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provided for a limited time by the Insolvency and Bankruptcy Code (IBC), like GoAir. A gazette notification issued to this effect by the Union corporate affairs ministry on Tuesday (Oct 3) comes as a huge relief to Indian airlines as the GoAir fiasco had made lenders wary of giving aircraft and engines to them, especially the financially weak ones. International leasing companies had raised red flags on this issue which meant that apart from strong players including Tata group airlines and IndiGo, other airlines here would have found lease costs rising due to lessors perceiving increased risk of having their assets stuck here for months if the airline files for bankruptcy under IBC.
The government on Tuesday issued a gazette notification saying: “…the provisions of sub-section (1) of section 14 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), shall not apply to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters.”
This notification was needed as India has so far not legislated the long pending Cape Town Convention (CTC). This convention enables lessors to get their aircraft back from defaulting or defunct airlines. The aviation ministry had in October 2018 sought comments on the CTC Bill 2018 to implement the treaty India had signed in 2008 to basically assure lessors their expensive assets like aircraft and engines will not get stuck here when Indian carriers default on paying rentals or go belly up. However the move has remained stuck since then.
As a result, lessors were unable to repossess 45 of Go First’s 54 Airbus A320 aircraft after NCLT admitted the airline’s plea for voluntary insolvency this May. Since bankruptcy law takes precedence over CTC, Go First planes can’t be repossessed for at least six months to a year. This led to aircraft leasing watchdog AWG issuing a “watchlist notice” for India. It has warned this case “would have a direct and material impact on future financings and leases to Indian airlines.” Aviation Working Group (AWG) is non-profit entity co-chaired by Airbus and Boeing and comprises of the world’s biggest aviation manufacturers, leasing companies, and financial institutions.
Cash-strapped SpiceJet had to issue a statement it is not taking the IBC route to comfort lessors. GoAir lessors have filed pleas to repossess their planes in early May and DGCA was to decide on their request within five working days. But within those five days, the NCLT admitted Go’s plea for voluntary insolvency kicking in the moratorium.
UN’s aviation arm, International Civil Aviation Organisation (ICAO), says the “primary aim of the Cape Town Convention is to resolve the problem of obtaining certain and opposable rights to high-value aviation assets, namely airframes, aircraft engines and helicopters which, by their nature, have no fixed location.
This problem arises primarily from the fact that legal systems have different approaches to securities, title retention agreements and lease agreements, which creates uncertainty for lending institutions regarding the efficacy of their rights. This hampers the provision of financing for such aviation assets and increases the borrowing cost.” India had ratified the convention in March 2008 but the same is yet to be fully implemented here.
