WILL AVIATION DISPUTES BE EASIER TO RESOLVE?

THE CONTEXT: India’s aviation sector is witnessing unprecedented growth, driven by rising middle-class incomes, expanding tourism, and strategic government initiatives such as the National Civil Aviation Policy (2016) and the UDAN (Ude Desh ka Aam Naagrik) scheme. Amid this rapid expansion, the Protection of Interests in Aircraft Objects Bill, 2025 seeks to bring India’s legal framework in line with global standards—particularly the Cape Town Convention and Protocol—thereby enhancing legal certainty for aircraft lessors and bolstering the overall ease of doing business in aviation.

THE BACKGROUND:

 Cape Town Convention and Protocol (2001)

• • Adopted under the aegis of the International Civil Aviation Organization (ICAO) to standardize legal transactions involving high-value aviation assets (aircraft, engines, helicopters).
  • Ensures swift remedies for lessors and creditors in cases of financial default or insolvency.

 India’s Accession (2008)

• • Approved by the Union Cabinet to promote foreign direct investment in aviation.
  • Without an enabling domestic legislation, however, conflict arose between global norms (Cape Town provisions) and existing Indian laws such as the Insolvency and Bankruptcy Code (IBC).

 Rationale Behind the New Bill (2025)

• • Frequent disputes (e.g., Kingfisher Airlines collapse, GoFirst insolvency, SpiceJet litigations) underlined the urgent need for a robust legal mechanism.
  • The new legislation aims to reduce risk perception among lessors, potentially lower leasing costs, and harmonize local regulations with international norms.

KEY SALIENT FEATURES OF THE BILL:

1. Legal Certainty and Creditor Rights

• • Establishes statutory remedies for lessors in case of debtor default, including repossession of aircraft, engines, and helicopters within two calendar months or a mutually agreed period.
  • Codifies legal predictability, previously absent under overlapping frameworks such as the Insolvency and Bankruptcy Code (IBC) and Companies Act.
  • Aims to mitigate instances like GoFirst (2023), where the NCLT’s moratorium overrode lessor rights, leading to legal ambiguity.

 

2. DGCA as Registry and Implementation Authority

• • Empowers the Directorate General of Civil Aviation (DGCA) as the nodal registry for aircraft objects, de-registration, and due diligence in asset tracking.
  • Mandates that airlines (debtors) regularly update their financial obligations to the DGCA, thereby introducing transparency and regulatory oversight.

 

3. Override Clause on Conflicting Laws

• • The Bill contains an overriding clause, ensuring it supersedes all conflicting laws in force (including IBC, Companies Act, etc.).
  • This constitutional precedence enhances India’s compliance score on the Cape Town Convention Index (AWG)—currently improved from 50 to 62, targeting 90.

 

4. Streamlined Dispute Resolution Mechanism

• • Allows for expedited dispute resolution outside traditional litigation channels, by granting operational and quasi-judicial powers to DGCA.
  • Aligns with international best practices, reducing average resolution timelines for repossession from 90+ days to within 60 days, as observed in compliant jurisdictions like Ireland and Singapore.

 

5. Cost Reduction and Trickle-down Effect

• • According to Civil Aviation Ministry estimates, the legislation could reduce aircraft leasing costs by 8–10%, by lowering risk premiums and improving India’s legal risk profile.
  • This may indirectly reduce operating expenditure for airlines, especially newer and regional carriers, aiding long-term affordability and aviation penetration.

 

6. Promotion of Domestic Leasing Ecosystem

• • Supports the Government’s Atmanirbhar Bharat in aviation finance by strengthening GIFT City, Gandhinagar, as a global leasing and financing hub.
  • Offers regulatory sandboxing, tax incentives, and infrastructure autonomy to attract global lessors to establish India-based Special Purpose Vehicles (SPVs).

