Aircraft Repossession in India: A 2017 Overview

AIRCRAFT REPOSSESSION IN INDIA: AN OVERVIEW

Author: Nitin Sarin, Advocate (India); Solicitor (England & Wales)

  1. INTRODUCTION:

“Aircraft repossession” in India is usually used as a synonym for or associated with the infamous Kingfisher Airlines case of 2009. The bankrupt airline paved the way for India to revamp its aging laws and gave the Government the impetus to attempt to align itself with the rest of the world, at least, in as far as repossession of aircraft is concerned. Unknown to most, the law relating to aircraft repossession in India has been tried and tested over decades, in fact the first repossession attempt being in the early 1990’s with the bankruptcy of erstwhile East West Airlines. East West Airlines had taken on lease Boeing 737-200 aircraft from the GPA Group after which it defaulted in payments forcing the Lessor to repossess the aircraft. Right from the early / mid 90’s, Lessors were faced with the difficult task of dealing with liens, directly or indirectly arising due to unpaid fees to the Airports Authority of India and other Government authorities.

Kingfisher of course carved the way for the modern day legal regime surrounding aircraft repossession in India. At this junction, it must be mentioned that over the last 8 years, there has been immense involvement of the Aviation Working Group (“AWG”) in India trying to assist the Government of India to align its laws with the Cape Town Convention (“CTC”) regime. This short document attempts to give an overview of the laws (Acts and Rules) relating to the, documentation required for, timing of, procedure for initiation of proceedings to recover, de-registration of and export of aircraft from India.

  1. DOCUMENTATION:

In any successful repossession, documentation is key. Most of the times, one must be able to preempt documentation that may be required by the various Authorities in India at the time of a hostile repossession and / or at the end of a lease with an uncooperative Lessee. Some of the documents that must be kept in hand during the full term of the lease are listed as follows:

  1. Irrevocable De-Registration and Export Request Authorization (“IDERA”);
  2. De-registration Power of Attorney;
    1. Must mention the power to apply to the DGCA; and
    2. Must mention the power to apply to the Customs authorities.
  3. De-registration request letters from the Lessee addressed to the DGCA;
    1. Must remain undated;
    2. Must be in the format as accepted by the DGCA; and
    3. The signature of the Lessee’s representative must be the same as that already held on file by the DGCA (as the DGCA will compare signatures).
  4. Customs export letters addressed to the Customs authorities;
    1. Must remain undated; and
    2. Must request for export of the aircraft as well as permission to file an advance manual shipping bill.
  1. WHEN IS IT TIME TO INITIATE REPOSSESSION PROCEEDINGS?

Contrary to popular belief, repossession of aircraft from India does require an immense amount of cooperation from the Lessee. Most of the times, it is important to keep a balance between being an “enforcer” and a “sympathizer”. Various Lessors will have different thresholds as to when they feel it is time to initiate proceedings. For some, default in payment for a single month triggers the panic button while others may causally linger on allowing the Lessee to build up debt of several months. In both situations, the ability of the Lessor to absorb the halted cash flow will determine the length of time required to take the decision to initiate repossession proceedings. In all cases, in case the Lessor is enlightened of the fact that the Lessee is cannibalizing its aircraft, then no time should be wasted and proceedings must be initiated immediately at all costs!

  1. HOW TO INITIATE REPOSSESSION PROCEEDINGS?

As mentioned above, cooperation of the Lessee is key. Nothing is more effective than amicable settlement of a dispute, it must be borne in mind that while it may be clear for a Lessor that the Lessee has no further hope of survival, the Lessee will keep trying to set affairs right. The inclement relationship starts when a Lessor tries to take away the core asset of the Lessee (nothing gives a Lessee the feeling of “the house crumbling” more than a repossession of an aircraft). Therefore, one must tread very carefully when it comes to initiating repossession proceedings. Also, it must be borne in mind that aircraft repossession proceedings are a mixed bag of legal proceedings (with any Government authority / Court) as well as commercial proceedings (with the Lessee). While both are equally important, the division of labour amongst the repossession team should be such that both types of proceedings may proceed conjointly. It has been our experience that commercial personnel should deal with each other (for e.g. coming to some sort of settlement or re-payment plan, etc.) while technical personnel should interact with other technical personnel (for e.g. in issues relating to aircraft records, etc.) and any inter mixing of the two personnel should be avoided. Dealing with the Government authorities / Courts should be left to the legal team as they are usually the most equipped to deal with the local systems and will be quick to respond to any queries and to supply documents as may be required by local law.

