India’s Commitment to the Cape Town Convention: A Recent MCA Notification

[Tanay Dubey is a third year B.A., LL.B. (Hons.) student at National Law University Odisha]

Through a notification dated 3 October 2023, the Ministry of Corporate Affairs (MCA) exempted transactions, arrangements, or agreements relating to aircraft, aircraft engines, airframes and helicopters from the application of the moratorium clause under section 14(1) of the Insolvency and Bankruptcy Code, 2016 (IBC). The notification is in furtherance of India’s obligations under the Cape Town Convention (CTC) and the Aircraft Equipment Protocol to which it acceded in 2008. The CTC establishes a set of minimum guarantees that the acceding countries have provided to the aircraft lessors and includes provisions for a time-bound mechanism to allow lessors to reclaim their aircraft.

Due to the ongoing insolvency resolution of Go Airlines, this development is seen as a major relief to the aircraft lessors, as this may allow them to reclaim the possession of their leased aircraft that continues to be in the possession of the corporate debtor due to the moratorium granted by the National Company Law Tribunal (NCLT) while admitting the application for corporate insolvency resolution process (CIRP) under section 10 of the IBC. The primary question raised in SMBC Aviation Capital Ltd v. Interim Resolution Professional of Go Airlines (India) Ltd. of whether the corporate debtor has any legitimate rights or beneficial interests in the aircraft, allowing it to maintain possession during the moratorium as per section 14, remains unsettled.

This post aims to analyse the rationale of the MCA behind the notification dated 3 October 2023. The implications of this development on the aviation industry and the working of the IBC are discussed. Further, emphasis has been laid on the need for ratification of the CTC and a balanced approach while dealing with insolvencies in the airline sector.

The Rationale

The Indian Government has taken various policy measures such as Project Rupee Raftaar and the provision of tax benefits to international lessors to attract aircraft leasing and domicile registration of aircraft in India. Due to the insolvency proceedings of several major Indian airlines like Go Airlines, Jet Airways, and Kingfisher Airlines, international lessors are increasingly losing confidence in the Indian market, which is a grave concern since they effectively lose rights provided to them under the lease agreements in relation to their leased aircrafts during the moratorium period. The Directorate General of Civil Aviation (DGCA) de-registered three aircraft of another ailing Indian airline, SpiceJet, at the request of aircraft lessors. This shows worrying signs for the Indian aviation industry as 80 per cent of India’s commercial aircrafts are leased as per PwC.

The CTC provides for an insolvency framework to protect the lessors from across jurisdictions. At the same time, the convention also recognizes the insolvency proceedings in the centre of the main interests. Other features include the 60-days waiting or a moratorium period, prioritisation of creditors with registered international interests, and two alternative approaches to deal with insolvencies involving creditors covered under the convention. It is interesting to note that some of these features are not in tandem with India’s domestic law i.e., the IBC. This can be attributed to the fact that India has acceded to the CTC but has not yet ratified it, although the Government had attempted to ratify the convention by introducing Cape Town Convention Bill in 2018, although it could not be passed in the Parliament.

The notification exempting the aircraft industry from the application of a moratorium under section 14(1) of the IBC can be seen as India’s first step towards honouring its commitment under the CTC, thereby alleviating the concerns of aircraft lessors, and boosting their confidence in the Indian market.

Implications and Concerns

The MCA has exempted the aviation industry from the moratorium clause by exercising its power under section 14(3) of the IBC which empowers the Central Government to exempt any transactions, agreements, or any other arrangements. It is pertinent to note that the CTC has not been ratified by the Parliament. This situation poses twin challenges to the resolution process of airline companies.

First, this renders the IBC toothless in insolvency matters relating to the aviation industry. The Supreme Court in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs observed that the objective of the moratorium is to keep the assets of the corporate debtor together during CIRP to facilitate the orderly completion of the processes envisaged under the IBC. Without a moratorium on the assets of a corporate debtor, particularly aircraft, it becomes exceedingly difficult to sustain an airline undergoing insolvency proceedings as a going concern. Nevertheless, the tribunal might still be able to categorize the aircraft as essential goods or services under section 14(2) of the IBC.

Secondly, the insolvency framework outlined in the CTC cannot be implemented unless the convention receives ratification from the Parliament since the convention cannot be made applicable unless it is accommodated in the municipal laws, especially when treaty obligations require alterations to domestic laws. This position was established by the Supreme Court in Jolly Verghese v. Bank of Cochin. In the present case, the provisions of the convention and the IBC are not in tandem with each other which renders ratification necessary. Consequently, the resolution process for airline companies becomes extremely complex whether it is carried out through the insolvency framework provided under the CTC or by the mechanism for resolution provided under the IBC.

Moreover, the notification is being touted as a major relief for the aircraft lessors in the Go Airlines insolvency proceedings, although the lessors might not be able to claim exemption from the moratorium clause under section 14(1) of the IBC since the notification does not provide for retrospective application.

Way Forward

The exemption of the aviation industry from the moratorium clause provided under the IBC in terms of the MCA notification is in accordance with India’s obligations under the CTC. It seeks to boost the confidence of aircraft lessors in the Indian market, which has wavered due to the bankruptcy of major Indian airlines.

Nonetheless, the absence of ratification of the CTC by the Parliament presents various challenges. The convention’s provisions, while beneficial, do not align seamlessly with India’s domestic insolvency legislation i.e., the IBC. Consequently, the IBC’s effectiveness in handling aviation sector insolvencies remains uncertain in light of the recent notification. Without a moratorium on a corporate debtor’s assets, notably aircraft, maintaining the viability of airline companies during insolvency proceedings becomes problematic.

To address these complexities, a balanced approach is crucial when dealing with airline sector insolvencies. The protection of the rights of the aircraft lessors must not be at the expense of keeping distressed airline companies as a going concern. Emphasis on the need for ratification of the CTC by the Parliament is essential to harmonize international obligations with domestic laws. This would enhance the stability of the aviation industry, attract international lessors, and facilitate smoother insolvency resolution processes for financially distressed airlines.

Tanay Dubey

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