CURRENT SCENARIO OF THE INDIAN AVIATION SECTOR:

1. Rapid Fleet Expansion and Demand Surge

• • India’s civil aviation market is undergoing unprecedented expansion, with IndiGo and Air India placing record-breaking orders for over 1,100 aircraft between 2022–2025. According to the Ministry of Civil Aviation (MoCA) Annual Report 2022–23, domestic air passenger traffic grew by 47% YoY, reaching nearly 140 million flyers, highlighting post-pandemic recovery and deepening aviation penetration.
  • This boom is not only driven by a rising middle class, urbanization, and infrastructural upgrades under UDAN (Ude Desh ka Aam Naagrik), but also by strategic ambitions to make India a global aviation hub, especially via the GIFT City leasing ecosystem and the expansion of airports under NABH Nirman.

 

2. Systemic Vulnerabilities: Airline Failures and Regulatory Gaps

• • The insolvency of GoFirst (May 2023), following unresolved cash flow issues and engine supply constraints, exposed deep legal and financial vulnerabilities. Lessors were barred from repossessing their aircraft due to an IBC-triggered moratorium, conflicting with obligations under the Cape Town Convention. Similarly, SpiceJet faced protracted arbitration and legal tussles over delayed lease payments and breached contract terms.
  • These failures highlight the lack of a predictable and creditor-friendly regulatory architecture, deterring investor confidence and inflating risk premiums, especially for start-ups and regional carriers.

 

3. Investor Confidence and AWG Compliance

• • India’s score on the Aviation Working Group’s (AWG) Cape Town Convention Compliance Index has improved from 50 (2022) to 62 (2024) post-introduction of the Protection of Interests in Aircraft Objects Bill, 2025. However, this still lags behind mature leasing hubs like Ireland (94) and Singapore (89).
  • A score of 90+ is critical for lowering leasing costs, improving access to asset-based financing, and integrating India with the global aviation finance chain. The bill’s passage, by aligning with ICAO norms, aims to structurally shift investor perceptions and offer legal sanctity to international creditors.

 

4. Taxation and Operational Constraints

• • Even as India seeks to promote GIFT City as a global leasing destination, complex and inconsistent tax norms deter global players. Several lessors reported receiving Income Tax notices under claims of establishing a permanent establishment (PE) via Special Purpose Vehicles (SPVs), despite assurances of tax neutrality.
  • The lack of a coherent tax architecture, coupled with opaque interpretations by revenue authorities, undermines the ease of doing business in aviation finance. This also conflicts with Section 5(1) of the Cape Town Convention Protocol, which mandates protection against arbitrary or excessive fiscal demands.

 

5. Infrastructure Push with Institutional Capacity Gaps

• • India is building or upgrading over 80 airports under UDAN 4.0 and 5.0, yet airspace management, DGCA’s institutional capacity, and ground handling protocols lag behind global standards. The DGCA—now designated as the Registry Authority under the 2025 Bill—requires capacity upgradation in legal enforcement, digital interface, and arbitration handling.
  • Moreover, the backlog of arbitration cases involving Indian airlines is still being routed to Singapore and London, reflecting the absence of robust domestic aviation arbitration infrastructure.

Global Perspective

1. Ireland’s Aircraft Leasing Model

• • Ireland is a global hub for aircraft leasing, owing to a stable tax regime, strong legal framework, and investor-friendly policies.
  • Emphasis on minimal bureaucratic interference and transparent arbitration fosters global leasing giants.

 

2. Singapore’s Approach

• • Centralized dispute resolution mechanisms and targeted tax incentives.
  • Integration of Civil Aviation Authority regulations with streamlined corporate laws sets an example for emerging aviation markets.

THE CHALLENGES:

1. Taxation Uncertainty and Fiscal Arbitraryism: While the Bill attempts legal harmonization in aviation leasing, the complexity and unpredictability of India’s taxation regime continue to deter global lessors. Several leasing companies have been served Income Tax notices for allegedly creating a “permanent establishment” (PE) in India via Special Purpose Vehicles (SPVs)—despite operating under global norms.

