India amends insolvency rules in wake of jet leasing dispute

By Indranil Sarkar, Arpan Chaturvedi and Jayshree Pyasi

BENGALURU (Reuters) -India has amended its insolvency law to exclude leased aircraft from assets that can be frozen, a long-awaited move expected to shore up the financing of its fast-growing airline industry by addressing discrepancies between global and local rules.

The rule change, disclosed in a government notice on Wednesday, aims to bring India’s bankruptcy laws into line with a treaty protecting the rights of foreign lessors, following a dispute over the bankruptcy of budget airline Go First.

Aircraft lessors of Go First were blocked from repossessing planes due to a moratorium imposed by Indian courts, prompting the world’s second-largest lessor, SMBC Aviation Capital, to warn the decision would shake the confidence of the aviation industry at a time when India is acquiring hundreds of new jets.

Wednesday’s notice said some provisions of the Indian Bankruptcy Code would no longer apply to transactions in aircraft, aircraft engines, airframes and helicopters.

The 2001 Cape Town Convention is designed to encourage lessors that control about half the world’s fleet to rent jets to airlines in exchange for a mechanism allowing them to take back their planes relatively easily whenever airlines default.

Although India signed the treaty in 2008, experts had said there was no local legislation enforcing it, putting the international framework at odds with local courts.

A global aviation leasing watchdog last month cut India’s compliance rating, threatening airlines with costlier financing.

“With this, India can hope to somewhat repair the reputation it has acquired as a risky country to lease aircraft and engine to,” Ramesh Vaidyanathan, managing partner of law firm BTG Advaya, told Reuters.

Industry experts had voiced concerns that the freezing of Go First planes would weigh on new deals, forcing domestic carriers to shell out higher deposits or higher monthly rents.

“Bankruptcy code restrictions have now been lowered to provide more flexibility for lessors,” said Rakhee Biswas, managing partner at Spaviatech Law.

In June, the country’s aviation secretary told Reuters India was working to resolve discrepancies between global aircraft leasing rules and its national bankruptcy laws.

The impact of Wednesday’s announcement on the Go First case is likely to be discussed during court proceedings where the foreign lessors are seeking to repossess their planes, according to people involved in the case.

(Reporting by Indranil Sarkar in Bengaluru, Arpan Chaturvedi in New Delhi and Jayshree Pyasi in Mumbai; Writing by Shilpa Jamkhandikar and Tim Hepher; Editing by Bernadette Baum, Elaine Hardcastle and Tom Hogue)