AVIATION BUZZ

A BRIEF ANALYSIS OF THE CAPE TOWN CONVENTION- PART 1

The world has been abuzz with activity of the aviation boom, and aircraft manufacturers are flooded with orders well into the next decade. Are all the airlines actually buying these aircraft? Is there a regulated mechanism for leasing, sale and lease back aeroplanes in this market.

We look at the contours of the rules put in place to manage and regulate this market.

Introduction:

Ever wondered who owns these gigantic aircraft? Whenever we ponder this question, a straight assumption is made that the airline operators own the aircraft, however, this is not the only case. As per the data released by the Centre for Aviation's (CAPA) Fleet database, almost 53% of the commercial aircraft globally are leased. Leasing of the aircraft gained momentum in the late 1960s to early 1970s. Initially, there were a few aircraft lessors as airlines considered owning an aircraft and making the fullest use of such aircrafts. With time, air travel became one of the most frequently used modes of travel, contributing greatly to the economies of states, and the aircraft design underwent technological advancements to accommodate more passengers and carriage weights.

Aircraft are depreciating assets, and thus, it was considered convenient for the premium airlines to lease a jet rather than spend huge amounts of money to make the fullest use of one particular jet, which would not render the returns invested in owning an aircraft outdated. It was also the case in developing countries that they had to raise finances to own an aircraft. The cost of an aircraft would sometimes be higher than their total economic threshold, so leasing comes to the rescue. Hence, leasing gained momentum and has continued to remain a preference for most airline operators across the globe.

The Convention on International Interests in Mobile Equipment:

This is also popularly termed ‘the Cape Town Convention’ concluded in November 2001 along with a ‘Protocol on Matters Specific to Aircraft Equipment’ (read together as one single agreement under ‘Article 6 (1)’ of the said convention).? The entire purpose of bringing the convention into the picture specifically for aircraft (as mentioned in its protocol) was to determine the specific opposable rights vested in the aircraft lessors due to the nature of the equipment, which does not remain under a specific jurisdiction. It was to provide a global security to aircraft lessors worldwide from the clutches of state-specific laws.

Some Provisions of the Cape Town Convention:

Article 1 (q) of the convention defines leasing agreements as “an agreement by which one person (the lessor) grants a right to possession or control of an object (with or without an option to purchase) to another person (the lessee) in return for a rental or payment.”

?Article 11 of ‘the CTC’ specifies ‘default’ to mean “an agreement in writing between a debtor and a creditor as to the events which may constitute a default or otherwise give rise to rights and remedies specified in Articles 8, 10, and 13 of the convention.” All of these arrangements are necessitated and formulated in the leasing agreement to avoid any ambiguity. Articles 8 and 13 of the convention talks about the re-possession of aircraft by lessors.

Protocol to convention provisions specifically for aircraft:

Parts XI and XIII of the protocol play a significant role in shaping aviation financing and leasing by protecting the rights and interests of the creditors.

Part XI provides for insolvency remedies enabling the creditors (lessors) to gain re-possession of the aircraft at the end of the waiting period prescribed in the declaration of accession by the contracting state, which was within two months for India. Until then, possession remained with the debtor, who continued enjoying the operations of the aircraft in the event of default to meet its dues in practice.

Part XIII, which serves as a rescue provision for the aircraft lessors, authorises them to export the aircraft in case of default from the lessors as per the terms of their leasing agreement. The debtor, following the provisions of the article, may obtain from the contracting state registry, an irrevocable de-registration and export request authorization (IDERA). The registry must then cooperate with the lessor to expedite the de-registration and export processes.

India acceded to the convention in the year 2008. Even after its accession to the Cape Town Convention (“CTC”), the convention still awaits the force of a legislation. However, certain provisions were brought into effect post the insolvency legislation. For e.g.: Articles XI and XIII of the protocol relating to aircrafts were brought into effect through the Aircraft Rules,

Amendment to the Aircraft Rules of 1937.

Part IV of the Aircraft Rules, 1937 (‘The Rules’) makes provisions for the registration and making of aircraft in India. The process necessitated the registration of aircraft in India, which may be owned by an Indian citizen, a body corporate headquartered in India or the state or central government authorities. This provisions also extends to aircraft owned by non-citizens or body corporates conducting business in India under its ‘Category B’ before operating any aircraft within the country. India brought significant amendment to part IV of ‘The Rules’ by insertion of section 30 (7) for de-registration of aircraft without the consent of aircraft operators if an application has been made by the ‘IDERA holders.’

