The Ministry of Corporate Affairs (“MCA”) issued a notification on October 03, 2023 under Section 14(3)(a) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), exempting the applicability of moratorium under Section 14(1) of the IBC to transactions, arrangements or agreements under the Cape Town Convention on International Interests in Mobile Equipment (“Convention”) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (“Protocol”) (the “Notification”).
In aircraft financing, the mobile nature of aircraft objects has posed issues for secured creditors, conditional sellers and lessors (collectively referred to as ‘creditors’). Some of the limitations include remedies available in one jurisdiction being restricted in another; security rights created under the law of a particular jurisdiction not being recognised in another; and conflicting priorities of competing security interests over an object. The Convention provides for a framework for international interest in mobile equipments such as airframes, aircraft engines and helicopters (collectively termed as ‘aircraft objects’), railway rolling stock, and space asset and for that purpose, creation of an international registration system for protection and preservation of those international interests. The Protocol sets out a detailed operational framework for implementation of the Convention specific to aircraft objects.[1]
The Convention and the Protocol were developed to provide a uniform framework to protect creditors of aircraft objects crossing national boundaries in the ordinary course of business. This is enabled by providing international recognition to international interests created over aircraft objects pursuant to security or lease agreements, etc., instead of only national laws; and according priority to such international interests registered in the International Registry (set up in Dublin) over unregistered interests or subsequently registered interests. The contracting states can however identify rights or interests with super-priority ranking. Such rights as declared and deposited by India include liens in favour of airline employees for unpaid wages, taxes or other unpaid charges payable to a government authority, related to the use of the aircraft objects and liens in favour of repairers of an aircraft object in their possession, to the extent of services performed and value added thereon, each for a specified period. The Convention and the Protocol also establish uniform rules on remedies exercisable upon default by a debtor, such as possession, sale, collection of income across jurisdictions and protection to creditors against a debtor’s insolvency.
The Convention and the Protocol were acceded to by India on July 01, 2008. The Ministry of Civil Aviation has (as recently as in May 2022) invited public comments on the draft bill for implementation of the CTC and Protocol. It was noted by the Ministry in its explanatory notes on the proposal for enactment of the Cape Town Convention Act, 2018, as well as the Bill in 2022 (hereinafter referred to as the “CTC Bill”) that an enabling legislation was required for bringing the full effect of the Convention and the Protocol.
CTC and the Protocol and its intersection with Insolvency
India being a contracting state, the provisions of the Convention and the Protocol are applicable to, inter alia, (i) a debtor who, while situated in India creates an international interest in an aircraft object; and (ii) an aircraft object registered with the Directorate General of Civil Aviation (“DGCA”).
Further, India has also opted for application of the provisions of the Convention and the Protocol to ‘internal transactions’ where (a) the centre of the main interests[2] of all parties to such transaction and the relevant aircraft object at the time of the conclusion of the contract is situated in India; and (b) where the interest created by the transaction is registered with the DGCA.
Coming to insolvency under the IBC, the resolution professional has the power to exercise control and take custody of any asset over which the debtor has ownership rights during its corporate insolvency resolution process (“CIRP”). Section 14(1) of the IBC also puts a moratorium in place, including on (a) recovery or re-possession of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor; and (b) foreclosure, recovery or enforcement of a security interest created by the corporate debtor in respect of its property. Since the basis of jurisdiction under the IBC is the registered office of the corporate debtor, a CIRP will only be that of an Indian company.
Whereas under the Convention read with Article XI of the Protocol (India having adopted Alternative A under this Article), a creditor with security interest or a lessee under a leasing agreement (in each case registered with the international registry) is permitted to take possession of aircraft objects of the debtor undergoing insolvency proceedings. This can be done after a waiting period of two calendar months from the date of commencement of the insolvency proceedings and does not require court intervention. Insolvency proceedings as defined under the Convention is wide and includes more than the CIRP and liquidation proceedings under the IBC. It is relevant to note that the moratorium during liquidation under IBC restricts creditor action, but not re-possession actions by lessors in any event.
During the waiting period of two calendar months, the debtor or the insolvency professional can elect to retain the aircraft objects after curing all past defaults (other than a default constituted by the opening of the insolvency proceedings) and committing to perform the debtor’s future obligations. Such an option to cure all past defaults or payments can also be prohibited by the moratorium on payment to any creditor during the CIRP.
If the default is not cured within the waiting period, then the secured creditor is entitled to, inter alia, take possession or control of the aircraft object, sell or grant lease of the aircraft object, or collect or receive any income or profits from the management or use such aircraft object. The creditor is also entitled to procure de-registration of the aircraft as well as export and physical transfer of the aircraft object from India. This relief is exercisable after the end of the waiting period, upon a request for such de-registration, physical transfer and export being submitted by a creditor (or an authorised person) to the registry authority under a recorded irrevocable de-registration and export request authorization (“IDERA”). While submitting such a request, the creditor is also required to certify that prior ranking registered interests, if any, have been discharged or that the holders thereof have consented to de-registration and export. Once the registry authority receives a request from the authorised party, it is bound to effect the de-registration of the aircraft and permit its export within five working days from such request being made, after due regard to applicable safety laws and regulations.
