[Analysis] India’s Aviation Reforms – Aligning Insolvency Laws with Global Leasing Standards

Table of Contents 

1. Introduction
2. Clearing runway, MCA’s amendment for the aviation industry
3. Key rationale for the exemption from ‘moratorium’ provisions
4. Lessor’s Confidence on India’s Aviation Industry
5. Influencing the shift: How Go First’s insolvency shaped the Aviation Industry’s moratorium decision
6. India’s Aviation Laws Soar to International Standards
7. Conclusion

1. Introduction

On November 16, 2001, the Convention on International Interests in Mobile Equipment and its Protocol on Matters Specific to Aircraft Equipment was adopted through collaboration between the International Civil Aviation Organization and the International Institute for the Unification of Private Law.

India became a signatory to these agreements and officially joined by depositing its instruments of accession with the International Institute for the Unification of Private Law on March 31, 2008.

2. Clearing runway, MCA’s amendment for the aviation industry

Now, the Ministry of Corporate Affairs vide Notification No. S.O. 4321(E)., Dated 03.10.2023 has notified that the daunting provisions of a “moratorium” under the Insolvency and Bankruptcy Code of 2016 (IBC, 2016) will no longer cast their shadow over transactions, arrangements, or agreements pertaining to aircraft, aircraft engines, airframes, and helicopters, as governed by the Convention and the Protocol.

3. Key rationale for the exemption from ‘moratorium’ provisions

The IBC’s moratorium provisions can significantly impact the rights of creditors and lessors by preventing them from recovering their assets during insolvency proceedings. Given the substantial value of aircraft and related equipment, a blanket moratorium could lead to significant financial losses for lessors and creditors, potentially affecting their ability to finance and lease these assets in the future.

4. Lessor’s Confidence on India’s Aviation Industry

Recently, India’s commercial fleet saw a remarkable shift, with nearly 80% of it being leased, a significant leap compared to the global average of 53%. Rather than outright purchasing of aircraft, leasing provides airlines with the advantage of freeing up substantial capital.

This capital can then be strategically channeled, potentially resulting in cost-effective flight operations for customers and a stronger focus on expanding their business, instead of being burdened by hefty loan repayments. In essence, leasing helps airlines turn a profit.

However, for this leasing trend to thrive, lessors must have confidence in the Indian aviation industry. If they harbour doubts about their ability to recover leased assets in the future, it may lead them to impose stricter terms and conditions on aircraft and engine leases. This could also result in increased lease costs.

Unfortunately, these changes create a ripple effect, making it challenging for other aviation companies to secure favourable leasing deals. Ultimately, these higher costs may be passed down to customers, affecting the affordability of air travel for all.

5. Influencing the shift: How Go First’s insolvency shaped the Aviation Industry’s moratorium decision

In the case of Go First (formerly owned by the Wadia Group), which filed for insolvency proceedings, the moratorium initially granted by the National Company Law Tribunal (NCLT) shielded the airline from lessors and creditors. This created challenges for lessors who sought to repossess their leased aircraft, resulting in legal disputes and uncertainty.

6. India’s Aviation Laws Soar to International Standards

India is a signatory to the Convention on International Interests in Mobile Equipment and its Protocol on Matters Specific to Aircraft Equipment, which deals with the financing and leasing of high-value assets in the aviation industry, including aircraft, aircraft engines, airframes, and helicopters.

These agreements provide specific rights to lessors and creditors in the event of default by the lessee, allowing them to repossess and recover these assets. To honour its international commitments, India needs to align its domestic laws with the provisions of these agreements.

India brings its insolvency laws in line with international standards by excluding aircraft, helicopters, and engines from the IBC’s moratorium provisions. This change promotes legal consistency and facilitates international financing and leasing transactions in the aviation sector, ultimately benefiting the industry’s stakeholders.

7. Conclusion

In a significant move that bolsters confidence in India’s aviation industry, the Ministry of Corporate Affairs has exempted aircraft, aircraft engines, airframes, and helicopters from the weight of moratorium provisions under the Insolvency and Bankruptcy Code.

This decision recognizes the crucial role of leasing in the aviation sector, aligns with international agreements, and fosters a favourable environment for investment. With a major chunk of India’s commercial fleet leased, this amendment ensures that the industry can soar to new heights, providing cost-effective travel options for passengers and fostering growth opportunities for airlines, all while adhering to global standards.