Lexology has published it here: https://www.lexology.com/library/detail.aspx?g=2de1a1a4-c2a7-4f92-89f1-7c857fa79ce4
AIRCRAFT OBJECTS BILL, 2025 – WILL IT FLY OR CRASH?
- Introduction
The Protection of Interest in Aircraft Objects Bill, 2025 (“Aircraft Objects Bill”)[1] was introduced in the Rajya Sabha on 10th February 2025 with the aim of harmonizing India’s aviation laws and aligning them with the Convention on International Interests in Mobile Equipment (“Cape Town Convention”)[2] and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (“Cape Town Protocol”) (collectively the “Cape Town Convention and Protocol”)[3], to which India had acceded on 1st July 2008. The Cape Town Convention and Protocol are pivotal international legal frameworks facilitating secure financial transactions involving mobile equipment, including airframes, aircraft engines, and helicopters. The Aircraft Objects Bill intends on giving force to the Cape Town Convention and Protocol in accordance with the declarations made by India at the time of accession. While it broadly aligns the aviation legislative framework in India with the Cape Town Convention and Protocol, the Aircraft Objects Bill specifically provides for the application of Article XI (Remedies on Insolvency) of the Cape Town Protocol. This will bring some respite to creditors while dealing with insolvency of debtors in the aviation sector under the (Indian) Insolvency and Bankruptcy Code, 2016 (as amended) (“IBC”), which is currently not well equipped to address the unique aspects of this sector.
- Insolvency of debtor in the aviation sector: Current regime
With the onset of airline insolvency, different challenges surfaced for both stakeholders and the Indian courts / tribunals, especially around the ownership of aircrafts which were leased to the insolvent debtor. Once insolvency is initiated under IBC, a moratorium[4] is inter alia applicable on: (a) recovery or re-possession of any property by an owner or lessor where such property is occupied by or in possession of the debtor; and (b) foreclosure, recovery, or enforcement of a security interest created by the debtor in respect of its property. To protect the interest of lessors in the event of such insolvency, the Ministry of Corporate Affairs issued a notification dated 3rd October 2023 under Section 14(3)(a) of the IBC (“Notification”)[5] which eclipses the Cape Town Convention and Protocol as regards the insolvency of a debtor. The Notification provided for immediate relief and clarity regarding the application of the Cape Town Convention and Protocol within the existing legal framework by exempting transactions, arrangements, or agreements under the Cape Town Convention from Section 14(1) of the IBC. Pending the enactment of a legislation to effectuate the provisions of the Cape Town Convention and Protocol, the Notification was a welcome move and signalled the legislative intent to prioritize the provisions of the Cape Town Convention and Protocol.
- Dealing with insolvency under the Cape Town Convention and Protocol
The Cape Town Protocol, under Alternative A of Article XI (Remedies on Insolvency), permits creditors with registered security interests or lessors to seize the aircraft from a debtor undergoing insolvency, after 2 (two) months from the date of commencement of the insolvency proceedings (“Waiting Period”) and without mandating court approval. During this period, although the aircraft objects can be used, the debtor and the insolvency administrator must ensure that it is preserved and maintained to retain its value. The debtor or the insolvency administrator can opt to retain the aircraft objects, provided all defaults (other than those triggered by initiation of insolvency) are rectified and by committing to fulfil future obligations. If these defaults are not resolved within the Waiting Period, the creditor is entitled to take immediate possession of the aircraft object without a further Waiting Period.
In contrast to the above, Alternative B of Article XI (Remedies on Insolvency) provides that the insolvency administrator or the debtor has to give notice to the creditor (at its request) as to whether it will cure the defaults and perform all future obligations or allow the creditor to take possession of the aircraft object. Failing issuance of such notice, the court may permit the creditor to take possession.
- Effect on IBC vis-à-vis the Aircraft Objects Bill
Given the liquidation of two key airlines in India and failed attempts to revive the airlines with resolution plans, the pressing need is to strike a balance between IBC and international agreement. Following this, the Aircraft Objects Bill has been introduced to provide a structured framework for handling insolvency in the aviation sector in India.
Section 6 of the Aircraft Objects Bill read with the declarations[6] made by India under Article XXX(3) specifically enforces the applicability of Alternative A under Article XI (Remedies on Insolvency) of the Cape Town Protocol provided that:
- the debtor is registered or incorporated in India or is person domiciled or has his principal place of business in India;
- the international interest of the agreement has been registered in accordance with the Cape Town Convention and Protocol; and
- parties have not, by a written agreement, excluded the application of Section 6.
With the above, creditors and / or lessors engulfed in the debtor’s insolvency under IBC can now expect a streamlined process and seek possession of aircraft objects or steady payment of dues in relation thereto (as the case may be). One can hope that this improves the chances of revival and rehabilitation of debtors in the aviation sector facing insolvency proceedings under IBC.
However, the Aircraft Objects Bill under Section 5 imposes obligations requiring a debtor to submit records of dues arising in relation to ownership or use of aircraft objects to the Directorate General of Civil Aviation (“DGCA”) and mandates a creditor to declare the occurrence of default by notifying the DGCA to be entitled to exercise any remedy under the Cape Town Convention and Protocol. It is further interesting to note that the Aircraft Objects Bill provides that the provisions of the Aircraft Objects Bill (once enacted) would prevail in case of inconsistency with any other law and impresses upon the exigencies inundating aviation insolvency. Be that as it may, IBC has consistently been given an ‘overriding effect’ and therefore, its interaction with the Aircraft Objects Bill has to be tested with time.
- Will the Aircraft Objects Bill fly or crash?
The Aircraft Objects Bill, although tabled before the Rajya Sabha and pending enactment, is a step in the right direction to adopt and enforce the provisions of the Cape Town Convention and Protocol within the Indian legislative framework. It will provide the much-needed statutory framework to deal with the legal obstacles in the event of the insolvency of an airline company as well as make aviation financing and leasing transactions simpler and certain. The Aircraft Objects Bill will also improve contract enforceability and provide the creditors / lessors with a way out to either repossess the aircraft objects or have their dues paid. This would assuredly contribute to a more favourable business environment in India and stimulate growth in upcoming domestic leasing hubs, such as the Gujarat International Finance Tec-City.
Even though the Aircraft Objects Bill empowers the Central Government to amend or withdraw any declaration in accordance with the Cape Town Convention and Protocol, at present, the Aircraft Objects Bill is overall set to facilitate smoother operations for creditors and lessors, fostering economic growth and development in the aviation sector.
[1] Protection_of_Interests_in_Aircraft_Objects_Bill_2025.pdf
[2] Microsoft Word – ct convention _cover + text_ – en JAEF
[3] Microsoft Word – air protocol _cover + text_ – en JAEF
[4] Section 14 of the IBC.
[5] https://ibbi.gov.in/uploads/legalframwork/8273e42bb4de11d39f37ab81f96f93ec.pdf
[6] Declarations lodged by the Republic of India under The Protocol to The Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment at the time of the Deposit of its Instrument of Accession.
Authors:
