Government Exempts Petroleum Assets From Moratorium; Aviation, Telecom May Be Next

Sectors involving natural resources may see a caveat under the Insolvency and Bankruptcy Code soon.

It has started for companies operating in the oilfields sector. A recent notification by the Ministry of Corporate Affairs said companies that have entered into production or revenue-sharing contracts, exploration licences, and mining leases made under the Oilfields (Regulation and Development) Act would be exempt from the moratorium provision under the IBC.

The issue first emerged during the insolvency proceedings of Videocon Oil Ventures Ltd., which has a 25% stake in the Ravva oilfield in the Krishna-Godavari basin, off the Andhra Pradesh coast, through a production-sharing contract. Since Videocon Oil went into insolvency in 2019, its interest in the oilfield has been protected by the moratorium.

To overcome this hurdle in future cases, the ministry has now removed contracts covered by the Oilfields (Regulation and Development) Act from the scope of the moratorium.

This notification empowers the government to revoke these licences and assign them to other entities, even during the insolvency proceedings, according to Mukesh Chand, partner at Economic Laws Practice.

Without these licences, an insolvent company will not have any value. This raises concerns about the viability of the resolution process for affected corporate debtors, potentially jeopardising successful outcomes, he said.

Experts that BQ Prime spoke with expect similar caveats for the telecom and aviation sectors.

Take, for instance, the Go First insolvency case, where the lessors are seeking possession of the leased aircraft citing the Cape Town Convention, which India is a signatory to. The global treaty gives lessors the right to repossess their aircraft in case of a payment default. But Go First's lessors have run into the moratorium wall as well.

If a notification similar to what the ministry has now issued is introduced for the aviation industry, lessors may gain the authority to reclaim their aircraft, according to Karishma Dodeja, partner at Trilegal.

While India has yet to ratify the Cape Town Convention, experts expect the government to use similar caveats to uphold its obligations under the treaty in future cases.

For the telecom sector as well, a similar approach is in the works.

The Department of Telecommunications released a draft telecom bill last September to address the issue of spectrum ownership for telecom service providers undergoing insolvency.

The bill proposes that spectrum ownership will remain with the government and cannot be sold by creditors under the IBC. According to Section 20(3) of the draft bill, if an insolvent telecom service provider fails to comply with these conditions, the assigned spectrum will automatically revert to the government's control.

While this Ministry of Corporate Affairs notification and any similar ones in the future for other sectors could be beneficial to the government as the licences and leases could be made available to other companies, such notifications have the potential to "adversely affect" companies undergoing insolvency, according to Dodeja.