Aviation Finance & Leasing 2020

Last Updated July 30, 2020

India

Law and Practice

Authors



Sarin & Co is one of the oldest firms in northern India. Originally established in Lahore (now in Pakistan), in 1932 the firm shifted to Chandigarh, India, when the city was inaugurated as the symbol of a new India in the early 1950s. Sarin & Co branched out into the field of aviation with the joining of Mr Nitin Sarin in 2008. Since then, the aviation team (consisting of six lawyers) have handled over USD16 billion-worth of transactions and have also carried out some of the most complex aircraft repossessions in the country. In 2019, the firm successfully paved the way for the first and only deregistration and export of an aircraft under the new Cape Town Convention and Aircraft Protocol Regulations. The firm advises foreign aircraft lessors, EXIM banks, banks and financial institutions.

A sale agreement, if executed while the asset is in India, runs the risk of being levied with several taxes in India such as capital gains tax, goods and services tax and stamp duty. Under Indian law, in case an original document (executed outside of India) is not stamped with the requisite stamp duty, then the said document must be affixed with the requisite stamp duty within three months after it has been first received in India. It must also be noted that certain states also impose stamp duty on copies of sale agreements.

Enforceability of a sale agreement will not be affected by the language it is written in. However, should a sale agreement need to be submitted to a court or a government entity, it is always recommended that it is translated into English and notarised. Furthermore, if a document is not properly stamped, courts in India have the power to detain a document and refuse to admit it into evidence unless and until it is properly stamped.

Under Indian law, as long as there is an offer by one party which is accepted by another for consideration, such an act or series of acts shall constitute "transferring title". This holds true for all installed parts, including an APU.

Under the general applicability of Indian law, the sale of an ownership interest in an entity that owns an aircraft or engine shall be recognised as a sale of that entity only. 

Bills of sale in relation to aircraft or engines in India may be governed by either English or New York law. There is no prohibition on bills of sale being governed by any foreign law in India.

A bill of sale should ideally note that a valid contract has been entered into – ie, that there has been an offer by the seller, the offer has been accepted by the purchaser and consideration has been received by the seller.

If a bill of sale is executed in any language other than English, it is recommended that a translated copy be provided for its proper enforcement. Further, notarisation is also recommended.

Generally, a bill of sale is not required to be registered or filed or subject to any consent from any government entity.

Execution of a bill of sale or the consummation of the sale of the ownership interest in an entity which is specifically sold to affect the transfer of ownership of the aircraft which it owns may be taxed in India while located in India. Most such transactions are undertaken when the aircraft is flying over international waters or flying over or parked on the territory of another country.

If validly executed, operating/wet/finance leases or leases concerning only engines or parts are permissible and will be recognised under the law of India.

It is fairly common for a foreign law governed lease to be recognised in India. A court shall apply such law as long as the rights of the parties deriving from such lease are not opposed to public policy and are not in breach of Indian law.

India is an exchange-controlled country, therefore any remittance of foreign exchange (including US dollars) requires the approval of the Reserve Bank of India (RBI). Most of these approvals have been delegated by the RBI to commercial banks, therefore making it easier for a domestic lessee to make rent payments to foreign operating lessors in foreign exchange. It may be noted, however, that specific approval is required from the RBI in case of remittance of payments under finance leases.

Repatriation of foreign exchange as rent payments requires the approval of the RBI. In relation to operating leases, the RBI has delegated the power to its commercial banks – known as the authorised dealer (or AD) banks – however, remittance of payments for finance leases requires the specific approval of the RBI. Similarly, in case a lease is enforced by a foreign lessor (operating or finance), it too would require the approval of the RBI before repatriation of any realised proceeds.

Execution of a lease agreement physically in India would typically attract the levy of stamp duty. Even for lease agreements executed overseas, they must be "stamped" – ie, the duty on them must be paid within three months of such document’s entry into India. In certain Indian states, even copies of originals (physical and electronic) may attract stamp duty.

A lessor does not need to be licensed or otherwise qualified in India to do business with a domestic lessee. Plainly, a foreign lessor based in a prohibited country would not be permitted to do business in India.

There are no mandatory terms required to be in a lease, the lease itself must be a valid and binding contract entered into between two parties competent to contract.

Tax and "grossing up" clauses are permissible and may be enforced by the courts provided the same form part of the binding contract entered into between the parties to the lease.

A lease agreement can cover parts that are installed or replaced on an aircraft or engine after its execution provided that the agreement itself contemplates such inclusion/coverage. For parts that are not covered under the lease, or which could not be anticipated at the time of execution of lease, a simple side letter or short lease amendment agreement may be entered into by the parties.

India will recognise the separate (and distinct) rights of both – the owner of the airframe as well as the owner of each of the engines. As such, India being a common law jurisdiction, title annexation does not apply.

Indian law recognises the concept of a trust and also recognises the role of an owner trustee.

The Directorate General of Civil Aviation (DGCA) is the authority responsible for maintaining the aircraft register in India. The DGCA records various parameters in relation to an aircraft such as details of the owner, lessor, operator and mortgagee. The effect of such notation on the aircraft register shall amount to notice to all third parties regarding the existence of such an interest in that aircraft.

An aircraft, once registered, is issued a certificate of registration by the DGCA. This certificate of registration contains various details such as name, address and nationality of the owner, lessor, operator and mortgagee of the aircraft.

While there is no specific register, at the time of registration of an aircraft taken on lease, the applicant is required to submit a copy of the lease agreement to the DGCA. There are also DGCA requirements that state that any lease amendments or novations must also be filed with the DGCA. There is no requirement to submit a lease in relation to an aircraft engine to any authority in India.

An aircraft taken on lease by an Indian operator from a foreign lessor cannot be registered in India unless the applicant submitted a copy of the lease to the DGCA. The consequence of failing to file the lease with the DGCA is that the aircraft would not be registered in India. Leases are not subject to any consent from any government entity.

The applicant applying for the registration of an aircraft must, along with the CA-28 aircraft registration form, as well as other documents, file a copy of the lease agreement with the DGCA. Registration of the lease, and thus consequent issue of the certificate of registration in relation to the aircraft, may take anywhere from two to four weeks. There is no requirement of any government consent whatsoever.

Before a lessee may import an aircraft into India, it must seek the consent of the DGCA and/or the Ministry of Civil Aviation (MoCA). The DGCA or MoCA shall grant its "in principle" approval for the import of the aircraft subject to it being satisfied about the safety of the aircraft intended to be imported. While there is no consent required as a pre-requisite to execution of a lease, the "no objection" of the DGCA/MoCA is required before import of an aircraft on lease will be permitted.

There is no specific form in which a lease must be for it to be registrable on the aircraft registry. A lease needs to be translated into English in case it is executed in a different language. Further, a notarised copy of the lease would suffice to be valid and registrable on the aircraft registry.

There is a fee for registration of an aircraft on the Indian aircraft registry which is based upon the weight of the aircraft. Apart from this fee, there are no other taxes or duties payable for registering a lease.

