developed by global aviation bodies like Airports Council International (‘ACI’), International Air Transport Association (‘IATA’), and Worldwide Airport Coordinators Group (‘WWACG’). Slots are assigned twice yearly, for the summer and winter seasons, and few airlines are reassigned their historical slots, primarily known as “Grandfather rights”. Airlines that utilise 80% of the slots keep it for the next season, famously known as “Use-it-or-Lose-it” rule. If the airline fails to comply with the 80% threshold, the slot goes back into the pool available to other airlines to apply and use.

    This article aims to analyse the current position of the Indian insolvency framework in the event of airline administration and how the status of airport slots in India as being untransferable has impacted the interest of stakeholders and undermined the assets recovery from airlines during insolvency.

    NATURE OF AIRPORT SLOTS: REGULATORY PERMISSIONS OR MONETIZABLE ASSETS

    Understanding Airport Slots and Their Regulation

    Airport slots are limited and therefore highly regulated by the Directorate General of Civil Aviation (‘DGCA’), an office attached under the Ministry of Civil Aviation (‘MoCA’). The existing framework is governed by the MoCA Guidelines for Slot Allocation, 2013, which restricts the transfer of airport slots, except in cases involving mergers and acquisitions or temporary rearrangements approved by the Airport Coordinator.

    This present framework that governs the allocation of airport slots deems them to merely be regulatory permissions granted by the airport coordinators rather than monetizable and transferable assets. India has witnessed multiple airline collapses, including Jet Airways, Kingfisher Airlines, and Go First. Each of these had substantial slot holdings at major domestic and international airports, which could have been of great help in reducing the financial burden on the airlines to some extent. Still, unfortunately, our insolvency framework doesn’t recognise them as an asset.

    CLASH WITH IBC OBJECTIVES

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was designed to maximize the value of assets of insolvent companies, aiming to preserve and rescue viable businesses. According to the Code’s objectives, it seeks:

    “…to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons…for maximization of value of assets…in a time-bound manner.”

    However, ignoring slots, holding immense monetary value as assets, undermines this purpose of the IBC. The current guidelines issued in 2013 do not align with the code which was enacted in 2016 with an intent to prioritize the interests of the creditors in the event of insolvency, For example, when Jet ceased operations in April 2019, it had some of the most lucrative slots at Heathrow, Mumbai, and Delhi. However, since Indian aviation law doesn’t recognize slots as assets, the Resolution Professional couldn’t monetize them under the IBC.

    Despite multiple representations, the DGCA and MoCA refused to reallocate the historic slots to the resolution applicant, the Kalrock-Jalan Consortium, stating in an affidavit:

    “On the date of moratorium, Jet had no slots and had also lost the right to claim historicity.”

    The inability to treat slots as tradable assets meant Jet’s potential revival lost steam. The resolution applicant had no assurance of getting the airline’s most critical operating assets i.e. its airport slots. However, the DGCA reallocated Jet’s slots to rival airlines, creating further complications and deterring a clean resolution.

      In India, slots can neither be transferred nor exchanged for monetary benefits. In the event of airline insolvency, the DGCA, the authority regulating the allocation of slots in India, throws back the slots owned by airlines into the slot pool, depriving the original airline of something that could have generated millions of dollars if recognized as assets.

    GLOBAL PRACTICES: RECOGNITION AND MONETIZATION OF SLOTS

    Understanding the approach followed by other major jurisdictions towards slot trading during insolvency events is imperative to ensure proper policy formulation.

    European Union: Monetizing Slot Transfers

    The European Union (‘EU’) slot allocation is governed by EU Regulation 95/93. Article 8(4) of this document provides for airlines to transfer or exchange airport slots, with or without monetary compensation, subject to the approval of the airport coordinator. The intent behind such a liberal approach is to protect the financial interest of airlines’ creditors during insolvency proceedings and allow airlines to realize economic interest by exchanging their high-value airport slots with other airlines for their less valued airport slots and monetary benefits for the balance. Through such structured transfers, the value of these assets is not wasted but utilized to recover some part of the value for the stakeholders.

    United Kingdom: Judicial Recognition of Slot Rights

      Through the significant ruling of the United Kingdom (‘UK’) Court of Appeal (‘the court’) in Monarch Airlines Ltd v Airport Coordination Ltd (2017), the judiciary reinforced the recognition of airport slots as intangible assets holding crucial economic value. Even though the UK ceased to be part of the EU, it still holds some of the principles and regulations followed earlier, and this is one of them. In this case, Monarch Airlines had entered administration, lost its operating license, and all the aircraft on lease were returned. When the airline lost the slots, it possessed under ‘grandfather rights’, the court upheld its right over the historic slots, dismissing the argument of future slot allocation purely based on current operational status, and declared such practice as arbitrary and contrary to the regulatory framework. Even though the court explicitly declined the outright sale of slots, it permitted structured exchange and transfers involving monetary consideration.

