Aircraft over Airlines: The Rationale behind the Protection of Interests in Aircraft Objects Act, 2025

Hiteshi Chugh & Reiyaa Vaish*

Background

India is the world’s third-largest domestic aviation market, yet the sector has seen its fair share of airline failures and recent legal developments suggest that this trend may continue. Aircraft are high-value and predominantly leased assets; the insolvency laws treated them no differently from other mobile assets of the corporate debtor.

The Protection of Interests in Aircraft Objects Act, 2025 (“the Act”) marks the first comprehensive attempt to streamline aviation insolvency and align with the international aviation standards. Under the Insolvency and Bankruptcy Code, 2016 (“the Code”), aircraft objects were subjected to a moratorium, which prevented lessors from repossessing their aircraft, resulting in financial losses and indefinite layup.

In this post, the authors analyse the introduced Act by navigating the circumstances that necessitated its enactment and the legal position that existed before it. How cases like GoFirst and Jet Airways had crucial implications on the stakeholders, and dissecting the provisions of the Act that have brought about significant changes. The post then turns to what lies ahead for India and its aviation sector in the global economy.

The Pre-2025 Legal Vacuum: Treaty Without Teeth

The Cape Town Convention, 2001 (“CTC”), an international treaty facilitating the financing and leasing of high-value, mobile assets, which entered into force in 2008, had little influence over the Indian aviation operations until now. The Conflict between the provisions of domestic law and the CTC led to a loss of confidence among lessors and higher leasing costs. These issues eventually downgraded India’s compliance rating by the Aviation Working Group. Before the enactment of the Code, the insolvency proceedings were dealt under Section 433 read with Section 434 of the Companies Act, 1956 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). The provisions of SARFAESI do not permit enforcement or creation of security in any aircraft, preventing banks and financial entities from financing aircraft in India and further eroding international trust in the aviation market. After the Kingfisher Airlines debacle (2013), the need for a coherent and comprehensive insolvency law grew.

While The Code did streamline and consolidate the fragmented insolvency process, it did not foresee the complexities of aviation insolvency, particularly the treatment of leased aircraft within a moratorium-driven resolution regime. The application of Section 14 created the need for enhanced protection for lessors, as leasing is the globally predominant mode of fleet acquisition, for which a simple notification exempting lessors from Section 14(1) cannot suffice. Further, the majority of the airlines operate on dry lease, due to which the lessors of aircraft would be considered ‘operational creditors’, which limits their involvement in the Committee of Creditors (“CoC”) during the proceedings as they possess no voting rights and therefore, cannot influence key decisions regarding resolution or liquidation despite their aircraft forming the operational backbone of the airline.

The restricted association of the aircraft lessors and lack of enforcement rights in the Code created a regulatory vacuum where neither insolvency objectives nor treaty-based creditor protections could be meaningfully realised. Without legislative clarity, the burden for reconciliation inevitably shifts to the judiciary, which is also restrained by the absence of an enabling framework.

Judicial Constraints in Aviation Insolvency: Lessons from Jet Airways and Go First

Section 238 of the Code is a non-obstante clause that overrides other laws in case of inconsistency. Before the Act came into existence, the CTC, which is the foundational treaty behind the Act, had no comparable domestic force. Consequently, the judiciary was hesitant when it came to foreign lessors’ demand to repossess aircraft during the Corporate Insolvency Resolution Process (“CIRP”), as seen in the case of Go First insolvency, where the court leaned towards protecting the insolvency process, due to which the repossession was delayed.

Moreover, cross-border insolvency complications arose during the Jet Airways insolvency as well. Parallel proceedings in the Netherlands and India compromised not only foreign relations but also stakeholders’ interests as well. Given the fact that one of the substantive objectives of the Code is to revive the corporate debtor, the Code failed to apply that in the airline sector, where insolvency proceedings have largely resulted in the grounding of operations rather than the preservation of the business as a going concern. Further, even the introduced act does not seem to place much importance on the revival of the corporate debtor, with its focus confined to creditor protection and asset preservation. This evidently reflects the government’s intent to align itself with the international expectations.

This policy choice is somewhat operationalised through India’s adoption of the Aircraft Protocol to the Cape Town Convention, which provides two alternative remedies. Alternative A extends automatic possession of aircraft objects to the creditor at the end of the waiting period, whereas Alternative B leaves the discretionary power to national courts. In a significant regulatory shift, India has formally adopted Alternative A of the protocol through the act. This approach offers a clear creditor-friendly remedy, strengthening enforceability in cross-border aircraft financing and leasing.