The debtor or its insolvency administrator during the waiting period is also bound to preserve and maintain the aircraft object and its value. Such preservation, however, does not preclude the use of the aircraft objects under arrangements designed to carry out such preservation and maintenance. A creditor can also apply for any interim relief available under applicable law during such period.
Extant Framework
In 2015, the Government of India made certain amendments to the Aircraft Rules, 1937 (“Aircraft Rules”), by inserting Rule 30(7), which states that the registration of an aircraft registered in India, to which the provisions of the Convention or the Protocol apply, shall be cancelled by the Central Government, within five working days from the date of receipt of an application for de-registration by an IDERA holder. The application is required to be accompanied with the original or notarised copy of the IDERA recorded with the DGCA and a priority search report from the International Registry regarding all registered interests in the aircraft ranking in priority, along with a certificate that those interests have been either discharged or the holders thereof have consented to de-registration and export.[3] Such de-registration is, however, contemplated to not affect the rights of the Central Government and other specified entities to arrest, detain, attach or sell the aircraft object under applicable law for payment of unpaid dues to the government or such entities.[4]
Prior to the insertion of Rule 30(7) to the Aircraft Rules, the DGCA would, upon receipt of a deregistration request from a creditor seek clarifications from the concerned Indian operators. The Aircraft Rules[5] and the Civil Aviation Requirements otherwise also require the DGCA to, inter alia,be satisfied prior to the grant of de-registration of an aircraft that the lease agreement is terminated in accordance with the clauses of the lease agreement, resulting in a delayed process.
Subsequently, the Aircraft Rules were further amended in 2017 to insert Rule 32A, stating that after an IDERA holder makes an application for export of the aircraft object, once its registration is cancelled under Rule 30(7) of the Aircraft Rules, the DGCA shall take action to facilitate the export and physical transfer of the aircraft, along with spare engine, if any, subject to payment of any outstanding dues relating to the aircraft and compliance of safety rules. The DGCA further issued an Aeronautical Information Circular (AIC) bearing Sl. No. 12/2018, dated November 16, 2018, which provided the procedural steps to be taken by the creditor to avail the export remedy, following de-registration of aircrafts under the Aircraft Rules.[6]
While these piecemeal amendments improved the situation, remedies available with aircraft creditors still involved a protracted process, including before the judiciary. There have been judicial directions in cases such as DVB Aviation Finance Asia PTE Ltd. V. Directorate General of Civil Aviation[7] and Wilmington Trust SP Services (Dublin) Limited v. Directorate General of Civil Aviation[8], allowing aviation creditors in India to avail the benefits of remedies including de-registration under the IDERA. However, absent an enabling domestic legislation for the Convention and the Protocol, in case of a conflict between municipal law and India’s international law obligations, courts have generally also been seen to uphold the domestic laws. This has had the effect of India being viewed as having a not-so-friendly environment for the aviation industry.
The CTC Bill was proposed to be introduced in the monsoon session of the Parliament this year, while the Hon’ble National Company Law Tribunal, New Delhi (“Hon’ble NCLT”),in the insolvency proceedings of Go Airlines (India) Limited had ordered a moratorium prohibiting the recovery of the aircraft and engines by the lessors of the airline company. In the absence of de-registration of aircrafts by the DGCA, the Hon’ble NCLT directed resumption of operations using such aircrafts in order to keep the corporate debtor as a going concern. It further declined the request of the lessors to conduct inspection of the aircrafts, owing to the obligation on the resolution professional under the IBC to maintain the corporate debtor as a going concern and protect and preserve its assets.[9] This decision brought into limelight the provisions of the IBC taking precedence over the Convention.
The Hon’ble Delhi High Court, in writ petitions filed by some of the aircraft lessors, vide orders dated July 05, 2023[10] and July 12, 2023[11], had earlier permitted the lessors to carry out periodic monthly inspections of the aircrafts and the resolution professional to carry out the maintenance tasks of the subject aircrafts and the engines, etc., parked at various airports, with due approvals under the extant rules/ law. The directions were later duly observed and followed by the Hon’ble National Company Law Appellate Tribunal, New Delhi too.[12] The Supreme Court refused to entertain the appeal filed by the resolution professional of Go Airlines against the order of the Hon’ble Delhi High Court.
