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  • Writer's pictureRishiraj Baruah

India’s insolvency law and the Cape Town Convention

The Convention on International Interests in Mobile Equipment (CTC) and the Protocol thereto on Matters Specific to Aircraft Equipment (Aircraft Protocol) were ratified by India on July 1, 2008. The purpose of the CTC is to provide a stable international legal regime for the protection of secured creditors, conditional sellers, and lessors of aircraft objects through a set of basic default remedies and protection of creditors’ interests by registration in an International Registry, thus securing priority and protection in the event of debtor’s insolvency. These enhancements of creditors’ remedies are designed to reduce risk and hence cost of borrowing. However, India has not implemented the specific provisions of the CTC nor the Aircraft Protocol by way of any domestic legislation in accordance with Article 253 of the Constitution of India. While India has amended its Aircraft Act, 1934 and the Aircraft Rules, 1937 to implement Article XIII (‘Registered International Interest’ and ‘IDERA’) of the Aircraft Protocol, other provisions of the CTC and Aircraft Protocol are subject to existing or future laws of India.

The Government of India promulgated the Insolvency and Bankruptcy Code on May 28, 2016 (“IBC”). Few of its salient features are as follows:

  • a moratorium of 180 days (extendable upto to 270 days) is declared which bars all creditors of the corporate debtor from instituting any suit or arbitration proceedings, or enforcing its security or repossessing their security. Any enforcement rights whether under any lease agreement, security document or any other law shall be suspended during the moratorium.

  • an insolvency professional is appointed who is empowered to run and manage the corporate debtor, including its assets on a going concern basis during the Corporate Insolvency Resolution Process(“CIRP”);

  • the existing board of directors stands suspended and the Committee of Creditors (“COC”) constituted by the financial creditors who steer the vital commercial decisions of the debtor company;

  • differential treatment between ‘financial creditors’ and ‘operational creditors’ during CIRP;

Typically, aircraft lease transactions in India are operational leasing arrangements, which mean that the aircraft lessors/financiers of such transactions will be considered as ‘operational creditors’ as per the IBC, with no decision making or negotiating power with the COC during the insolvency process or at the stage of approval of the resolution plan. If the lease transaction is a financial lease, which can be termed as a hire-purchase arrangement, the lessors/financiers of such leases could be considered as ‘financial creditors’ under the IBC.

With regard to the insolvency provisions of CTC, declarations lodged by India under the Aircraft Protocol at the time of its accession mention that India opted to apply Article XI, Alternative A, in its entirety to all types of insolvency proceedings. Per the declaration, the ‘waiting period’ for the purpose of Alternative A is 60 days (i.e. two calendar months). We believe that the remedies granted by Alternative A are in conflict with the provisions of the IBC. While the IBC, upon admission of an insolvency petition, grants a moratorium of 180 days (extendable upto 270 days) during which aircraft owners, lessors and financiers are barred from enforcing its security or repossessing their security, the CTC Alternative A allows the security interest holder to repossess their secured asset after the ‘waiting period’ if the defaults under the relevant agreement remain uncured during the ‘waiting period’.

It should be noted that India’s accession to the CTC and the Aircraft Protocol was prior to the implementation of the IBC. Therefore, the IBC will override any other law in force to the extent that provisions of such laws are inconsistent with the provisions of IBC.

The Ministry of Civil Aviation, Government of India published the Cape Town Convention Bill, 2018 (the “Bill”) on October 8, 2018 in order to implement the CTC/Aircraft Protocol in India with a view to discharging the treaty obligations and to avail benefits of the Indian accession to the treaty. The main feature of the Bill is that the CTC and Aircraft Protocol will given the force of law in India once it has been enacted by the Parliament and have been appended to the Bill as first and second schedule respectively. The declarations made by India have also been made a part of the Bill as the third schedule. The Bill also contains a provision that will accord primacy to the provisions of the Convention/Protocol in case of conflict with any other law. It also empowers the Government to make rules, if necessary, for implementing the Convention and the Protocol in India. The Bill is undergoing public consultations and it is difficult to ascertain when it will be enacted as legislation by the Parliament. The timelines for implementation of the Bill cannot be determined since this is election year and will have to be tabled at the Parliament once it is in session after the elections are concluded. Therefore, the CTC and Aircraft Protocol are still subject to domestic laws of India (including the IBC).

Certain questions emerge out of this dichotomy which would need to be considered, some of which are as follows:

  1. Whether deregistration of an aircraft from the aviation registry could be effected under an IDERA during debtor’s insolvency? The author believes since making an IDERA application to the DGCA do not constitute ‘institution of suits or proceedings against the corporate debtor’, an IDERA application requesting deregistration could be made to the DGCA, however whether DGCA will give effect to the IDERA application is a gray area.

  2. Whether the rental dues which are pending prior to insolvency would be repaid under a resolution plan? The author believes since pending rental dues would be construed as ‘operational debt’, such operational debt would receive a minimum value equivalent to the value they would have received during liquidation.

  3. Whether the insolvency professional is under any obligation to honor all the commitments under the lease agreement during the moratorium period? Typically, contracts would continue as is, but the consequences of not honoring commitments of a contract under the IBC is unclear.

  4. Whether an aircraft which is already deregistered could be exported from the premises of the debtor? The author believes, if express or constructive possession of aircraft has been transferred to the lessor / owner prior to initiation of the moratorium, then repossession can happen, otherwise moratorium will apply.

  5. Whether the lessor / owners would be in a position to renegotiate the terms of their contract during the insolvency period? The position in relation to this is unclear since the negotiation of contracts might require approval of committee of creditors which undertakes all commercial decisions during CIRP.

Keeping in view the evolving insolvency jurisprudence, it is difficult to ascertain whether the rights of a creditor under the CTC and Aircraft Protocol would be read harmoniously with the IBC, especially due to the lack of an established insolvency jurisprudence in the aviation industry, apart from certain cases relating to the winding up of Kingfisher airlines (which occurred prior to the ratification of the CTC and implementation of IBC), some of which are still pending at various courts in India. This is even more pertinent now due to the current financial distress of Jet Airways.

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