Govt changes insolvency rules, makes it easier for lessors to recover planes if airline goes bankrupt

The Ministry of Corporate Affairs has issued a notification on Wednesday to quash a key provision of the Insolvency and Bankruptcy Code (IBC) with respect to aircraft, aircraft engines, airframes and helicopters, which will make it easier for lessors to recover their planes in case an airline goes bankrupt.

The notification released by the Ministry of Corporate Affairs on Wednesday states: “The provisions of sub-section (1) of section 14 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), would not be applicable to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters.” 
 

What is the Cape Town Treaty?

The Cape Town Convention on International Interests in Mobile Equipment, or Cape Town Treaty, which was signed in 2001 and became effective in 2006, lessens the risks of lending for aircraft lessors and financiers, and for parties involved in aircraft purchasing and leasing.

The Cape Town Treaty was formulated to make it easier for lessors to take back aircraft if airlines defaulted on payments. It was adopted by India in 2008. 
 

Go First Bankruptcy

The government's notification to exempt transactions involving aircraft, aircraft engines, and helicopters from the Insolvency and Bankruptcy Code (IBC) comes amid the ongoing insolvency proceedings of Go First, the Wadia Group-owned airline.

Go First had filed for voluntary insolvency in the National Company Law Tribunal (NCLT) on May 2 under the Insolvency and Bankruptcy Code, blaming US engine maker Pratt and Whitney for its troubles. The airline said it was forced to ground half of its fleet because of faulty engines supplied by Pratt & Whitney.

On May 10, the principal bench of NCLT at Delhi admitted Go First's voluntary plea to initiate an insolvency resolution process. The tribunal appointed an IRP while suspending the board and putting a moratorium on the debt-ridden airline's financial obligations.

In granting protection, the tribunal ordered a freeze on Go First's assets even though some lessors had already terminated their leases with the airline and placed requests with the aviation regulator to repossess the planes.

The lessors were unable to recover their planes bankruptcy protection supersedes repossession requests under its local laws.

Since Go First is going through an insolvency resolution process, a moratorium is in place and lessors are locked in a legal battle with Go First for recovering their planes. 

(With Agency Inputs)