THE INTERSECTION BETWEEN THE CAPETOWN CONVENTION AND IBC, 2016: AN OXYGEN MASK FOR THE INDIAN AVIATION INDUSTRY

Chinna Aswathy Abraham – Senior Associate, Dispute Resolution Practice

Mayday? More like, May-Decade! Starting with the grounding of the Kingfisher Airlines in 2012, followed by the downfall of Jet Airways in 2019, all the way to the latest insolvency of Go First- it is safe to say that it has been a bumpy ride for the Indian Aviation Industry.

With the initiation of the Corporate Insolvency Resolution Process (‘CIRP’) against Go First- India and more particularly the Indian insolvency law framework was brought under global scrutiny. As per Section.14 (1)(d) of the Insolvency & Bankruptcy Code, 2016 (‘IBC’), once a Corporate Debtor is put into CIRP, moratorium is declared, prohibiting the recovery of any property by a lessor, where such property is occupied by or in the possession of the Corporate Debtor.

Now, Go First had an impressive fleet of 50-60 aircrafts, the majority of which were taken on lease from various aircraft lessors. With the commencement of the CIRP, the said lessors sought for the deregistration and repossession of their aircrafts. However, due to the prohibition imposed by Section.14(1)(d), the said lessors were essentially left remediless.

In fact, in a hearing before the Hon’ble NCLAT, SMBC Aviation Capital, one of the largest aircraft lessors in the world, submitted that “lessors and international aircraft owners were declaring India as a ‘risky jurisdiction’ for aircraft leasing.”[1] UK-based Aviation Working Group (AWG), a non-profit entity that tracks and contributes to the development of international aviation financing and leasing laws, placed India on a watchlist with a ‘negative outlook’ [2]as India had allegedly failed to comply with international aircraft repossession norms.

One cannot talk about international aircraft repossession norms, without referring to ‘The Convention on International Interests in Mobile Equipment’ (‘Convention) and the ‘Protocol on Matters Specific to Aircraft Equipment’ (‘Protocol’), collectively referred to as the ‘Cape Town Convention’ (‘CTC’). Since different jurisdictions and legal systems have varying approaches to securities, the CTC aims at bringing uniformity to the repossession rights concerning high value-aviation assets such as aircrafts and helicopters[3]. India acceded to the CTC in 2008 but has not yet ratified it. There are, however, murmurs of the government planning to introduce a Cape Town Convention Bill.

To better understand how the CTC protects the interests of the aircraft lessors, let us delve a little deeper into the Protocol. Article XI of the Protocol provides for two alternatives– A & B -for handling insolvency-related events involving aircraft objects.

Alternative A

On the commencement of the insolvency related event (such as the ‘CIRP’ in India), the possession of the aircraft object shall be given to the creditor no later than the earlier of:

• At the end of the waiting period (as may be provided in the laws of the primary insolvency jurisdiction)
• The date on which the creditor would be entitled to possession of the aircraft object if Article XI did not apply (ie, if earlier date is prescribed under national law excluding the effect of CTC)[4]

Until the creditor is given possession of the aircraft object, the insolvency administrator (such as the Resolution Professional in India) or the debtor itself is responsible for maintaining the said object and protecting its value. Further, the creditor is also free to apply for any other forms of interim relief available under the applicable law.

There is, however, an exception to the above. Possession of the aircraft object may be retained by the debtor, where all defaults (other than those constituted by the opening of insolvency proceedings) have been cured within the above period and all future obligations have also been agreed to be performed. However, if there is a default in the performance of such future obligations, a second waiting period would not apply and the lessor is entitled to obtain an order from the court for repossession of the aircraft object.

Alternative B

“Upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor, upon the request of the creditor, shall give notice to the creditor (within the time specified) whether it will:

(a) cure all defaults (other than a default constituted by the opening of insolvency proceedings) and agree to perform all future obligations, under the agreement and related transaction documents; or

(b) give the creditor the opportunity to take possession of the aircraft object, in accordance with the applicable law.”

At this juncture, it may not be necessary to look closely at Alternative B, given the fact that as on date, all Contracting States (except Mexico) have opted for Alternative A[5]– including India. As per India’s declaration[6], lodged under the Protocol, India will apply Article XI, Alternative A in its entirety to all types of insolvency proceedings, and the waiting period shall be two (2) calendar months.

However, in contradiction to its accession to the CTC and declaration of Alternative A, India has been following the provisions of moratorium as provided in the IBC, 2016 – which far exceeds two (2) calendar months. Consequently, creditors, including aircraft lessors have been flocking to the courts in India seeking to deregister and repossess their aircrafts, but to no avail. This has adversely affected the global aircraft lessors trust in India’s international commitments, resulting in India being labelled a ‘risky jurisdiction’, in addition to be being put on various watchlists. India is currently the world’s 3rd-largest civil aviation market[7], only behind the USA and China, and the recent events were sure to jeopardize India’s ranking in the international aviation market.

Hence, to combat the turbulence, on 03^rd October, 2023, the Ministry of Corporate Affairs issued a Notification[8] stating that the provisions of Section.14(1) of the IBC, 2016 “shall not apply to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters.”[9] In other words, aircraft, aircraft engines, airframes and helicopters are now exempt from the purview of moratorium under the IBC, 2016.

This comes as a huge relief to aircraft lessors, as it allows them to deregister and take repossession of their aircrafts within 60 days from the insolvency commencement date. Since the Notification, AWG has issued a positive watchlist notice for India under the CTC compliance index[10]. It remains to be seen if the Notification will offer any respite to the lessors of Go First, as it does not provide for retrospective application. Several industry and legal experts have also expressed their apprehension on keeping the Corporate Debtor a going concern once the lessors are given possession of the aircrafts in line with the CTC. It also raises questions regarding the status and treatment of these aircraft lessors when compared to other lessors, under the IBC, 2016.

Hence, much like the airplane oxygen mask, while the MCA Notification may not have succeeded in removing the turbulence, it does offer temporary solace to various stakeholders at a time of distress.

1. ‘India is a risky jurisdiction…,’ SMBC Aviation Capital on Go First, Jet Airways, Kingfisher failure | Mint (livemint.com)
2. Aviation leasing watchdog puts India on watchlist after NCLT’s GoFirst order, assigns negative country ‘negative’ outlook – The Hindu
3. Cape Town Convention and Protocol (icao.int)
4. Aligning IBC with Cape Town Convention: A Relief for Aircraft Lessors? – Airlines/Aviation News | The Financial Express
5. Ibid
6. D – India – UNIDROIT
7. India has become the world’s third-largest aviation market: President Ms. Droupadi Murmu | IBEF
8. 8273e42bb4de11d39f37ab81f96f93ec.pdf (ibbi.gov.in)
9. Ibid
10. Home – Aviation Working Group (awg.aero)