Aircraft habitually based in India must be registered in the country. There are very few circumstances in which a foreign registered aircraft is permitted to operate habitually in India, the most common being in relation to a wet lease (when a foreign registered aircraft is permitted to operate in India). Wet leases are also only permitted in the country in exceptional circumstances.

Notarised copies of these documents are required along with the CA-28 aircraft registration form:

  • customs clearance certificate/bill of entry of the aircraft;
  • certificate of de-registration from the previous registering authority;
  • evidence to the effect that the aircraft has been purchased or wholly owned by the applicant;
  • in case of aircraft purchased from a previous owner, then an affidavit to that effect;
  • in case aircraft is taken on a dry lease, then a copy of the lease agreement is to be annexed;
  • in case the aircraft is owned by a company or corporation, then a document of registration of the company and the names, addresses and nationalities of the directors;
  • a copy of the import licence issued by the Director General Foreign Trade or permission for import of aircraft issued by the Ministry of Civil Aviation/DGCA;
  • in cases where the aircraft has been mortgaged/hypothecated, the owner/operator shall submit his or her consent for the same and the papers to this effect.

A foreign lessor may be required to pay income or other taxes upon leasing an aircraft or engine to an Indian lessee depending upon the domicile of the foreign lessor as well as the provisions of the specific double taxation avoidance treaty with the country of domicile of the foreign lessor and India. Ordinarily, where a lessee is required to withhold tax but does not do so, the onus would remain with the lessee and the responsibility would not shift to the foreign lessor.

Simply put, by virtue of being a party to a lease or because of its enforcement of a lease, the foreign lessor would ordinarily not be deemed to be resident, domiciled in or carrying out any business in India. However, it is always prudent to have a tax expert study the relevant double tax avoidance treaty between the country of domicile of the foreign lessor and India.

Unless the direct involvement and consequent negligence of the foreign lessor is proved in respect of aircraft or engine maintenance and operations, no liabilities would be imposed on the foreign lessor as a result of its being a party to such lease.

Under Indian Law, the lessee under a dry lease remains primarily liable for loss or damage caused by the aircraft to third parties, although in the event of a claim both the lessor and the lessee would get sued. Needless to add, both the lessor and the lessee will be liable for negligence in relation to the aircraft arising as a result of their own acts and omissions. Normally, a lessee under a dry lease remains liable for injuries to the person or property of third parties, passengers and responsible for breach of environmental laws.

The Indian law on vicarious liability confines the liability of the master only to the torts committed by his or her servants and agents where the same were within the scope of the servant’s/agent’s authority. As the relationship between the lessor and lessee is on a principal-to-principal basis, there will be no vicarious liability either. However, there are four exceptions to the above rule and the lessor may be held liable:

  • where the lessor retains control over the lessee, and interferes with and/or makes himself a party to the tortuous act;
  • where the act contracted to be done is wrongful or illegal;
  • where a legal or statutory duty is imposed on the lessor; and
  • where the act contracted to be done is, by its nature, likely to cause danger to others – in such a case there is a duty on part of the lessor to take all reasonable precautions against such risk

Creditors of a domestic lessee may exercise a lien over the aircraft – for example, an unpaid bailee may exercise a mechanics lien; the Airports Authority of India may attach an aircraft for unpaid statutory dues. However, such creditors would not have the right to sell the leased aircraft.

The following third-party rights would take priority over a lessor’s rights under an aircraft or engine lease:

  • the Airports Authority of India can exercise a lien on the aircraft for any unpaid dues such as landing and parking charges – this also includes the private airport operators exercising under the powers vested to the Airports Authority of India;
  • an unpaid bailee can exercise a mechanics lien;
  • similarly, statutory dues such as taxes, workmen wages, etc, form the first charge on the asset;
  • the government or its agencies can confiscate, detain or requisition aircraft (whether foreign-owned or otherwise) under certain circumstances, such as if an emergency is declared by the central government or if the aircraft is involved in criminal activity.

Indian registered aircraft may be insured by an Indian insurer, who in turn would seek re-insurance on the international insurance market – provided, however, that there is a 5% reinsurance retention mandatorily required with the General Insurance Company of India.

The operator must have insurance coverage for liability towards hull, crew, passengers and third parties. Insurance is also mandatory for baggage, etc, as may be required under the Carriage by Air Act, 1972.

There is a 5% re-insurance retention mandatorily required with the General Insurance Company of India.

"Cut through" clauses are enforceable in India.

Assignments of insurances and reinsurances are routinely carried out in aircraft transactions in India.

A foreign lessor may terminate an aircraft lease should the lessee be in default of its obligations under the lease. As long as the foreign lessor is acting within the terms of the lease, there are no restrictions on its ability to terminate. A foreign lessor would require the permission of the customs authorities as well as the RBI to re-export the aircraft from India. Sale of the aircraft following such termination is permissible.

There is no remedy of self-help in India. Peaceful repossession of the aircraft can, of course, be obtained without judicial intervention. Legally, the lessor may terminate the agreement and take possession or control of the aircraft. In cases where there is no co-operation, the lessor has the option to apply to a court.

There are no specific courts that are specifically competent to decide aviation disputes. The forum would be determined by the value, facts and circumstances of the aviation dispute.

The CPC provides that summary procedure provided under Order XXXVII shall apply to the following classes of suits:

  • suits upon bills of exchange, hundee (unconditional orders in writing made by a person directing another to pay a certain sum of money to a person named in the order) and promissory notes;
  • suits in which the plaintiff seeks only to recover a debt or liquidated demand in money payable by the defendant, with or without interest, arising 
    1. on a written contract, or
    2. on an enactment, where the sum sought to be recovered is a fixed sum of money or in the nature of a debt other than a penalty, or
    3. on a guarantee, where the claim against the principal is in respect of a debt or liquidated demand only.

Therefore, summary judgment may only be an effective method in cases where a foreign lessor seeks to recover unpaid rent and other monies under the lease and not to enforce the lease. The courts of law are ready to intervene upon proper proceedings being filed. Interim measures such as grounding of the aircraft can be obtained fairly quickly and usually within a week or two of the initiation of the legal action. Where there is an arbitration clause, the court will pass an interim protection order when the arbitration clause is enforced.

In India, as elsewhere, the grant of an injunction under the Civil Procedure Code, 1908 (CPC) is a discretionary remedy. It may be granted unconditionally or upon such terms as the court may impose. In exercising its jurisdiction, the court will not enter upon a pre-trial assessment of the lessor’s claim. If the court is satisfied that the lessor has a prima facie case against the lessee and that, in the absence of an injunction, "irreparable injury" or loss, which cannot be compensated for in damages, is likely to be caused to the lessor, it will grant the injunction. Before granting an injunction, the court will direct that notice of the same be given to the lessee, except in cases where it appears that the object of granting the injunction would be defeated by such delay as would result from this.

India would recognise a lease governed by a foreign law and will enforce its terms and sustain claims arising under it as long as the rights are not in breach of Indian law or public policy. Submission to a foreign jurisdiction would also be recognised. Further, immunity is recognised only in limited terms in India, as such execution and performance of obligations under a lease would constitute private and commercial acts of a private party, and therefore not allow any party to plead immunity.

