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Go First Insolvency: India's Tryst With the Cape Town Convention

By Shubhamay Dutta (Advocate/International Attorney), (B.A.LL.B., LL.M. (Universiteit Leiden, The Netherlands)

As of today, India is the third largest aviation market in the world. India also boasts of having one of the youngest aircraft fleets in the world. The Indian aviation market has been expanding rapidly since the 1990s, especially after the advent of liberalization in India. Indian aviation recently gained a big boost with Air India placing an order for 470 aircrafts, which was followed by an order of 500 aircrafts placed by their rival, IndiGo. This is indeed a dynamic moment for Indian aviation. In order to facilitate the growth of aviation, India has signed and ratified various treaties. The Cape Town Convention, which guarantees rights of lessors over leased assets is one of them. India signed the Cape Town Convention in 2008, but little has been done to ratify the same. The Indian aviation industry has seen many issues like the Kingfisher Insolvency in 2012, among others.

In order to mitigate this, the Aircraft Rules, 1937 were amended and Rule 30(7) was inserted. This clause obligates the Directorate General of Civil Aviation (DGCA) to deregister the aircraft in question and removes any discretionary power held by the DGCA in this regard. This amendment came as a relief to lessors. But in 2019, during the Jet Airways insolvency, although most of the deregistration process for most aircraft was carried out smoothly, it was noticed that there was a degree of judicial interference in the process. In order to clear tax dues, the judiciary began restraining the DGCA from deregistering aircraft.

The final blow to India’s aircraft leasing ecosystem comes with Go First’s voluntary insolvency. In the month of May, Go First filed for voluntary insolvency before the National Company Law Tribunal (NCLT) in New Delhi. The plea was admitted on 10th May 2023 and a moratorium was placed. Some of the lessors, fearing this had already terminated their lease agreements with Go First, sought for deregistration of their aircraft. But with the moratorium in place, the deregistration process was halted. This resulted in a legal battle in the NCLT. The NCLT in this matter is caught in a clear conflict between the domestic laws of India, which in this case is the Insolvency and Bankruptcy Code, 2016 (IBC) and the Cape Town Convention, to which India has been a signatory since 2008. In the present case, the provisions of the IBC and the Cape Town Convention are conflicting with one another. Where the Cape Town Convention guarantees rights of lessors over their assets in circumstances such as insolvency and bankruptcy, the IBC on the other hand seeks to secure the corporate debtor and infringes upon the rights of operational creditors, such as lessors. By means of a moratorium, the lessor, under Section 14 of the IBC, is denied the right to repossess their asset, which, in the Go First case can be interpreted as a serious breach of India’s international obligations.

The Go First case in India has taken several twists and turns throughout. Some lessors, before the admission of the Insolvency Petition had already terminated their lease and submitted their documentation for deregistration of their aircraft. As per Rule 30 (7) of the Aircraft Rules, 1937, the DGCA is obligated to deregister the aircraft within 5 working days from the receipt of the deregistration application. In this case, the petition was admitted before the lapse of the 5 working days and hence, the DGCA was restrained from deregistering the aircraft because of the moratorium under Section 14 of the IBC. The lessors who had filed for deregistration before the moratorium filed an application before the NCLT for deregistration of their assets. They argued that they had filed deregistration before the moratorium and were entitled to repossession of their assets. However, their arguments were rejected by the NCLT. An appeal was filed before the National Company Law Appellate Tribunal (NCLAT). The NCLAT refused to interfere with the Order of the NCLT. But in this regard, the NCLAT noted that some of the lessors had indeed filed their applications before the moratorium. Noting this, the lessors were given the liberty to file fresh applications before the NCLT.

The aggrieved lessors then approached the Delhi High Court. The Delhi High Court, while deciding on this, provided some relief to the lessors. The lessors were allowed to access their assets for inspection and maintenance.

Back in the NCLT, fresh applications were subsequently filed by the same group of lessors pleading for deregistration of their aircraft. After extensive arguments between the parties involved, the NCLT passed its order, which is nothing short of damning for India’s reputation as a rising aviation market. This Order was passed with complete disregard to the rights of lessors under the Cape Town Convention. This Order, passed on 26th July 2023, went on to brand lessors’ bona-fide attempt to repossess their own assets as a “dubious” attempt. This order has come under sharp criticism from aviation legal experts from India and abroad.

The Order is bound to have far-reaching effects on India. Many lessors and creditors all over the world have already expressed their displeasure. There is also an ongoing apprehension around the world when it comes to doing business in India. This is largely due to the hardships lessors are being put through when it comes to repossession of their assets.

As of today, India has an important decision to make. When it comes to the aviation sector, India has risen to become the third-largest aviation market in the world. Despite this achievement, due to the hardships that lessors are facing, India is being perceived as a risky jurisdiction. This will prove to be detrimental to India’s interests and to its growing aviation market. A risky jurisdiction means that lessors are now apprehensive about carrying on business with India-based clients. Even if they agree to do business in India, they are likely to charge higher lease rentals to mitigate their risks. This would mean an increase in costs for airline companies, resulting in higher airfares.

Given this situation, in order to comply with its voluntary international obligations and to protect its reputation, the first step has to be taken by the Indian judiciary. The judiciary must aid in the expeditious deregistration of lessor-owned aircraft. The second step to resolve this issue is for India to pass the Cape Town Convention Bill, 2018 which will result in the ratification and implementation of the Cape Town Convention in India. This would come as a comfort to lessors, as they need not be worried about repossessing their assets anymore. India, as an aviation market, has great potential. Unfortunately however, conflicting and vague policies have resulted in several hardships that stakeholders have had to face. If these ambiguities are resolved, India’s growth as an aviation market can be greatly accelerated.

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