Cape Town Convention and Insolvency and Bankruptcy Code: Recent MCA Notification
[Govinda and Arayan are students at Gujarat National Law University.]
The Insolvency and Bankruptcy Code 2016 (IBC) was enacted with a view to providing a robust revival mechanism for distressed entities and helping them continue as a going concern. Therefore, one of the goals of having an insolvency law is to ensure the suspension of debt recovery actions by the creditors and provide the breathing space for the debtors and creditors to renegotiate their contracts. This requires a period of moratorium in which there is no collection or other actions by creditors against debtors.
Section 14 of the IBC provides for the moratorium that kicks into action after the commencement of insolvency proceedings. Section 14(1) inter alia lists out the various actions which are prohibited on account of the moratorium, including the action of recovery of any property in possession of the debtor by an owner or lessor.
Now, through a notification dated 3 October 2023, by exercising its power under Section 14(3)(a) of the IBC, the Ministry of Corporate Affairs (MCA) has made it clear that Section 14(1) will not be applicable to transactions, agreements and arrangements under the Cape Town Convention on International Interests in Mobile Equipment (CTC) and Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol). This is a welcome move for the aviation industry, as this decision has direct implications for reducing the cost of credit for airlines. With the availability of a faster repossession mechanism in case of default by a lessee, lessors can immediately act on repossessing their aircrafts even if the airlines go bankrupt.
Among the sectors significantly affected by the simultaneous consequences of lockdown measures and travel constraints, it is evident that the aviation industry stands out prominently. For individuals engaged in the aviation finance and leasing sector, the compounded effects of travel restrictions and lockdowns presented a particularly formidable period of difficulty and adversity during COVID-19.
This move has its roots in the insolvency case of Go Airlines (India) Limited (GoAir). GoAir filed for insolvency, attributing financial troubles to faulty engines. The National Company Law Tribunal (NCLT) admitted the insolvency application on 10 May 2023, suspended the board and restrained the lessors from exercising their right of deregistration of aircrafts citing the imposition of moratorium on the airline's financial obligations. GoAir’s aircraft lessors challenged the NCLT's admission of insolvency, arguing that they should be allowed to reclaim their leased aircraft, but the National Company Law Appellate Tribunal (NCLAT) refused their plea to stay NCLT proceedings.
The NCLT order and the subsequent approval by NCLAT in appeal produced a strong reaction from aircraft lessors. The lessors were reasonably justified in their strong opposition to the insolvency proceedings as it seriously affected their interests in aircrafts and the re-marketability of the aircrafts due to delayed repossession process. Not only did the NCLT decision disallow the repossession of aircraft by the lessor, but it also projected India as a risky jurisdiction for aircraft leasing as the local insolvency law hampered the implementation of the CTC and the Protocol.
CTC and India
The CTC and the Protocol facilitate aircraft, engine, and spare parts financing and leasing by mitigating lessors' risk and broadening the legal predictability associated with such transactions, even in instances of insolvency. India submitted an instrument of accession with the depositary and became a party to the CTC in 2008, but it lacks domestic legislation to enforce the CTC. The CTC and the Protocol established uniform rules on remedies exercisable by the creditors upon default by a debtor, such as possession, sale, collection of income across jurisdictions and protected creditors’ interest in case of a debtor’s insolvency.
Under Article XI of the Protocol which provides for ‘Remedies on Insolvency’, India through the declaration lodged under the Protocol at the time of the deposit of its instrument of accession, adopted Alternative A and the waiting period thereunder was specified as two calendar months. So, the debtor is obliged to give possession of the aircraft after the initiation of insolvency either at – (a) the end of waiting period or (b) the date on which the creditor would be entitled to possession of the aircraft object if the Article did not apply (i.e. as per the lease agreement), whichever occurs earlier. This time period is in conflict with the 180-day moratorium imposed after initiation of the corporate insolvency resolution process (CIRP) under the IBC which bars creditors from enforcing security interest in the aircraft, and the IBC, being a later law and domestic legislation, prevailed over the framework provided under the convention and the Protocol. Hence, even after the end of the waiting period under Article XI, the moratorium imposed after initiation of the CIRP restricts the creditors to repossess the aircrafts.
To give teeth to the framework under the CTC and the Protocol, in 2018, the Ministry of Civil Aviation (Ministry) came up with the draft Cape Town Convention Bill with a view to discharging the treaty obligations and availing the full benefit of the Indian accession to the treaty.
The Ministry also emphasized that separate legislation is essential, given the prevailing circumstance wherein international financial institutions accord insufficient significance to a nation's accession to the CTC unless it is accompanied by corresponding implementing legislation. The Organization for Economic Cooperation and Development has also established a benchmark whereby airlines of a CTC/Protocol signatory country may receive a 10% discount on loan processing fees for aircraft acquisition, contingent upon the enactment of such implementing legislation within that respective nation. The government had realized the importance of giving force to the CTC in its true spirit long back, but the efforts did not culminate into concrete measures.
Again, the Central Government recently announced that it will introduce the bill with necessary changes in the monsoon session of Parliament this year, but no steps have been taken in that direction. With the international framework not coming in force due to the lack of domestic enforcement, the CTC and the Protocol were rendered toothless and created difficult situation for creditors of aviation industry in the light of debtor’s insolvency.
However, the recent notification by MCA clears the air around the conflict between the IBC and CTC. Now, aircraft lessors will not have to worry about insolvency proceedings against airlines as their transactions, agreements, and arrangements will be immune from the moratorium.
The effects of the notification have started to show up. The Aviation Working Group, a watchdog representing the aircraft manufacturers and leasing firms, which had put India on a watchlist with a negative outlook in May due to its failure to comply with International norms for aircraft repossession, has now improved India’s score on the global index after this notification. This move by the MCA has definitely enhanced the trust and confidence of aircraft owners and lessors in the Indian jurisdiction. Even the Delhi High Court has acknowledged the notification and will hear its impact on the GoAir’s lessors and their claim to de-register the aircrafts.