  1. RECOVERING AIRCRAFT RECORDS:

It is common knowledge that an aircraft without its records is worthless. Therefore, the struggle for recovery of aircraft records must be initiated at the very beginning. As mentioned above, involving a technical person is key – this person should be able to liaise with the technical department of the Lessee and be able to assess the (usually deteriorating) situation. In our experience, we have seen Lessee’s lock up aircraft records in secret locations while others simply store the records in an easily accessible location at either their head office or their airport office. In one intriguing incident in 2016, the vital aircraft records were stored (deliberately) in the Lessee’s Managing Directors residence! Once access has been gained to the aircraft records, it is highly advisable to employ a professional document organizer who can scan all the records for safe keeping in a digital vault.

More often than not, the technical personnel of the Lessee would not have been paid their salary / other dues in which case, payment to the said employees may be considered in return for access to the aircraft records (Note: We are aware that taking possession of aircraft records before termination of a lease may lead to criminal liability however, as you are paying off debt of the Lessee by paying their staff, the Lessee’s management usually agrees to such payments in exchange for the aircraft records). Also, the last two repossessions handled by our firm saw two very varied methods of record keeping, in the first instance the records were kept haphazardly while in the second example, each document has been indexed and filed immaculately.

It is also very important to employ a local agent, i.e. someone with the technical knowledge in relation to aircraft records. There are a number of Indian firms who provide asset management services, etc. who would jump at the opportunity to work with a Lessor to assist in recovering aircraft records.

Do bear in mind that for a smooth repossession, one must try and secure the original Certificate of Registration as soon as possible. The reason for this is explained in the paragraphs below.

  1. DE-REGISTRATION OF THE AIRCRAFT:

One of the most unpredictable processes in repossession of an aircraft from India is the process of de-registration. This paragraph will give a brief overview of the law as well as a brief snippet of our experiences in de-registering aircraft in the recent past, i.e. in the year 2016 and 2017.

  • De-registration – the Rules and Regulations:

Rule 30 of the Aircraft Rules 1937 deals with registration as well as de-registration of aircraft in India. Rules 30 (1) to (5) deal with registration while Rule 30(6) and (7) deal with de-registration of aircraft.

Rule 30(6) is reproduced as follows:

“(6) The registration of an aircraft registered in India may be cancelled at any time by the Central Government[1], if it is satisfied that –

(i) such registration is not in conformity with the provisions of sub-rule (2); or

(ii) the registration has been obtained by furnishing false information; or

(iii) the aircraft could more suitably be registered in some other country; or

(iv) the lease in respect of the aircraft, registered in pursuance of sub-clause (iv) of clause (a) of sub-rule (2), has expired or has been terminated in accordance with terms of lease; or

(v) the certificate of airworthiness in respect of the aircraft has expired for a period of five years or more; or

(vi) the aircraft has been destroyed or permanently withdrawn from use; or

(vii) it is inexpedient in the public interest that the aircraft should remain registered in India.”

Rule 30(7) is reproduced as follows:

“(7) The registration of an aircraft registered in India, to which the provisions of the Cape Town Convention or Cape Town Protocol apply, shall be cancelled by the Central Government, within five working days[2], if an application is received from IDERA Holder prior to expiry of the lease along with: —

(i) the original or notarised copy of the IDERA; and

(ii) a certificate that all Registered Interests ranking in priority have been discharged or the holders of such interest have consented to the deregistration and export:

Provided that the deregistration of an aircraft by the Central Government under sub-rule (6) or sub-rule (7) shall not affect the right of any entity thereof, or any inter-governmental organisation, or other private provider of public services in India to arrest or detain or attach or sell an aircraft object under its laws for payment of amounts owed to the Government of India, any such entity, organisation or provider directly relating to the services provided by it in respect of that object.”