• • The OECD’s BEPS guidelines on taxation of digital and financial services are ambiguously interpreted in India, raising the risk of retrospective tax liabilities, reminiscent of the Vodafone and Cairn disputes.
  • Critics allege this is a veiled “arm-twisting strategy” to compel firms to migrate operations to GIFT City, raising concerns over coercive regulatory practice.

 

2. Persistent Barriers to Ease of Doing Business: Despite the legislative advancement, India still ranks 63rd in World Bank’s Ease of Doing Business Index (2020) and suffers from legacy bureaucratic red tape, procedural opacity, and fragmented inter-agency coordination.

• • Aviation leasing requires interaction with multiple bodies—DGCA, MoCA, RBI, Ministry of Finance—creating institutional friction.
  • Issues like high stamp duties, lack of single-window clearance, and slow dispute resolution mechanisms impede transaction flow.
  • The lukewarm response to GIFT City’s leasing ecosystem reflects these hurdles—despite financial incentives, only a handful of global lessors have formally shifted base.

 

3. Tensions with the Insolvency and Bankruptcy Code (IBC), 2016: The Bill’s overriding clause aims to prioritize international treaty commitments under the Cape Town Convention. However, this may clash with Section 14 of the IBC, which enforces a moratorium on creditor actions post insolvency filing.

• • In GoFirst’s case (2023), the NCLT barred lessors from de-registering aircraft due to IBC protections, undermining treaty obligations and investor confidence.
  • Unless harmonized, courts may face interpretative dilemmas between domestic insolvency sovereignty and international commercial commitments.
  •  The Banking Law Reforms Committee (BLRC, 2015) had flagged the need to isolate high-value assets like aircraft from general bankruptcy pools—a recommendation yet to be codified.

 

4. DGCA’s Institutional Capacity and Administrative Readiness: The Bill designates the DGCA as the primary Registry and Enforcement Authority. However, questions remain on whether the agency possesses the requisite legal, technological, and arbitration capacity.

• • Currently, DGCA is understaffed (with ~75% sanctioned strength filled as per MoCA RTI 2023), and lacks dedicated legal/technical wings for real-time enforcement or cross-border asset recovery.
  • India still lacks a National Aircraft Repossession Protocol (NARP), unlike ICAO-compliant jurisdictions like Ireland or UAE.

 

5. Judicial Delays and Weak Contract Enforcement Mechanisms: India ranked 163rd in contract enforcement (World Bank, 2020), with average litigation taking over 1,445 days to resolve. Aviation leasing disputes involving arbitration (e.g., SpiceJet-BBAM dispute) continue to be routed offshore (Singapore, London) due to lack of trust in Indian arbitration enforcement.

• • The absence of a specialized aviation commercial bench or integrated arbitration framework limits recourse within Indian legal jurisdiction.
  • Despite India being a signatory to the New York Convention, judicial delays in enforcement of foreign arbitral awards further deter lessors.
  • No clarity exists on whether directions from DGCA under the new Bill will enjoy the status of quasi-judicial enforceability or be subject to judicial review.

 

6. Infrastructure Backlogs and Operational Constraints

While demand is surging (47% YoY passenger growth in 2022–23), infrastructure has not kept pace:

• • Airport capacity utilization has exceeded 130% in metros like Delhi and Mumbai (MoCA, 2023).
  • UDAN airports suffer from poor logistics, inadequate night landing facilities, and insufficient maintenance support—deterring regional airline viability.
  • Even if leasing becomes easier, aircraft deployment capacity remains constrained by ground infrastructure and poor airspace management (~75% still under defence control).

 

7. Risk of Selective Policy Favoritism: The push to shift all aviation leasing to GIFT City—while strategically sound—risks creating a state-induced monopoly or geographical concentration, potentially stifling market-led ecosystem development across other cities like Bengaluru, Hyderabad, or Delhi NCR.