      IATA Worldwide Airport Slot Guidelines (WASG)

      India’s currently followed guidelines reflect partial adherence to the IATA WASG. Under clauses 8.11 and 8.12 of these guidelines, transparent and coordinated Slot transfer and slot swapping are allowed with or without monetary consideration. These international practices promote liquidity in the aviation market, especially during airline insolvency.

      India aims to transform itself into a global aviation hub, which is impossible without aligning its domestic rules and regulations with those of globally adopted practices. Some Indian airports like Delhi and Mumbai have massive passenger traffic, and slots at these airports carry significant economic value. However, the insolvency event of Go First, where the slots held by the airline were reallocated in the slot pool by DGCA, providing other airlines the opportunity to avail themselves, reflected the restriction imposed on slot trading in the secondary market by existing guidelines. Therefore, recognizing slots as transferable assets and enabling their regulated transfer or exchange becomes of prime importance to improve market liquidity, protect creditors’ interests, and encourage investment in the aviation sector.

      PROPOSED SLOT TREATMENT IN INSOLVENCY

      Post the shift of treatment of slots from ‘regulatory permissions’ to ‘intangible monetizable and transferrable assets’, there is a need for complete overhaul in the framework regarding the treatment of slots as soon as an airline is declared insolvent. As per Chapter 9, Coordination after Final Slot Allocation, Section 8 Part (i) slots can only be held by an airline with a valid operating licence – “Aircraft Operators Certificate (‘AOC’)” When an insolvency proceeding is initiated against an airline, it does not automatically become inoperative and hence still has the power to hold the slots. The airline in this time period shall be entitled to either transfer the slots and monetize them until the airline holds the AOC, subject to the final approval by the DGCA, or since the status of ‘Airport Slots’ is an asset, therefore the Resolution Applicant may initiate a ‘free and transparent’ bidding process which shall be regulated by DGCA for final approval. The bidding process shall be completed within a reasonable time as determined by the authorities concerned.

      CONCLUSION

      Indian laws have developed considerably ensuring liberal behaviour and balancing it with reasonable regulatory oversight. However, the challenge of monetizing slots in India presents a critical void in the current insolvency framework, particularly in the aviation sector. The case of Jet Airways depicts the failure of legal framework in realising the rights of airline of its historic airport slots holding immense commercial value.

      Learnings from international regimes such as EU and UK reflect that a liberal and structured approach towards slot trading can protect the creditors’ interests during financial distress and improve liquidity in the market enhancing investor’s confidence. Though the threat of potential monopolization persists, well planned and formulated policies and regulations can mitigate these concerns. So, the real question is: Can India truly afford high-value assets like airport slots in insolvency proceedings, or is it time to rethink our legal definitions of value before subsequent airline bankruptcy costs us more than grounded planes?

    1. The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

      The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

      By abhigyan tripathi and anmol mahajan, fourth-year students at rgnul, patiala

      Introduction

      One of the primary objectives of the Insolvency and Bankruptcy Code,  2016 (“IBC”) is to facilitate the rescue of the Corporate Debtor (“CD”) as a going concern. In furtherance of fulfilling the IBC’s legislative intent, MS Sahoo was appointed to chair a sub-committee and recommend a regulatory framework for Pre-packaged Insolvency Resolution Process (“PPIRP”). The President, on the basis of the sub-committee’s suggestions, promulgated the IBC (Amendment) Ordinance, 2021 which allows MSMEs to go for PPIRP.

      One of the ways of rescuing a corporate entity is through the PPIRP wherein the objective is to establish a balance between the creditors’ interests and the business and assets of the Corporate Debtor (“CD”). PPIRP is an insolvency procedure involving a smooth transition of its assets by the CD to the prospective buyer prior to the appointment of a Resolution Professional who facilitates the corporate restructuring. The aim of this piece is to engage in a cross-jurisdictional analysis of the aforementioned Ordinance and test its efficacy in the Indian market scenario on the basis of three parameters, i.e., transparency, debtor-in-possession methodology, and the role of the adjudicating authority.

