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Arundhati Barman Roy & Bhoomi Shah, Cape Town Convention and Insolvency in the
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Arundhati Barman Roy; Bhoomi Shah, "Cape Town Convention and Insolvency in the
Aviation Industry: A Global Study," RGNUL Financial and Mercantile Law Review (RFMLR)
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Aviation Industry: A Global Study' (2021) 8(1) RGNUL Financial and Mercantile Law
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VII. CAPE TOWN CONVENTION AND
INSOLVENCY IN THE AVIATION
INDUSTRY: A GLOBAL STUDY

- Arundhati Barman Roy & Bhoomi Shah*

ABSTRACT

The following Research Paper, titled, "Cape Town Convention and Insolvency in the Aviation
Industry: A Global Study" aims to understand the juxtaposition of the Cape Town Convention
Bill, 2018 (Bill) proposed to be passed in India, along with the Insolvency and Bankruptcy
Code, 2016 (IBC) which is currently in force. The aviation industry worldwide, including
India, typically operates on the model of leasing, with a large number of aircraft carriers in
India being leased from lessors offshore. The Cape Town Convention and Protocol, which
was signed in 2001 and now has 65 signatories, aims at ensuring predictability and credibility,
and contribute to cost savings through the standardization of aircraft financing and leasing
globally, especially in the case of insolvency. However, the current law that governs aviation
insolvency in India is IBC, which does not provide an easy exit option for lessors of aircraft
due the application of the moratorium provision under Section 14 of IBC which demands that
the lessor cannot reclaim any property that has been leased as well as prohibits the suspension
of supply of essential goods and services during the CIRP. These provisions have become a
hurdle towards attracting aircraft financing and investment in India, the current COVID-19
pandemic exacerbating it, and the passage of the Bill will solve this issue and introduce the
standard followed in other sophisticated jurisdictions. The paper aims to analyse this issue of
law, in light of the previous aircraft insolvency cases and the procedure abided by other
signatories, and hence arrive at a holistic conclusion on the present study.

Introduction ........................................ 119 Case Studies in India...........................129

Indian Laws Pertaining to the Aviation The Use of Alternative Model A and
Industry Currently in Force ................ 121 Global Study of Implementation of the
Insolvency and Bankruptcy............ 121 Cape Town Convention ...................... 132
Non-consensual Rights .................. 123 United Kingdom.............................133
Deregistration of Aircrafts ............. 125 Canada...........................................135
Project Rupee Raftaar .................... 126 Australia.........................................135
Other Legislative Instruments........ 127 United States of America ............... 137

*The authors are fifth-year students of B.A.LL.B. (Hons.) at NMIMS Kirti P. Mehta School
of Law, Mumbai.
2021] AIRCRAFT REPOSSESSION LAWS IN INDIA 119

Further Benefits under the Cape Town Discount.........................................138

Convention: In Terms of Discount and Domesticity....................................139
D om estic A pplication ......................... 138 Conclusion .......................................... 140

I. INTRODUCTION

The Cape Town Convention on International Interests on Mobile

equipment and the Protocolon Matters specific to Aircraft Equipment'("Cape

Town Convention"), a UNIDROIT instrument passed in 2001, is perhaps one

of the most ambitious and successful international commercial law
instruments fashioned, as it helps to promulgate the idea of a new type of
secured financing device- a proprietary interest whose existence and validity
is not affected by domestic laws, 2 thus aiding the creditor to achieve peace of
mind and in turn lowers the cost of credit for clients.

The principal objective of the Cape Town Convention and Protocol

with respect to the aviation industry is to standardise aircraft financing
globally, in order to create a legal regime that is universally applicable. The
protocol does so by aiming to reduce the level of risk for the intending
creditors/lessors, leading to the reduction in the cost of aircraft
financing/leasing and thus, eventually benefitting the end consumer, who is

' The Cape Town Convention on International Interests in Mobile Equipment, Nov. 16, 2001,
2307 U.N.T.S. 285 (entered into force Mar.1, 2006),
https://www.unidroit.org/english/conventions/mobile-equipment/mobile-equipment.pdf
[hereinafter Cape Town Convention].
2 Anton Didenko, A HistoricalOverview of the Basic Concepts of the Cape Town Convention
(PartI): 'InternationalInterest'and 'Internationality',6 CAPE TOWN CONVENTION JOURNAL
136 (2017).
120 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

either the passenger of airlines 3 or the shipper of goods, by a reduction in the

cost of operations.

The Cape Town Convention and its Protocol on Matters specific to

Aircraft Equipment were primarily adopted by the ICAO and UNIDROIT in
order to create certainty for financing of aircraft equipment by lending
institutions. 4 This uncertainty arose due to the varying nature of laws regarding
securities, title retention agreements, and lease agreements in different legal
systems globally. By adopting this Convention, there will not only be certainty
but also predictability5 in the field of aircraft financing.

India is one of the 65 signatories of the Cape Town Convention and its
Protocol and has aimed at discharging its treaty obligations under the same by
enacting the Cape Town Convention Bill, 2018. The need for this Bill arises
due to the conflict of the provisions of the same with various other laws in
force in India including the Code of Civil Procedure, 1908, the Insolvency and
Bankruptcy Code, 2016 ("IBC"), the Specific Relief Act, 1963, and the
Companies Act, 2013.