Only in certain cases can a foreign decree be executed in India directly as if it had been passed by a court in India. Section 44A CPC provides, inter alia, that where a foreign judgment has been rendered by a superior court in any country or territory outside India, which the government has by a notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court of India.

Courts in India may refuse execution if it is shown to the satisfaction of the court that the decree falls within any of the following exceptions specified in Section 13 of the (Indian) Civil Procedure Code 1908, which inter alia provides that a foreign judgment shall be conclusive of any matter directly adjudicated upon, except where:

  • it has not been pronounced by a court of competent jurisdiction;
  • it has not been given on the merits of the case;
  • it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases where such law is applicable;
  • the proceedings in which the judgment was obtained were opposed to natural justice;
  • it has been obtained by fraud; and
  • it sustains a claim founded on a breach of any law in force in India.

Section 44A, however, only refers to decrees or judgments under which a sum of money is payable. Essentially, therefore, it must be a money decree to fall within the purview of Section 44A.

In the absence of any reciprocal arrangement or treaty, a suit will have to be filed for enforcement of any such judgment or any such order obtained. The United Kingdom and Northern Ireland have been declared as reciprocating territories for the purpose of Section 44A. Curiously, there is no such arrangement with the USA; accordingly, the judgment of a US court may only be enforced by a suit upon the judgment and not by proceedings in execution (under Section 44A).

In a suit on a foreign judgment, the court cannot go into the merits of the original claim or question its correctness or propriety. Through precedent, the courts have held that the word "judgment" in the expression "foreign judgment" has been assigned the same meaning given to it in English law and refers to the decree or order of a foreign court. A foreign judgment must be final and conclusive in the court in which it is passed for it to be considered a valid cause of action. In order to establish that a final and conclusive judgment has been pronounced, it must be shown that, in the court in which it has been pronounced, it conclusively, finally and forever established the existence of the right of which it is sought to be made conclusive evidence in this country (ie, in India) so as to make it res judicata (ie, a thing conclusively decided between parties).

India has ratified the Geneva Convention and New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Any foreign award under the New York Convention or the Geneva Convention can be enforced in India in accordance with the provisions of Part II of the (Indian) Arbitration and Conciliation Act 1996. Where the concerned court in India is satisfied that such a foreign award is enforceable under the Act, the award is deemed to be a decree of that court and enforceable as such. The courts will not revisit the issues involved in the arbitration or sit as a court of appeal.

If a court in India is requested and if the court is satisfied that there is sufficient cause to do so, it would render a judgment in a foreign currency.

As long as the court does not form the opinion that the default interest or the penalty imposed on the lessee is excessive or uncalled for, there are no limitations on a lessor’s ability to recover default interest or to charge additional rent following the termination of the lease for default. In case a court does come to the conclusion that the default interest or penalty on the lessee is not sustainable, it may levy a rate of interest on its own accord which would ordinarily be the prevailing market rate of interest.

A lessor under an aircraft lease seeking enforcement of such a lease would not be required to pay any taxes or fees in connection thereto.

A lessor would be expected to comply with the terms of the lease. If the terms of the lease provide for a notice period, then such notice period must be adhered to unless specifically waived by the lessee.

In India, the doctrine of sovereign immunity does not apply to statutory corporations or bodies incorporated under the (Indian) Companies Act, 1956 and 2013 or to any government-owned entities. This doctrine applies only to the exercise of certain sovereign functions performed by the state. The execution and performance of its obligations by a company under an agreement will constitute private and commercial acts done for commercial purposes.

India has ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Any foreign award under the New York Convention can be enforced in India in accordance with the provisions of Part II of the (Indian) Arbitration and Conciliation Act 1996. Where the concerned court in India is satisfied that such a foreign award is enforceable under the Act, the award is deemed to be a decree of that court and enforceable as such. The courts will not revisit the issues involved in the arbitration or sit as a court of appeal.

In general, it is prudent to factor into a significant amount of time to properly enforce one’s rights in India, mainly due to the country's complex bureaucracy. Also, in case of any contest by the lessee, enforcement may be delayed.

India recognises the concept of both a contractual assignment and novation.

As long as the New York or English law-governed assignment and assumption agreement or novation agreement is a valid contract under Indian law – ie, the agreement is not a result of fraud, coercion or misrepresentation and it records an offer, the acceptance of the offer and is for valid consideration – the courts in India will uphold the validity of such an agreement. The consent of the lessee will also be required for such agreement to be valid and enforceable. As long as the agreement itself is not opposed to public policy, there are no mandatory terms that such agreement must contain to be valid under Indian law.

It is advisable for the aircraft and/or engine lease assignment and assumption/novation agreement to be translated, in the event that it is not in English, and notarised.

Recently, the DGCA has mandated that all aircraft lease assignment and novation agreements must be filed with the regulator. As such, there is no requirement for an engine lease assignment and novation agreement to be filed with the DGCA, but it is recommended. Such agreements are not subject to any consent from any government entity.

The procedure of filing an aircraft or engine lease assignment and assumption/novation agreement is fairly simple, a notarised copy of the agreement may be filed under a covering letter with a request that the same be placed on the file of the aircraft. It must also be mentioned that a change in the ownership of an aircraft needs to be recorded in the aircraft register, the regulations also state that it is illegal for any person to fly or assist in flying such aircraft until the name of the new owner is not endorsed on the certificate of registration. Permission must specifically be sought from the Director General to continue flying the aircraft until such activity is carried out.

No consents are required in advance; however, it is usual practice to apply to the DGCA seeking permission to continue flying the aircraft in case of a change of ownership

There are no taxes or duties payable in respect of such assignment and assumption/novation agreement. As is usual practice with lease agreements, the original assignment and assumption/novation agreement, if brought into India, must be "stamped" within three months of it first being received in the country. Certain states also require copies of agreements to be "stamped".

In cases where the ownership interest of an entity owning an aircraft is transferred with legal title to the asset remaining with that entity, a change on the aircraft certificate of registration of the aircraft would not be required and, therefore, the aircraft may continue flying unhindered.

An aircraft in India may be deregistered on the application of the lessee/operator. the owner, the lessor or the IDERA holder.

DGCA Suo Moto

The DGCA may also suo moto cancel the registration of an aircraft:

  • if it no longer satisfies the ownership test;
  • if the registration has been obtained by furnishing false information;
  • if the aircraft could more suitably be registered in some other country;
  • if the certificate of airworthiness in respect of the aircraft has expired for a period of five years or more;
  • if the aircraft has been destroyed or permanently withdrawn from use; or
  • if it is inexpedient in terms of the public interest that the aircraft should remain registered in India.

Lessee/Operator or Foreign Lessor/Owner

The lessee/operator or foreign lessor/owner may apply to the DGCA for deregistration of an aircraft in case the lease in respect of the aircraft has expired or has been terminated in accordance with the terms of the lease. The applicant would have to approach the DGCA with a written application requesting deregistration and the reason for such a request. The consent of all the parties named on the certificate of registration should also be enclosed.