      I. Analysing the Pre-packaged Insolvency Framework in the United Kingdom

      Following the suggestions put forth by the Cork Report, the United Kingdom (“UK”) introduced its first wave of insolvency reforms in 1986 which envisaged the concept of ‘Corporate Rescue’.[i] The second wave of these reforms was introduced when Part 10 of the Enterprise Act, 2002 revised and improved the Insolvency Act of 1986. Even though the bare texts of both aforementioned statutes do not make a mention of “pre-packaged insolvency”, the UK always has had a Debtor-in-Possession based insolvency procedure, namely the Company Voluntary Arrangement (“CVA”). The CVA is analogous to PPIRP in the sense of the same being an informal and voluntary method of going through the insolvency process. Keeping in mind the pandemic situation, the UK has made even further attempts to make the insolvency framework more “debtor-friendly” by introducing the Corporate Insolvency and Governance Act, 2020. Since a company availing the CVA is required to couple it with the formal Administration procedure for a court-ordered moratorium, it cannot be used as a tool of financial restructuring. Therefore, this Act aims at providing financially riddled enterprises a chance at informal restructuring through a standalone moratorium on adverse creditor action.

      1.1 Transparency

      Ms. Teresa Graham, CBE, an Advisor to the UK Government and a renowned accountant, was given the responsibility to carry out a review of the PPIRP practice in the UK in 2013. As a result of the same, ‘The Graham Review of 2014’ was released. As was anticipated, the review was in favour of PPIRP practice in the UK but highlighted the lack of transparency as a major concern specially for unsecured creditors. A set of voluntary measures were suggested by the review to counter the transparency issue.

      One such solution proposed was setting up a group of experienced business people called ‘pre-pack pool’. This group shall be responsible to carry out an independent scrutiny of the pre-pack sale and suggest improvements to the same. Another solution to tackle the issue of transparency, as suggested by the Review, was the Statement of Insolvency Practice (SIP) 16 that may be understood as guidance for Insolvency Practitioners to conduct Insolvency Administrations. SIP16 provides for disclosure to be made by the Insolvency Practitioners to the creditors explaining and justifying the reasons for which a pre-packaged sale was undertaken.  

      An enterprise can still go through with a pre-pack deal even if a pre-pack pool member issues a negative statement, though the same has to be reflected as per the SIP16 requirements. In case the pre-pack member issues a positive statement, it would also be referred to in the SIP16 statement. The Insolvency Practitioners’ Association adopted these voluntary measures in November, 2015.

      1.2 Administration of the CD

      In the UK, the management of the debtor company rests with an administrator who is appointed for this purpose. Such an appointment can be made (a) by the Court, (b) by the holder of the floating charge, or (c) by the company or its directors. The administrator has the primary objective to rescue the debtor company as a going concern.

      1.3 Role of the Courts/Tribunals

      The role of courts can be looked at from both a positive and negative prism. The positive aspect of court involvement will not only protect the interests of the unsecured creditors but also will act as a grievance redressal mechanism. The final stamp of the court will also provide a credible authority to the procedure. However, the negative aspect is that such an intervention of the courts is discretionary and time taking which defeats the basic purpose of a pre-packaged insolvency.

      The UK has a mixed solution to this, on one hand where the insolvency practitioner is entrusted with finalizing the pre-pack transaction, on the other hand the creditors can approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway.

      II. Analysing the Pre-packaged Bankruptcy Regime in the United States

      The United States insolvency regime provides for three kinds of proceedings: pre-packaged bankruptcy proceedings, pre-arranged bankruptcy proceedings, and pre-plan sales. These procedures are an amalgamation of both out-of-court and formal mechanisms. It is therefore necessary to gauge the three procedures on the basis of the following criterion:

      2.1 Transparency

      The provisions of the US Bankruptcy Code, 1978, have been able to ensure a substantial amount of transparency through its provisions since they require approval of any resolution/reorganization plan within Chapter 11 by all the classes of creditors for bankruptcy proceedings to move forward. As per section 1123(a)(4) of the Code, every interested party in a class of creditors is required to be treated equally through the reorganization plan envisaged by the CD. To avail the benefits of flexibility within the ambit of Chapter 11, a CD has to ensure that the interested stakeholders are on board at every step and therefore cannot ignore the rights of even unsecured creditors as per section 1129(a).

      Even pre-plan sales under section 363 of the US Bankruptcy Code, though not requiring approval from all the interested stakeholders, need to be approved by the requisite Bankruptcy Court.[ii][1] In the context of section 363 sales, a bidder used to set the purchase price floor for other prospective buyers to know the minimum bidding amount is termed as the ‘stalking-horse’. The stalking-horse bidding, which is often engaged in by the debtors, helps in ensuring a proper due-diligence by the interested buyers. This has resulted in highly successful restructurings since the creditors are able to reap the benefits of high-value sale of the CD’s assets.[iii]

      2.2 Administration of the CD

      The pre-packaged/pre-arranged bankruptcy regime in the United States does not involve an automatic appointment of a Trustee (analogous to RP or Administrator in the UK) since the CD assumes the role of a debtor-in-possession and performs restructuring responsibilities while being in control of its assets under Chapter 11. A debtor remains in possession till the approval of the reorganization, dismissal of the same and subsequent liquidation proceedings (under Chapter 7) or the appointment of a court appointed trustee.

