The Cape Town Convention Bill, once passed, will override the moratorium provisions of IBC

Under IBC, such lessors are treated as operational creditors, thus, face a higher risk of a haircut during resolution. Under IBC, such lessors are treated as operational creditors, thus, face a higher risk of a haircut during resolution.

By Neeti Shikha, Urvashi Shahi & Shreya Sharma

IBC has offered a timely resolution option for several companies. However, it is not the most befitting options for the aviation sector. This is due to multiple reasons. The aviation industry is characterised by capital-intensive assets, 81% of which are the leased commercially-operated aircrafts. Section 14 of the IBC prohibits repossession of the property once the moratorium is declared. This may become detrimental for preserving the value of the aircrafts. Grounding them for long, not only causes financial losses but also results in massive maintenance expenditure. Thus, the shadow casted by moratorium over the leased aviation assets for a period of six months would result in a significant deterioration in value. Indian carriers currently are running more than 600 passenger aircrafts, of which 80% are funded via operating lease. Under IBC, such lessors are treated as operational creditors, thus, face a higher risk of a haircut during resolution. Given that India aims to establish its aircraft leasing industry by 2040, this might serve as a major disincentive to the upcoming players.

Additionally, owing to the absence of cross border resolution framework, there is no certainty on the rights and liabilities, especially the security interest, which is dependent upon multiple factors such as place of asset, place of main insolvency proceeding and coordination amongst different jurisdictions, etc. This concern becomes more alarming for India as none of the aircraft lessors are based here, thereby attracting cross border implications. Without an effective cross border framework in place, the looming precariousness only increases the cost of financing for this sector.

The ministry of civil aviation introduced the Cape Town Convention Bill on October 8, 2018, to implement the Cape Town Protocol in India. The Bill intends to discharge the treaty obligations and avail full benefit of the Indian accession to the treaty. It aims to resolve the concerns regarding uncertainty of security rights in the high-value aviation assets, which by their nature, have no fixed location. It is yet to achieve the status of a law. Once enacted, it would override the provision of any other law, including IBC. With the ongoing distress, the current crisis has triggered the need for a sector-specific solution as proposed under the Bill.

The Bill, once passed, will override the moratorium provisions of the IBC. Pursuant to Article XI of the Protocol, the lessor can take possession of the aircraft if dues are not cleared within two months of initiation of insolvency proceedings. Until then, the insolvency administrator must preserve and maintain the aircraft as stated in the lease agreement. The lessor is also entitled to apply for any other interim relief available under the Indian laws. However, there remain some “watch-outs” as well. For instance, in case of repossession applications, what are the documentation requirements and stamp duty implications for making such requests upon initiation of insolvency proceedings? What all costs should be factored in by lessors? Clarity on these practical issues is important to allow parties to take advantage of the protocol. Further, it is yet to be seen how courts will decide on the cross-country cooperation and execution of a foreign decree. While the protocol under Article XII binds India to co-operate to the extent possible with foreign courts and foreign insolvency administrators, the role of the court remains important. Courts should not pass any order, inter alia, that may defeat the purpose of this. The success of such harmonisation endeavours would largely depend on the pioneering role and cooperation of the airline industry in India.

In India, the aviation sector currently contributes $72bn annually—3% of the GDP. Considering that the sector may witness continued stress, there is an imminent need for a special resolution framework for both operationally and financially reorganisation. With a view to make India a leading leasing industry that may handle 90% of aircrafts being ordered by 2040, FM, in her budget speech, stated that the government aims at ease out repossession processes. Equally important is to create a legal environment that allows hassle-free restructuring. At this juncture, the implementation of the Bill would be a major overhaul. Once implemented, it would provide a huge market for asset-based financing and leasing in aviation sector.

Authors work with Centre for Insolvency & Bankruptcy, Indian Institute of Corporate Affairs. Views are personal

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