IDERA Holder

An IDERA holder may also apply to the DGCA for deregistration of the aircraft in light of the Cape Town Convention and Aircraft Protocol. The IDERA holder would have to approach the DGCA with an application as prescribed under AIC 12 of 2018 and annex the original or notarised copy of the IDERA. The IDERA holder must also provide evidence of the consent of the entity named as the priority interest holder in the aircraft as per the International Registry. The DGCA is mandated to deregister the aircraft within five working days of receipt of application from the IDERA holder.

The consent of the lessee or operator is required in all situations except when an IDERA holder applies to the DGCA for deregistration, annexing the original or notarised IDERA.

In cases where deregistration is sought under an IDERA, the IDERA holder must submit an application form as per AIC 12 of 2018 annexing the original or notarised copy of the IDERA. The IDERA holder must also provide evidence that all international interests ranking in priority to that of the IDERA holder in relation to the aircraft have been discharged or, alternatively, provide the consent of the entity named as the priority interest holder in the aircraft as per the International Registry. Alternatively, when deregistration is not sought under the IDERA route, then the owner, mortgagee or lessor must apply to the DGCA annexing the original "no objection" letters from each of the entities named on the certificate of registration of the aircraft. The DGCA always has the power to request any additional documentation that it may deem fit during scrutiny of an application for deregistration.

Deregistration under the IDERA route takes five working days from the date of receipt of application from IDERA Holder. Deregistration under any other method may take anywhere from one to four weeks, assuming the DGCA does not request any additional documents which may be sought on a case-to-case basis.

There is no concept of the DGCA providing advance assurances to an aircraft owner, mortgagee or lessor regarding the prompt deregistration of an aircraft. The regulations, however, mandate that any request by the IDERA holder for deregistration shall be processed within five working days from the date of receipt of such application.

There are no fees or taxes chargeable in respect of the deregistration of an aircraft. Costs are also minimal.

A deregistration power of attorney should satisfy the general principles of powers of attorney – ie, it should not confer any power that the issuer itself does not possess. Further, it is advisable that the power of attorney be executed on Indian stamp paper and attested by a notary public. Also, it is recommended that it be executed in English or any language which the grantor is able to fluently understand. Advance lodging of the deregistration power of attorney with the DGCA is not required but it is recommended.

The person exercising powers under the deregistration power of attorney would need to demonstrate that he or she is duly authorised by the attorney (in case of a corporate entity) to sign and act on behalf of such attorney. A board resolution or officers certificate issued by the attorney would usually suffice.

It is recommended that deregistration powers of attorney be governed by Indian law.

Usually, if a deregistration power of attorney is stated to be irrevocable, the grantor would not be able to revoke the same. However, in practice, the grantor could always dispute the power of attorney on the grounds of fraud, coercion or misrepresentation.

Under India’s newly introduced Cape Town Convention regulations, an IDERA holder is able to deregister and export an aircraft from India without the consent of the lessee. If the mortgagee of an aircraft is the IDERA holder or the certified designee, then it may also export the aircraft without the owner or lessor’s consent. The asset need not be located in India at the time of deregistration.

Permissions that are required for the export of an aircraft from India include:

  • permission from the Directorate General of Civil Aviation under AIC 12 of 2018 (after the IDERA holder pays government dues accrued against the aircraft for three months prior to the date of application for deregistration);
  • permission from the Directorate General of Foreign Trade; and
  • permission from the customs authorities as well as from the Reserve Bank of India.

These permissions cannot be issued in advance and time required for grant of each license may range from two to three weeks.

There are no taxes payable in respect of the export of an aircraft from India; costs and fees may vary on a case-to-case basis.

The DGCA usually requests proof of de-activation of the Mode S code from the aircraft. Also, all original documentation (request letters, etc) should be notarised and adequate proof should be included to prove that the signatory of original documents submitted to the DGCA are duly authorised to do so by their company/employer.

An order of liquidation would result in the Power of Attorney and IDERA no longer being effective. However, the process from initiation of such proceedings until actual passing of such an order can take several months or even years; therefore, lessors, owners and mortgagees of aircraft must be prudent and act swiftly on initiation of such insolvency proceedings.

If a liquidator is appointed or if a similar process is initiated, it is not necessary that the lease will be set aside, although it is always in the power of such authority to do so. Once the period of moratorium is over, there is no reason why a lessor would be prevented or delayed from repossessing the aircraft on termination of the lease. The aircraft owner and its rights (under an operating lease) will be recognised and the aircraft will not be deemed to be part of the lessee’s property. Government dues, taxes, wages, etc, will always take precedence over the lessor’s rights, in as far as recovery of monies is concerned.

In an operating lease, the owner of the aircraft will always be recognised as the title holder. The main risk for a lender in case of insolvency of the borrower, guarantor or an entity providing security is the inability to recover its debt.

Under the Insolvency and Bankruptcy Code, 2016, the Tribunal may pass an order commencing a corporate insolvency resolution process – this triggers a moratorium of 180 days, extendable by a maximum further period of 90 days.

If the debt owed by a debtor is above INR100,000 (increased to INR10 million at the time of publication, due to the COVID-19 crisis) then the Insolvency and Bankruptcy Code 2016 proposes two independent processes (i) an insolvency resolution process and (ii) liquidation. A creditor must apply to the National Company Law Tribunal (NCLT) to accept the debtor company into the Corporate Insolvency Resolution Process (CIRP). Once a corporate debtor is admitted into the CIRP, its board of directors is suspended and its management is placed under an independent "interim resolution professional". Simultaneously, a moratorium takes effect which prohibits:

  • the continuation or initiation of any legal proceedings against the corporate debtor;
  • the transfer of its assets;
  • the enforcement of any security interest;
  • the recovery of any property from it by an owner or lessor; and
  • the suspension or termination of the supply of essential goods and services to it.

The moratorium lasts for the duration of the CIRP period – ie, 180 days extendable by another 90 days. The interim resolution professional will then invite and verify claims made by the corporate debtor’s creditors, classify them, and within 30 days of the admission into CIRP, form a Committee of Creditors, comprised of all the financial creditors of the corporate debtor who shall in turn appoint an independent professional to function as the "resolution professional". Within 180 days from the start of the CIRP, a resolution plan for the revival of the company needs to be approved by creditors holding 75% of the financial debt. The NCLT can extend this by another 90 days.

If no plan is approved by the Committee within the time frame available, it may opt for liquidation. The NCLT is then required to order the liquidation of the corporate debtor. If an order of liquidation is passed, a liquidator will be appointed to sell the assets of the corporate debtor and distribute the assets among the creditors.

Ipso facto defaults are regular inclusions in lease transactions relating to aircraft in India and would be recognised to repossess an aircraft during lessee insolvency proceedings. Defaults under the 2016 Code arising during the period of the COVID-19 pandemic have been excluded.

In case a domestic lessee is wound up, an aircraft on an operating lease may be taken back by its owner and the lease agreement would no longer subsist. All rights flowing from the lease – namely, rent, security deposit and maintenance reserves – would also end.

