The impact of this moratorium under the IBC raised serious concerns regarding India’s compliance with its obligations under the Convention on International Interests in Mobile Equipment (concluded in Cape Town on November 16, 2001) (the “Convention”) and the Protocol on Matters Specific to Aircraft Equipment (the “Protocol”) (hereinafter, collectively the “CTC”). The CTC was acceded to by India on March 31, 2008, inter alia, with the objective of facilitating the leasing and financing of an aircraft and setting down clear rules to govern them, such as rules in relation to the financiers/lessors’ ability to get swift repossession of an aircraft in the event of default. Moreover, while the matter was sub-judice, the Ministry of Corporate Affairs issued a notification stating that the provisions of Section 14(1) of the IBC, i.e., in relation to the moratorium, “shall not apply” to agreements under the CTC, relating to aircraft, aircraft engines, airframes and helicopters^[2] (“MCA Notification”). The DGCA accordingly looked to the High Court for directions on processing deregistration basis the MCA Notification, as the matter was sub-judice.

The entire event resulted in a significant loss of confidence on the part of international lessors on account of frustration with the legal process with several considering stricter leasing terms and higher rental rates on Indian leases which would make it a challenge for Indian airlines to secure affordable leasing options, potentially increasing the costs for passengers. The Aviation Working Group (“AWG”), a global watchdog representing aircraft makers and leasing firms, downgraded India’s compliance score and placed it on the negative watchlist in the year 2023.

In this regard, from the perspective of international lessors, one of the most encouraging components of the order of the Delhi HC was the Court’s upholding of India’s commitment under the CTC, by noting that: “By acceding to the Cape Town Convention and Cape Town Protocol, India chose to apply the provisions as set forth in the Cape Town Convention and Cape Town Protocol to all matters in respect of aircraft, aircraft objects, airframes and aircraft engines …. the MCA Notification was although delayed but was a necessary adjunct to the Declaration of Accession of the Cape Town Protocol and is thus retrospective in its operation.”.

All aircraft were promptly deregistered by the DGCA pursuant to the High Court’s order.  However, despite the significant progress made in restoring lessor’s confidence in India through the High Court’s order, the international lessor community remains somewhat circumspect of the situation. AWG has not yet removed India from the negative watchlist despite the High Court’s order. These apprehensions are not without reason, as the risk of going through an unclear and inefficient procedure for deregistration and export of aircraft looms large and is proving to be a major impediment during the last leg of repossession, i.e., the export of aircraft for the lessors.

2. The Remedies of Deregistration and Export under the Convention and Protocol

Chapter III of the Convention provides a financier with a set of basic remedies in the event of a debtor’s default, such as taking possession of the equipment and, in the case of a security agreement, foreclosure and sale of the equipment in or towards satisfaction of the applicable secured obligations^[3]. The default remedies available under the Protocol expand the available remedies contained in the Convention to include provisions dealing with de-registration and export^[4]. It is to be noted that deregistration and export are each two distinct remedies available to the creditor on default of the debtor. These remedies are, however, only available (a) to the extent agreed by the debtor (which agreement can be given at any time) and, (b) following the occurrence of a default (as specified in Article 11 of the Convention). The Protocol provides for two separate approaches for a financier to achieve de-registration and export of an aircraft in a default scenario. The first route^[5] is for the creditor to obtain relief pending final determination^[6] from a court in the jurisdiction where the aircraft is registered. The second route is available if the debtor provided an IDERA which was lodged with the requisite authorities, which must then cooperate expeditiously to deregister and export the subject aircraft (“IDERA Route”).^[7]

The IDERA Route does not require a court order, and instead provides for a standing direction to the applicable registry authority in a Contracting State (the DGCA in India) to honor a request for deregistration and export if certain prerequisites are met. In effect, Article XIII of the CTC establishes a clear set of rules for deregistration, which does not provide for a discretion on the part of the registry authority. However, such a remedy cannot be exercised “without the prior consent in writing of the holder of any registered interest ranking in priority to that of the creditor”^[8] and exercise of such directions by the authority is “subject to applicable safety laws and regulations”^[9]. Therefore, the only discretion provided to the registry authority in refusing deregistration or export is if such action will not be in compliance with any applicable local safety laws and regulations.

3. Non- consensual Rights or Interests under the Convention.

Acknowledging the fact that there are jurisdiction specific legal rights of possessory liens and detention, the Convention, under Articles 39 and 40, permits the Contracting State to declare any such rights as may exist under their specific local laws, which will be considered equivalent to or in priority of the registered interests in the International Registry, whether or not they are themselves registrable or non-registrable in the International Registry. These rights are generally called non-consensual rights or interests (“NCRI”) under the Convention and the ability for the Contracting State to declare them upfront was included in the Convention so that maximum information is provided to financiers and lessors in order for them to calculate legal risks and appropriately price such risks in transactions^[10].

