Contributed by Parthiv Mishra

Introduction

In the complex realm of the aviation industry, a myriad of conflicts unfold, comprising contradictory laws and divergent rights. These intricacies call for an exploration of the aviation market, where globalizing and harmonizing interests becomes a critical endeavour. This article navigates through the global landscape shaped by the Cape Town Convention on International Interests in Mobile Equipment and its divergence with the Indian domestic law: Insolvency Bankruptcy Code. This variance is further explained using the pivotal event of Go First’s bankruptcy, which has amplified concerns among international players about confidence in India’s aviation market. Lastly, we examine the steps the government is taking to fortify the foreign entities confidence back and create a conducive environment for India’s aviation market to excel. 

Transforming Aviation Finance: The Cape Town Convention’s Global Framework

In the aviation industry worldwide, the mobile nature of aircraft poses significant challenges for creditors. Aircraft financing and leasing frequently involve multiple parties across various jurisdictions. Consequently, rights and liabilities that are recognized in one jurisdiction may not be acknowledged in another, resulting in a lack of interest recognition. Conversely, competing interests may also arise. For instance, a lessor may seek to repossess a leased aircraft, while a financial creditor may aim to seize the same aircraft due to non-payment of debt.  

To overcome these challenges, 68 countries including India came together in Cape Town and formed an international treaty called the Cape Town Convention on International Interests in Mobile Equipment (CTC) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol), which laid an international framework to protect diverse interests in the aviation industry.

CTC has made it easier to secure finance for new aircraft, decreased the cost of borrowing, and simplified aircraft leasing. Importantly, CTC has provided greater legal certainty for creditors and investors, thereby striving for efficiency and stability in the aviation market. This has been achieved by providing international recognition of the interest created over aircraft and prioritizing these international interests over others. Accordingly, CTC entails and provides a wider ambit for the resolution of aviation matters pertaining to insolvency than IBC, as its success lies in its ability to globally harmonize diverse interests across different nations, making it a crucial tool for the global aviation industry.

On July 01, 2008, CTC and Protocol were acceded to by India. However, it does not have full force in India and the Supreme Court in Jolly Verghese v. Bank of Cochin emphasized that the procedure outlined in CTC cannot be followed until it has been fully ratified by Parliament. Till then, CTC is merely another international treaty that has to yield to the domestic laws in cases of conflict. 

Go First’s Bankruptcy and Repossession Attempt 

Go First in 2022, had the 4th highest domestic market share by passenger carried, with 9.5 percent. However, due to their claims of “faulty” Pratt & Whitney engines that grounded about half its 54 Airbus A320neos, along with the lingering effects of COVID-19, Go First began defaulting on their payments. As a result, the company continued losing revenue and the lessors filed notices to terminate of aircraft lease agreement. On May 4, the lessors tried deregistering the leased aircraft in accordance with Rule 30(7) Aircraft Rules, 1937, which essentially states that the registration of an aircraft shall be cancelled by the government within five working days from the date of receipt of deregistration by Irrevocable Deregistration and Export Request Authorization (IDERA) holder. IDERA empowers lessors, in cases of default, to deregister their aircraft from the country they were leased in and repossess them. However, this repossession attempt was stopped mid-way as Go First voluntarily declared bankruptcy under Section 10 of IBC and their plea was admitted by the National Company Law Tribunal, thereby triggering the moratorium period.

This did not happen during Jet Airways’ bankruptcy as lessors were able to successfully deregister and repossess their aircraft before the moratorium period commenced. Therefore, our aviation industry was presented with an unprecedented situation, and the primary question in SMBC Aviation Capital Ltd v. Interim Resolution Professional of Go Airlines (India) Ltd. is whether a corporate debtor has any legitimate interest in the aircraft which would prevent the lessor from seizing it. Simply put, whether lessors can repossess leased aircraft after the initiation of the moratorium period.

Legal Turbulence: Navigating Aircraft Repossession Contradictions Amid Bankruptcy

To answer the above question, we would have to consider two laws that are in direct contradiction to one another. Indian domestic law IBC expressly states under Section 14(1)d that a lessor cannot claim leased property during a moratorium period. The rationale behind this was emphasized in the Supreme Court case of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, where the court opined that the purpose of the moratorium is to allow the businesses in distress to have a fair chance of reviving their company by keeping their assets together, which otherwise they cannot if the leased assets were seized. 

On the contrary, CTC provides that a lessee under a leasing agreement is permitted to take the leased aircraft during the insolvency proceedings without court intervention. However, it can only be done after a waiting period of two months (60 days) from the date of commencement of insolvency proceedings, by filling in an application to the registry authority under IDERA. In the application, the creditor is required to certify that the higher raking interests, if any, have been discharged or have consented to deregister. Once the registry authority has received the request, it is bound to deregister the aircraft and permit its export within five working days. Here, the rationale is to enable the lessor to start his new cycle of leasing aircraft and avoiding deterioration of assets. Additionally, a collaborative incentive is created, encouraging the lessors to continue leasing without having any fears of prolonged legal battles, fostering a more conducive and progressive environment for future transactions in the market.

Domestic Law vs. International Treaty: The Clash in Legal Frameworks

Needless to say, in cases of conflict, the courts have consistently favoured domestic law over international treaties. The general practice for the court is to rely on domestic laws while only using international law as a supplementary means to corroborate their judgments. For instance, in M/s Entertainment Network (India) Ltd. v. M/s Super Cassette Industries Ltd, the domestic Indian Copyright Act had come to loggerheads with various international copyright-related conventions. Taking both into account, the court opined that international rules must be considered, given that the government willingly signed the international treaties. However, this can only be done if the international treaties do not conflict with the domestic laws. Similarly, in the case of Aban Loyd Chiles Offshore Ltd. v. Union of India, the court reiterated the importance of considering international treaties as long as they do not conflict with domestic legislation.

Given the priority given to domestic laws over international treaties, why would the Indian Government want to ratify an international treaty that directly contradicts one of its domestic laws?

It is because of the crucial role that leasing plays in India’s aviation landscape, making it reliant on international players. India’s position to not ratify CTC and envisage its principles has affected its position in the global aviation market. Aviation Working Group downgraded India’s compliance rating because Go First’s bankruptcy was globally perceived as an unlawful attempt to seize lessor’s property. This apprehension might create a major barrier to foreign investment and participation in India’s aviation market. Therefore, establishing a secure and streamlined legal framework becomes imperative for the Indian government to dispel these concerns and attract international investments.

Fostering Aviation Prosperity: Building Confidence in India’s Leasing Ecosystem

Indian government has decided to implement the CTC Regulations in India with full effect. In pursuance of this, the government proposed the Cape Town Convention Bill, 2018. However, it never saw the light of day. Subsequently, the government has proposed the Cape Town Convention Bill, 2021, which is currently put out for public comments. Meanwhile, to calm down the lessors, the government issued a Notification under Section 14(3) of IBC on October 03, 2023, exempting the applicability of a moratorium period under Section 14(1) of IBC specifically for transactions and agreements made in the aviation sector.

This notification along with the broader intention to give full force to CTC is a step in the right direction. It strengthens India’s stance on globalizing rights, thereby offering a lessor-friendly path for the aviation business. Additionally, to strengthen its ratings and bring leasing to India, it is necessary for the Indian Government to provide a clear incentive to the parties. Accordingly, the Indian Government is establishing a favourable tax system in GIFT City, to expand India’s aviation market and establish itself as a key player in the global aviation industry. Hence, it is certain that India’s positioning in the global aviation market can only improve from here. However, what remains uncertain is whether Go First’s lessor would be able to use the said notification to their aid.