The Convention on International Interests in Mobile Equipment and the Aircraft Protocol are in force in India. However, there have been several implementation issues which over the years have been dealt with by the Ministry of Civil Aviation which has been holding frequent consultations with the Aviation Working Group. Various amendments have been made to India’s subordinate legislation – ie, the Aircraft Rules, 1937, Civil Aviation Requirements (CARs) and Aeronautical Information Circulars (AICs) which imbibe the tenets of the Convention and Protocol.

There remain several conflicts between local municipal law and the Convention and Protocol – in such a scenario, local law shall prevail over international obligations. At the time of publication, to remedy this issue, the Government of India has introduced the Cape Town Convention Bill, 2018 and has invited comments and suggestions from the general public. Further action in this regard is awaited. AEPs are not required.

India has made extensive declarations under the Convention, as listed below.

Specific Declaration under Article 39(1)(a)

“The following categories of non-consensual right or interest have priority under its laws over an interest in an aircraft object equivalent to that of the holder of a registered international interest and shall have priority over a registered international interest, whether in or outside insolvency proceedings, namely:-

(a) liens in favour of airline employees for unpaid wages arising since the time of a declared default by that airline under a contract to finance or lease and aircraft object;

(b) liens or other rights of an authority of India relating to taxes or other unpaid charges arising from or related to the use of that aircraft object and owed by the owner or operator of that aircraft object, arising since the time of a default by that owner or operator under a contract to finance or lease that aircraft object; and

(c) liens in favour of repairers of an aircraft object in their possession to the extent of service or services performed on and value added to that aircraft object.”

General Declaration under Article 39(1)(b)

"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."

Declaration under Article 40

"The following categories of non-consensual right or interest shall be registrable under the Convention as regards any category of aircraft object as if the right or interest were an international interest and shall be regulated accordingly, namely:-

(a) liens in favour of airline employees for unpaid wages arising prior to the time of a declared default by that airline under a contract to finance or lease an aircraft object;

(b) liens or other rights of an authority of India relating to taxes or other unpaid charges arising from or related to the use of an aircraft object and owed by the owner or operator of that aircraft object, arising prior to the time of a declared default by that owner or operator under a contract to finance or lease that aircraft object; and

(c) rights of a person obtaining a court order permitting attachment of an aircraft object in partial or full satisfaction of a legal judgment."

General Declaration under Article 52

"The Convention shall apply to all its territorial units."

Declaration under Article 53

"All the High Courts within their respective territorial jurisdiction are the relevant courts for the purposes of Article 1 and Chapter XII of the Convention."

Mandatory Declaration under Article 54(2)

"Any and all remedies available to the creditor under the Convention which are not expressed under the relevant provision thereof to require application to the court may be exercised without court action and without leave of the court.

India has made extensive declarations under the Protocol, they are:

Declaration under Article XXX (1) in Respect of Article VIII

India will apply Article VIII.

Declaration under Article XXX (2) in Respect of Article X Providing for the Application of the Entirety of Article X

India will apply Article X of the Protocol in its entirety and the number of working days to be used for the purposes of the time limit laid down in Article X(2) of the Protocol shall be that equal to no more than:

(a) ten (10) working days in respect of the remedies specified in Article 13(1)(a), (b) and (c) of the Convention (respectively, preservation of aircraft objects and their value; possession, control or custody of aircraft objects; and, immobilization of aircraft objects); and

(b) thirty (30) working days in respect of the remedies specified in Article 13(1)(d) and (e) of the Convention (respectively, lease or management of aircraft objects and the income thereof; and, sale and application of proceeds from aircraft objects).

General Declaration under Article XXX (3) in Respect of Article XI Providing for the Application of Alternative A in its Entirety to all Types of Insolvency Proceeding

India will apply Article XI, Alternative A, of the Protocol in its entirety to all types of insolvency proceedings, and that the waiting period for the purposes of Article XI(3) of that Alternative shall be two (2) calendar months.

Declaration under Article XXX (1) in Respect of Article XII

India will apply Article XII.

Declaration under Article XXX (1) in Respect of Article XIII

India will apply Article XIII."

Article XIII of the Protocol does apply domestically. For the DGCA to record an IDERA in relation to an aircraft, an IDERA holder or his or her authorised signatory or certified designee of the authorised signatory shall submit an application as per Appendix B of CAR Section 2, Airworthiness Series F Part I Issue II. Along with the application the applicant must submit an original IDERA and two notarised copies thereof.

Indian courts have had limited opportunities to deal with issues pertaining to the enforcement of the Convention and Protocol. By way of recent judgments, especially the AWAS v Spicejet case, the Delhi High Court has inter alia recognised the mandatory nature of Rule 30(7) of the Aircraft Rules, 1937 and upheld the duty cast upon the DGCA to deregister an aircraft on the basis of an IDERA. All the case law to date deals extensively with India’s international obligations under the Convention/Protocol and with deregistration; however, no court has directly dealt with the issue of physical export of an aircraft from India under the Convention and Protocol.

India had neither ratified the 1948 Geneva Convention on the International Recognition of Rights in Aircraft nor the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft.

There are very strict regulations and restrictions on loans from foreign lenders, especially in foreign exchange. The RBI is the relevant regulator; before any borrowings can be made, the prior approval of the RBI is required.

India is an exchange-controlled country. The relevant enactment is the Foreign Exchange Management Act, 1999 which is administered by the RBI. Any financing or repatriation of realisation of proceeds under a loan, guarantee or security document would require the approval of the RBI.

Guarantees, especially for foreign exchange denominated transactions, are regulated by the RBI’s Foreign Exchange Management (Guarantees) Regulation, 2000 and other Regulations. The prior approval of the RBI would be required for a borrower to grant security to foreign lenders.

Prior approval of the RBI would be required in case of any guarantee involving the guarantee of a debt owed to a foreign entity by an Indian entity.

In practice, there is never a domestic special purpose vehicle involved which owns the finance aircraft.

A negative pledge is recognised.

The question of whether material restriction/requirement is imposed on intercreditor arrangements is dependent on a case-to-case basis.

The concept of agency and the role of an agent under a syndicated loan is recognised.

The usual practice permitted is the issuance of bonds as subordinated debt instruments. There are extensive RBI guidelines on what forms for subordination are permissible and restrictions on the percentage of debt that may be subordinated.

The transfer of outstanding debt is permissible and recognised, subject to RBI approval, which may be required on a case-to case-basis.

There are no usury or interest limitation laws. However, courts in India always have the power to fix interest rates if an opinion is formed that the applied interest is harsh or excessive.

Typical forms of security granted in aviation finance transactions in India could include the taking over of security of immovable property by way of a mortgage or movable property/bank accounts, etc, by way of a deed of hypothecation.

A security agreement, if executed properly – and if it satisfies the test of being a valid contract between two parties competent to contract – would be upheld as being valid in relation to the aircraft, engines, warranties or insurances.

Indian Law recognises the concept of a trust and the relevant national legislation is the Indian Trusts Act, 1882. India is not a party to the Hague Convention on Trusts, 1986.

A borrower may assign to a security trustee pursuant to a security assignment or a mortgage its rights to the aircraft of under an aircraft lease.

