Re-tweaking of IBC to secure aircraft lessor's rights

How often have you heard that the government has tweaked a law for an industry? It is a rare instance. The government has recently tweaked the IBC clause to secure aircraft lessor rights. We know you may have many questions about the news. Before we get into the details of the change, it is essential to cover the basics. So, let us start with it.

What is IBC?

IBC stands for the Insolvency and Bankruptcy Code. The Insolvency and Bankruptcy Code of 2016 is a significant piece of legislation that was enacted to consolidate and amend the laws concerning the reorganization and insolvency resolution of individuals, partnerships, and corporate entities in India.

In simple terms, it is a law that was created to help businesses that take loans and companies giving out loans (or assets) resolve matters when businesses declare bankruptcy. They are unable to make the payments.

IBC and Aviation Industry

The government had to tweak the rule after Go First declared bankruptcy in May. How does it affect the lessors? We will come to it shortly.

For those who are wondering, what are lessors? A lessor is a party that owns an asset and leases that asset to another party, known as the lessee, in exchange for periodic payments. With respect to the aviation industry, lessors are companies that lease their aircraft or engines to airline companies.

Let us now come back to the story.

When a company declares bankruptcy, an order is released that freezes all the company's assets. In this case, Go First's assets are airplanes and engines.

Post-filing bankruptcy, some lessors have already terminated their leases with Go First. However, they were unable to recover their planes because the IBS law stopped them from doing so.

So far, so good?

Cape Town Convention: The Problem

If the IBC says that lessors are not entitled to receive the assets, why are lessors not happy with it? They should be obeying the law of the land. The problem is the Cape Town Convention.

The Cape Town Convention provides a legal framework for financing the acquisition of aircraft. It establishes a system of international interests in aircraft, which allows lessors to have a recognized and enforceable claim to the aircraft and its associated rights.

In simple terms, in 2001, a treaty was signed in this convention where it was decided that if a company from the aviation, space equipment, and railway sectors defaulted on its financial obligations, the lessor had a right to repossess its assets.

Based on this, lessors of Go First should get back their assets because India was also one of the countries that signed the treaty.

Do you see a problem? IBC refrains the lessors from getting back the assets, but the Cape Town Convention grants them access to take back the assets in a situation similar to Go First's.

The solution

The Indian government had to find a solution to this problem. On an international stage, breaking a treaty is not something a country would want to do. A fastest-growing economy that is looking for investments from all over the world. The international aviation body (Aviation Working Group) recently downgraded India's compliance for the reasons discussed above. The government had to react and make the necessary changes.

The Ministry of Corporate Affairs has issued a notification to scrap a key provision of the IBC in the case of aircraft and aircraft engines, which will make it easier for lessors to recover their planes in case an airline goes bankrupt.

“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.

The change should send a strong signal to the international aviation body. Also, lessors should be happy, as things will move in a positive direction for them.