The Protection of Interests in Aircraft Objects Act, 2025: A Structural Reset

The Act sets about a drastic re-direction of priorities in aviation insolvency with a debtor-centric rescue in place of a creditor-centric recovery. This, however, is not a procedural reform but an ideological recalibration. They erroneously adopt the same standard set for corporate property, while admitting that aircraft assets are not subject to collective insolvency treatment. India has ratified the Aircraft Protocol, with a preference for the domestic policy to corporate salvage, making India bow to international standards of creditor protection.

The structural reset has three mechanisms: a temporal compression, inversion of the legal hierarchy, and automation of regulatory procedures. India will switch the 270-day moratorium regime of the Code to the 60-day waiting period, after which automatic repossession will be made. Failing this, airlines will be allowed to forego the negotiation windows historically enjoyed, as seen in the Jet Airways and Go First cases. Overturning existing law by incorporating CTC, where the Code used to dominate as later domestic law, the Act gives CTC priority. An executionary creditor-friendly document under CTC, the Irrevocable Deregistration and Export Request Authorisation transforms the once possibly negotiable regulatory procedures into creditors’ rights. It is statutorily obligatory for the Director General of Civil Aviation (“DGCA”) to cooperate with creditors, removing the regulatory defiance that occurred in Go First.

Most importantly, the Act forces pre-insolvency workouts by making formal reorganisation unviable. The automatic repossession of airlines at day 61 means that the airlines cannot come forward with realistic solution packages that would involve keeping their fleet as the workhorse of the business goes away before the reorganisation can take place to seal the breathing space that was the core of corporate reorganisation. However, this induces the creditor to risk repricing by eradicating the 8-10% high-risk jurisdiction premium that used to be reflected in the cost of leasing. The winners, however, are future solvent carriers getting access to cheaper capital and not distressed airlines fighting to stay afloat. The Act is specific in its preference for asset liquidity over airline revival, i.e., airline insolvency does not become asset liquidation by choice or discretion of the judicial process, but by necessity. What comes out is predictability, which is, however, purchased at the cost of safeguards that the Act consciously abandons.

Reordering Priorities: What the act consciously sacrifices

The statutory framework of the Act has shown what is considered unnecessary by the legislature. Sections 6, 7 and 9 of the Act have not just fortified creditor redress, but have overtaken the element of time and operation prerequisites of corporate rescue systematically. The 60-day repossession period has staged a classic guillotine clause: any timeline process that once ran to 18 months or 270 days is now obsolete when aircraft move out of the cage at day 61. The self-executory de-registration rights of Section 7 have destroyed regulatory gatekeeping. The cooperation of DGCA has made administrative action statutory rather than discretionary. In Section 9, the overriding clause has reversed priority hierarchies. Cape Town obligations no longer give way to domestic insolvency objectives; it has subsumed them.

The formation of a CoC, a debt restructuring plan, and equity injection- all these traditional CIRP behaviours assume the debtor has productive assets at the negotiation stage. The Act provides no temporal or structural bridge, nor any carve-out designed to preserve the airline as a going concern. The calculation in the legislation has been based on the element of fixing market failures at quantifiable costs. The previously charged 8-10% premium on jurisdiction by aircraft financiers was merely an insurance against the volatile airline insolvency process. The Act has removed this surcharge by turning the outcomes of creditors into a matter of time and certainty and transferring savings in an afflicted airline as a matter of course to prospective borrowers in the system.

These changes have reflected regulatory recognition, with the ex-ante capital access restriction being more rigid than the ex-post rescue flexibility advantage. Whether this move is right or wrong is an empirical question, which the Act has assumed is already answered. The fact which has been the real constraint to the growth of Indian aviation has not been inefficiency in operations or regulatory uncertainty, but rather the cost of financing.

Conclusion and Recommendations

The introduced act puts forward a creditor-friendly approach, reducing the ambiguity with which foreign lessors used to extend credit against their aircraft in the Indian aviation market. This stabilises India’s standing in the global market; however, the act will serve no purpose unless supplementary rules are introduced to reinforce the same. The success of this framework will ultimately rest on the ability of regulators and adjudicatory bodies to apply its provisions uniformly, without reverting to discretionary or ad hoc practices.

*The authors are Second-year B.B.A., LL.B. (Hons.) students at National Law University Odisha, Cuttack.