Aircraft lessors hope for a smoother runway under new bill

India is the third largest aviation market globally, with 80 per cent of its commercial fleet leased, compared to the global average of 53 per cent. The Convention on International Interests in Mobile Equipment and the Protocol to the Convention on Matters Specific to Aircraft Equipment (convention and protocol) adopted at Cape Town in 2001 address, among other matters, the rights of international aircraft lessors in cross-border aircraft leasing. India signed the convention and protocol in 2008 but has yet to enact their international principles into domestic law. As a result, insolvency laws in India are now inconsistent with the provisions, particularly the remedies, of the convention and protocol.

Go First’s insolvency has highlighted this inconsistency and the issues arising from it. Go First, a low-cost carrier, defaulted on rental payments for its leased aircraft and six aircraft lessors terminated their lease arrangements on 2 May 2023. Go First voluntarily filed for insolvency protection on the same date at the National Company Law Tribunal. The aircraft lessors sought to deregister and repossess their aircraft before Go First’s petition was admitted. However, as the petition was admitted on 10 May, within five working days of the date of its filing, the Director General of Civil Aviation (DGCA) refused to deregister the aircraft on the ground that they were bound by the moratorium prescribed by the Insolvency and Bankruptcy Code, 2016 (IBC).

The lessors applied to the Delhi High Court for an order that the DGCA deregister the aircraft. The lessors’ case was founded on rule 30(7) of the Aircraft Rules, 1937, which is consistent with the convention and protocol requirements that the DCGA deregister the aircraft on receipt of the requisite documentation from the lessor, without the prior consent of the lessee. The applicants further relied on explanation (a) to section 18 of the IBC which excludes assets belonging to a third party from the scope of the moratorium. Additionally, the lessors contended that the leases were terminated before the insolvency application was admitted and the aircraft were thus exempt from the moratorium.

Go First contended that civil courts cannot interfere in IBC proceedings during the moratorium and that the IBC supersedes the aircraft rules and takes precedence over the convention and protocol. The DGCA submitted that they could not deregister the aircraft since the moratorium commenced during the five working day period required under the aircraft rules for de-registration.

Delhi High Court issued an interim order allowing the lessors access to inspect and maintain the aircraft and restraining Go First from modifying the aircraft without the lessors’ prior written approval. Go First challenged this order before a Delhi High Court division bench. The division bench upheld but amended the order to the effect that Go First would maintain the aircraft subject to permission from and monthly inspections by the lessors. Go First’s appeal to the Supreme Court was rejected.

The Aviation Working Group then placed India on its watchlist with a negative outlook. This reflects the perceived risk exposure of lessors in the Indian aviation market and will likely increase the costs of leasing aircraft in India.

Though the Delhi High Court orders are a step in the right direction and align with the lessors’ objective of minimising the depreciation of the commercial value of their aircraft, they fall short of India’s commitment to the convention and protocol.

In April 2022, the Ministry of Civil Aviation published the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 (bill). The bill reflects the provisions of the convention and protocol and supersedes the IBC. It is necessary for the bill to be passed into law as soon as possible to ensure that the domestic insolvency regime for leased aircraft matches the global position. It could be argued that it should also apply to insolvencies which started before the law is promulgated with effect from the date of promulgation.

An issue which remains to be addressed is the position of a lessor who terminates an aircraft lease before the admission of a petition under the IBC. This will have ramifications for the whole economy and developments should be tracked.

Sudeshna Guha Roy is a partner, and Jyotiranjan Nayak is an associate at Bharucha & Partners.