In this respect, one may note that India has specifically declared for certain categories of non-registrable NCRIs^[11] under Article 39(1)(a) of the Convention, which are (i) liens in favour of airline employees for unpaid wages; (ii) liens or other rights of an authority of India relating to taxes or other unpaid charges; and (iii) liens in favour of repairers of an aircraft and registrable NCRIs under Article 40 of the Convention, which includes all of the above as well as “rights of a person obtaining a court order permitting attachment of an aircraft object” (“Specific NCRIs”).

In addition to the specific declarations above, India has also submitted a general declaration under Article 39(1)(b) which states that “Nothing in the Convention shall affect its right or that of any entity thereof, or any intergovernmental organization in which India is a member, or other private provider of public services in India, to arrest or detain 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 service or services provided by it in respect of that object or another aircraft object” (“General Declaration”).  While the Specific NCRI under Article 39(1)(a) covers NCRIs which once declared will have equivalent or superior priority over a registered interest, the effect of the General Declaration is to acknowledge preservation of rights which will override all other provisions of the CTC. However, the effect of the General Declaration could be such that certain rights available under local laws would be considered as an interest superior to all NCRIs and registered interests.

Further, the Convention or the Protocol do not in any manner make the remedies of deregistration and export, subject to satisfaction of the abovementioned NCRIs. In fact, Article IX(2) of the Protocol specifies that the remedy of deregistration and export cannot be exercised without the prior consent in writing of the holder of any “registered interest” ranking in priority to that of the creditor and does not make such remedies conditional upon the satisfaction of NCRIs. Against the above background, we analyse below the Indian laws in relation to remedies of export and deregistration available under the IDERA Route to creditors/ lessors in India.

4. Aircraft Deregistration and Export as Default Remedies in India

In terms of procedure, the primary provisions that govern deregistration and export of aircraft are Rule 30(7) and Rule 32 of the Aircraft Rules, 1937 (“Aircraft Rules”). Furthermore, these rules are to be read in conjunction with the DGCA Aeronautical Information Circular No. 12/2018 dated November 16, 2018 (Standard Operating Procedure for implementation of Rule 32A relating to export of aircraft covered under the Cape Town Convention) (“AIC 2018”) under which DGCA has prescribed the procedure for effectuating the export of an aircraft. Specifically, it should be noted that post grant of the deregistration under Rule 30 (7) of the Aircraft Rules: “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.”

Additionally, under AIC 2018, any other organization covered under the proviso to Rule 30(7) of the Aircraft Rules (“Proviso”) and having outstanding dues pertaining to the aircraft in question, may raise bills and intimate DGCA. DGCA is thereafter required to inform the IDERA holder (lessor) by an e-mail about such liability and the IDERA holder is required to make payment of the same and submit the certificate of payment of bills to DGCA for it to permit the export of the aircraft.

As such, even after the aircraft has been deregistered under the IDERA Route by DGCA, still there are several dues to be cleared and consents to be obtained before the export can be undertaken. While the Proviso is more or less in line with the General NCRI declared by India under Article 39(1)(b) of the CTC, in this respect, a major issue arises in determining what entities are covered under the Proviso. It should be noted that the there are two prongs to this Proviso which are required to be conjunctively satisfied:

• Part 1: The first part of the Proviso stipulates that the entity should be a central government entity, an inter-governmental organisation or a private provider of public services in India;
• Part 2: The second part of the Proviso requires that entity should have a right to arrest, detain, attach or sell the aircraft object in question, “under its laws”.

However, the abovementioned criteria are not clear in several respects, some of which are highlighted below:

• The scope of the term “any entity thereof” with reference to the central government could theoretically include any governmental instrumentality, which may include not merely authorities such as income tax and customs authorities, but also government companies (as defined under the Companies Act, 2013) or public sector undertakings and statutory authorities.
• The phrase “private provider of public services” is also unclear as the term public services is not clearly defined. The lack of clarity could lead to significant issues as operation and maintenance of airports is a public service/activity and to that extent, any ancillary service provided in relation to the same can be argued to be a public service by extension, even if they are providing the service to the airline under a private contract.

In essence, any third-party vendors who may have provided services relating to the aircraft, including but not limited to ground handling, maintenance, and fuelling under private contracts with the airline, could claim that they are the provider of public services and thereby covered by the Proviso. This is indeed an interpretation which is being mooted by such entities in order to prevent lessors from exporting their aircraft without clearance of all of their pending dues.

• Similarly with respect to Part 2, there are several points that require clarification such as whether the right to attach, arrest, detain or sell under India’s law, is a reference to specific rights that an entity or a government agency/authority should have under a statute or whether the phrase “arrest, detain, attach or sell” is merely indicative and could include rights that may be determined in the favour of a party in the future pursuant to court proceedings. In case of the latter, theoretically, any entity covered under the first prong could approach a court of law for remedies like attachment even if it does not have such a right at the stage at which deregistration/export is being undertaken. As per India’s declaration under Article 40 of the CTC, such attachment order should only have priority over other registered interests if it is itself registered in the International Registry. However, since there is no local legislation implementing the CTC, the Indian deregistration and export process does not clarify the same.

