Cape Town Convention – A Masterpiece For Aviation Transactions

Purpose of Cape Town Convention

The Cape Town Convention is spirited to protect the interest of lessors and creditors. The purpose of drawing up Cape Town Convention 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.” Also it was intended “to reduce risks for creditors, and consequently, the borrowing costs to debtors, through the resulting improved legal certainty. This promotes the granting of credit for the acquisition of more modern and thus more fuel-efficient aircraft.” ^[1] States will certainly benefit from it if they observe the principles of the said convention in their functioning.

Indian Scenario

Under Article 49 of the Convention and Article XXVIII of the Protocol, India had deposited instrument of accession with depositary (UNIDROIT) on 31.03.2008 along with the Declarations and became a Party to the Cape Town Convention/Protocol on 01.07.2008.^[2] Hence it can be opined that India had ratified the said Convention way back in 2008. Accordingly we may look forward to bring legislation in place to extend the guarantees mentioned under the said convention in favor of creditor and lessor since India is a contracting State. However, India may be having law to deal with the corporate insolvency but will they stand guard in aviation transactions when the lessor seeking remedy against lessee defaulting on repayment is thought provoking.

Indeed, India must fly parallel with its western counter parts in the skies, who are positioned in the top slot owing to the fact that heavy investment are being made on its soil. But due to lack of dedicated strong legislation to address the need of various parties entering into a financial arrangements with Indian operators, investors may be hesitant. The international aviation giants may find it difficult to stabilize their feet in India given the uncertainties associated with financing of aviation assets and lack of assurance for creditor. If major Aviation players in Indian market are looking forward to procure aircraft on lease from lessors in order to expand their fleet, accordingly we must bolster our Aviation regulatory regime to extend assurance with conviction, to lessors or financial institutions, that India is a safe place to extend sums in support of building aviation sector. Ostensibly, there is a pressing demand from intentional financial institutions to bring in separate legislation in conformity with Cape Town Convention. Recently, it is felt that people on internet apparently are critical of the recent announcement made by an Airline to get numerous aircrafts on lease since we lack implementing legislation to fulfill our obligation under Cape Town Convention. Such fears if existing can be settled down only through robust legislation in place. Also, such legislation will address the recourse to be adopted if the debtor becomes insolvent in due course and shows its inability to discharge the debt in the given time frame. The mitigation of risk factor involved in the lending process can be done in the garb of well thought-out domestic legislation leading to the compliance of the said convention. According to Aviation Working Group (which works on State compliance), the effective compliance in respect of the said convention comes only when contacting State “takes all action to ensure that CTC has the force of national law with priority over any conflicting law (effective implementation). Fully and accurately applies the operative terms of CTC to actions and disputes within its scope, whether administratively or judicially”.^[3] It’s high time and India must go ahead with enacting exhaustive law (encompassing alternative dispute resolution remedies especially when our courts are overburdened).

In the backdrop of the fact that our Govt. is committed to remove barriers to trade and is ready to afford opportunity to international players in Indian market, it is anticipated that soon the legislation will follow categorically for the purpose of advancing the interest of Indian aviation players and thereby regulate the financing issues associated with the procurement of its various assets. Even, aviation credit cost will become directly proportional to condensed lease charges. The deal fetched by lessee would be at reduced lease rentals and economically beneficial to him. Even, as bonus to concerned state, all those who will adopt the said convention will be entitled to get 10% discount on export credits premiums.^[4] Our dream to stand tall in the air space will be realize soon if we keep embarking with the idea to afford safe legal zone to lessors and creditors in Indian jurisdiction.

The author is an Aviation Professional, Author, Editorial Board Member of Indian Review of Air & Space Law at MNLU Mumbai Views expressed are personal.