The following paper aims to understand the present regime in India

with respect to laws applicable to aircraft leasing and the effect that these laws
have on the present market scenario. With the moratorium provisions under
IBC laying heavily upon the lessors, the Cape Town Bill would be a welcome
change that would boost FDI in the Aviation sector. Furthermore, the paper
also aims to understand the laws applicable to third-party non-consensual
rights in the sector and the changes that the proposed Bill would bring to those.

3 Dr. Vadim Linetsky, Economic Benefits of the Cape Town Treaty, ICAO (Oct. 2009),
https://www.icao.int/sustainability/Documents/AnnexC.pdf.
4 Cape Town Convention and Protocol, ICAO,
https://www.icao.int/sustainability/Pages/Capetown-Convention.aspx.
5 Linetsky, supra note 3.
2021] THE CAPE TOWN CONVENTION 121

Finally, the paper critically evaluates the global scenario as to the

implementation of the Cape Town Convention and understands as to which of
the two models under the law would be ideal for India.

II. INDIAN LAWS PERTAINING TO THE AVIATION INDUSTRY

CURRENTLY IN FORCE

A. Insolvency and Bankruptcy

Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC") has

detailed the conduct towards the company in question during the period of the
moratorium which is meant for restructuring and revival of the said company.
Section 14(1)(d) specifically entails that the lessor cannot recover any property
that is in possession of the corporate debtor in the duration of the moratorium.
Further, Section 14(2) of the IBC mentions that the supply of essential services
cannot be suspended or terminated to the corporate debtor while the
moratorium is persisting. 6 Previously, the Indian courts have interpreted
electricity, raw materials, real estate as being essential services in various
cases. It must be noted that in the case of UttarakhandPower Corporation
Ltd. v. M/s. ANG Industries Ltd, with respect to the continuing supply of
essential services, it has been held that when the essential supply of goods and
services are provided during Corporate Insolvency Resolution Process
("CIRP") then the Insolvency Resolution Professional ("IRP") has to bear the
costs within the stipulated time period even when CIRP is ongoing and
furthermore, that if dues are not paid for two consecutive months then the
supply could be terminated. 7

6 The Insolvency and Bankruptcy Code, 2016, Act No.3, Acts of Parliament, §14.
7 Uttarakhand Power Corporation Ltd. v. M/s. ANG Industries Ltd., 2018 SCC OnLine
NCLAT 53.
122 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

Under the Cape Town Convention and Protocol, Article XI deals with
remedies in insolvency under two Alternative models, Alternative A and
Alternative B have been provided for the benefit of the creditors, who are in
many cases lessors of the aircraft. As an interim relief, the lessor can move the
registration authorities for de-registering the aircraft in case of a default.
Further, this bill will allow the lessor for repossession of the aircraft if the dues
are not cleared within two months of the initiation of the insolvency
proceedings. 8 Until then, the IRP is obligated to preserve the aircraft and
ensure that it is being maintained as per the terms of the lease agreement.
However, if the said defaults under the agreement are cured and an
undertaking has been given by the IRP or the lessee that future obligations
would be performed and upheld, then the right of possession may be continued
even after the expiry of two months. 9 The Cape Town Convention and
Protocol would override the moratorium provisions of IBC. The Insolvency
and Bankruptcy Code has a non-obstante clause to override the application of
other applicable laws impeding its functioning.10 Hence it guarantees
supremacy to the operation of IBC in comparison to any other law, in case
their provisions become inconsistent with that of the Code. This was noted in
the case of Pr. Commissionerof Income Tax v. Monnet IspatAnd Energy Ltd.,

8 Cape Town Convention Bill, 2018, Declarationslodged by the Republic of India under the
aircraftprotocol at the time of the deposit of its instrument of accession, MINISTRY OF CIVIL
AVIATION, GOVERNMENT OF INDIA,
https://www.civilaviation.gov.in/sites/default/files/Cape%20Town.pdf.
9
Ashwin Bishnoi, et. al., Insolvency in Indian Aviation: What Does India's New Cape Town
Convention Bill Mean ForRecovery And Re-Possession Of Leased Aircrafts?KHAITAN & CO.
(Dec. 3, 2018)
https://www.khaitanco.com/thought-leadership/Insolvency-in-indian-aviation-what-does-
indias-new-cape-town-convention.
10 The Insolvency and Bankruptcy Code, 2016, Act No.3, Acts of Parliament, §238.
2021] THE CAPE TOWN CONVENTION 123

where it was held that the non-obstante clause under IBC would override the
inconsistency under the Income Tax Act.1 1

However, it is also to be remembered that the Cape Town Bill under

its Section 5 also contains a non-obstante clause to override the effect of other
legislations. 12 Since both the legislations contain non-obstante clauses, it is a
settled position of law that going by established rules of statutory
interpretation, that the statute having the latter non-obstante clause, in this case
the Cape Town Bill, would prevail over the older non-obstante clause, i.e., of
IBC. 13 This would mean that the debtor cannot claim for the continuance of
lease agreement during the CIRP process, even under the garb of it being an
essential service, in case of a default; since the provisions of the moratorium
would be overruled by Article XI of the Bill.

