The Cape Town Convention on International Interests in Mobile Equipment (the Convention) was signed at Cape Town, South Africa, on 16 November 2001. The Convention aims to provide greater confidence to aircraft lessors and banks by enhancing the credit and security in aircraft transactions, which in turn lowers the cost of aviation credit. The Convention does this by providing for the creation, recognition and enforcement of certain interests (security interests) in aircraft objects. These interests can be registered with the International Registry of Mobile Assets (based in Ireland) and provides for their priority over competing interests.

India, one of the largest emerging aviation markets in the world, acceded to the Cape Town Convention on 31 March 2008, with the Convention coming into force on 1 July 2008. The Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Protocol) was also acceded to and brought into force on the same dates. At the time of accession, India made declarations under Articles 39(1)(a), 39 (1)(b), 40, 52, 53 and 54(2) of the Convention and Article XXX (1), (2) and (3) of the Protocol[1].

The Convention was put to its biggest proxy test yet following the bankruptcy of Kingfisher Airlines, which saw all the major aircraft leasing companies and banks scrambling to have their aircraft repossessed and flown out of India. The government and others, such as the Airports Authority of India and private airport operators, had extended a large amount of credit to Kingfisher and they moved to exercise their lien over Kingfisher aircraft, which belonged to private international leasing firms or banks.

The detention of these aircraft by the authorities resulted in a number of international leasing firms and banks approaching the courts to have the aircraft released and flown out of India. All the lease agreements pertaining to Kingfisher aircraft pre-dated India’s accession to the Convention, which therefore did not apply in the repossession process. Nonetheless, the Kingfisher experience has roused all parties concerned and has paved the way for the Indian government and the Ministry of Civil Aviation to start considering proper implementation of the Convention. The driving force behind the initiative comes from the aviation industry and includes airlines and aircraft lessors.

Having faced a number of obstacles, the Aviation Working Group (AWG), the Federation of Indian Airlines (FIA) and a number of Indian law firms gathered together to discuss and pave the way for proper implementation of the Convention in India. The joint action ultimately concluded that one solution was to enact the convention into domestic law. The alternative was to amend the existing subordinate legislation: the Aircraft Rules and Civil Aviation Requirements (CARs). This would specifically entail amending Rule 30[2] of the Aircraft Rules as well as Civil Aviation Requirements, Section 2 – Airworthiness Series-F, Part-I, dated 10 September 1998[3].

Full implementation of the Convention into local law

Full implementation would be achieved by having a short bill passed by the Parliament whereby the Cape Town Convention would be given the force of law in India and would prevail over any other existing laws in case of conflict. This represents the obvious permanent solution.

Amendment of regulations and subordinate legislation

This option presents some challenges. For example it would mean giving force to Irrevocable Deregistration and Export Request Authorisation (IDERA) which would be accepted by the Directorate General of Civil Aviation (DGCA) and honoured presented to the relevant authorities by an aircraft owner or lessor seeking deregistration of its aircraft. In case of such amendment, it would be imperative to exclude the requirement of the DGCA to seek the consent of the lessee airlines. Further, it would be necessary to exclude the requirement of the aircraft owner or lessor to produce the original certificate of registration at the time of applying for deregistration, as the original certificate, in most cases, would be held by the airline and this would effectively amount to seeking the consent of the airline before deregistration. This would be completely counter-productive as it defeats the purpose of a speedy deregistration and export.

To understand the matter more clearly, the Ministry of Civil Aviation convened a meeting on 23 August 2013 in New Delhi to discuss the problems facing the airlines, leasing companies and banks as to the implementation of the Convention in India. The meeting was attended by all the Indian airlines, represented by the FIA, and most of the world’s aircraft leasing companies and banks, who were represented by the AWG. A number of leading law firms were also present.

After explaining the issues faced by all the parties to the Secretary, Ministry of Civil Aviation and the Director General of Civil Aviation, a discussion was held wherein all the pros and cons were discussed and where it was highly recommended by the leasing companies and banks that the ultimate and most permanent solution to the problem would be to enact the Convention in its full form and spirit into domestic law.

The Secretary and the Director General both expressed their opinion that the way forward would be to amend the existing subordinate legislation (the Aircraft Rules and CARs) as opposed to Parliament enacting legislation, which would entail a long and cumbersome process of consultation among various ministries. It was further suggested by the Secretary that the areas of conflict between the Convention and previously enacted Indian laws should be identified and an attempt be made to amend the existing laws.

For this purpose, the Secretary and Director General invited detailed representations from the concerned parties and gave assurances that they were highly committed to addressing the grievances of all the financing parties and to ensuring that the situation faced during the Kingfisher saga is not repeated in the future. The Secretary and Director General were extremely considerate and expressed their view that the supporting legislation could be amended during a short period of three to four months after receipt of suggestions.

This move by the government is extremely proactive and will reduce the jurisdictional risk for aircraft lessors and financers, reduce premiums for loan guarantees by export credit agencies and provide for the easier deregistration and export of aircraft equipment. This must be viewed as an interim step towards the ultimate goal of full implementation of the Convention through its incorporation into domestic law via Act of Parliament. After all, the government’s intention is clear (it has already acceded to the Convention) all that remains to be done is to perfect its applicability.