The Convention on International Interests in Mobile Equipment and the Protocol on Matters specific to Aircraft Equipment (the 'Protocol') (together the 'CTC'/ 'Convention') came into effect on November 16, 2001 at a Diplomatic Conference in Cape Town, South Africa. Initially adopted by about 20 states the number has since grown to 83 and includes both developing and developed economies1. The Convention primarily aims at making available competitive credit facility by providing readily enforceable rights, in mobile equipment such as the aircraft object, in the hands of the creditors. CTC has consistently been able to strengthen creditor confidence in providing secure and competitive financing and has also been successful in –
- Providing creditors with viable default remedies;
- Creating the concept of 'international interest' which is recognized by the Contracting States;
- Creation and recognition of International Registry ('IR') – which works as a public register and notice to third parties;
- Creating and safeguarding priority of interests, etc.
India acceded to the Convention and the Protocol on March 31, 2008 which after a waiting period of three (3) months became effective on July 1, 20082. Whilst international conventions and treaties have the force of law in India, in the absence of a legislative enactment underpinning the said convention or treaty, in case of conflict, the municipal laws prevail. In this context, and to overcome this roadblock the industry and stakeholders have, over the years, closely worked with the Government of India towards making the Convention effective.
B. Developments YoY
In this article we briefly recount the major events which resulted in creation of working structure by incorporating CTC provisions into Indian legal framework, either by legislative enactment or Court orders.
The following events capture the evolution of CTC related legal framework since the bankruptcy of Kingfisher Airlines Limited ('Kingfisher') to that of Jet Airways (India) Limited ("Jet Airways").
Kingfisher was the first airline to default under various leasing arrangements after CTC became effective in India. Whilst most aircraft operated by Kingfisher were not covered by CTC, the default and the consequent bankruptcy of the airline marks an important milestone in the development of CTC in India, as it amplified the need for a clear and effective recourse mechanism which the creditor could deploy for securing its assets.
CTC provides for the Irrevocable Deregistration and Export Request Authorization (IDERA)3, and instrument, which if filed/ recorded with the Directorate General of Civil Aviation ('DGCA'), requires the DGCA to deregister a given aircraft upon an application being made by the party authorized in the IDERA. The IDERA however was not applicable to most Kingfisher aircraft which led to litigation and delay on account of DGCA's refusal to deregister.
This catapulted major stakeholders, such as the lessors, lenders and the Government of India, into action to inter alia (1) facilitate deregistration and export in a timebound and transparent fashion, (2) avoid cannibalization of the aircraft/ engine, (3) create a channel of communication, et al.
- 2014/ 2015
Given the above context, there was a lot of groundwork done by the Aviation Working Group ('AWG')4 for appropriate legislative incorporation of the Convention in the domestic legal framework.
The Government of India made certain amendments to the Aircraft Rules, 1937 ('Aircraft Rules') which came into force on February 9, 2015 as the Aircraft (Third Amendment) Rules, 20155. The amendment essentially inserted Rule 30(7) which is in pari materia with Article IX(5) of the Protocol.
The DGCA now has a duty to deregister an aircraft, within five (5) working days, where the party holding an IDERA files an application for deregistration under Rule 30(7) of the Aircraft Rules along with:
- an original or a notarised copy of IDERA recorded with the DGCA;
- a priority search certificate issued by the IR under the Convention with respect to the Registered Interests in the aircraft ranking in priority; and
- a certificate from the IDERA holder confirming that registered interests ranking in priority (registered with the IR) to that of the IDERA holder have been discharged or the holders of such interests have provided their consent to such deregistration and export.
The above amendment is considered a positive step towards making India CTC compliant as it provides a clear procedure for invocation of IDERA as a part of domestic legal framework. The efficacy of the legislation soon came to be tested as various lessors/ lenders invoked the instrument under the amended provision when SpiceJet Limited ('SpiceJet') started continuously defaulting on its obligations under the leases towards mid-2014.
Prior to the insertion of Rule 30(7) to the Aircraft Rules, the DGCA would, upon receipt of a deregistration request from creditor of the aircraft, seek clarification from the concerned Indian operator. The process was time consuming and hardly ever resulted in deregistration and export leaving the creditors with no other option but to initiate legal proceedings to enforce their rights and safeguard their asset.
It was in view of continuous defaults and the reluctance of the DGCA to deregister despite invocation of the IDERA, that certain creditors-initiated court action against SpiceJet. The decision of March 19, 2015 by the High Court of Delhi ('Court') in Wilmington Trust SP Services (Dublin) Limited Vs. DGCA & Ors6. marks a turning point in how the Convention is interpreted and applied. The Court also made important observations with respect to honoring international conventions, interface between the municipal laws, and the rights and obligations provided to parties under the Convention.
