 "The Cape Town Convention Bill: What is it, and why is India introducing it?")
The Indian government plans to introduce the Cape Town Convention Bill in the monsoon session of the Parliament in July this year.
The move is aimed at making the process easier for aircraft leasing companies to seize the planes of airlines that miss rental payments.
The proposed Bill will give primacy to the Cape Town Convention in case of conflict with any other local law, mainly the Insolvency and Bankruptcy Code (IBC), 2016.
The Cape Town Convention
The Cape Town Convention (CTC) is a global treaty that guarantees the rights of lessors to repossess leased high-value equipment such as aircraft, engines, and helicopters in case of payment defaults.
It was adopted at a conference in Cape Town in November 2001 under the International Civil Aviation Organisation (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT).
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The convention aims to solve problems of obtaining certain rights to aviation assets such as aircraft engines, helicopters and airframes, which, by their nature, have no fixed location.
India is now a signatory to the convention, but the Indian Parliament has not ratified the same. Hence, the law prohibits such recovery once a company initiates bankruptcy proceedings.
Go First case
Go First filed for bankruptcy this year. The airline's total debt to financial creditors was Rs 6,521 crore as of April 28. The airline owes over Rs 2,600 crore to aircraft lessors, which include SMBC Aviation, CDB Aviation's GY Aviation Leasing, Jackson Square Aviation, and BOC Aviation.
Go First blamed Pratt and Whitney, its engine suppliers, for the crisis. The airline said that P&W supplied faulty engines, which halted their flights.
Cape Town Convention in India
The recent admission of Go First's insolvency resolution plea by the National Company Law Tribunal (NCLT) made the lessors concerned over leasing aircraft to India-based airlines. They feel that the country is a "risky jurisdiction".
To reassure the lessors, the Centre has started to rework the Cape Town Convention Bill. The reworked Bill, once approved, will be presented before the Parliament. If passed, the Cape Town Convention Act will guarantee the rights of lessors to repossess their leased equipment.
If necessary, the Act will empower the Centre to make rules for implementing the convention and protocol in India. This is also expected to boost lessors' confidence in the Indian civil aviation space.
It is also expected to lower the lease rentals in India and help finance high-value mobile equipment, like airframes, helicopters and engines.
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.
Worried lessors also filed for the deregistration of six aircraft with SpiceJet, which has defaulted on lease rentals.
The Aviation Working Group (AWG), a company that maintains an index of how well a country meets CTC compliance requirements, said that India remains on the 'CTC Compliance Watchlist'.
Usually, insolvency resolution drags for a really long time, and the lessor is unable to recover the aircraft due to the moratorium.
Data from the Insolvency and Bankruptcy Board of India shows that till December, as many as 610 cases have been resolved under the IBC, with the average time taken being more than 600 days.
People working on the draft Bill said that it would make it mandatory to return the aircraft to the lessor within two months from the start of the bankruptcy process.
In India, there are no domestic laws to enforce the provisions of the Cape Town Convention, and therefore if there is a conflict with a domestic carrier, the latter prevails. Lessors, however, don't give importance to this accession as it is not backed by legislation.
A government official said, "Feedback from the industry has revealed that there are certain provisions of the convention that are in conflict with laws which fall outside the jurisdiction of the civil aviation ministry. Hence, lessors are asking for a separate law which has legal backing. This is to ensure that even in future if any law is passed, the protection of lessors under the convention remains unaffected."
A separate legislation will benefit Indian airlines as countries that have implemented the Cape Town Convention are eligible for a 10 per cent discount on the loan processing fee to acquire aircraft.