The Go First insolvency matter has aircraft lessors worried about repossessing the planes they had leased to the airline, thanks to the company assets getting protection from seizure under the IBC. But, with signs that India would ratify the Cape Town Convention, lessors should feel reassured. Rohit Vaid explains what the convention is
The Cape Town Convention
The Cape Town Convention or CTC is a global treaty which guarantees the rights of lessors to repossess their leased high-value equipment such as aircraft, helicopters and engines in case of payment defaults.
The legal instrument was adopted at a diplomatic conference held in Cape Town in November 2001, under the auspices of the International Civil Aviation Organization (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT).
At present, India is a signatory to the convention but Parliament has not ratified the same. The unique situation has given precedence to local courts’ judgments over the norms of the convention. Consequently, an inter-ministerial consultation process has been kicked off to revise the Bill, which was scheduled in the Parliament in 2018.
India is reworking its CTC Bill
In the wake of the Go First crisis, global lessors are concerned over leasing aircraft to India-based airlines, as the country is increasingly being declared a ‘risky jurisdiction’. To calm the lessors, the Center has started to rework the Cape Town Convention Bill. The reworked Bill, once approved by the Cabinet, will be presented before the Parliament. If passed, the resulting Cape Town Convention Act will guarantee the rights of lessors to repossess their leased equipment.
The Act will accord primacy to the provisions of the convention in case of a conflict with any other law (read the bankruptcy law). It will empower the Center to make rules, if necessary, for implementing the convention and protocol in India. This is also expected to boost lessors’ confidence in the Indian civil aviation space.
Once the Bill is passed…
The Bill’s ratification into an Act of Parliament will fulfill the long standing demand of the aircraft lessors. The reworked CTC Bill, if passed by Parliament, is expected to settle cases between lessors and airlines under the provisions of the Cape Town Convention, thereby averting legal conundrums like the one witnessed in the Go First case.
It is also expected to lower the lease rentals in India as the country’s risk premium will reduce.
Besides, it will aid in achieving efficient financing of high-value mobile equipment in order to make the operations as cost-effective and affordable as possible.
The lower lease cost is then expected to be passed on to the passengers or will be used to grow the country’s civil aviation sector. Currently, a majority of the 700 or so passenger aircraft in operation in the country are leased.
Has Go First acted as a catalyst for the reworked Bill
The recent admission of Go First’s insolvency resolution plea by the National Company Law Tribunal (NCLT) as well as the protection granted to the assets of the airline under a moratorium has acted as a catalyst for the reworked Bill, since the development has suspended the lessors rights to repossess their leased aircraft to the carrier. In the present instance, lessors have moved the National Company Law Appellate Tribunal (NCLAT) against the order passed by the NCLT to initiate insolvency proceedings.
The blowback from the crisis is also being felt by other airlines, especially SpiceJet. The situation has led an international body representing aircraft lessors to give a negative outlook on India. The UK-based Aviation Working Group (AWG) has said that the country remains on the ‘CTC Compliance Watchlist’. The AWG maintains an index of how well a country meets CTC compliance requirements.
Additionally, industry insiders told FE that the ongoing legal tussle has the potential to hike aircraft lease rentals for India’s airlines significantly, as the country is now tagged a ‘risky jurisdiction’. On average, an Airbus A320 aircraft has a lease-amount range of about $250,000-$300,000 per month. These factors have been a major cause for the commencement of the rework on the CTC Bill.