Aircraft Leasing in India – Gloom and Doom

By – Ramesh Vaidyanathan & Mansi Singh

India’s bankruptcy tribunal (“NCLT”) last week disallowed aircraft lessors from taking possession of their leased aircraft from the beleaguered Go First Airlines. The NCLT ruled that physical possession of the aircraft would indisputably be with Go First and the lessors cannot claim possession during the insolvency proceedings. While the NCLT order threw a much-needed lifeline to the airline, it severely jolted the international aircraft leasing community.

Go First cancelled all its flights and filed for voluntary bankruptcy on May 2. NCLT extended Go First bankruptcy protection to allow it to explore a revival, and barred lessors from repossessing their leased aircraft. As soon as the news of Go First filing for bankruptcy spread, many lessors served termination notices in a bid to deregister and repossess their aircrafts. The Indian aviation regulator (“DGCA”) put the deregistration applications on hold as the bankruptcy proceedings supersede the deregistration requests of the lessors. This means that the lessors may not be able to repossess their aircrafts for almost a year as the moratorium could extend up to 270 days.

Aircraft to remain with the airline

The lessors urged NCLT to allow them to repossess their aircraft as the lease termination notices were issued even before the bankruptcy proceedings had been admitted (on May 10). The lessors argued that the termination notices were issued as the airline was defaulting on payments. NCLT rejected the contentions of the lessors and reasoned that the lessors knew about the impending moratorium and issued pre-emptive lease termination notices. The NCLT called this action of the lessors ‘dubious’ and ruled that the aircrafts would be available to Go First for operations as the DGCA had not deregistered the aircraft.

Lessors cannot inspect their aircraft
The lessors had also sought permission to inspect their aircraft every month to ensure that the aircraft, its engines, and other parts were protected from unauthorised access, removal, replacement, operation, or use by Go First. They contended that as the lease agreements had been terminated, the airline did not have any right over the aircraft. Rejecting these contentions, the NCLT clarified that only the resolution professional, appointed by the NCLT, could maintain and protect the aircraft.

What next?
The lessors have the option of moving the appellate tribunal against the order of the NCLT. However, given the anxiety of various stakeholders to maintain the status of the airline as a going concern, it is unlikely that the appellate tribunal will reverse this order of the NCLT.

This is not the first time that the lessors are struggling to repossess their aircraft from an Indian carrier. In the past, lessors struggled to repossess their aircrafts when Kingfisher went belly up, and many aircrafts were eventually recovered in such a bad state that they could only be sold as scrap. While India is a signatory to the Cape Town Convention that allows lessors to repossess aircraft from a defaulting or a defunct airline, it is yet to be fully implemented. A Cape Town Convention Bill has been now been proposed that will accord primacy to the provisions of the Convention in case of conflict with any other law including the bankruptcy law. However, the bill is still awaiting Parliamentary nod.

There is an immediate need to give full force to the Cape Town Convention by expediting the passing of the Cape Town Convention Bill. Alas, in the meantime, the Go First fiasco has not just jeopardised India’s aspirations of becoming an aircraft leasing hub but has also potentially and materially impacted the leasing market for Indian airlines.

Lessors will have to keep a close watch on the financial health of the operators and take swift action if there are delays on the part of the airline in fulfilling lease obligations.