Whether Leonardo da Vinci in medieval Italy or John Secondari in 1965 US said, “Once you have tasted flight, you will forever walk the earth with your eyes turned skyward, for there you have been, and there you will always long to return”, India today represents the essence of this statement. First seeing commercial success in 1930 with Tata Airlines and witnessing the achievements of Indigo since its launch in 2003, the aviation sector is now the third-largest industry globally. It is predicted to be worth USD30 billion by 2024.
The industry has survived as long as it has for several reasons, including legal protectionism, many aspects of which are now at the forefront of GoFirst’s voluntary insolvency. GoFirst is a low-cost carrier with financial issues and liabilities that led to the grounding of 54 of its aircraft.
In May 2023, the National Company Law Tribunal (NCLT) admitted GoFirst’s application and declared an insolvency moratorium. The lessors could thus not repossess their aircraft. However, shortly before this order, the lessors had filed for an irrevocable deregistration and export request authorisation for 45 of GoFirst’s aircraft. For this, the Aircraft Working Group placed India on a watchlist for failing to honour the Cape Town Convention (CTC), the uniform international legal framework governing the financing and leasing of aircraft.
This example shows the schism between India’s international obligations and local laws. While India has been a signatory to the CTC and its aircraft protocol since 2008, it has yet to enact local legislation to implement its obligations. Local laws have taken precedence over the CTC and protocol in the courts. To bridge this gap, Delhi High Court (DHC) in 2015 recognised India’s international obligations, holding that under the constitution, it must interpret the CTC in good faith, in line with its objects and purpose.
After the NCLT order, the DHC granted the lessors an interim order, finding that they owned the aircraft. The resolution professional was not allowed to take control of the aircraft. The interim order permitted the lessors to inspect and maintain the aircraft and prohibited GoFirst from removing any part from them. However, two major provisions of the Insolvency and Bankruptcy Code, 2016 (code) conflict with the CTC and protocol.
While section 14(1) of the code prevents the lessors from taking action against the corporate debtor, including repossessing aircraft, until after the corporate insolvency resolution process period of 330 days, article XI of the protocol, dealing with insolvency and adopted by India, grants a moratorium of two months, within which lessors may apply for interim relief.
Second, section 53 of the code sets out an order of priority for settling debts. Under the CTC, however, India has chosen to pay only debts relating to non-consensual rights, such as taxes and repairs, from the time of default.
Provisions of the CTC and the protocol also conflict with the Civil Procedure Code, 1908, the Specific Relief Act, 1963 and the Companies Act, 2013.
To resolve such conflicts, the government has introduced the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 (CTC bill), giving precedence to the CTC and the protocol when it conflicts with any other law. Chapter III deals with default and remedies. Debtors, including lessees, must submit records of default to the registry authority, that is the Director General of Civil Aviation. Creditors, including lessors, may take possession or control of an aircraft, sell it or grant a lease and receive income and profits derived from it. Courts may make orders enforcing these rights, including interim orders preserving aircraft and their value.
Creditors must register their debtors’ defaults with the registry authority to exercise these rights. If a creditor registers an international interest in an aircraft, an insolvency professional cannot deny possession to them. The Director General must honour a request from a creditor who has registered a default to deregister an aircraft and allow its physical removal.
Conflict leads to uncertainty. The CTC bill will give the assurances and protection for which suppliers, lessors and investors have been waiting. The aviation sector will then be able to spread its wings and fulfil its potential.
Sanjay Gupta and Namita Das are partners at Dentons Link Legal. Sydrah Sarfaraz, a senior associate, and Abhay Goyal and Prakriti Singh, both associates, also contributed to the article.
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