Further, in accordance with the powers delegated to the DGCA by the Ministry of Civil Aviation (the “MoCA”) the Directorate has framed its Civil Aviation Requirement (“CAR”) which is contained in Section 2 – Airworthiness Series F Part 1 Issue II and the relevant paragraph 9 is reproduced below:

“9. CANCELLATION OF REGISTRATION OF AIRCRAFT

9.1 The registration of an aircraft registered in India may be cancelled at any time by the DGCA, if it is satisfied that: –

  1. such registration is not in conformity with para 3.1[3] of this CAR; or
  2. the registration has been obtained by furnishing false information; or

iii. the aircraft could more suitably be registered in some other country; or

  1. the aircraft has been destroyed or permanently withdrawn from use; or
  2. it is inexpedient in the public interest that the aircraft should remain registered in India; or
  3. the lease in respect of the aircraft registered pursuant to paragraph 3.1(iv)
  4. a) has expired, or
  5. b) has been terminated by mutual agreement[4] between the lessor and the lessee, or
  6. c) has been otherwise terminated in accordance with the provisions of the Lease Agreement, or terms of lease[5]

vii. the Certificate of Airworthiness in respect of the aircraft has expired for a period of five years or more.

9.2 The registration of an aircraft registered in India, to which the provisions of the Cape Town Convention or Cape Town Protocol apply, shall be cancelled by the DGCA, as provided in the Cape Town Protocol, if an application is received from IDERA Holder prior to expiry of the lease along with-

(i) the original or notarized copy of the IDERA; and

(ii) a certificate that all Registered Interests ranking in priority have been discharged or the holders of such interest have consented to the deregistration and export.

Provided that the deregistration of an aircraft by the DGCA under para 9.1 and 9.2 shall not affect the right of any entity thereof, or any inter-governmental organization, or other private provider of public services in India to arrest or detain or attach or sell an aircraft object under its laws for payment of amounts owed to the Government of India, any such entity, organization or provider directly relating to the services provided by it in respect of that object.

9.3 The registered owner or his authorized representatives may apply to DGCA, New Delhi for cancellation of registration, enclosing original C of R[6]. The applicant should also specify the clause of Rule 30 and the relevant paragraph of this CAR under which cancellation is sought. In case, it is proposed to invoke para 9.1(vi)(c) of this CAR, the request for deregistration shall be supported by full explanation regarding the relevant provision of the lease agreement and the justification for using the provisions.”

After immense intervention by the AWG, the Government of India introduced Rule 30 (7) above. Thereafter, it was found that the local regulations were still out of sync with the CTC and therefore the following Rule 32A was introduced. It is reproduced as follows:

“32A. Export of Aircraft. – Without prejudice to the provision to rule 30, the Central Government shall, consequent upon cancellation of registration of an aircraft under sub-rule (7) of rule 30, if an application is made by IDERA Holder for export of the same aircraft, take action within five working days to facilitate the export and physical transfer of the aircraft, along with spare engine, if any, subject to compliance with application safety rules and regulations relating to that aircraft operation. “

  • De-registration – the Case Law:

The aforementioned regulations were tested by the Delhi High Court in matters filed by aircraft lessors against M/s Spicejet Limited. The cases lay down binding precedent and are summarized as follows:

B & B Air Acquisition 34953 who had terminated certain lease agreements and thereafter requested the DGCA to deregister their aircraft. On being asked to return the original certificate of registration and proof of deactivation of the Mode “S” code, the Lessor filed a writ petition against the Authority seeking a direction for deregistration of the aircraft, the Hon’ble High Court of Delhi held:

“According to the petitioner, respondent No. 2 is obliged to cancel the registration of the Aircrafts pursuant to Regulation 30 (6) (iv) of the said Rules.

A bare perusal of the said rule indicates that it provides power to DGCA to cancel the registration of an aircraft in the circumstances, as spelt out in Rule 30(6) of the said rules.

Learned counsel appearing for DGCA points out that an application for their relief was made by the petitioner on 15.12.2014 and the same is under consideration.

The learned counsel appearing for the lessee of the Aircrafts (respondent no. 2) submits that several disputed questions are involved including the amount due to the lessor. He further contends that DGCA is required to provide him a hearing.

Be that as it may, it is apparent that the DGCA would have to take a view on the application made by the petitioner. Accordingly, the present petition is disposed of by directing that the DGCA take a view on the application filed by the petitioners as expeditiously as possible in accordance with law.[7]

Thereafter, B and B Air Acquisition 34953 Leasing Limited filed LPA 32 of 2015 before the learned Division Bench of the Delhi High Court against the judgment passed by the learned Single Judge.

