Go First crisis: What's the Cape Town Convention? Why do we need it?

The decision by the bankruptcy court will also increase India's risk profile, resulting in lessors charging higher risk premiums from other local airlines, increasing the latter's cost of doing business. Lessors have already filed for deregistration of SpiceJet aircraft, which has already defaulted on lease rentals and has been negotiating with the lessors.

Go First airline entering the insolvency resolution proceedings has triggered concerns among aircraft lessors who are unable to repossess the planes they had leased to the airline. The proceedings legally bar lessors from repossessing the aircraft.

The decision by the bankruptcy court will also increase India's risk profile, resulting in lessors charging higher risk premiums from other local airlines, increasing the latter's cost of doing business. Lessors have already filed for deregistration of SpiceJet aircraft, which has already defaulted on lease rentals and has been negotiating with the lessors.

The problem lies in India's non-adherence to the Cape Town Convention which severely hampers the ability of creditors of Indian airlines to fully access the protections given in other jurisdictions. A global aviation leasing watchdog has put India on a watchlist with a negative outlook saying it failed to comply with international aircraft repossession norms after airline Go First was granted bankruptcy protection.

What is the Cape Town Convention
Cape Town Convention is a global treaty designed to increase financing and leasing of aircraft, engine and spare parts by reducing a lessor's risk and by enhancing legal predictability in these transactions, including in the case of an airline's insolvency or default.

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NCLT's Go First ruling may hike aircraft leasing costs: executives

The Cape Town Convention or the Convention on International Interests in Mobile Equipment was concluded in Cape Town in 2001, along with the Protocol on Matters Specific to Aircraft Equipment.

The primary aim of the Convention and the Protocol is to resolve the problem of obtaining certain and opposable rights to high-value aviation assets, namely airframes, aircraft engines and helicopters which, by their nature, have no fixed location. This problem arises primarily from the fact that legal systems have different approaches to securities, title retention agreements and lease agreements, which creates uncertainty for lending institutions regarding the efficacy of their rights. This hampers the provision of financing for such aviation assets and increases the borrowing cost.

While India has acceded to the convention in 2018, it has not been ratified by Parliament, which means it is not yet law in the country. Hence, any other standing law including the country's bankruptcy laws, has primacy over the convention. The aviation ministry had in October 2018 sought comments on the CTC Bill 2018 to implement the treaty India had signed in 2008 to basically assure lessors their expensive assets like aircraft and engines will not get stuck here when Indian carriers default on paying rentals or go belly up. The government came up with another Bill in 2021, which was put out for public comments in April 2022, but it has not been introduced in Lok Sabha.

Now, the government may finally consider passing this bill to ensure India's aviation story is not hit by leases getting more expensive. Once a law, CTC will get equal weightage as the bankruptcy law.

'Risky jurisdiction': Aircraft lessors raise alarm over Go First crisis in India

What the non-adherence to the Convention means
Various lessors of Go First had requested aviation regulator DGCA to deregister more than 40 aircraft under the Cape Town Convention. As per the Convention norms, once a lessor makes such a request, the same has to be implemented by the authority concerned within five working days.

But the bankruptcy court 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 planes. The decision of the bankruptcy court of putting a moratorium on the airline takes precedence over the provisions in the Convention that allow lessers to repossess aircraft. In the absence of Convention provisions in India, It's now a protracted battle for the lessors. As many as 11 lessors, backed by global banks, that leased aircraft to the airline will now move the appellate tribunal, opposing the bankruptcy order and to allow them to repossess their aircraft.

Plane lessors to India have suffered before. A large number of their planes leased to Jet Airways remained grounded for more than a year as the airline underwent insolvency proceedings. Before that, they lost assets that were leased to now-defunct Kingfisher Airlines.

Go First lessors queue up to stitch deals with Air India, Vistara & IndiGo

Why India needs legalisation of Cape Town Convention
Though India is a signatory to the Convention, its provisions need legal protection since they clash with many existing laws which now take precedence over the Convention norms. For the growth of its aviation market which is intricately connected to global aviation business, India must legalise the Convention provisions.

Inevitably, higher costs will be passed onto passengers in the form of high ticket prices, which will make it more difficult for Indian airlines to compete with their international counterparts.

(With inputs from agencies)

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