The Judgment is the first substantive decision by an Indian Court analyzing the provisions of the Convention wherein the Court also interpreted the amended Rule 30(7) of the Aircraft Rules and also directed deregistration of a certain aircraft 'forthwith'. The Court, observed that the insertion of Rule 30(7) did not provide the DGCA any discretion once an application for deregistration was filed and stated that:
"A bare reading of the aforesaid would show that with the insertion of sub-rule (7) in Rule 30, the doubt, if any, as to whether the DGCA had any discretion in the matter has got removed. Upon the creditor fulfilling the conditions prescribed in clause (i) and (ii), of sub-rule (7), of Rule 30, the DGCA is mandatorily required to cancel the registration."
The Aircraft Rules were further amended in 2017 to insert Rule 32A7 which provides that upon an application being made by the IDERA holder for export of the Aircraft, once the registration of an Aircraft is cancelled under Rule 30(7) of the Aircraft Rules, the DGCA shall take action to facilitate the export and physical transfer of the aircraft, along with spare engine, if any, subject to payment of dues and compliance with applicable safety rules and regulations, relating to that aircraft operation.
The above amendment filled the gap between the deregistration and export of the aircraft and provided some degree of certainty with respect to the process and timelines in repossessing an aircraft.
Rule 32A of the Aircraft Rules, on further analysis, was found insufficient particularly because there was a precious amount of time lost between deregistration and export of an aircraft owing to demands made by various parties such as the airport operators, maintenance facilities, government department etc. To address this issue, the DGCA issued the Standard Operating Procedure8 ('SOP') on November 16, 2018 to streamline and bring transparency to the process of export of an aircraft under Rules 30(7) and 32A of the Aircraft Rules.
The SOP endeavors to provide a definitive set of actions which the creditor may need to take in order to export the aircraft from the Indian jurisdiction once it is deregistered under Rule 30(7) of the Aircraft Rules. The DGCA, under the SOP, is tasked, inter alia with the responsibility of –
- publishing a list of designated officers of various airport operators – for continued communication in case of a deregistration event, on its website;
- publishing the request for deregistration received under an IDERA on its website;
- ensuring proper communication and transparency with respect to dues;
- issuing the ferry flight permit once it received a go ahead/ no objection from various parties;
- assisting in the flight out of the aircraft, etc.
Each of the above amendment came to be tested (once again) when Jet Airways entered the resolution process in April 2019. It was probably the most regulated and structured deregistration event of a large scheduled Indian operator (100+ aircraft), and in most of the cases where deregistration was requested under Rule 30(7) of the Aircraft Rules, it was honored by the DGCA.
Barring legal issues and claims with respect to aircraft which were finance leased, or where deregistration or export was withheld owing to a Court order, the process was way more straightforward than what the industry has experienced in the past.
The creation of IR and the concept of international interest have gradually been recognized, accepted and honored by multiple jurisdictions, which is a key achievement for CTC as this provides a uniform mechanism for both registration and enforcement of rights. Though there is lot of work, such as the ratification by more countries in order to make application comprehensive, uniformity of declarations made by various countries, adoption of the provisions of the Convention into domestic legal framework, where necessary, etc., that remains to be done, the Convention has come a long way.
Looking inwards, and as set out above, many steps have been taken to give effect to the Convention and though the amendments made to the Aircraft Rules now provide a much comprehensive framework with respect to deregistration and export, India definitely still needs an underpinning legislation9 to provide a proper reach to the Convention to inter alia ensure, that creditors' rights are protected in cases of liquidation, eligibility for OECD discounts, et al.
The above has been an impressive journey for the Convention in India and globally, possibly making it the single most international convention in aircraft financing which has actually to a great extent brought about uniformity in norms with respect to financing, security and repossession across multiple jurisdictions.
2 Article 49 of the Convention.
3 Article XIII of the Aircraft Protocol.
4 Aviation working group (AWG) is a not-for-profit legal entity comprised of major aviation manufacturers, leasing companies and financial institutions that contribute to the development of policies, laws and regulations that facilitate advanced international aviation financing and leasing.
5 In line with the amendment to the Aircraft Rules, the DGCA on April 27, 2015, amended the CAR, Section 2 – Airworthiness, Series 'F' Part-I, dated September 10, 1998 on 'Procedures Relating to Registration/ Deregistration of Aircraft'. May we draw reference to clause 2(f) to (j) and clause 9.2 of the annexed CAR.
6 WP(C) 871/2015 & 747/2015, Wilmington Trust SP Services (Dublin) Limited Vs. DGCA & Ors: March 19, 2015.
7 32A. Export of aircraft. The Central Government shall, consequent upon cancellation of registration of an aircraft under sub-rule (7) of rule 30, if an application is made by the IDERA Holder for export of the same aircraft, take action to facilitate the export and physical transfer of the aircraft, along with spare engine, if any, subject to:
(i) the payment of outstanding dues in respect of the aircraft; and
(ii) the compliance of the rules and regulations relating to safety of the aircraft operation.
8 AIC 12/2018, dated 16th November 2018.
9 A draft Cape Town Convention Bill, 2018 was published on October 10, 2018.
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