Effect of the Notification
Pending the enactment of a legislation effectuating the provisions of the CTC and the Protocol, the Notification has the effect of exempting transactions, arrangements and agreements that accord preservation of rights of the aircraft lessors and financiers to, inter alia, de-register aircrafts and repossess them on account of an airline company’s default or insolvency. This is a move towards strengthening India’s international commitment under the CTC and the Protocol, the frameworks for which have evolved through a desire to enhance protection to creditors lending in connection with or leasing aircrafts. International financial institutions too have not given due weightage to accession to the CTC and the Protocol by any country unless it is accompanied by an implementing legislation, thereby making aircraft borrowing and leasing expensive. The Notification is therefore expected to provide an impetus to instilling greater confidence and predictability in international financing and leasing of aircrafts in Indian markets. The move shall empower aircraft financiers/ creditors by making aircraft financing efficient and viable, by reducing the time and procedural steps for such financing as well as recovery, including during the insolvency proceedings under IBC. The Notification is also consistent with one of the objectives of IBC, which is promotion of availability of credit. One of the immediate developments following the issuance of the Notification is the projected increase in India’s score in the positive watchlist notice in the CTC compliance index as issued by the Aviation Working Group, the UK-based global aviation watchdog.[13]
Whether the Notification can be said to have retrospective application will be an immediate question for judicial interpretation. It is also relevant to note that the Notification is applicable only during CIRP proceedings and not during personal insolvency proceedings (we have not analysed if this is likely to cause any issues in the smaller aircraft segments). Equally, the Notification does not provide relief against insolvency or similar proceedings under the Companies Act, 2013, the type another Indian airline was facing. Further, whether the Notification can also be construed to be an exception to prohibition on transfer of funds by a resolution professional during the CIRP will be an interesting dimension to explore.
For further information, please contact:
Dhananjay Kumar, Partner, Cyril Amarchand Mangaldas
dhananjay.kumar@cyrilshroff.com
[1] “Airframes” is defined under the Protocol to mean, “airframes (other than those used in military, customs or police services) that, when appropriate aircraft engines are installed thereon, are type certified by the competent aviation authority to transport: (i) at least eight (8) persons including crew; or (ii) goods in excess of 2750 kilograms, together with all installed, incorporated or attached accessories, parts and equipment (other than aircraft engines), and all data, manuals and records relating thereto”;
“Aircraft Engines” is defined under the Protocol to mean, “aircraft engines (other than those used in military, customs or police services) powered by jet propulsion or turbine or piston technology and: (i) in the case of jet propulsion aircraft engines, have at least 1750lb of thrust or its equivalent; and (ii) in the case of turbine-powered or piston-powered aircraft engines, have at least 550 rated take-off shaft horsepower or its equivalent together with all modules and other installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto”;
“Helicopters” is defined under the Protocol to mean, “heavier-than-air machines (other than those used in military, customs or police services) supported in flight chiefly by the reactions of the air on one or more power-driven rotors on substantially vertical axes and which are type certified by the competent aviation authority to transport: at least five (5) persons including crew; or (ii) goods in excess of 450 kilograms, together with all installed, incorporated or attached accessories, parts and equipment (including rotors), and all data, manuals and records relating thereto”.
[2] ‘Centre of the main interests’ is defined under the Protocol to mean: (i) if it is a body corporate, the place of the debtor’s statutory seat or, if there is none, the place where the debtor is incorporated, formed or registered, unless proved otherwise; or (ii) if he is a natural person, is domiciled in or has his principal place of business in India.
[3] Rule 30(7), The Aircraft Rules, 1937.
[4] Proviso to Rule 30(7), The Aircraft Rules, 1937.
[5] Rule 30(5), The Aircraft Rules, 1937.
[6] AIC Sl. No. 12/2018 dated November 16, 2018 issued by the Government of India.
[7] DVB Aviation Finance Asia PTE Ltd. v. Directorate General of Civil Aviation, WP (C) 7661/2012 and CM No. 4208/2013, High Court of Delhi (April 08, 2013).
[8] Wilmington Trust SP Services (Dublin) Limited v. DGCA & Ors., WP (C) 871/2015 & 747/2015, High Court of Delhi (Order dated March 19, 2015).
[9] Bluesky 31 Leasing Company Limited & Ors. v. Mr. Abhilash Lal, Interim Resolution Professional of Go Airlines (India) Limited, (IB)-264(PB)/2023, Hon’ble National Company Law Tribunal, New Delhi (Order dated July 26, 2023).
[10] Go Airlines India Limited v. SMBC Aviation Capital Limited and Ors., W.P No. 6569 of 2023 and other Writ Petitions, High Court of Delhi, Single Bench (Order dated July 05, 2023).
[11] Go Airlines Limited v. SMBC Aviation Capital Limited & Ors., LPA 537/2023, CM APPL. 34411-34413/2023, High Court of Delhi, Division Bench (Order dated July 12, 2023).
[12] Engine Lease Finance B.V v. Resolution Professional of Go Airlines (India) Ltd. & Anr., Comp. App. (AT) (Ins.) No. 1088 of 2023, Principal Bench, New Delhi (Order dated August 18, 2023).
[13] Following the order in the insolvency proceedings of Go Airlines, India was downgraded in its compliance rating with international leasing laws by the Aviation Working Group.