In the meanwhile, on 29.01.2015 other Lessors filed similar writ petitions (i.e. WP (c) 871 and 747 of 2015) before the Hon’ble High Court seeking a similar relief as BBAM, i.e. seeking deregistration of their aircraft by the DGCA. Extensive arguments were heard and even the AWG intervened as an intervener in the matter to illustrate the various CTC provisions under law.

During the pendency of WP (c) 871 and 747 of 2015 before the High Court, the Government of India, on 9th February, 2015 incorporated Rule 30(7) of the Aircraft Rules, 1937 giving official recognition to the IDERA and introducing of the words “shall cancel registration” in relation to the action to be taken by the DGCA on presentation of an IDERA. The text of Rule 30 (7) has already been reproduced above and for the sake of brevity is not being reproduced again.

While deciding WP (c) 871 and 747 of 2015, the Hon’ble Delhi High Court inter-alia held:

“The Division Bench Judgment of this court in DRI Vs. Corporate Aircraft Funding Company LLC, has however, construed the power of the DGCA under Rule 30 of the Aircraft Rules, as an enabling power. Being a judgment of the Division Bench, concerning the issue at hand, it would have to be followed both as a matter of propriety and in law, having regard to the principle of judicial hierarchy

A bare reading of the aforesaid would show that with the insertion of sub-rule (7) in Rule 30, the doubt, if any, as to whether the DGCA had any discretion in the matter has got removed. Upon the creditor fulfilling the conditions prescribed in clause (i) and (ii), of sub-rule (7), of Rule 30, the DGCA is mandatorily required to cancel the registration.

This aspect of the matter, however, need not detain me any further as, Rule 30 stands amended with the insertion of sub-rule (7) in Rule 30 of the Aircraft Rules. The relevant amendments brought about in Rule 30, vide notification no. GSR 78(E) dated 09.02.2015, issued by Ministry of Civil Aviation read as follows :-

                                                                        *****

A bare reading of the aforesaid would show that with the insertion of sub-rule (7) in Rule 30, the doubt, if any, as to whether the DGCA had any discretion in the matter has got removed. Upon the creditor fulfilling the conditions prescribed in clause (i) and (ii), of sub-rule (7), of Rule 30, the DGCA is mandatorily required to cancel the registration.

Therefore, keeping in mind the aforesaid, in my view, a mandamus shall issue to the DGCA to act in a particular manner, as the conditions prescribed for acting in that manner, as required by law, stand fulfilled.

Any other direction would only frustrate the object and purpose with which the amendment has been brought about in Rule 30. I am, thus, persuaded to direct the DGCA to de-register the aircraft objects, which are subject matter of the captioned writ petition[8].”

Thereafter, the matter has been settled by the aircraft Lessors with M/s Spicejet Limited, wherein the Lessors have agreed to withdrawn their requests for deregistration as well as withdraw their winding up petitions filed against the Airline. As such, in our opinion, the judgment of the learned Single Judge passed in WP (c) 871 and 747 of 2015 dated 19.03.2015 has attained finality with no challenge before the Division Bench of the Hon’ble Delhi High Court. Therefore, in light of Rule 30 (7) of the Aircraft Rules, 1937 as interpreted by the Hon’ble High Court of Delhi there is a mandatory duty cast on the DGCA to cancel the registration of an aircraft if an IDERA (original or notarised) is received along with a certificate that all registered interests ranking in priority have been discharged or that the holders of such interest have consented to such deregistration and export.

At the time of drafting this present memorandum, there is another case pending in the Delhi High Court titled “Supertech Aviation Private Limited Vs. Director General of Civil Aviation & Ors.”[9]

  • De-registration – The Practical Experience:

Over the last few years since the demise of Kingfisher Airlines, the author has had vital experience in trying to de-register and export various aircraft from India. Two of these cases are summarized as follows:

Case 1 (August 2016):

IDERA: Yes

DPoA: Yes

Pre-signed Letters left Undated from Lessee Consenting to De-registration: Yes

Experience: The Lessor had to meet with the Ministry of Civil Aviation a number of times to explain the case. The Lessor applied for de-registration on the basis of the IDERA as well as the undated consent letters from the Lessee. The Aircraft was de-registered in a record time of 48 hours however in the present case, there was heavy intervention by the MoCA.