It is possible to assign the rights and benefits only without also assigning the attendant obligations of the lessor as long as such assignment is valid under the governing law.

A security assignment or a guarantee may be governed by English or New York law and does not need to be governed by Indian law to be fully enforceable.

No particular form of security assignment is required in India, nor does it need to be registered in India. However, it is recommended that the security assignment should preferably be filed and recorded with the DGCA. Since December 2006 the DGCA has started endorsing a security interest on the Certificate of Registration in accordance with the amended rules. The DGCA will endorse on the Certificate of Registration the name of the mortgagee and/or details of the hypothecation. The English language will suffice and shall be accepted by the DGCA.

It is advisable to notarise the security assignments; where they are executed abroad, preferably they should also be authenticated by an Indian consular or other diplomatic officer. Although India is a signatory to the Hague Convention, consularisation is still recommended for practical purposes. This is because some of the government offices continue to insist on consularisation although it is not technically required any more. In recent experience, it has been observed that most government departments, including the DGCA, accept notarised copies of documents thereby making the requirement for consularisation more or less redundant.

The aircraft being a movable asset, there is no mandatory requirement to register any mortgages, liens, encumbrances, etc, on them in India. However, the aircraft mortgage can be registered with the Sub-Registrar of Assurances under the Indian Registration Act, 1908 within four months of its execution. The registration with the Sub-Registrar of Assurances (of movables) constitutes persuasive value against a claim by a bona fide purchaser without notice. Registration with the Registrar of Companies is also possible; however, it is not compulsory if the mortgagor of the aircraft is not an Indian entity having its registered place of business in India.

Domestic law security instruments are not required. Where the owner of the aircraft is a foreign entity/citizen, local law filings are not required.

Charges in relation to aircraft owned by Indian entities only are required to be registered with the Registrar of Companies.

Transfer of security interests over an aircraft and/or engines is recognised in India.

In case the identity of the secured parties under a security assignment changes, the document evidencing the same may be filed with the DGCA on its creation.

This is not applicable under Indian law.

Usually, a secured party under a security assignment would not be deemed to be a resident, domiciled, carrying on business or subject to any taxes in India.

A domestic law mortgage over an aircraft or engine is not required in India.

Both aircraft and spare engines are moveable objects, so there is no difference between the form of security required.

A bank account can be charged by way of hypothecation. The deed of hypothecation would need to be filed with the bank maintaining the account which is to be charged for it to be perfected.

The question of whether a third party could take or register a lien over an aircraft or engine would depend on who is trying to discharge the lien. In case the lessee seeks to discharge this lien, it would be liable to pay the total outstanding amount payable to that third-party contractor/repairer. However, if a lessor or secured party seeks to discharge a lien then in all probability it would have to bear only the value of the work actually done on that particular aircraft asset. In case of deregistration and export under India’s Cape Town Convention regulations, the IDERA holder must bear the cost of all charges accrued three months prior to the date of submission of the IDERA, owed to the central government, or any entity thereof, or any inter-governmental organisation in which India is a member, or other private provider of public services in India.

Under the new Cape Town Convention and Aircraft Protocol regulations, a fleet lien is not recognised.

Third parties which are government entities have the right to arrest, detain, attach or sell an aircraft for payment of amounts owed. However, under the new Cape Town Convention and Airport Protocol regulations, these dues are limited to three months prior to the date of application by the IDERA holder.

A lien can be discharged immediately on payment of the monies owed to the party exercising the lien.

There is a register of charges maintained by the Registrar of Companies. However, only Indian owners of aircraft assets are required to register a charge against such aircraft with the Registrar; foreign owners are not required to make any such filings. The interests of the aircraft mortgagee or security trustee shall be noted on the certificate of registration of the aircraft as well as on the aircraft register maintained by the DGCA. Such registration shall result in notice to all third parties as to the interest of the security trustee or mortgagee in the aircraft. Further, the DGCA shall also always require the consent of the mortgagee/security trustee named on the certificate of registration/aircraft register for any amendment of the entries in relation to the aircraft.

A fleet-wise detention of aircraft taken on operating lease, especially after termination of the operating lease, would not be recognised.

A potential purchaser of an aircraft must check the aircraft register maintained by the DGCA as well as the International Registry maintained under the Cape Town Convention and Aircraft Protocol.

In the practical sense, there should be no difference in enforcing a security assignment as opposed to a loan or guarantee.

A security trustee may enforce its rights under a security assignment pursuant to only a notice and acknowledgement executed by the lessor and the relevant lessee.

Domestic courts in India will uphold foreign law as the governing law as well as submission to a foreign jurisdiction subject to the same not being opposed to Indian public policy.

Enforcement of foreign judgments and arbitral awards have already been dealt with in the preceding sections (see 2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards).

There is no remedy of self-help in India. Peaceful repossession of the aircraft can be obtained without judicial intervention. In cases where there is no co-operation, the secured party has the option to apply to a court.

The court in which enforcement action under a security agreement/aircraft mortgage is decided would depend on the jurisdiction in India where the lis arises, the nature and value of the claim.

Summary judgment may only be an effective method in cases where a secured party seeks to recover debt and other monies under the security agreement. There are no conditions that need to be complied with, apart from the fact that court fees will need to be paid on the amount so claimed from the defaulting defendant.

Courts in India would, on the request of a secured party, pass judgment in a foreign currency.

There are no major taxes or fees that a secured party would be required to bear in connection with the enforcement of a security agreement/aircraft mortgage.

From a practical standpoint, since the courts in India are overburdened with work, lenders have preferred to have security documents governed by English law and any enforcement takes place in England. The UK is a reciprocating territory and money decrees passed in the UK may be enforced in India much more easily than decrees from non-reciprocating territories.

This is not applicable under Indian law.

The Cape Town Convention Bill, 2018 is still pending, with comments from the general public already having been received. The Bill must now follow the procedure prescribed to be placed before both houses of Parliament before it can be enacted into a law. This Act, if passed, is likely to have a huge impact on the legalities of aviation financing.

Sarin & Co

48, Sector 4
Chandigarh 160001
India

+91 98142 52145

consult@sarinlaw.com www.sarinlaw.com
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Trends and Developments


Authors



Rajinder Narain & Co is now known as RNClegal. It was the first legal firm to have opened its doors in New Delhi, soon after the Independence of India in 1947. It was extensively involved with the development of the Constitution of India. The firm’s partners served as Judges and then Chief Justices of the High Court, and held offices as Presidents and Secretaries of the Supreme Court and High Court Bar Associations in India and abroad. The firm now specialises in aviation law and structured finance, international and cross-border transactions and investments and related work, and counts among its clients several Fortune 500 companies. The firm is widely regarded for its experience and teams of lawyers. It has associates and correspondent lawyers in all major cities in India and financial capitals of the world, which enables it to provide seamless service and advice. The firm has received, and continues to receive, awards from national and international bodies for its work and contributions to industry publications, in recognition of its excellence as one of the top firms in India.

With a ±20% growth, year on year, India’s domestic civil aviation traffic will shortly become the third largest in the world, after the US and China. The International Air Transport Association (IATA)’s 2019 Annual review avers that passenger numbers increased by 18.5% in 2018.