      2.3 Role of the Courts/Tribunals

      In both the pre-packaged and pre-arranged bankruptcy proceedings, the CD is required to file a Chapter 11 petition with the concerned bankruptcy court after having completed the procedure associated with voting and negotiation upon the reorganization plans. Even the section 363 pre-plan sales require the court’s stamp over the validity of asset sale. 

      There are various bankruptcy-specific courts in the United States which analyze the reorganization plans in an expedited manner. They ensure that there is no gross discrimination against any impaired class of creditors while clamping-down upon the minority dissenting creditors if the reorganization plan is fair and equitable as per the requirements of the Bankruptcy Code under section1129(b).

      Such flexible structures and procedural guidelines ensure that restructurings are successfully wrapped within two and four months for pre-packaged and pre-arranged bankruptcy proceedings as compared to 11 months for traditional Chapter 11 proceedings. Pre-plan sales under section 363 take only as much time as the auction process and the courts only require the CD to have successfully served the notice of asset sale to all stakeholders.[iv]

      Conclusion and Analysis

      Insolvency in India and the rules governing it are still at a nascent stage of development. The COVID-19 pandemic led to a complete standstill of the framework since the Central Government paused all fresh filings of insolvency proceedings. Hence, the introduction of pre-pack insolvency comes as a breath of fresh air.

      Firstly, with respect to transparency, concerns surrounding transparency in the process have not yet been addressed but the analysis of the UK and US models of pre-pack above gives valuable input. The introduction of a pre-pack pool as seen in the UK regime can be a game changer in this regard. Not only will this make the process more transparent but will also help in the corporate rescue of the debtor. Additionally, the pre-pack pool might have been even more effective in the UK, if referral to the same was mandatory. The authors believe that mandatory referral to a similar body may have been conducive for medium and large enterprises in India.

      Secondly, with respect to the administration of the CD, the recent ordinance provided for the debtor-in-possession regime, wherein unlike the CIRP, the CD is responsible for protection of its assets so that the position of the creditor is not jeopardized. One important advantage of this regime is that it will minimise the obstacles to business during PPIRP since the CD is empowered to continue running its business operations, with the express objective of working in the best interests of the creditors. It is essential to derive insight from the UK framework and mould the Indian model in a manner which lets the Insolvency Resolution Professional proceed with the implementation of the plan while giving the creditors a right to approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway as is done by the UK.   

      Thirdly, as far as the role of NCLT is concerned, the procedure requires an initial application for moving forward with PPIRP before the NCLT under section 54A(1) by a CD which falls under the category of MSME. Thereafter, the NCLT has 14 days to either reject or accept the same. Furthermore, the approval of a resolution plan requires a 66% vote by value in its favour by the creditors, post which it is submitted to the NCLT for consideration. Therefore, the highly overbearing role of NCLT as per the procedure defined by this ordinance might possibly help in reducing the problem of delays and discretion which already plagues CIRP.  Therefore, the NCLT needs to adopt a fast-track approach which is similar to the one adopted by Courts in the US. Sub-tribunals specialized in dealing with insolvency matters in a more efficient fashion (as compared to the current regime) may be instituted which can make sure that restructuring plans, if in accordance with equity and fairness envisioned by the IBC, are approved and applied to successfully rescue the CD.

      Despite the Ordinance having been passed to counter the adverse effects of COVID-19 on insolvency, the expedite nature of PPIRP can potentially benefit the Indian insolvency regime as a whole. It should also be kept in mind that maximising returns from this PPIRP framework requires a great amount of transparency during the entire process to ensure that certain categories of creditors do not partake in backdoor negotiations, which might result in a win-lose position between the concerned stakeholders. The authors are of the opinion that PPIRP framework for MSMEs is a first step in a series of reforms and if implemented properly, goes a long way towards ease of doing business in India as a whole.

       

      [i] Cork Report of the Review Committee, Insolvency Law and Practice, (Cmnd 8558, 1982), para 198.

      [ii] Bo Xie, Pre-pack Approach in Corporate Rescue (Edward Elgar Publishing, 2016), 205-206.

      [iii] Ben Larkin et al, Restructuring Through US Chapter 11 and UK Prepack Administration, para 8.51.

      [iv] Ibid.