Default and remedies
Rights of debtors
On 13 April 2022, the Ministry of Civil Aviation of India published a draft of the Protection and Enforcement of Interests in Aircraft Objects Bill (the Bill). The objective of the Bill is to codify and prepare a comprehensive law for the repossession and transfer of aircraft objects. The Bill also implements the provisions of the Convention on International Interests in Mobile Equipment and Protocol on Matters Specific to Aircraft Equipment (the Cape Town Convention and Protocol),(1) which were previously in conflict with the Companies Act 2013 and the Insolvency and Bankruptcy Code 2016. This article highlights the salient features of the Bill.
The Bill is applicable to "debtors" and "sellers" who are situated in India at the time of the conclusion of the contract.(2) The Bill provides three alternative definitions of a "debtor" – namely:
- "a chargor under a security agreement";
- "a conditional buyer under a title reservation agreement"; or
- "a lessee under a leasing agreement or a person whose interest in an aircraft object is burdened by a registrable non-consensual right or interest".(3)
The Bill also applies to aircraft objects that are located or pertain to an aircraft registered in India.(4) For the purposes of this Bill, the phrase "situated in India" is defined to include interested parties that:
- are incorporated or registered under any law in force in India;
- have a registered office in India;
- have their centre of administration in India;
- have their place of business or principal place of business in India; and
- in the absence of a place of business, have their habitual residence in India.(5)
If the creditor is situated in a non-contracting state, the Bill is still applicable to them.(6)
Under section 10 of the Bill, the debtor and the creditor may mutually agree to declare in writing an event to constitute default. In the absence of such an agreement, the provision defines "default" as "a default which substantially deprives the creditor of what it is entitled to expect under the agreement".
The Bill also provides remedies to the charge under section 12; in the event of default, the chargee can take one or more of the remedies available. The remedies available are:
- to take possession or control of the aircraft object charged to it;
- to sell or grant a lease of such aircraft object; or
- to collect or receive any income or profits arising from the management or use of such aircraft object.
According to section 15 of the draft bill, the creditor may also:
- obtain the de-registration of the aircraft; and
- obtain the export and physical removal of the aircraft object from the region in which it is located, to the degree that the debtor has agreed at any time to do so.
However, none of the remedies can be exercised unless the creditor declares the default to the Directorate General of Civil Aviation.(7)
Section 13 of the Bill states that, at any time of the default, all the interested persons may agree that ownership of any aircraft object covered by the security interest shall vest in the chargee or towards satisfaction of the secured obligations. On the chargee's application, the court may direct that ownership of, or any other interest in, any aircraft object covered by the security interest be transferred to the chargee in or towards the satisfaction of the secured obligations.(8)
Section 14 of the Bill protects the interests of conditional sellers and provides remedies to interested parties in event of default. In addition to this, under section 17, creditors may be granted relief even when final adjudication is pending. The provision states that the creditor can apply to the court to preserve the aircraft and its value. They may request possession or immobilisation of the aircraft or ask for the lease, management or sale of the aircraft object at this stage.
The Bill lays some emphasis on "international interest" while discussing the effects of insolvency. Under section 18, the draft provides that an international interest is effective if it was registered in conformity with the Cape Town Convention and Protocol prior to the start of the insolvency proceedings. The Bill also defines and provides the roles and duties of an insolvency administrator.(9)
For the remedies to be effectively invoked, section 19 of the Bill lists a few prerequisites that have to be satisfied. The debtor must be a body corporate, firm or a natural person. If it is either of the first two, it must be registered or incorporated in India. If they are a natural person, they must be domiciled in or have to have their principal place of business in India. Additionally, the debtors and creditors should not have excluded the application of the remedies available under this section.
In addition to protecting the interests of creditors and lessors, the Bill also keeps in mind the rights of debtors. The debtor is entitled to quiet possession and use of aircraft in the absence of default.(10) In a case of default and in an instance of transfer of associated rights or related international interest, the debtor must be given a notice in writing. For default, the notice must be of a minimum of 10 days.(11)
The Bill provides a number of remedies and reliefs to the stakeholders involved in the financing of aircraft objects in India. The new law is a welcome change as the Bill aims to harmonise Indian laws with the Cape Town Convention. When Kingfisher Airlines went bankrupt in 2012, leasing companies such as International Lease Finance Corp and DVB Bank in Germany experienced numerous challenges in reclaiming their planes. In addition, in 2015, various firms filed cases in the Indian courts seeking deregistration of six Boeing 737s leased to SpiceJet. Difficulties were also encountered in collecting aircraft after Jet Airways went bankrupt in 2019. Therefore, structuring the domestic law to ease repossession and streamline insolvency processes has been long overdue.
For further information on this topic please contact Syed Tamjeed Ahmad or Rakhee Biswas at Spaviatech Law by telephone (+91 99 9927 0013) or email ([email protected] or [email protected]). The Spaviatech Law website can be accessed at www.spaviatechlaw.com.
(1) India acceded to the Cape Town Convention in 2008.
(3) Section 2(20) of the Bill.
(7) Section 10(3) of the Bill.