INTRODUCTION:
The aviation industry is an essential part of global connectivity, allowing businesses, tourists, and trade to cross international borders. However, this industry is highly capital-intensive and relies heavily on leasing and financing arrangements for aircraft. In cases where the airline becomes insolvent, the interests of aircraft lessors and financiers may conflict with domestic insolvency laws that typically favour the restructuring of the debtor.
In India, the most significant cases that have highlighted the conflict were Go Airlines insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), in conflict with the rights of aircraft creditors. A recent notification from the Ministry of Corporate Affairs (MCA) has aimed to alleviate these challenges by exempting certain aircraft-related agreements from the IBC’s moratorium provisions. This blog examines the implications of this exemption, how it aligns with the Cape Town Convention[1], and the impact it can have on the Indian aviation and insolvency landscape.
BACKGROUND: THE CAPE TOWN CONVENTION AND AIRCRAFT FINANCING
The Cape Town Convention on International Interests in Mobile Equipment, including its Protocol on Matters Specific to Aircraft Equipment was devised as a response to the particular difficulties of financing and leasing high-value mobile equipment, specifically aircraft. Such instruments aim to standardize and establish an international legal regime to safeguard creditor interests by:
- Admitting recognition of international interests in mobile equipment everywhere.
- Registered interests are prioritized over unregistered or subsequent claims in an international registry.
- It provides specific remedies for creditors, like repossession and deregistration, on debtor default.
India adopted the Cape Town Convention in 2008, ostensibly becoming a step to conforming with international norms. Yet, the failure to implement specific legislation alongside the overarching presence of Indian insolvency law, for example, IBC, has considerably watered down the effectiveness of this Convention. It thus becomes one of the more common and problematic scenarios, where an Indian court has a natural tendency to resort to home laws rather than an international norm.
THE CONFLICT: IBC’S MORATORIUM AND CREDITOR RIGHTS
The Insolvency and Bankruptcy Code (IBC) provides for a moratorium during corporate insolvency resolution processes (CIRP), which has the following effects:
- Restricts recovery actions by creditors, including repossession of leased assets.
- Prevents security from being enforced over the property of a debtor.
Even though it gives the debtor company scope to restructure, concurrently, it prevents aircraft creditors from taking back high-value assets that include aircraft and engines. This was most manifest while dealing with Go Airlines’[2] case, where lessees were prevented from repossessing aircraft though occasions of default had become visible.
In contrast, the Cape Town Convention grants creditors expedited remedies, whereby they can repossess aircraft without resorting to court action after two months have elapsed. The inconsistency of the IBC with that of the Convention has created judicial uncertainty, which has seriously affected India’s credibility for aviation financing.
THE MCA NOTIFICATION AND ITS IMPLICATIONS:
On October 3, 2023, the Ministry of Corporate Affairs (MCA) issued a notification under Section 14(3)(a) of the Insolvency and Bankruptcy Code (IBC), exempting agreements governed by the Cape Town Convention and its Protocol from the moratorium provisions specified in Section 14(1).
Key Provisions of the Notification
- Exemption from Moratorium:
- Aircraft lessors and financiers are now allowed to take back their assets without the constraints that the moratorium provisions of the IBC have placed on them.
- This exemption applies only to those transactions that are registered under the Cape Town Convention and its international registry.
- Two-Month Waiting Period:
- Creditors must wait for two months from the date of the initiation of insolvency proceedings before exercising their rights.
- During this period, the debtor or insolvency practitioner may cure defaults and agree to perform future duties.
- Deregistration and Export:
- Creditors can request deregistration and export of aircraft through an Irrevocable Deregistration and Export Request Authorization (IDERA).
- The requests are to be processed within five working days by the Directorate General of Civil Aviation (DGCA), under the condition that all earlier claims are cleared.
EFFECT ON AIRCRAFT CREDITORS:
The latest notice benefits aircraft lessors and financiers in that:
- Risk Minimization: Creditors can now exercise their rights without undergoing long-winding judicial processes that would reduce uncertainty over asset recovery.
- Process Simplification: The requirement on the DGCA to expedite deregistration and export procedures significantly minimizes potential delays.[3]
- Compliance with International Standards: Adherence to the principles of the Cape Town Convention would give India a creditor-friendly jurisdiction that would attract more investment in the aviation sector.