B. Non-consensual Rights

India, along with the USA, UK, Ireland has placed priority on certain
third-party rights over the rights of the registered international interests, which
visibly affects the lessors detrimentally.1 4

The issue of non-consensual rights that frustrate the aviation financiers

also crops up. Non- consensual rights are those which are derived by the
operation of law, and not contractual arrangements, and would include taxes,
airport fees, etc. These rights cause the gestation period of cases to increase
and the Indian authorities in the past have also demanded that the lessors
should first pay off these dues before taking possession, hence, indirectly

" Commissioner of Income Tax v. Monnet Ispat And Energy Ltd., (2018) 18 SCC 786.
12 Cape Town Convention Bill, §5.
13 Solidaire India Ltd v. Fair Growth Financial Services Ltd, (2001) 3 SCC 71 110.
14 SOUICHIROU KOZUKA, ET.AL., IMPLEMENTING THE CAPE TOWN CONVENTION AND THE
DOMESTIC LAWS ON SECURED TRANSACTIONS 341 (Springer International Publishing, 2017).
124 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

making the lessors liable for debts they never took themselves. 15 For example,
in India, the current Aircraft Rules state that the dues pending with the airport
operator three months prior to the date the Irrevocable Deregistration and
Export Request Authorisation ("IDERA") holder sought deregistration from,
shall be mailed by the operator to the IDERA holder. 16 This stance of the
government is interpreted by the critics to be biased in favour of domestic
airlines. The longer the legal tussle for the possession of the aircraft, the longer
the grounding period, which would cause substantial capital loss to the value
of the engine along with the loss in current receipts due to lack of rental
payments.1 7

It is also to be noted that the Cape Town Convention permits the

creation of non-registrable liens which would have corresponding detention
rights in favour of third parties and enabling them to seek possession of the
aircraft to enforce the pending dues with the lessee. 18

India has, in its declarations for the Convention, categorically

recognised the non-consensual rights of liens in favour of the airline
employees with respect to their unpaid wages to the employees and the unpaid
charges and taxes liable to be paid to the operator before the default is
declared, and the court orders approving attachment of aircraft as award. The
same can be registered in a manner similar to that as international interest and
would have priority over the latter. 19 For non-consensual rights of the nature
of unpaid wages, pending charges with the operator since the time of the
default as well as the value-added services to the aircraft performed, these

15 Id. at 346.
16 Aircraft Rules, 1937, Rule 32A, Standard Operating Procedure AIC 12/ 2018, MINISTRY OF
CIVIL AVIATION, GOVERNMENT OF INDIA, http://164.100.60.133/aic/AIC12_2018.pdf.
17 SOUICHIROU KOZUKA, supra note 11,
at 346.
18 See Cape Town Convention, Art. 39 & Art 40.
19 Cape Town Convention Bill, 2018, Declaration under Art. 40., Form 6.
2021] THE CAPE TOWN CONVENTION 125

rights would have priority even when they are not registered. 20 The
Government of India and its agencies continue to have the right to arrest and
detain the aircraft for its pending dues even if the same is not registered under
Article 39.21

This inadequate protection of the rights of the lessors due to India's

opt-in declaration under the Convention might be overcome by having SPVs
in contracting states that do not have this negative declaration. 2 2

Arguendo, it can also be said that since non-consensual rights being

statutory dues would amount to operational debt as per the present position of
law. 2 3 Hence, in the event of a Corporate Insolvency Resolution Process, their
dues would rank lower in the hierarchy compared to that of the lessors who
have been considered to be financial creditors. 2 4 However, whether the carve-
out mechanism in the Cape Town Bill which gives preference to non-
consensual rights, would have a diluting effect on the dues of the lessors still
remains a moot point.

C. Deregistration of Aircrafts

In the present situation, the DGCA requires the consent of the lessee
for the deregistration to occur. In addition to this, the Airports Authority of
India and its operators can impose lien for non-payment of charges, and other
government departments like the customs authorities of India can also demand
impounding under Section 142(c)(ii) of the Customs Act, 1962 and Section

20 Cape Town Convention Bill, 2018, Declaration under Art. 39(1)(a)., Form 1.
21 Cape Town Convention Bill, 2018, Declaration under Art. 39(1)(b)., Form 4.
22 SOUICHIROU KOZUKA, supra note 11, at 356.
23 Director General of Income Tax (Admn. & TPS) v. M/s. Synergies Dooray Automotive

Ltd. & Ors., 2019 SCC OnLine NCLAT 691.

24 Jindal Steel and Power Limited v. DCM International Limited, 2017 SCC OnLine NCLT

989.
126 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

87(c) of the Finance Act, 1994 (the Finance Act), which allows attachment of
the property under the control of the defaulter. 25

D. Project Rupee Raftaar

The impetus for implementing the Cape Town Convention and

Protocol in India can be attributed to ProjectRupee Raftaar embarked on by
the current Narendra Modi government.

Most scheduled carriers in India operate airplanes leased from Dublin,

Ireland, or Singapore. 2 6 In fact, over 70 percent of the aircraft acquisitions
which have occurred in the past decade in the country have been on an
operating lease basis. 2 7 The ambitious ProjectRupee Raftaarby the Working
Group of Ministry of Civil Aviation (2019), aims to develop aviation leasing
and financing in India by promoting the International Financial Services
Centre ("IFSC") in GIFT City, Gujarat (the only IFSC in the country) with
various regulatory and tax reforms in order to make India an Aviation
financing hub like Dublin, Singapore or Hong Kong. It is to be remembered
that transactions carried out in IFSCs are still considered to be off-shore, but
the benefit it provides is that the physical distance is eliminated as an
impediment.