India has 706 passenger aircraft in operation by several scheduled carriers. This will likely grow to 1,100 by 2027. Other aircraft are operated by non-scheduled carriers or are privately owned. India has more than 100 airports, domestic traffic of approximately three million, and freight of approximately three million tons for the year 2020, which includes both domestic and international.

India’s programme to expand and build new airports and enhance ground handling facilities, and to develop further Maintenance and Repair Organisations (MROs) and Technical Training Institutes is well known and is referred to elsewhere in this article.

Cape Town Convention

India is a signatory to the Cape Town Convention, and to the Aircraft Protocol and has put in place a regulatory regime for quick repossessions and enforcement of rights. A bill has been drafted to give statutory recognition.

Foreign Direct Investment

Non-resident and resident Indians can own equity in airlines in India that operate scheduled and non-scheduled flights. Others can invest up to 49%, although this limit can go up with Government approval. The effective control must remain in the hands of a domestic company.

Vistara Airlines’ equity is in the hands of Singapore Airlines (49%) and the balance of 51% with the well-known international industrial house of Tatas.

MROs

Foreign parties can hold equity in MROs and ground handling services without limit.

There are also certain plans being finalised to make policy changes to stimulate MRO activities.

Aircraft Finance, Sale and Leasing in India

Prime Minister Modi is keen to make India a hub for the financing and leasing of aircraft. To this effect, Gujarat International Finance Tec-City Co. Ltd, ie, GIFT City, is being developed as the country’s first International Financial Services Centre (IFSC).

In order to stem the outflow of foreign exchange, the Ministry of Civil Aviation has taken in hand a new initiative called Project-Rupee-Raftaar and has invited our firm to be a part of that exercise. One of our Aviation Partners, Ajay Kumar, is a member of a Working Group formed by the Government and is engaged in regulatory framework. The Government will provide certain tax incentives for business set up in the IFSC, which includes tax deductions for 15 years and certain other concessions to banks and insurance companies.

Aircraft Types

Boeing and Airbus continue to be the two main suppliers. The single-aisle A-320 and B-737 families are most popular, although a number of ATRs are operating on shorter routes and in hilly areas. There is a smattering of Bombardiers, Embraers and helicopters, too.

Modes of Acquisition

Aircraft are principally lease-financed or are taken on an operating-lease basis. Aircraft Lessors and Banks located in the West are active, although lately there has been an increase in activity by Chinese lssors and banks. Chinese transactions are routed mostly through Hong Kong, but now an increase in activity from the mainland is being seen.

The usual modus operandi is for airlines to place orders with manufacturers and transfer those contracts or options to lessors or financiers, who will in turn buy and lease, with or without the support of Export Credit Agencies, the Exim Banks of the US, Japan et al. There could be a consortium of banks especially for multi-aircraft transactions. Transfer and lease-back are used increasingly to raise finance. Of course, the transactions need to be structured with suitable safeguards for a smooth flow and trouble-free operation.

Government Initiative for Boosting the Indian Aviation Industry

A regional connectivity scheme called UDAN (let the common man fly), is in operation, which has created a capacity of ten million seats by connecting smaller cities. The Government has given support to airlines by way of concessions and gap funding (the gap between the cost of operation and revenue). Whilst growth and revenue will continue to be guaranteed by flights between large cities, there is nevertheless a commendable uptick of 242% in the traffic between smaller towns and routes.

The last Budget of the Government of India, announced on 1 February 2020, provided additional funds for these activities.

Repossessions and Bankruptcies

India watchers will remember the Kingfisher Airlines imbroglio about ten years ago. This airline folded and its licence to operate was cancelled in October 2012. Difficulties were faced in repossessions. Most of its aircraft pre-dated the Cape Town Convention. Now, under the amended Aircraft Rules, the Director General of Civil Aviation is required to deregister aircraft within five working days upon application of Irrevocable Deregistration and Export Request Authorisation (IDERA)-holders. All that is required is to produce the IDERA or its notarid copy, along with a Certificate to state that all pre-registered interests are either discharged or the holders of those interests haseve given their consent to deregister and re-export.

A landmark judgment of the High Court of Delhi (with which our firm was involved) held 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 been 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”.

The Aircraft Rules were amended further with effect from 28 March 2017, to include a new Rule 32A under which, once the registration of the Aircraft is cancelled under Rule 30(7), the Directorate General of Civil Aviation (DGCA) shall take action to facilitate the export and physical transfer of the aircraft, along with the spare engine, if any, subject to payment of outstanding dues in respect of the aircraft and compliance with applicable safety rules and regulations relating to that aircraft operation.

In order to streamline and bring transparency to the process of export of an aircraft, on 16 November 2018, the DGCA issued an Aeronautical Information Circular (AIC) No 12 of 2018 which deals with "Standard Operating Procedure for Implementation of Rule 32A, relating to Export of Aircraft Covered under Cape Town Convention". The AIC, extracted below, details the procedure to be followed by the DGCA on receipt of an application from an IDERA-holder and also provides the format in which an IDERA-holder is to make an application to the DGCA for deregistration on the basis of an IDERA:

“The following Standard Operating Procedure (SOP) shall be followed by all concerned for implementation of Rule 32A of the Aircraft Rules, 1937.

  • All the airport operators will designate an officer for dealing with matters relating to Rule 32A and communicate the name and contact details, including the e-mail address, of the concerned officer to the Director of Airworthiness, DGCA Headquarters, by e-mail. They shall keep DGCA apprised about any changes in the contact details of such persons from time to time as and when such changes take place. DGCA will compile a list of such contact persons and shall place the same on its website and keep it updated.
  • As and when an occasion requiring deregistration of an aircraft under sub-rule (7) of Rule 30 of the Aircraft Rules, 1937 arises, IDERA Holder will file a request with DGCA in the format given at Appendix ‘A’.
  • On receipt of the deregistration request from an IDERA Holder as per Appendix ‘A’, DGCA will immediately post this fact on its website giving the date of receipt of the request, the type and registration No. of the aircraft and the name of the operator in whose name the aircraft is registered. DGCA will also issue an e-mail in this regard to all the contact persons referred in para 1.
  • DGCA will take necessary action to deregister the aircraft in accordance with sub-rule (7) of Rule 30 and communicate by e-mail the date of deregistration to all contact persons as per para 1.
  • 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 default i.e. 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. Any dues prior to three months preceding the date of declared default shall not be included in the aforesaid calculation.  The airport operator will forward the bills to the IDERA Holder by e-mail with copy to DGCA and will also indicate the necessary bank details to enable electronic payment.
  • Any other organization covered under the proviso to sub-rule (7) of rule 30 and having outstanding dues pertaining to the aircraft in question, may also raise bills and intimate DGCA about it within five working days from the date of declared default. DGCA will inform the IDERA Holder by e-mail about such liability also if notified within five working days of the date of declared default. DGCA will not be responsible for any dues that are not notified to it within the specified period of five working days.
  • Without affecting the liability of the airline operator/s, IDERA Holder, on receipt of the bills by e-mail from the concerned airport operator/s and the organization/s referred in para 6, may make the payment for the same. If such be the case, the airport operator/s and the other organization/s shall issue a certificate to the IDERA Holder within two working days of receiving the payment, stating that the bills raised by them in respect of the aircraft have been cleared. Such certificate shall be forwarded to the IDERA Holder by e-mail with copy to DGCA.
  • The IDERA Holder will submit to DGCA a copy of the certificate of payment of bills given under para 7, along with his request for permission to export the aircraft from India. On receipt of such a request, DGCA will issue the necessary permissions promptly as provided in Rule 32A.
  • Once the permission is granted by DGCA for the aircraft to fly out of India, the IDERA Holder will send an e-mail to the concerned airport operator forwarding a copy of DGCA’s permission and indicating the exact date of the flight out of India and requesting for a bill with respect to any dues accrued for the aircraft after the date of declared default up to the date of departure. The airport operator will raise a bill for such dues within one working day and send the same to the IDERA Holder by e-mail with copy to DGCA, along with the necessary bank details to enable electronic payment. Once the IDERA Holder makes the payment, the aircraft can depart from India in accordance with DGCA’s permission and no airport operator shall prevent the aircraft from leaving India.”

