[By Arunav Kapur and Jacob Eldho Kalarikkal]
The authors are students of Rajiv Gandhi National University of Law, Punjab
Introduction
In the era of ever-increasing need for expeditious travel and prioritization of convenience, the aviation industry plays a major role in providing swift and accessible transportation. The aviation industry of India recently made history with over 5,00,000 travelling passengers accounted for in a single day. Yet, paradoxically, the industry operates on razor-thin margins. It is a huge loss bearing industry with a net loss of over Rs 110 billion in 2022-2023, driven by high fixed costs, volatile fuel prices, and cutthroat competition on fares. Along with this it is pertinent to highlight the extreme capital required to purchase an aircraft outright. To overcome this, airlines rely on sale-and-leaseback models, leasing up to eighty percent of their fleets from international financiers. However, when an airline defaults on its payments and insolvency proceedings are started, the presence of these international entities who are the lessors of the aircraft causes a complex jurisdictional and statutory conflict. Against this backdrop, the Convention on International Interests in Mobile Equipment (“the Cape Town Convention” or “CTC”) becomes the necessary guiding force.
The CTC, aims to reduce the risks of aircraft financing by establishing a predictable, structured and independent framework for lessors to protect their asset i.e. the aircrafts. Through this essay, the authors analyse the conflict between the Irrevocable De-Registration and Export Request Authorisation (“IDERA”) mechanism under the CTC and the statutory moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). By examining recent legislative advancements leading to the Protection of Interests in Aircraft Objects Act, 2025 (“the Act”) and drawing insights from U.S. jurisprudence. While giving appropriate arguments and reasoning, the author would highlight rationale behind the prioritization of the IDERA provisions as well as the need to find a balance in aviation insolvency between international financiers and corporate debtors.
Domestic Moratorium vs. International Repossession
Section 14 of the IBC lays down provisions for a strict moratorium period upon the commencement of a Corporate Insolvency Resolution Process (“CIRP”). This provision provides an automatic stay, prohibiting the enforcement of security or recovery over any asset in the possession of the debtor. It also includes those assets which are under lease with the objective of preserving the debtor as a going concern. In the aviation context, this historically froze the assets of insolvent airlines, prohibiting lessors from deregistering and exporting their aircraft. Conversely, the CTC champions the express repossession of mobile equipment. Under the CTC framework, an IDERA empowers an authorised party (typically the lessor) to procure the deregistration and physical export of an aircraft without judicial impediment, overriding local insolvency moratoriums.
For years, this created a severe normative hierarchy dispute in India. The IBC’s asset-freeze ideology clashed directly with the CTC’s asset-recovery mandate. Lessors argued that grounding aircraft during a protracted CIRP inevitably destroys their value, as aircraft are highly depreciable assets that require rigorous, continuous maintenance. Article 13 of the Protection of Interests in Aircraft Objects Act, 2025, which implements the Cape Town Convention, provides for the statutory recognition of the Irrevocable De-registration and Export Request Authorisation regime under the Aircraft Protocol as the only authorised party able to initiate the deregistration and the export of the aircraft, i.e., the lessor, an irrevocable request is made to the local aviation authority to deregister the aircraft and physically remove the plane overriding any local insolvency moratorium.
The Go First Catalyst
The breaking point for this statutory dissonance was the insolvency of Go First in 2023. When the National Company Law Tribunal (“NCLT”) admitted the airline into CIRP and imposed a moratorium, lessors were barred from repossessing over fifty aircrafts. In response, the Aviation Working Group had downgraded India’s compliance rating, which is used to decide the interest rate and other financials relating to the leasing, triggering an immediate spike in leasing premiums for all lessees from India. The crisis laid bare a fundamental reality that prioritising domestic insolvency moratoriums over international finance obligations artificially inflates the cost of doing business for the entire domestic aviation sector.
Acting under the pressure of plummeting investor confidence, the Ministry of Corporate Affairs issued a notification in October 2023 under Section 14(3)(a) of the IBC, exempting aircraft and engines from the statutory moratorium. While this action facilitated the deregistration of Go First’s aircraft, it was widely viewed as a stop-gap measure. Delegated legislation lacks the permanence often preferred by international financiers. Recognising the need for a permanent measure, the Parliament enacted the Protection of Interests in Aircraft Objects Act, 2025. This legislation formally incorporated the CTC into law, granting it primacy over the conflicting domestic statutes, including the IBC. Crucially, the Act adopted the “Alternative A” under Article XI of the Aircraft Protocol of the CTC. To understand its significance, it is important to understand that the Aircraft Protocol offers its Contracting States a choice of insolvency frameworks. Alternative A is possibly the most rigid, creditor-protective option. It states that upon the initiation of insolvency proceedings, the debtor or insolvency administrator must either cure all defaults and commit to future lease obligations within a strictly defined “waiting period,” or unequivocally surrender the aircraft back to the lessor. This is not a novel experiment; rather, it is the adoption of a recognised standard that jurisdictions like the United States have enforced for decades, yielding benefits such as significantly lower capital and leasing costs for airlines.