This is expected to reduce the costs of air travel and help the growth
of low-cost carriers in India, where air travel is still considered to be a luxury

25 Shardul Thacker, Creatingand enforcing security interests in transportassets in India, THE

TRANSPORT FINANCE LAW REVIEW (May 2020), https://thelawreviews.co.uk/edition/the-
transport-finance-law-review-edition-6/1225588/india.
26 Mihir Mishra, Plans afoot to base aircraft leasing firms at GIFT city, ECONOMIC TIMES
(Jun. 28, 2018), https://economictimes.indiatimes.com/news/economy/infrastructure/plans-
afoot-to-base-aircraft-leasing-firms-at-gift-city/articleshow/6478553 1 .cms?from=mdr.
27 Report of the Working Group, ProjectRupee Raftaar: Development of Aircraft Financing
and Leasing in India, MINISTRY OF CIVIL AVIATION 5 (Jan. 10, 2019).
2021] THE CAPE TOWN CONVENTION 127

by many and has also been catalysed by the fact that India is expected to
become the third-largest aviation market by 2022, but the current aircraft
leasing ecosystem has several bottlenecks resulting in a low number of
operating aircraft.

The Raftaar report has suggested, amongst other regulatory and policy
reforms, that the Cape Town Bill, 2018 should be enacted so that the right to
detain aircraft has an overriding effect as well as establishes a seamless data
connection between the International Registry and the online Register
operated by the DGCA. 2 8 The Cape Town Convention is expected to have an
overriding effect on the non-consensual rights that have made the lessor liable.

With respect to SARFAESI, the current position is that it cannot be

applied for security over aircraft for the benefit of the aircraft leasing
companies as per Section 31(c) of the SARFAESI Act. The Raftaar report
suggests the deletion of this exception.

E. Other legislative instruments

Rule 30(7) of the Aircraft Rules states that within five days of
application of the IDERA holder, the aircraft has to be deregistered and the
current judicial trend has been known to support the right of repossession by
the lessor. 2 9 Rule 30(7) of the same also comes with a proviso that the Central
Government's right to detain or attach and sell the aircraft object for its
pending dues would not be affected, making way for non-consensual rights. 3 0
Further, Rule 32A of the Aircraft Rules also mandates the aid of the

28 Project Rupee Raftaar, supra note 21, at 38 & 71.

29 See Corporate Aircraft Funding Company LLC v. Union of India &Ors,, 2013 SCC OnLine
Del 1085.
30 Aircraft Rules, supra note 16, at rule 30.
128 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

government, and hence its agencies, to facilitate the export of aircraft after the
cancellation of IDERA.

The above rules have to be read with the relevant Civil Aviation
Requirements issued by DGCA which outlines the procedure for the same. 3 1
The 2020 revision to this has also permitted not only the authorised signatory
but also the certified designee of the authorised signatory to sign the IDERA
application, and even prescribes a format for the application, 3 2 hence,
constructing a formal mechanism that was absent previously.

The Airports Regulations also provide the competent authority the

right to detain aircraft in the event of non-payment of the fees, unless a general
or specific order of the Central Government mandates otherwise. 3 3

However, subsequent to this case, via the 2018 amendment, the first
proviso was inserted which states that the arrears of dues accrued during the
time period comprised of three months immediately preceding the date of
declared default and the period subsequent to the date of declared default up
to the date of departure of the aircraft from India 3 4 has to be remitted before
the deregistration takes place and the plane is allowed to be exported and the
balance is to be recovered from the airline. The concerned Airport Authority
also has to give notice within 5 days of receiving intimation from DGCA
pertaining to the deregistration process, to the lessor about its obligation to
clear pending dues.

31 DGCA, Civil Aviation Requirements, Section 2, Series F, Part I, MINISTRY OF CIVIL

AVIATION, GOVERNMENT OF INDIA.
32
Id. at 17A
33 Airport Authority of India (Management of Airports) Regulations, 2003, Regulation 10,
https://www.aai.aero/sites/default/files/rtidir/gazzl3.pdf.
3 Id.
2021] THE CAPE TOWN CONVENTION 129

Hence, in recent years, there has been a legislative thrust to ease out
aviation leasing in India and the boons of it can be witnessed in the case of Jet
Airways, which declared bankruptcy in 2019, and out of 123 of its fleet, only
11 remained in possession with it. The repossession and releasing of the
erstwhile Jet Airways aircraft was a welcome change compared to the
Kingfisher fiasco which had occurred just a decade prior. 3

III. CASE STUDIES IN INDIA

Before the enactment of the Insolvency and Bankruptcy Code, 2016,

India had followed the position as mentioned under the Cape Town
Convention with respect to aircraft.

The famous case of DVB Aviation FinanceAsia PTE Ltd v. Directorate

Generalof Civil Aviation36 pertained to the Kingfisher Airlines, which was in
a debt of USD one billion. In this case, the insolvent lessee claimed that since
its lease also had a purchase option therefore it also had ownership rights as
well. The DGCA also demanded a No Objection Certificate from the lessee
before it could grant clearance to the lessor to acquire its aircraft. In the end,
the Delhi High Court opined that the DGCA erred by demanding a No
Objection Certificate from the lessee and mandated deregistration to take
place. In this case, the court did not examine the Cape Town Convention but
it was done so in the subsequent case of Spice Jet.