THE WAY FORWARD:

1. Taxation Reforms for Fiscal Predictability and Investor Trust

• • Clarify tax treatment for Special Purpose Vehicles (SPVs), define “permanent establishment (PE)” in alignment with OECD’s BEPS framework, and notify a tax neutrality regime in GIFT City for 10–15 years (as in Singapore or Ireland).
  • The Vodafone (2012) and Cairn (2015) tax disputes underline how unpredictable taxation deters long-term capital. Leasing firms have cited inconsistent treatment of SPVs and arbitrary IT notices as reasons for caution.
  • The Direct Tax Code Task Force (2019) recommended rationalisation of cross-border tax rules to enhance investor sentiment.

 

2. Harmonization of IBC with Cape Town Convention Commitments

• • Introduce an aviation-specific carve-out in Section 14 of the IBC (moratorium) to ensure treaty compliance with the Cape Town Convention. Create an inter-ministerial panel (MoCA + MCA + MoF) for codified harmonisation.
  • GoFirst’s case (2023) demonstrated how IBC protections prevented lessors from repossessing aircraft within ICAO-mandated timelines, damaging India’s reputation on the AWG Compliance Index.
  • The Banking Law Reforms Committee (BLRC, 2015) emphasized “asset segregation” for high-value, transnational instruments like aircraft.

 

3. Institutional Capacity Building within DGCA and Allied Agencies

• • Augment DGCA’s human capital through dedicated training on international aviation finance, commercial arbitration, and fast-track regulatory protocols. Invest in AI-based aircraft asset registries and enforcement dashboards.
  • Create a National Aviation Legal Cell (NALC) under DGCA, in collaboration with ICAI and ICSI, to assist in interpretation, enforcement, and arbitration.

 

4. Strengthening GIFT City’s Global Competitiveness:

• • Offer a globally benchmarked incentive package—zero capital gains tax, simplified GST processes, and sovereign guarantees for long-term contracts. Institutionalize single-window facilitation for leasing entities in GIFT IFSC.
  • Only a handful of global lessors have committed to GIFT City, citing unclear incentives, red tape, and lack of dispute resolution infrastructure.
  • Ireland’s Shannon model—enabled through a mix of tax holidays, dispute redressal channels, and globally recognized legal enforceability—is worth emulating.

 

5. Judicial Sensitization and Legal System Alignment

• • Conduct periodic training for NCLT and High Court judges on global aviation leasing frameworks, ICAO protocols, and enforcement of arbitral awards. Introduce aviation commercial benches in high caseload jurisdictions.
  • Despite India being a signatory to the New York Convention (1958), enforcement of foreign arbitral awards remains slow, unpredictable, and review-prone.

 

6. Multilateral Signalling and Market Confidence Building

• • Leverage India’s ICAO membership and AWG participation to signal regulatory confidence globally. Host annual India Global Aviation Leasing Dialogue under MoCA with IATA, ICAO, and global lessors.
  • India’s AWG score improved from 50 (2022) to 62 (2024) but still lags behind Ireland (94) and Singapore (89). Strategic signalling can bridge perception gaps.

THE CONCLUSION:

The Protection of Interests in Aircraft Objects Bill, 2025 marks a pivotal move to synchronize India’s aviation laws with international standards. While the Bill holds promise for reducing legal disputes, lowering risk premiums, and fostering a more vibrant aviation ecosystem, its true impact will hinge on effective implementation, taxation reforms, and sustained engagement with global aviation stakeholders.

UPSC PAST YEAR QUESTION:

Q. What is the need for expanding the regional air connectivity in India? In this context, discuss the government’s UDAN Scheme and its achievements. 2024

MAINS PRACTICE QUESTION:

Q. “The Protection of Interests in Aircraft Objects Bill, 2025 is a step towards aligning India’s aviation sector with global leasing standards, but its success will depend on harmonized legal frameworks and institutional reforms.” Analyse.

SOURCE:

https://www.thehindu.com/business/Industry/will-aviation-disputes-be-easier-to-resolve-explained/article69431370.ece

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