Liens: Yes, the Airports Authority of India had to be paid off large amounts of money towards navigation / parking charges, etc. Also, the Airport had to be paid a number of charges. The DGCA also asked the Lessor to clear Government dues to Air India for ground handling services provided to the Lessee. Also, we must caveat that the Lessor held the original CoR in relation to the Aircraft, which is a mandatory requirement to return the same in case of termination of a lease with the mutual consent of both Parties.

Export: The Lessor faced the biggest challenge in exporting the aircraft from India as the Customs authorities were not willing to understand the case and kept insisting on a no objection certificate from the Lessee (despite termination of the lease agreement), after much explanation, they finally agreed to grant the export permission to the Aircraft.

Case 2 (May 2017):

IDERA: Yes

DPoA: Yes

Presigned Letters let Undated from Lessee Consenting to De-registration: Yes

Experience: The DGCA gave the Lessor 2 options, 1. To follow the IDERA route, in which case the de-registration matter would be referred to the Ministry as the DGCA alleged that the powers to de-register an aircraft in line with the CTC (i.e., within five working days) had not been delegated to them by the Ministry; Or 2. To follow the mutual consent route, submit the Lessee’s consent and the original CoR and have the Aircraft de-registered immediately. The Lessor managed to get the original CoR from the Lessee and followed point 2. It took the Lessor 6 working days to get the file moved from one Officer to another, however, the Aircraft was finally de-registered.

Liens: There were no liens exercised in the case as the Lessee had provided a sufficient bank guarantee to the Airports Authority of India. The relevant NOC from the AAI was granted within 6 working days of the Lessor applying for the same.

Export: Export procedures in the present case were carried out smoothly.

  1. EXPORT FROM INDIA

The last (and usually most under estimated task) in the repossession of an aircraft is completing the Customs formalities. As illustrated above in Case 1 and Case 2, the experience of a party trying to export an aircraft can be highly varied. The most essential roadblock to overcome is the ability to explain why the aircraft is not being exported by the same entity who imported the same. The fact that aircraft are imported into India duty free provided they are on lease, make the matter even more complex (to explain to the Customs authorities) as they are being exported from India off lease. Broadly the documentation required by the Customs authorities is as follows:

  • Export Invoice
  • Original DGCA Approval and de-registration confirmation letter
  • Manufacturer Certification
  • NOC from the Lessee (requires extra work in the case of a hostile repossession)
  • NOC from Airport Authority of India
  • Permission for Advance Manual Shipping Bill Letter
  • Power of Attorney in favour of the person applying for such export
  • Temporary Certificate of Registration (from the new State of registry)
  • Import Bill of Entry Copy and Invoice
  • Aircraft Lease Agreement Copy

It is always advisable for a Lessor to hire the services of a specialized customs broker to handle the export formalities as they usually possess the technical knowhow (and previous relationships with the concerned Officers) to have the process completed.

[1] The Central Government has delegated these powers to the Directorate General of Civil Aviation ( the “ DGCA”).

[2] The words “within five working days” have been inserted vide notification dated 23rd March 2017 published in the Official Gazette on 28th March 2017.

[3] Paragraph 3.1 speaks of the two categories under which an Aircraft may be registered in India.

[4] This is where the undated de-registration request letters stating that the lease agreement has been mutually terminated come in handy.

[5] This is the most problematic provision in so much as it envisages that the Directorate shall satisfy itself (giving the Directorate discretion) that the lease agreement has been terminated in accordance with the Clauses of the lease agreement.

[6] Another pressing issue is the one that the Directorate requires, in all the circumstances, whether by the mutual termination route or the IDERA route, the original Certificate of Registration to be returned. We have witnessed certain circumstances where the Directorate has demanded the original to be returned and in others, they have proceeded to directly de-register the aircraft. As such there is immense uncertainty in this aspect and depends heavily on which airworthiness officer the case is marked to.

[7] Judgment dated 22.12.2014 passed by Vibhu Bakhru J. in W.P. (c) 9172 of 2014 B and B Air Acquisition 34953 Leasing Limited Vs. Directorate General of Civil Aviation and Another.

[8] Judgment dated 19.03.2015 passed by R. Shakdher J. in WP (c) 871 and 747 of 2015 AWAS 39423 Ireland Ltd & Ors Vs. DGCA and Wilmington Trust SP Services (Dublin) Vs. DGCA.

[9] WP(c) 3214 of 2017.

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