In the 2015 Spice Jet1 7 case, the Delhi High Court categorically
ordered the DGCA to deregister the aircraft that had been leased out to

35 Rajinder Narain & Co., Trends and Developments in India: AVIATION FINANCING AND
LEASING 202 (Chambers Global Practice Guide ed., 2020).
36 DVB Aviation Finance Asia PTE Ltd v. Directorate General of Civil Aviation WP (C)
7661/2012, http://delhihighcourt.nic.in/dhcqrydispo.asp?pn=70783&yr=2013.
37 Ireland Ltd & Ors. v. Directorate General of Civil Aviation & Anr., 2015 SCC OnLine Del
8177.
130 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

SpiceJet by the two Irish lessors. Here, SpiceJet had defaulted in the payment
of lease rents and thus, a default and termination notice had been issued upon
the airline. Even after the termination notice, SpiceJet had continued to use the
leased aircraft for its functioning. This was also held to be illegal by the Delhi
High Court. SpiceJet argued that since a scheme of arrangement was underway
with respect to the insolvency and restructuring of SpiceJet, it would be of
great prejudice to the airline if the default notice was enforced, but the High
Court, stating India's international commitments under the Cape Town
Convention and Protocol rejected the said argument in favour of the Irish
lessors and stated that since there was no dispute regarding the default
committed by the debtors, the lessors could, according to their financial
judgement invoke their rights under the Convention and the Court was in no
position to question the same. Further, India was under an obligation to uphold
its international commitments with respect to the Cape Town Convention and
Protocol as per Article 51(c) of the Indian Constitution. This position was also
followed in the case of CorporateAircraft Funding Company LLC v. Union
of India & Ors.3 8

The aviation authority's reluctance to deregister was highlighted in

both cases, setting out bad precedents for aviation leasing and deterring the
lessors. 3 9 This is also exacerbated by the fact that the courts have placed
priority on the non-consensual rights of government agencies over that of the
lessors.

38 Corporate Aircraft Funding Company LLC v. Union of India & Ors,, 2013 SCC OnLine
Del 1085.
39 Ludwig Weber, Public andprivatefeatures of the Cape Town Convention, 4(1) CAPE TOWN
CONVENTION JOURNAL 61 (2015).
2021] THE CAPE TOWN CONVENTION 131

In Directorateof Revenue Intelligence v. CorporateAir Craft Funding

Co., 4 0 the previous order of the court mandating the DGCA to deregister the

aircraft under Rule 30 of the Aircraft Rules, 1937, was reversed so that the
government agency could carry out the investigation for the alleged fraudulent
activities.

In AER Lingus Ltd. v. Airport Authority of India and Union of India4 1

too, the plea of the Airport Authority to detain aircraft till its pending charges
were settled was allowed, thus enabling the non-consensual rights to yet again
have a higher preference than that of the rights of the lessor.

Jet Airways Case Study42 : The Jet Airways Insolvency case, with
simultaneous proceedings in India and the Netherlands, has exposed the
loopholes existing in the area of Cross Border Insolvency in India. When the
consortium of lenders filed a case against the leading airline in India, the
question that the lessors raised was with respect to the deregistration and
repossession of the aircraft objects that were being operated by Jet Airways.
Even though India had acceded to the Cape Town Convention and Protocol,
the enabling legislation, that is the 2018 Bill has not been passed. Thus, the
provisions of IBC were made applicable to the lease agreements in this case.
The status of the lease agreements, in this case, was exposed when the DGCA
an application made by the Dutch Company, for the deregistration of a Boeing
777 aircraft, since the moratorium provisions were in force. Currently, more
than 100 aircraft that were being operated by Jet Airways have been
deregistered by DGCA. However, if the Cape Town Convention Bill, 2018

40 Directorate of Revenue Intelligence v. Corporate Air Craft Funding Co., 2013 SCC OnLine
Del 1898,1 22.
41 AER Lingus Ltd. v. Airport Authority of India and Union of India, AIR 2015 SC 1903.
42 State Bank of India v. Jet Airways (India) Ltd., CP 2205 (IB)/ MB/2019,
http://www.jetairways.com/insolvencyproceedings/Documents/NCLT-Order.pdf.
132 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

would have been in force, the process for the lessors would have been swifter
and less time-consuming.

India has further made a declaration to adopt the strict timeline route
under the Bill, which is given as the Alternative A Model under Article XI of
the Convention/ Protocol.

IV. THE USE OF ALTERNATIVE MODEL-A AND GLOBAL STUDY

OF IMPLEMENTATION OF THE CAPE TOWN
CONVENTION

Under Article XI of the Cape Town Convention Bill, two models of

Insolvency Resolution are provided; namely Alternative Model A and
Alternative Model B. By the Declaration under the Cape Town Convention
Bill, India has planned to adopt the Alternative Model A.4 3 The key difference
between the said two models is the applicability of a strict timeline.

The Alternative A Model is similar to Section 1110 of the U.S.

Bankruptcy Code, as it has been derived from the same. Here, the corporate
debtor is given two options, where it must either: (a) cure all the defaults and
agree to perform all future obligations under the Agreement, or (b) give
possession of the aircraft objects to the creditor within the waiting period,
which as per the Declaration signed by India, is two months. 4 4 Hence, it is
evident that the Alternative A Model presents both parties with a strict timeline
to carry out the resolution process. It must further be noted that the debtor/
administrator of the insolvency process is meant to preserve the value of the
aircraft objects until they are repossessed by the creditors/ lessors.