IMPACT ON AIRLINES:
For airlines, notice introduces stricter compliance requirements when it comes to lease agreements and financing terms.[4] With this, operational pressures, especially in insolvency situations, may be heightened, while responsible financial practices are nurtured. Airlines that enter into obligations to uphold will enjoy benefits such as cost savings on financing and an improved ability to access worldwide leasing markets.
LEGAL CHALLENGES AND OPEN QUESTIONS:
- Retrospective Application:
- A relevant issue is whether the notification has a retroactive effect on current insolvency cases, like the case of Go Airlines, in which disputes are already pending.
- The courts would have to clarify whether the notification affects the proceedings initiated before the date of its issuance.[5]
- Limited Scope:
- The exemption from the moratorium is specifically to the CIRP under the IBC and does not extend to individual insolvency or liquidation proceedings governed by the Companies Act, 2013. This means that smaller aircraft creditors, who mostly deal with individual debtors, may not be covered by this exemption.
- Interaction with Payment Restrictions:
- The IBC places restrictions on the CIRP such that resolution professionals cannot make any payments to creditors. This is in potential conflict with the requirements of the Cape Town Convention that past defaults be remedied before repossession.
- It may be required that the courts address this discrepancy to allow for the effective implementation of the notification and reconciliation of the different legal frameworks.
JUDICIAL PRECEDENTS:
Indian courts have held that in the absence of enabling legislation, international conventions stand secondary to domestic laws. Noteworthy cases include DVB Aviation Finance Asia PTE Ltd. v. DGCA[6] and Wilmington Trust SP Services v. DGCA[7] whereby the judiciary had refrained from enforcing rights under the Cape Town Convention without appropriate statutory backing.
This new notice should bridge the gap; still, its success depends largely on consistent judicial interpretation and enforcement. Howsoever the existing judicial approach might determine the course these international rights take within the Indian structure of law is still under question.
CONCLUSION:
The notification issued by the Ministry of Corporate Affairs represents a critical step forward in reconciling India’s domestic insolvency laws with its international commitments under the Cape Town Convention.[8] By exempting aircraft creditors from the moratorium provisions of the Insolvency and Bankruptcy Code (IBC), the notification provides essential clarity and instils greater confidence within the aviation sector.
This exemption, by making asset recovery easier and reducing risks, enhances India as an aircraft financing destination. It emphasizes financial discipline to the airlines and the critical need to adhere to international standards.
Although the notice addresses several of the problems that exist, its scope is limited and, to some extent, conflicts with other sections of the IBC. A more holistic legislative framework that effectively implements the Cape Town Convention and Protocol would, therefore, be required for the full exploitation of this exemption.
As India moves forward in its efforts to balance the intricacies of insolvency legislation with international obligations, the notification is a step towards a more balanced approach in which the rights of creditors and the protection of debtors can exist together. For the aviation industry, it sends a definitive message: India is set to emerge as a global hub for aircraft leasing and financing.
Author(s) Name: Alisha Garg (Symbiosis Law School, Pune)
References
[1] Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (16 November 2001, 1 March 2006) 2367 UNTS 517 (Cape Town Protocol).
[2] Go Airlines India Ltd v SMBC Aviation Capital Ltd and Ors [2023] Writ Petition No 6569 (Del HC, 5 July 2023) (Single Bench).
[3] Sandeep Gopalan, ‘Transnational Commercial Law: The Way Forward’ (2002) 18 Am U Intl L Rev 803.
[4] Air Transport Action Group, Aviation: Benefits Beyond Borders (Annual Report, 2016) https://aviationbenefits.org/media/149668/abbb2016_full_a4_web.pdf accessed 7 January [2025]
[5] Mark Bisset, Aviation Finance & Leasing (Law Business Research, London 2017).
[6] DVB Aviation Finance Asia PTE Ltd v Directorate General of Civil Aviation [2013] WP (C) 7661/2012 and CM No 4208/2013 (Del HC, 8 April 2013).
[7] Wilmington Trust SP Services (Dublin) Ltd v DGCA and Ors WP (C) 871/2015 and 747/2015 (Del HC, 19 March 2015).
[8] Elliott M Selden, ‘Air Space’ (2002) Air and Space.
