In a positive development for the aviation sector, the Ministry of Corporate Affairs (MCA) on October 3 issued a notification exempting transactions, arrangements, and agreements related to leased aircraft, aircraft engines, airframes and helicopters from the application of the moratorium clause of Insolvency and Bankruptcy Code (IBC).
Under the Cape Town Convention (CTC), a global treaty initiated in November 2001 under the umbrella of the International Civil Aviation Organization (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT), aircraft lessors, who are the rightful owners of these assets, enjoy robust safeguards to repossess aircraft in the event of lessee defaults on lease rental payments. This global framework has been a cornerstone of confidence in aviation leasing arrangements.
However, in contrast to the CTC, the IBC in India has imposed limitations on the ability to repossess aircraft when an airline, facing financial difficulties, files for insolvency, and the National Company Law Tribunal (NCLT) accepts their plea. This situation leads to a moratorium on the recovery of leased assets, significantly affecting the risk perception of global aircraft owners when leasing their assets to Indian airline operators, causing them to impose higher risk premiums on their transactions.
The MCA’s recent notification brings a welcome change to this scenario. According to Palak Vyas, Associate Director at CareEdge Ratings, “The exemption from the moratorium clause for leased aircraft under the IBC represents a positive step forward for the Indian aviation industry. It provides lessors with the ability to repossess their aircraft even if the airline undergoes bankruptcy proceedings. This exemption is expected to restore confidence in the Indian regulatory framework among lessors, potentially leading to a reduction in lease rental rates for aircraft in India. This, in turn, is likely to enhance the profitability of airlines in the medium term.”
This significant regulatory change holds the promise of a more favourable business environment for the Indian aviation industry, as it aligns the country’s regulations more closely with international standards, potentially boosting investment and confidence in this sector.