43 Cape Town Convention Bill, 2018, Article XI.

as Supra note 8.
2021] THE CAPE TOWN CONVENTION 133

The Alternative A Model provides for a healthy and necessary

alternative to the moratorium provisions under the IBC due to the niche nature
of the aviation industry as opposed to other industries. Here, it is imperative
to understand the macroeconomic significance of the aviation industry,
including the fact that the cost of manufacturing and maintenance of aircraft
objects are very high in value and largely susceptible to depreciation.
Furthermore, the difficulty in the mobility of aircraft and finally the
vulnerability of airlines to insolvency lead to this kind of differential
treatment. Another factor to consider would be the amount of cross-border
financing and leasing in this industry which thus, calls for streamlining of laws
across nations with a fixed timeline.4 5

As opposed to this, the model proposed under Alternative B undertakes

a discretion-based approach, which allows the judiciary to carry out any
additional steps in order to cure the insolvency in the form of an additional
guarantee. Here, no rule of a fixed timeline is applicable, hence there exists a
large scope for countries to interpret insolvency on a case-to-case basis,
weakening the position of the Cape Town Convention. Therefore, due to the
lack of a timeline, most countries have preferred to adopt the Alternative A
model over Alternative B. 4 6

A. United Kingdom

The United Kingdom has recently passed the Corporate Insolvency

and Governance Act, 2020 which has made several noteworthy changes in the
insolvency regime of the country, particularly in terms of the duration of the

" Jeffrey Wool & Andrew Littlejohns, Cape Town Treaty in the European Context: The Case
for Alternative A, Article XI of the Aircraft Protocol, AIRFINANCE JOURNAL,
http://awg.aero/wp-content/uploads/2019/10/capetowntreatyinthe-europeancontext.pdf.
46 Id.
134 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

moratorium period for the corporate debtor in order for it to have time to
analyse alternate models to make itself a viable going concern as well as
extending protection to the suppliers of goods and services, only drawing out
an exception for those providing financial services. This ban on termination
clauses in supply contracts is very vital for our current research paper in terms
of what it reflects for the aviation industry.

The language of the bare provision of the new Amendment states that
there would be a prohibition on terminating contracts of supply for goods and
services or 'doing any other thing' to a company because of the corporate
debtor commencing an 'insolvency procedure.' 4 7 This puts forward a
widespread ban on ipsofacto clauses. In fact, even if the right to terminate the
contract arose prior to the insolvency procedure, the supplier would
temporarily lose the right during the ongoing insolvency procedure. The only
redressal would be to approach the relevant office holder like the liquidator or
receive the corporate debtor's consent or approach the court of law citing
immense hardship caused by the same. 4 8 Hardship has not been defined in the
Act and hence, future court rulings awaited for interpretation.

It is noteworthy to mention that while pre-insolvency breaches and

insolvency procedure as a reason cannot be cited for termination, non-payment
of dues during the insolvency process by the corporate debtor can be a ground
for termination in case of continued supply. However, in terms of repossession
of the aircraft, the interests of the Cape Town creditors continue to be
distinguished and protected to a superior extent in comparison to the general
aircraft lenders and lessors. Much like the erstwhile position, a Cape Town

47 Insolvency Act, 1986, §233B,

https://www.legislation.gov.uk/ukpga/2020/12/crossheading/termination-clauses-in-supply-
contracts/enacted.
48 Id. at § 233B(5).
2021] THE CAPE TOWN CONVENTION 135

creditor has the ability to repossess the aircraft within the first 60 days of the
insolvency process as the Convention stipulates. 4 9

B. Canada

Even in other sophisticated common law jurisdictions like Canada,

Alternative A under Article XI of the protocol has been enacted in the national
insolvency legislation. Hence, the possession of the aircraft has to be given if
the defects are not cured and future obligations are not promised to be
performed by the insolvent company within 60 days and in a recent ruling, the
Canadian courts recognised this application for the first time.5 0

C. Australia

In the recent insolvency case of Virgin Australia,5 1 the Australian court

recognised that the provisions of the Cape Town Convention would be
applied, which has been enacted in the Australian domestic law via the
International Interests in Mobile Equipment (Cape Town Convention) Act,
2013, and will take precedence over other domestic laws. This was substantial
as out of the 144 aircraft of the airline, 142 were leased with 73 different
lessors or financiers. The lessors of Virgin Australia had to abide by the
waiting period applicable till 19, 2020, within which an agreement had to be
arrived at between the lessees and the lessors otherwise the IDERA would

49 Cape Town Protocol, Article XI.

so David B Kierans, First Court Decision in Canada implementing the Insolvency provision
of Cape Town Convention, GOWLINGWLG, https://gowlingwlg.com/en/insights-
resources/articles/2019/insolvency-provisions-of-the-cape-town-convention/.
)

51 Strawbridge, in re Virgin Australia Holdings Ltd (2020) FCA 726 MIDDLETON J (25 May

2020) (reasons published 27 May 2020); Brown, David, Aircraft Leases: International
Convention takes Australian Courts into Virgin Territory, U. OF ADELAIDE LAW RESEARCH
PAPER NO. 2020-72 (Jun. 29, 2020)
https://papers. ssrn.com/sol3/papers.cfm?abstract_id=3637670.
136 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

apply, causing the aircraft to be deregistered and exported back, whose

authorisation could not be affected by the local courts of Australia. 52

Australia has also adopted the Alternative A model of Article XI of the

Protocol. The Virgin Airline insolvency also gave rise to a significant ruling
in terms of the Convention as in Wells Fargo Trust Company, National

Association (trustee) v. VB Leaseco Pty Ltd (AdministratorsAppointed).5 3

Australia became the first jurisdiction amongst the ratifying states to interpret
Article XI(2) of the Protocol. The Federal Court held that the leased engines
had to be transported by the corporate debtor back to the lessors' place of
business in Florida at its own costs as required by the terms of the lease
agreements. The corporate debtor had argued that the term "give possession"
of the article would just mean making available the engines for the creditors
to take over and not delivering them. The Court read Article XI(2) with Article
XI(3) to arrive at a conclusion that the intention was to give possession in a
commercially reasonable manner.5 4