Prior to 2018, when IDERA wasn’t implemented in India, the aircraft owners would approach Director General of Civil Aviation (DGCA) for de-registration of the aircraft so that it ceases operation in the Contracting State, It would consult with all the stakeholders involved in the financing, management, and operations of the aircraft and it could also reject the de-registration as observed in the case of SpiceJet defaults on leases for 6 aircrafts in 2014, which strangulated the lessors and left no remedy. The IDERA amendment in India gave them a sense of relief and trust in DGCA for the implementation of Cape Town Convention in India. Section 32 (A) of ‘The Rules’ provides for cancellation and export of aircraft from the Contracting State with an imposed condition of clearance of outstanding dues, which brings me to the next problem of Insolvency and Bankruptcy Code (‘IBC’) 2016.

The conflict between IDERA and Insolvency & Bankruptcy Code of India:

In the aftermath of the Kingfisher Airlines Limited case, a strong need for insolvency laws was felt, to address the evolving problems faced by airline insolvency. IBC was promulgated in 2016 and addressed this issue. It allowed the airlines to take possession of the aircraft after a moratorium period imposed before the initiation of the Corporate Insolvency Resolution Process (‘CIRP’). The moratorium on the assets of the company freezes the assets, and thus it cannot be alienated, disposed of, or used by the debtor or any other person having interest in the asset under Section 14 of the IBC. The ‘Go Air’ insolvency crisis creates a dichotomy wherein lessors claim that the aircraft was originally an asset of the lessor, and thus, under the termination of the lease, it can be claimed back by them through the process of de-registration, whereas several other stakeholders consider it to be an asset of the airline and thus claim their thrust of interest. IBC favours secured creditors, and thus lessors were kept out of this range. It also imposes a prevalence of national legislation over an international convention. Thus, it creates a dead end for the lessors despite there being optimum recourse as per international standards.

Current developments in India:

India is currently in the phase of developing separate legislation that will override the effect of IBC on aviation leasing and which shall be in conformity with the Cape Town Convention and its protocol. This bill was formulated in 2018 and was kept open for the purpose of public inspection. The bill has been reworked, and ‘Airspace Safeguarding: The Protection and Enforcement of Interests in Aircraft Objects Bill 2022’ it is yet to be implemented. The purpose of introducing the bill in conformity with the Cape Town Convention was to respect Article 51(c) of the Indian Constitution to foster respect for international law and international treaties, to harmonise the existing Indian laws with the aviation industry, and bring reforms in the legislation.

India needs to act urgently.

In the CAPA estimates, cited above, of the 53% of aircraft leasing done in the post Covid-19 era, almost 80% of that leasing is done in India.

In the aftermath of the Go-Air crisis, India has been downgraded by the airline working group. This could negatively impact airlines in India, imply higher lease rentals, and possibly even mean blacklisting some entities permanently from acquiring aircraft. India as a nation, has lost a lot of credibility, With the string of disasters starting with Kingfisher, then Jet Airways, and now Go Airways, with more than 2000 aircraft on order, and India being recognised as the third largest aviation market on earth, its time we got our ducks in a row.

Conclusion: India foresees tremendous growth in the aviation sector, with numerous international financiers willing to invest in India, and thus, the tussle between India's legislation or pro-nationalistic approach in a globally connected industry requires to be harmonised by mitigating conflict among various national and international laws. A sense of trust and investment safe environment in the sector needs to be created for the aircraft leasing market to establish a firm grip on the market.

This article was written by Shraddha Pandey for Avialaz Consultants with inputs and editing by Sanjay Lazar . Shraddha is an advocate and is currently doing her LLM at MNLU Mumbai.

Avialaz Consultants an aviation consultancy, was co-founded by Sanjay Lazar who is an author and Harvard Law Professional with 37 years’ experience in aviation, law, public speaking, and leadership coaching. He is available at @lazar1 on Linked-In & @sjlazars on X (formerly Twitter)

His book ‘On Angels’ Wings — Beyond the Bombing of Air India 182' is a number 1 #Bestseller available on Amazon.in ?