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India’s Cape Town Convention Bill – Will It End Lessors’ Woes?

By: Ramesh Vaidyanathan and Mansi Singh

At a diplomatic conference held in Cape Town in November, 2001, the Convention on International Interests in Mobile Equipment (the “Convention”) and the Protocol to the Convention on Matters Specific to Aircraft Equipment (the “Protocol”) were passed. The principal objectives of the Convention and the Protocol were to standardise transactions involving movable property. The Convention/Protocol enables the owners/lessors of aircraft to deregister and export their aircraft from the jurisdiction of the operator by submitting certain pre-recorded documents, and without the need for any subsequent reference to the lessee/operators. By the implementation of the Convention/Protocol, countries intend to achieve efficient financing of high value mobile equipment like airframes and engines, which in turn reduces the operating costs of the airlines and makes flying more affordable.

India – Status Check

According to the CAPA fleet database, there are 652 commercial aircrafts with operators in India as of October 2018 (including 34 in storage). Of these, 531 aircraft are leased, which is 81% of the total. This compares with a leased aircraft share of 52% in Asia and 53% globally. While leased aircraft have dominated Indian skies for a long time, the lessors have been increasingly wary of Indian markets after the Kingfisher and SpiceJet fiascos. The continued delays in de-registering Kingfisher operated aircraft since it suspended operations in 2012 created an impression that India is not serious about the Convention/Protocol. There were reports that some lessors threatened to withdraw from the Indian market entirely or at least attach a higher risk premium to the market amid concerns that they will continue to face challenges in recovering their assets in a default situation.

India acceded to the Cape Town Convention/Protocol in 2008 and the Ministry of Civil Aviation (“MCA”) made changes to the Aircraft Rules, 1937 (“Aircraft Rules”) to provide for the deregistration and export of aircraft as per the Convention/Protocol. Despite the amendments, certain provisions of the Convention/Protocol continued to be in conflict with other Indian laws that fell outside the powers of the MCA such as the Civil Procedure Code, 1908, the Specific Relief Act, 1963, the Companies Act, 2013 and the recently enacted Insolvency and Bankruptcy Code, 2016 (“IBC”). For example, there is no clarity on whether an owner/lessor can deregister and export the aircraft from India once an insolvency resolution process is initiated against the airline and the statutory moratorium comes into effect.

The Cape Town Convention Bill, 2018

Taking note of the conflicting provisions of the Convention/Protocol with other Indian laws, the MCA introduced the Cape Town Convention Bill, 2018 (“Bill”) in October 2018 to enable the stakeholders to avail the full benefit of India’s accession to the Convention and Protocol. The Bill is yet to clear the two houses of Parliament and receive the assent of the President. The Bill contains a non-obstante clause to accord primacy to the provisions of the Convention/Protocol in case of conflict with any other Indian legislation.

Having said that, the presence of a non-obstante clause in the Bill may not help completely as some of the existing Indian legislations contain similar provisions granting overriding effect to such legislations in case of a conflict with other Indian laws. One such legislation is the IBC. This may be a concern for the lessors as the provisions of IBC conflict with the Convention/Protocol and re-possession of aircraft may pose a challenge in case insolvency proceedings are initiated and the moratorium begins to run.

Conclusion

Despite some of the concerns mentioned above, the proposed law is expected to provide greater confidence to financial institutions involved in asset-based financing and leasing transactions in India as the risk of the aircraft not being deregistered immediately should significantly reduce. The Organisation for Economic Cooperation and Development (OECD) has set a norm that ten percent discount will be given in the processing fee for a loan to acquire aircraft to airlines of any country that is party to the Convention/Protocol, provided that an implementing legislation has been passed by that country.

Once implemented, the law may provide a new lease of life to airlines in India, most of which have been struggling to stay afloat owing to the lethal combination of rising fuel prices and the depreciating rupee. Not just the lessors and the airlines but even the passengers are likely to benefit as the reduced financing costs and lease rentals are expected to be passed on to the passengers.

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