It is also interesting to note that Virgin Australia's sister-company

Virgin Atlantic has also filed for Chapter 15 Bankruptcy, which allows foreign
companies to file for bankruptcy in the USA if they have assets there. The UK-
based Virgin subsidiary also aims to pass a restructuring plan for survival. 5

52 Anthony J Cordoto, Where do aircraftlessors stand after the insolvency of Virgin Australia
Airlines?, LEXOLOGY (May. 31, 2020),
https://www.lexology.com/library/detail.aspx?g=7c9d5730-e6el -45f8-90da-d46ef6a37c98.
5 Wells Fargo Trust Company, National Association (trustee) v. VB Leaseco Pty Ltd
(Administrators Appointed), (2020) FCA 1269.
5 John Canning, Wells Fargo v Virgin: the first clarificationon an insolvency administrator's
obligation to "give possession" under the Cape Town Convention, KINGS & WOOD
MALLESONS, https://www.kwm.com/en/au/knowledge/insights/insolvency-administrators-
obligation-to-give-possession-cape-town-convention-20200831.
5 Virgin Atlantic warns it is running out of money, BBC (Aug. 5, 2020),
https://www.bbc.com/news/business-53659844.
2021] THE CAPE TOWN CONVENTION 137

D. United States of America

The most important provision of the Cape Town Convention and

Protocol, Article XI, is fashioned after Section 1110 of the United States
Bankruptcy Code. The US was one of the first countries to recognise the need
for a differential treatment to be given to Aviation insolvency.

Under Section 1110, the corporate debtor is required to perform all the
obligations and cure all existing defaults within 60 days of the insolvency
petition and by the end of this period has to agree to perform the agreement,
otherwise, repossession would occur. 56 This said agreement is not permanent
recognition of the lease and the same can be rejected later. US case laws have
also held, differing from the Australian Federal Court, that the repossession
does not need to happen as stipulated in the agreement and hence, maintenance
can be waived off.5 7

However, in the past, airlines have bypassed this provision by filing a

Chapter 11 Bankruptcy (known as the reorganisation bankruptcy), giving US
courts the jurisdiction and causing instead of Section 1110, Section 365 to
operate, which too has a 60-day waiting period but does not obligate the
corporate debtor to enter into an agreement and remove all defects by the
expiry of the term. A possible defence of the creditor might be existent if its
home jurisdiction has also adopted Alternative A and, in that scenario, the
application of the Convention may be sought. However, this argument has not

56 Donald G. Gray et. al., The Cape Town Convention aircraft protocol's substantive
insolvency regime: a case study of Alternative A, 5 CAPE TOWN CONVENTION JOURNAL 115
(2016),
https://doi.org/10.1080/2049761X.2016.1290517.
5 Mark Lessard, et. al., USA Law and Practice:AVIATION FINANCING & LEASING (Chambers
Global Practice Guide ed., 2019).
138 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

been witnessed in the courts before and without a doubt, the lessors have less
bargaining power in this scenario. 5 8

Apart from the benefits accrued under the insolvency process, the Cape
Town Convention has also aided the above-mentioned jurisdictions in availing
advantages with respect to creating an aviation-finance-friendly environment.
The two major methods in which this is made possible are through the
discounts under Cape Town Convention and its domestic application.

V. FURTHER BENEFITS UNDER THE CAPE TOWN

CONVENTION: IN TERMS OF DISCOUNT AND DOMESTIC
APPLICATION

A. Discount

The Organisation for Economic Cooperation and Development

(OECD) has set a norm that a ten percent discount shall be provided in the
processing fee for a loan to acquire aircraft to airlines of any country which is
a party to the Cape Town Convention/Protocol provided legislation that has
been passed and implemented by that country. 59 Thus, it can be said that one
of the benefits that India would gain by the passing of the Cape Town
Convention Bill would be to avail such a discount. This would align with the
ideals set forth under Project Rupee Raftaar which aims at making India a
more aviation finance-friendly jurisdiction, modelled after the leader in the
aviation industry, Ireland. The most admirable feature of Ireland's lessor
model that India aims to employ in the future through this Project is the swift

58 Todd K. Wolynski & Oliver Althoff, Tips for aviation and aerospace professionals on
navigating a business transformation, WHITE & CASE (Jun. 22, 2020),
https://www.whitecase.com/publications/insight/take-it-us-tips-aviation-and-aerospace-
professionals-navigating-business.
59 The Cape Town Convention Bill, 2018, Explanatory Note, 8, 1.4
2021] THE CAPE TOWN CONVENTION 139

repossession of aircraft from a financially-strained airline and redeployment

elsewhere in the world. This has been aided through Ireland being a part of the
Cape Town Convention and Protocol since its very inception, in 2001.60

The availing of the Cape Town Discount is a major impetus for any
jurisdiction wanting to boost its aviation industry, and ProjectRupee Raftaar
cements such an intent from India. Further, India has also made the requisite
declarations under the Cape Town Convention, which grants it heightened
economic benefits under the Convention. 6 1

B. Domesticity

The application of the convention on transactions that are purely

domestic in nature, where both the lessor and lessee are Indian parties, leads
to the question of internationality conundrum, which was mitigated by the
insertion of Article 50 thereby allowing the States to disallow the application
of the Cape Town Convention in cases of transactions which are entirely
domestic in nature although the same has not been utilised by any State
presently, including India. 62

It is also to be noted that in the current market scenario, there are little
to no domestic lessors in the Indian context. The Project Rupee Raftaar
initiative also plans to bring in foreign lessors in India for better accessibility
which is expected to help in the growth of complementary domestic industries
associated with aircraft leasing.