In this regard, the CTC Practitioner’s Guide published by the AWG, elucidates that while a contracting state can make a general declaration regarding the interests that would have priority over the registered international interests under the CTC, such a declaration should not in itself be construed as extending the scope of rights available to, or bestowing upon any such entity the right to detain or arrest an aircraft. However, this clarity is absent from the Proviso.

• Further, while the General NCRI has been incorporated (with some changes) in the Proviso, the Aircraft Rules make no reference to the Specific NCRIs which have also been declared by India. The objective behind specifically including the General NCRI as against the Specific NCRIs under the Proviso adds to the lack of clarity in relation to what rights and whose rights are sought to be reserved under the Proviso. In almost all cases such rights exist vis-à-vis the operator airline and not the lessor of the Aircraft who is the IDERA holder and it may not be possible to legally enforce such rights against the IDERA holder.
• Additionally, the scope of the Proviso is made even more problematic when read with the AIC 2018 which states that: “The airport operators will calculate the outstanding dues related to the aircraft in question for a period of three months immediately preceding the date of declared defaulte. the date on which the request for deregistration was received in DGCA, and raise bills within five working days of the first e-mail received from DGCA as per para 3.”

This relaxation for the lessor to only pay 3 months’ dues, has not been extended to other entities which are covered under the Proviso by virtue of Clause 6 of the AIC 2018. Therefore, a scenario is possible where an airport operator is only permitted to recover 3 months’ worth of outstanding dues but a third party vendor being covered under the Proviso can require the lessor to clear all pending dues (beyond 3 months) with them before the grant of a no-objection to export the aircraft.

In the absence of clarity under the AIC 2018 on all these aspects, there is a significant discretion at the hands of DGCA in determining what entities fall under the scope of this Proviso resulting in the overall scope of this Proviso being fairly wide.

To that extent, if viewed in line with the declaration under the CTC, the scope of the Proviso should ideally be limited to governmental authorities or bodies like the airport authority or the income tax/ customs department or private bodies such as airport operators, that have a statutory power under the Indian laws to arrest or detain aircraft in certain circumstances. However, the experience of several lessors going through the export process appears to be very different with some indicating that the lack of clarity in relation to the entities covered under the Proviso is resulting in the DGCA requesting them to clear dues of airline’s vendors other than the abovementioned, in order to obtain a no-objection certificate for exporting their aircraft.

Conclusion

From the lessors’ perspective, this may appear to be a patently unfair proposition. Firstly, the rent for their aircraft has already been due for several months from the operator. Secondly, the lessors have not been able to maintain/preserve their aircraft due to having no access to their aircraft resulting in severe deterioration of their asset. Moreover, considering that a lessor is already in the same position as another operational creditor under IBC, expecting them to clear all operational dues of the operator, without any assurance of being able to recover the same from an insolvent operator is tantamount to holding them at ransom for their repossessing aircraft. At the very least, the limitation of clearing 3 months’ dues as is applicable to airport operators under the AIC 2018 should also be made applicable in case of all other parties covered under the Proviso.

While the industry agrees that a proper legislation to implement the CTC in India is the need of the hour, in this particular respect, it should also be noted that the current draft of the “Protection and Enforcement of Aircraft Objects Bill, 2022 (“CTC Bill”)”, has also incorporated the Proviso verbatim under Section 8(2) of the CTC Bill, and provides no further clarity on the issues identified above. In the absence of a clear guidance, we may very well be looking at the prospect of another long-drawn court procedure in order to provide the correct interpretation to the said Proviso.

Footnote

[1] Note: Irrevocable Deregistration and Export Request Authorization, which is an undertaking and power of attorney provided by the airlines to the Lessors under the provisions of the Cape Town Convention, which empowers lessors to get their aircraft deregistered, repossess and fly them out, in cases like those of lease payment defaults.

[2] Notification by the Ministry of Corporate Affairs, Government of India dated October 3, 2023

[3] Convention, Articles 8 through 15

[4] Protocol, Article 1X(1)

[5] Protocol, Article X(6)

[6] Convention, Article 13

[7] Protocol, Articles XIII and IX(5) and IX(6).

[8] Protocol Articles IX (2)

[9] Protocol Articles IX (5).

[10] ‘Memorandum Prepared Jointly by Airbus Industrie and the Boeing Company on Behalf of tan Aviation Working Group’, UNIDROIT 1995.

[11] Note: Rights and interest of a third party in the aircraft object which do not require the consent of the operator or creditor in order to have priority over the interests recorded in the International Registry.

This article was originally published in Lexology on 10 July 2024 Co-written by: Ankita Kumar, Partner; Aditya Mitra, Senior Associate. Click here for original article

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