Insolvency of aircraft operator: default remedies.

A high-value asset requires significant and secured financing. Suppose the asset is ‘mobile’ like an aircraft (the value of a B737 Max or an A320Neo could vary between $90 million and $120 million), it becomes all the more complicated as the security provided for financing has to hold good across jurisdictions.

While multiple conventions govern various aspects of aviation, none directly addressed the financing and acquisition of an aircraft prior to the Convention on International Interests in Mobile Equipment, i.e., the Cape Town Convention (CTC/Convention), which came into effect on November 16, 2001, at a Diplomatic Conference in Cape Town, South Africa and was acceded to by India on March 31, 2008, which after a waiting period of three months, became effective on July 1, 2008.

The Indian constitutional framework provides the executive with the power to enter into a convention/treaty as this is an executive decision. However, a more delicate nuance that bears a lot of significance is that unless the treaty provisions are incorporated into the domestic legal framework, in cases of conflict, the domestic law will prevail over the requirements of the convention/treaty.

CTC has played a vital role in providing parties with viable default remedies, reduced cost of financing, a public register for records relating to ownership and security in an aircraft object in the form of an International Registry and most importantly, a network of about 83 countries that have acceded to the Convention.

Repossesion

In a default scenario, including the insolvency of an aircraft operator, it becomes imperative for the owner/financier or the creditor to regain control of the aircraft and secure it at the jurisdiction of choice. In the Indian repossession experience, we have noted a remarkable change in how repossessions have evolved from the time of Kingfisher to the latest Jet Airways.

It is essential and in the interest of the stakeholders, including the consumers, that CTC is made a part of the domestic legal framework reasonably quickly; this not only makes the transactions eligible for a 10 per cent OECD (Organization for Economic Co-operation and Development) discount but also provides the creditor with necessary CTC relief (which have already been opted by India in its Declaration under the CTC) if the operator slips into bankruptcy.

Considering India has not explicitly excluded the intra-country transactions from the effect and coverage of the Convention, it will be all the more critical that it is now adopted holistically. This is also particularly important given the initiative that the Government of India has taken by setting up the aircraft leasing and financing platform at the GIFT IFSC, Gujarat.

(Neha Singh is Associate Partner, Link Legal).

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