These rules worked during repossessions of the Jet Airways fleet since the declaration of its bankruptcy in 2019. Out of a fleet of 123 aircraft, 11 aircraft remain in its possession, of which six were on finance lease. All others were repossessed.

Jet Airways was one of the leading airlines in India with a market share of 22.6%. It has been in bankruptcy since June 2019. Its fleet has been largely repossessed by owners/financiers/lessors, who in some cases have re-leased aircraft domestically, to SpiceJet and others.

Taxation

Most airlines write off lease payments and interest from their taxable income. Indian Goods and Service Tax (GST) of 5% is payable on the lease rent payable to the lessor by the airlines on a reverse-charge basis. Subject to certain conditions, no customs duty on the import of aircraft into India by scheduled operators, air-taxi operators, flying clubs, training institutes, the Government of India, State Governments, Public-Sector Undertakings of the Central Government or the State Governments. Non-scheduled permit-holders pay a customs duty of approximately 2.575% on the import of aircraft. Private importers of aircraft pay a customs duty of approximately 19%. The laws of India require lessees to deduct a withholding tax in respect of payments made to foreign parties, where the income arises in India. India taxes income on the basis of residence or accrual. However, certain Double Taxation Avoidance Agreements (DTAA) reduce or eliminate the rates of withholding in certain cases. 

Impact of COVID-19

Airlines all over the world are suffering due to lockdowns, even though in some countries, including India, unlocking has started. A limited number of domestic flights are permitted. International flights remain suspended till the end of July, except evacuation and special flights.

An analysis published by the International Civil Aviation Organization (ICAO) has estimated that, due to COVID-19, there will be:

  • an overall reduction, ranging from 42% to 52%, in seats offered by airlines;
  • an overall reduction of 2,344 to 2,978 million passengers;
  • a loss of approximately USD308 to USD391 billion of the gross operating revenues of airlines.

Despite a severe cash crunch, airlines in India have not been provided with any bailout packages by the Government so far. Whilst relatively stable airlines will be able to ride through, it may create an irreversible downward curve for others, who may have been struggling already. In the medium term, airlines could look at a cut-down in their fleets. In the longer term, and for airlines to overcome the COVID-19 setback, it seems necessary for the Government to step in, in terms of tax relaxation or a reduction in the levy imposed on ATF. At the moment, this hovers between 40 to 44% in various Indian States. Carriers with weak balance sheets and inadequate collateral have survived so far by withholding payments to suppliers and/or restructuring. In Corrective and Preventive Actions’ (CAPA) assessment, Indian carriers may need USD2.5 billion to keep flying.

This period has not seen repossessions. Certain lessors have agreed to rent deferrals and restructurings. Finance transactions have also seen restructuring, with some lenders stepping out and new lenders stepping in.

Legislative Amendments

  • the Insolvency and Bankruptcy Code, 2016: a Corporate Insolvency can be initiated in India by any creditor who is owed at least INR10 million. To shield financially distressed borrowers in these difficult times, the Government has suspended the initiation of fresh insolvency proceedings for six months, with effect from 25 March 2020. This is extendable to 12 months. In fact, no insolvency proceedings can be commenced even after this time for defaults which were committed during this period.
  • the Civil Aviation Requirement on Registration and Deregistration: on 15 June 2020, the Civil Aviation requirements on the Registration and Deregistration of Aircraftwere amended. A filler paragraph was inserted which requires an IDERA-holder/Certified Designee to file an application in a prescribed format along with the original or a notarised copy of the IDERA for recording the existence of an IDERA:

7A. “Recording of Irrevocable De-registration and Export Request Authorization

For recording IDERA with DGCA the IDERA holder or his authorized signatory or certified designee of the authorized signatory shall submit application as per Appendix B, along with Original IDERA and notarized copy or two notarized copy thereof.”

The above applies prospectively.

Prior to this amendment, there was no formal mechanism to record IDERAs and the lessee would file a copy of the IDERA with the DGCA under their cover letter. The DGCA would then acknowledge the cover letter, which would act as the evidence of the filing of an IDERA.

Rajinder Narain & Co

RNClegal/Rajinder Narain & Co.
Solicitors & Advocates
Maulseri House
7, Kapashera Estate
New Delhi - 110 037
India

+91 9971187497

+91 11 4122 5000

reeva.chugh@rnclegal.com www.rnclegal.com
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Law and Practice

Authors



Sarin & Co is one of the oldest firms in northern India. Originally established in Lahore (now in Pakistan), in 1932 the firm shifted to Chandigarh, India, when the city was inaugurated as the symbol of a new India in the early 1950s. Sarin & Co branched out into the field of aviation with the joining of Mr Nitin Sarin in 2008. Since then, the aviation team (consisting of six lawyers) have handled over USD16 billion-worth of transactions and have also carried out some of the most complex aircraft repossessions in the country. In 2019, the firm successfully paved the way for the first and only deregistration and export of an aircraft under the new Cape Town Convention and Aircraft Protocol Regulations. The firm advises foreign aircraft lessors, EXIM banks, banks and financial institutions.

Trends and Development

Authors



Rajinder Narain & Co is now known as RNClegal. It was the first legal firm to have opened its doors in New Delhi, soon after the Independence of India in 1947. It was extensively involved with the development of the Constitution of India. The firm’s partners served as Judges and then Chief Justices of the High Court, and held offices as Presidents and Secretaries of the Supreme Court and High Court Bar Associations in India and abroad. The firm now specialises in aviation law and structured finance, international and cross-border transactions and investments and related work, and counts among its clients several Fortune 500 companies. The firm is widely regarded for its experience and teams of lawyers. It has associates and correspondent lawyers in all major cities in India and financial capitals of the world, which enables it to provide seamless service and advice. The firm has received, and continues to receive, awards from national and international bodies for its work and contributions to industry publications, in recognition of its excellence as one of the top firms in India.

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