The recent failures of Jet Airways and Go First highlight important issues within India’s Insolvency and Bankruptcy Code (IBC). These cases reveal the complexities involved in airline insolvencies. The inability to revive these airlines has sparked discussions on the inadequacies of the IBC, particularly in managing service-sector bankruptcies.
Jet Airways – A Case Study
Jet Airways, once a leading airline, faced insolvency in June 2019. It owed over ₹8,000 crore to creditors, primarily the State Bank of India. Operational inefficiencies, excessive debt, and fierce competition led to its decline. In 2021, the Jalan-Kalrock Consortium won a bid to revive the airline with a ₹4,783 crore plan. However, legal disputes with lenders hindered progress. The consortium failed to meet financial obligations, leading to complications in the resolution process.
Operational and Regulatory Challenges
The consortium struggled with regulatory hurdles, including obtaining necessary certifications and airport slots. They also faced financial obligations, such as worker dues and airport charges. Mismanagement of grounded aircraft further exacerbated the airline’s financial troubles. Ultimately, the Supreme Court ordered liquidation due to non-compliance with the resolution plan.
Go First – An Unfortunate Turn
Go First filed for voluntary insolvency in May 2023 after grounding its fleet due to engine issues. The airline relied heavily on leased aircraft, which were quickly repossessed by lessors after defaulting on payments. Legal battles ensued, complicating any attempts at revival. A government notification further weakened Go First’s position, leading to its eventual liquidation in September 2024.
Common Factors in Failures
Both airlines exhibited mismanagement of key assets. Jet Airways allowed its grounded aircraft to deteriorate, while Go First’s reliance on leased aircraft left it vulnerable. The inability to monetise assets and operational inefficiencies contributed to their failures.
Flaws in the IBC Framework
The IBC’s one-size-fits-all approach is unsuitable for service-sector insolvencies like airlines. Delays in proceedings and lack of interim funding hinder revival efforts. Additionally, the absence of an aviation-specific framework within the IBC leads to asset depletion and financial losses.
Need for Reform
Legal experts recommend reforms to the IBC tailored for the aviation sector. Suggestions include prioritising lessors in insolvency proceedings, introducing debtor-in-possession financing, and enforcing stricter timelines. Full alignment with the Cape Town Convention is also essential to protect lessors’ rights during insolvencies.
Questions for UPSC:
- Critically analyse the challenges faced by the Indian aviation sector under the current Insolvency and Bankruptcy Code.
- Explain the significance of the Cape Town Convention in relation to aircraft leasing and insolvency.
- What are the major factors contributing to the insolvency of airlines in India? Discuss with examples.
- Comment on the effectiveness of the Insolvency and Bankruptcy Code in managing service-sector bankruptcies, particularly in aviation.
Answer Hints:
1. Critically analyse the challenges faced by the Indian aviation sector under the current Insolvency and Bankruptcy Code.
The Indian aviation sector faces important challenges under the Insolvency and Bankruptcy Code (IBC), primarily due to its one-size-fits-all approach. The IBC lacks provisions tailored for service-sector bankruptcies, leading to prolonged proceedings that erode goodwill and market position. Airlines like Jet Airways and Go First experienced asset depletion due to mismanagement and legal disputes, complicating revival efforts. The moratorium on asset repossession further weakens lessor relationships, hindering operational continuity. Additionally, the absence of interim funding and unclear restructuring plans discourage investment, ultimately exacerbating the financial instability of airlines.
2. Explain the significance of the Cape Town Convention in relation to aircraft leasing and insolvency.
The Cape Town Convention is crucial for aircraft leasing and insolvency as it provides a standardized framework for protecting lessor rights during insolvency proceedings. It facilitates efficient repossession of aircraft, ensuring lessors can recover their assets swiftly, which is vital in the aviation sector where aircraft are often leased. India’s partial alignment with the Convention has created legal ambiguities, particularly during airline insolvencies like those of Jet Airways and Go First. Full incorporation of its provisions into Indian law would enhance lessor protections, streamline repossession processes, and ultimately support airline viability during financial distress.
3. What are the major factors contributing to the insolvency of airlines in India? Discuss with examples.
Major factors contributing to airline insolvency in India include excessive debt, operational inefficiencies, and mismanagement of assets. For instance, Jet Airways faced over ₹8,000 crore in debt, compounded by fierce competition and operational challenges. The Jalan-Kalrock Consortium’s lack of aviation expertise hindered its revival efforts. Similarly, Go First’s reliance on leased aircraft made it vulnerable; when it defaulted on payments, lessors swiftly repossessed aircraft, leading to operational paralysis. Both cases illustrate how financial missteps and asset mismanagement can precipitate insolvency in the highly competitive aviation sector.
4. Comment on the effectiveness of the Insolvency and Bankruptcy Code in managing service-sector bankruptcies, particularly in aviation.
The effectiveness of the Insolvency and Bankruptcy Code (IBC) in managing service-sector bankruptcies, especially in aviation, has been limited. The IBC’s generic framework does not adequately address the unique challenges faced by airlines, such as the need for quick operational turnaround and the management of leased assets. Delays in proceedings and lack of interim funding have led to asset depletion, as seen in the cases of Jet Airways and Go First. Furthermore, the moratorium on asset repossession under the IBC often conflicts with lessor rights, complicating recovery efforts. Thus, reforms are necessary to enhance its efficacy in this sector.
