Introduction
In May 2023, the Indian Aviation Industry was confronted with a pivotal moment, Go First, a low-cost airline, filed for insolvency due to the collapse of its market share from 11% in November 2019 to 6.9% in March 2023. As a result, 50 Airbus aircraft were left stranded in a legal quagmire. Aircraft lessors found themselves in legal battles. The roots of the deadlock lay in the moratorium placed under the Insolvency and Bankruptcy Code (“IBC”), a mechanism designed to freeze the asset recovery during the insolvency proceedings. The company was prevented from the repossession of their assets, revealing a conflict between the international obligations and the sovereign design.
Under the Cape Town Convention (“the Convention”), it is a requisite for the contracting state to ensure efficient remedies for asset-based creditors, including the repossession of the aircraft. However, due to the absence of domestic legislation, India was listed as a “non-compliant” in the Aviation Working Group’s Cape Town Compliance Index, but was further upgraded after the legislative clarification, leading to an upgrade in the compliance rating.
Responding to the situation, the Government of India has enacted the Protection of Interests in Aircraft Objects Act, 2025 (“the Act”). The act aligns the Indian laws with the convention, providing the legal framework and exempting aircraft, engines, and helicopters from the IBC’s automatic moratorium provisions. However, this deviation from the general insolvency regime raises investment law concerns. By altering the rights of foreign lessors and potentially impacting the expectations under Bilateral Investment Treaties (“BITs”), the reform invites scrutiny through the lens of indirect expropriation.
Against this backdrop, the blog first deliberates on the conflict between the IBC and the Aircraft leasing mechanism. Secondly, it highlights the legal implications arising from the adoption of the Convention. Thirdly, it examines the investment law ramifications of the reform, assessing potential claims of indirect expropriation and treaty breaches. Lastly, the piece concludes with an aim to propose a forward-looking framework.
Navigating the Conflict: IBC vs Cape Town Convention
It is essential to note that within the “Type A” remedies of the Convention, such as repossession and sale of the aircraft, are mandatory tools for the enforcement that are availed by the State to the creditors, ensuring swift recovery in the cases of default. This also allows the contracting States to provide expeditious relief as quickly as 60 days to effect the repossession. In response, the signatories issue the court order for the swift repossession after the default presentation.
To the contrary, the expansive moratorium placed by the IBC under Section 14 bars the “suits and proceedings” against the lessor. When Go First filed for insolvency under Section 10 of the IBC, lessors immediately decided to fly out their aircraft under the rights of the convention, but were barred by the Indian Courts. It was reported that, in defiance of vindication of Go First’s Irrevocable Deregistration and Export Request Authorizations (IDERAs), which allows the lessor to export the aircraft without the operator’s consent, were in court, the Directorate General of Civil Aviation (DGCA) refused to deregister the aircraft during the 180-day moratorium – so the aircraft remained in India and were not delivered up to the lessors for months. Hence, the design is inherently in conflict with the convention.
The conflict further exacerbates as Section 14 aims to preserve the debtors’ value for all stakeholders and give the Insolvency Resolution Professional breathing space. Moreover, as per Section 53 of IBC, which establishes a waterfall mechanism for the process of liquidation, it initially covers insolvency and liquidation costs, then secured creditors and government dues, then unsecured financial creditors, and lastly the operational creditors. In SpiceJet vs. Willis Lease Finance, it was observed that lessors would be the subordinate claimants as they are treated as operational claimants. While the IBC aims to balance stakeholder interests, its current classification of lessors as operational creditors limits their ability to share equitably in the airline’s enterprise value during resolution.
The Convention prioritises swift recovery for lessors, overriding local creditor hierarchies — a tension that came to the fore in the Go First insolvency episode. As it is often scholarly highlighted about the Convention that it “is more inclined towards protecting the interests of the lessors by ascertaining that they expeditiously regain the possession of their aircraft”.After the recurrent tensions, on October 3, 2023, a notification was issued by the government which bypassed the IBC by exempting “transactions, arrangements or agreements under the Cape Town Convention…relating to aircraft, aircraft engines, airframes and helicopters” from the IBC moratorium. But the vacuum of standalone legislation was necessitated.
Regulatory Balancing or Fragmented Revamp?
It is quintessential to mention that, regardless of acceding to the Convention in 2008, India has delayed the implementation for over 15 years, unlike other jurisdictions such as Malaysia and South Africa, which enacted laws to implement the treaty immediately. Often leaving foreign lessors without effective legal remedies in Indian insolvency proceedings, the dualist system has highlighted the consequences of non-implementation. This Act refers to Article 253 of the Constitution of India in its preamble and includes an overriding clause under Clause 9, stating that in the case of any inconsistency, the Act will prevail over all other laws, including the IBC. This obedience to the treaty’s key protections, most notably, the 60-day moratorium under Alternative A of Article XI, allows lessors to repossess aircraft during insolvency proceedings.
