Jan 29, 2024

Will lessors/lenders continue to face difficulty in repossessing aircraft in India in the post GoFirst environment?

Will lessors / lenders continue to face difficulty in repossessing aircraft in India in the post GoFirst environment?

The GoFirst Episode

GoFirst initiated voluntary insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) in May 2023. The moratorium under Section 14(1) of the IBC, upon initiation of corporate insolvency resolution process of a debtor, therefore came into effect on 10th May 2023 prohibiting, inter-alia:

(i) institution or continuation of suits or proceedings against GoFirst including execution of judgment, decree or order of any court, Tribunal, arbitration panel or other authority;

(ii) transferring, encumbering, alienating or disposing off by GoFirst any of its assets or any legal right or beneficial interest therein;

(iii) any enforcement action or recovery action over any security interest created by GoFirst; and

(iv) recovery of any property by an owner or lessor where such property is occupied by or in the possession of GoFirst.

The National Company Law Tribunal (“NCLT”), which is the adjudicating authority on IBC matters in India, in the matter of GoFirst, in accordance with the law in force as at the time of initiation of insolvency of GoFirst, observed that aircraft leases are covered under the moratorium under the IBC, and hence, repossession of aircraft by lessors was disallowed by the NCLT.

Context on Cape Town

India is a signatory to and has acceded to the Convention on International Interests in Mobile Equipment (“Cape Town Convention”) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (“Protocol”). India deposited the instruments of accession with UNIDROIT on 31st March 2008 and as part of its accession, India has issued a general declaration under Article XI of the Protocol providing for the application of Alternative A in its entirety to all types of insolvency proceedings. This provides a two-month waiting period to enable the debtor/ lessee to cure defaults prior to repossession of the aircraft by lenders / lessors – i.e. operating similar to a two-month moratorium on repossession.

However, there is no specific domestic legislation on the implementation of the Cape Town Convention and Protocol in India, other than recognizing the effectiveness of an IDERA issued under Article XIII of the Protocol and registered with the International Registry and the Directorate General of Civil Aviation. The Supreme Court has, in relation to International Conventions and treaties, observed that in the absence of contrary domestic legislation Indian courts would respect the rules of international law and treaties. When IBC was implemented in 2016 in India, it became the specific legislation to the contrary in so far as insolvency moratorium periods for aircraft.

The much-coveted 3rd October Notification

On 3rd October 2023, the Ministry of Corporate Affairs, Government of India issued a notification (“Notification”) stating that the provisions of Section 14(1) of the IBC relating to moratorium will not apply to transactions, arrangements or agreements under the Cape Town Convention and Protocol relating to aircraft, aircraft engines, airframes, and helicopters. The Notification has been issued under section 14(3) of IBC which empowers the Central Government to disapply section 14(1) from such transactions, agreements or other arrangements as may be notified by it. Therefore, the Notification is effective from the date of its publication and a separate amendment to the IBC is not required for the effectiveness of the Notification. The Notification is prospective in nature and should apply to airline insolvencies initiated post the date of the Notification i.e. it is unlikely to apply to GoFirst whose insolvency was initiated in May 2023.

In our view, the Notification is a significant development for lessors & lenders desiring to lease or finance aircraft to Indian operators, as it gives them the much-required ability to repossess aircraft with, at best, a two-month waiting period in terms of the Cape Town Convention & Protocol.

This article is authored by the AZB & Partners’ Aviation team. Please do not hesitate to reach out to us at aviation.mumbai@azbpartners.com in case of any queries.





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