Comparative Jurisprudence: The U.S. Standard
To understand the mechanics and benefits of the new regime, it is important to look at the country that inspired it the United States.
Recognising the unique nature of aviation finance, the U.S. Congress carved out Section 1110 of the Bankruptcy Code. Section 1110 serves as the global gold standard for balancing airline restructuring with lessor rights. It mandates that a lessor’s right to repossess an aircraft is not hindered by the automatic stay, unless the airline debtor, within sixty days of the bankruptcy filing, agrees to perform all future lease obligations and cures all existing defaults. The U.S. Third Circuit in In re Trans World Airlines, Inc., elucidates § 1110’s mechanics, noting it limits the automatic stay to 60 days post-filing to promote low-interest aviation financing. In TWA’s restructuring, this framework balanced debtor breathing room against lessor rights, affirming § 1110 as the gold standard, Alternative A emulates this by offering airlines a strict two-month window to cure or proceed with the insolvency proceedings.
This sixty-day window provides a distressed airline with a brief, strict breathing period to secure interim financing, renegotiate leases, or reject unneeded aircraft, while assuring lessors that their assets will not be trapped in endless litigation. Alternative A of the CTC’s Aircraft Protocol was directly modelled on Section 1110. By adopting Alternative A with a sixty-day waiting period via the 2025 Act, India has harmonized its legal framework with this internationally proven standard. If an Indian airline enters insolvency today, the Resolution Professional has exactly two months to either cure defaults and retain the aircraft, or step aside and allow the lessor to exercise their IDERA rights.
The Path Ahead
With the integration of the CTC via the 2025 Act, the government has effectively signalled that maintaining cheap access to global aviation capital supersedes the traditional necessity of having a uniform application of insolvency law. While this is a massive victory for lessors, it poses a challenge for corporate debtors. This could effectively strip an airline of its entire fleet guarantying liquidation, defeating the IBC’s primary objective of corporate rehabilitation. To ensure that the new regime works practically within the Indian commercial ecosystem, The authors would like suggest the following –
- Strict Adherence to the Cure Period :- The success of Alternative A relies entirely on commercial predictability. Historically, the NCLT and the NCLAT have leaned towards preserving the “going concern” status of corporate debtors, often invoking the inherent powers under Rule 11 of the NCLT Rules, 2016, to grant equitable stays. For a conditional repossession system under the Act to function effectively, there must be an established view that the sixty-day timeline is mandatory, not merely directory. Tribunals must refrain from invoking discretionary equitable powers to grant injunctions once this statutory period expires, ensuring that the law is applied strictly in accordance with its commercial intent.
- Fostering an Interim Finance Market :- In the U.S., airlines survive the initial bankruptcy phase by securing Debtor-in-Possession (“DIP”) financing, backed by absolute first-priority repayment guarantees to the creditor. India’s equivalent, the Interim Finance under Section 28 of the IBC remains underutilized, severely by the creditors or the NCLT, as domestic lenders fear that their priority status will be diluted or challenged by the Committee of Creditors. To help airlines survive the sixty-day window and recover, the Reserve Bank of India (“RBI”) must relax provisioning norms for banks extending interim finance for such reasons. Furthermore, the Insolvency and Bankruptcy Board of India (“IBBI”) must tighten regulations to guarantee priority under the Section 53 waterfall mechanism for the creditors. Additionally, easing foreign direct investment restrictions for international Alternative Investment Funds (“AIFs”) which are private investment groups that specifically look to fund and rescue financially troubled companies could inject the needed capital into the aviation market.
III. Harmonising Airport and Operational Dues :- Even with the incorporation of the IDERA, lessors are frequently blocked on the tarmac by the Airports Authority of India (AAI), private airport operators, and fuel entities asserting liens over unpaid parking, landing, and fuel charges by the airlines. To resolve this “crown debt” bottleneck problem, the Directorate General of Civil Aviation (“DGCA”) and the Ministry of Civil Aviation must issue a comprehensive Standard Operating Procedure stating that aircraft lessors cannot be held liable for the historical operational dues of the corporate debtor. Furthermore, the concept of a “fleet lien” – holding one leased aircraft hostage for the debts of another must be statutorily prohibited. Such operational dues should be strictly treated as operational debt to be settled through the IBC resolution plan, rather than be weaponised to detain leased assets.
Conclusion
This transition toward statutory recognition of the Cape Town Convention represents the maturation of India’s aviation and insolvency jurisprudence. By evolving from the absolute asset-freeze of the IBC to a conditional repossession system under Alternative A, India has embraced a tested compromise. If applied with judicial discipline, this regime will not only safeguard the financial security of international lessors but also secure India’s position as a premier, low-risk hub for global aviation.