60
Project Rupee Raaftar, supra note 21, at page 16
61
Thomas Traschler, The significance of Qualifying Declarations under the Cape Town
Convention, 24 OXFORD UNIVERSITY PRESS ON BEHALF OF UNIDROIT 42-57 (2019).
62 Anton Didenko, A HistoricalOverview of the Basic Concepts of the Cape Town Convention
(PartI): 'InternationalInterest'and 'Internationality',6 CAPE TOWN CONVENTION JOURNAL
136 (2017).
140 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

The present laws and regulations, in general, do not make a

differentiation between a domestic and foreign lessor, and neither will the
Cape Town Convention Bill if enacted. However, Rule 32A of the Aircraft
Rules, 1937 does mandate the Central government to aid the process of export
in case of a foreign lessor.

The proviso to Regulation 10 of the Airports Authority of India

(Management of Airports) Regulations, 2003, reads as:

Provided that in respect of an aircraft which is to be

exported under rule 32A of the Aircraft Rules, 1937, the
current and accumulated dues shall include only such dues
that accrued in respect of that aircraft and in relation to
flights operated by that aircraft during the period comprised
of three months immediately preceding the date of declared
default and the period subsequent to the date of declared
default up to the date of departure of the aircraft from India.

The proviso creates confusion if the Rule in the nature of non-

consensual right would have precedence over the domestic lessors' rights as it
would have on a foreign lessor.

Thus, it is seen that apart from the improvement made to Airline

Insolvency laws, the Cape Town Convention and Protocol would provide
other benefits as well. This has become especially pertinent in the current
scenario, where the aviation industry needs a tremendous boost.

VI. CONCLUSION

The current pandemic has made the aviation industry its biggest victim
with airlines all around the world on the verge of insolvency like the Virgin
group as discussed above.
2021] THE CAPE TOWN CONVENTION 141

In the present scenario, due to the significant impact of COVID-19 on

the aviation industry, the Aviation Working Group ("AWG"), a group of
leading aircraft manufacturers, suppliers, administrators, and lessors,
including but not limited to Airbus and Boeing, has released a statement 63 on
Airline Restructuring Principles where it has categorically recognised that it
is ready to engage with all Cape Town Convention contracting states to work
through their issues and ensure compliance, including in the insolvency
context. 64 Although the statements made by this group are not binding in
nature upon its members, it has created a strong resolution in adopting such
guidelines which enables its members to opt-out of a jurisdiction that has not
complied with the Cape Town Convention Alternative Model A. Furthermore,
it has ensured compliances and it would be appointed as an administrator in
insolvency proceedings of Airlines in jurisdictions compliant with Alt Model
A of Cape Town Convention. 65 This can be viewed as a major benefit of
adopting the Cape Town Convention Bill.

In India, to restore the aviation industry to its previous might, there is

a need to have a seamless supply of goods and services like aircraft, which is
a market trend to be leased by the airlines due to its heavy costs and is mostly
done in India from foreign countries. This has caused the Cape Town
Convention Act to come into the limelight once again- whose passage was

63 Aviation Working group, Covid 19 Air Transport Disruption Statement on airline

restructuring principles,
http://awg.aero/wp-content/uploads/2020/10/AWG-statement-on-airline-restructuring-
principles-22-October-2020.pdf.
64 Aviation Working group, COVID 19 Action, http://www.awg.aero/project/covid-19-action-

and-involvement/
65 Aviation Working group, Pro Forma Letter - On Commencement Of Insolvency,

http://awg.aero/wp-content/uploads/2020/03/ctc-insolvency-compliance-letter-from-awg-
covid19.pdf.
142 RGNUL FINANCIAL AND MERCANTILE LAW REVIEW [Vol. 8(1)

stilled, even though its draft was out for public comments, after the Jet
Airways fiasco of 2019.

It is observed that in the case of Uttarakhand Power Corporation Ltd,

it was stated that during CIRP if the costs of the essential supply of services
were due for two months continuous, then the supply of the same could be
terminated.

After analysing the position of other common law countries like the
jurisdictions of USA, UK, Australia, and Canada, it is opined that on the
passage of the Cape Town Convention Act, there would not be much
difference in the position except that the registered lessors would have the
right of repossession within two months of the insolvency being declared if
the default in pending payments is not cleared.

Hence, it is the position of the authors that though primafacie the Cape
Town Act seems to be in conflict with the IBC, on a deeper understanding of
its application, both the statutes are in harmony and if passed will help to fulfil
their common objective of making India an investor and business-friendly
destination internationally.

In fact, after analysing the application of the Bill in a holistic manner,

especially in the context of other prevalent laws, it is observed that its passage
would have multiple positive impacts on the aviation industry, not only aiding
the insolvency process but also building confidence in the aircraft financiers
to participate in the leasing process by giving them incentives like availing
Cape Town Discount. The numerous timelines provided in the various
legislative instruments pertaining to the Aviation sector would also be
streamlined and superseded if the Bill is passed and hence, will also help in
making the process of aircraft acquisition less cumbersome. Thus, it is
2021] THE CAPE TOWN CONVENTION 143

concluded that the Cape Town Convention Bill, 2018 which brings in
significant improvements to the aviation insolvency law in India, needs to be
brought back into the limelight for the swift revival of the Airline Industry in
India.