While this strengthens creditor confidence and aligns India with international aviation finance norms, it also sets a concerning precedent. By carving out aircraft objects through a sector-specific insolvency regime, Parliament risks fragmenting the IBC’s uniform framework. In effect, it creates a hierarchical clash: should more treaties follow, will India continue carving out industries—shipping, telecom, fintech—from the IBC’s purview?
This trend could prompt future legal disputes, specifically where competing creditor classes seek parity in treatment. Already, insolvency timelines in India remain tumultuous, with CIRPs averaging 843 days in FY2024 and creditor haircuts reaching 73%. Granting lessors a 60-day fast-track, in such an environment, may disproportionately burden lessees and creditors, undermining principles of equitable resolution. Moreover, as observed in the report of the Comptroller and Auditor General of India, the limited moratorium may hinder a lessee’s ability to restructure or revive business operations, particularly in capital-intensive sectors like aviation. It narrows the window for judicial remedies, workforce retention, and financial turnaround, raising concerns over employment loss and systemic risk.
While India’s legislative choice is valid, the regulatory dilemma of selective implementation with respect to honouring international obligations without destabilising domestic legislative coherence poses an important dichotomy. The broader question remains: how far should treaty-driven carve-outs go? The Gramophone doctrine ensures that Parliament retains discretion, but once that discretion is exercised, the resultant legislation must be weighed not just for adherence, but for integrity.
BITs, FDI and Aircraft Finance: An Investment Law Perspective
Beyond the aviation sector, the concerns also arise in the international investment law as it may be viewed through the lens of BITs and Free Trade Agreements. Such a regulatory revamp can amount to indirect expropriation by undermining an investment’s value. Under BITs, “occurs if a measure or series of measures, substantially or permanently deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment.” Here, the lease contract and the aircraft constitute an “investment” for the lessor. If the lessor is effectively forced by the State for long term toleration of loss and delayed repayments, that could level the necessary “equivalent to direct expropriation”. Frequent changes in the position of law can violate the standard of free and equitable treatment. Notably, India’s language of India’s model BIT under Article 6.3(i) explicitly permits the “actions relating to bankruptcy, insolvency or the protection of the rights of creditors” as valid restrictions. Hence, the special dispensation of the IBC might be characterised as an unforeseen change for the foreign investors.
From the Foreign Direct Investment (“FDI”) perspective, signals are mixed. As the Act aligns with the Convention, on one hand, it restores predictability for investors and further enhances confidence in the Indian market by reducing the cost of finance. However, the retroactive nature of the reform results in many lessors losing money and time under the old regime. In similar industries, like telecom and infrastructure, where foreign investments constitute major stakes, such a carve-out has initiated arbitration. Hence, the aircraft carve-out is treaty-driven rather than industry favouritism. Moreover, the BIT language ensures the legitimacy of insolvency procedures. Nonetheless, such sector-specific amendments could invite Investor State Dispute Settlement claims under Full Protection and Security of India’s treaties.
Conclusion: Toward Harmonisation of Insolvency Norms
In sum, the Act was necessitated by the correction of the anomaly that had been discouraging the international treaty. But it must not devolve into an ad-hoc exception, as a long-term strategy is pivotal for the harmonisation of the international interests and the Indian legislation. This might include the recognition of the treaty-backed security regimes and even the amendments in the moratorium or the waterfalls for allowing the limited remedies. By such structural incorporation of the remedies through broad-based regulations, the coherence between the IBC (or parallel legislations) and international standards can be preserved.
The manner of reform plays a pivotal role. Such sector-specific exceptions may entail regulatory risks – for instance, they risk being perceived as selective interference if mirrored elsewhere. More broadly, it underscores that insolvency law should be coherent and predictable. For India’s broader economy, the lesson should be the transparent and prospective alignment with the international standards.
Going forward, it is imperative that policymakers embrace a treaty-conscious approach to legislation: any decision to modify creditor rights ought to consider international obligations from the outset. In the aircraft sector, that means fully honouring the Convention, while in other sectors, India should similarly weigh its free trade and BIT commitments, lest fragmented carve-outs in insolvency or regulatory laws could undermine investor trust. A better path is comprehensive reform that integrates treaty standards. By this, India can attract long-term capital while retaining the sovereign prerogative to regulate.
This blog is written by Shaurya Jha and Yash Roy, 2nd Year students, Hidayatullah National Law University.
