The aviation industry has been one of the hardest-hit during the COVID-19 crisis, and Indonesia is no exception. Indonesian airlines report a steep decline in the number of travelers, and some are looking at restructuring, such as through the issuance of restructuring bonds. Aircraft owners, lessors and security trustees are now weighing the risks. Desperate times require desperate measures, including possibly the repossession of aircraft registered in Indonesia, as shown by a recent peak in queries on this matter from aircraft owners, lessors and security trustees.
This legal update reiterates the procedures for the repossession of aircraft registered and operated by lessees in Indonesia and discusses some past experiences in repossession matters, in which ABNR was involved in recent years, and offers some practical takeaways that may be helpful for future matters.
Overview of available remedies
Indonesia is a party to the Cape Town Convention (“CTC”) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (the “Protocol”), which offer aircraft owners, lessors and security trustees the three main types of remedies available under the CTC:
- self-help (non-judicial) remedies;
- relief pending final determination; and
- de-registration and export of an aircraft through the use of an Irrevocable De-Registration and Export Request Authorisation (“IDERA”) or a Certified Designee Letter (“CDL”).
Under Article 54(2) of the CTC, Indonesia has declared that any and all remedies available to the creditor under the CTC (that 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. However, in practice, self-help remedies such as taking physical possession of an aircraft are not available in Indonesia due to the absence of an aviation regulation that allows a party to do so.
Relief pending final determination is an option, but may not be the preferred route in practice. Under Article 79 of Law No. 1 of 2009 on Aviation (the “Aviation Law”), a creditor may request temporary action from an Indonesian district court. The parties will submit to the jurisdiction of a certain district court as agreed in the relevant aircraft lease agreement, or a district court with relative competence in the event the aircraft lease agreement contains no provision on choice of forum. However, court proceedings are typically slow and formalistic in Indonesia, probably explaining why this remedy is little used.
An aircraft owner, lessoror security trustee should not be required to pursue its claim through judicial proceedings as long as:
- the lease agreement has been registered with the International Registry;
- the lease agreement provides the owner or lessor the right to unilaterally terminate the lease agreement following the lessee’s default; and
- the owner, lessor or security trustee holds an IDERA, which has been registered with and acknowledged by the Directorate General of Civil Aviation (“DGCA”), or the security trustee holds a CDL.
It is still common in transactions involving the lease of aircraft registered in Indonesia for parties to prepare, in addition to the IDERA and/or CDL, a deregistration power of attorney, usually legalized by an Indonesian notary. We believe there is little value in preparing this document, as the IDERA and/or CDL already incorporate an element of authorization (as contemplated in the power of attorney), and contrary to the power of attorney in the IDERA and/or CDL, a “normal” power of attorney terminates upon the bankruptcy or apparent insolvency of either the grantor or the attorney. Furthermore, the grantor of a “normal” power of attorney always has the right to exercise the powers granted to the attorney under the power of attorney. Finally, although these powers of attorney normally state otherwise, they are in fact revocable (although this and the grantor’s exercise of powers granted to an attorney under the power of attorney would normally constitute a breach of contract under the transaction documentation).
Indonesia has made a few reservations under the CTC, including Articles 39 and 40. This means that the following non-consensual rights or interests 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):
- liens in favor of airline employees for unpaid wages arising from the time of a declared default under a contract to finance or lease an aircraft object;
- liens or other rights of an authority of Indonesia relating to taxes or other unpaid charges arising from or related to the use of that aircraft object, and arising since the time of a declared default under a contract to finance or lease that aircraft object; and
- liens or other rights in favor 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.
Finally, nothing in the CTC shall affect the right of Indonesia or that of any entity thereof, or any intergovernmental organization of which Indonesia is a member, or other private provider of public services in Indonesia, to arrest or detain an aircraft object under its law for payment of an amount owed to the government of Indonesia, any such entity, organization or provider being directly related to the services or services provided by it in respect of that or another aircraft object.
The Indonesian Civil Code also recognizes the “right of retention”. This right is a statutory remedy available to certain types of creditors that may refuse to surrender the possession of goods as long as the “secured” debt remains unpaid. The right to retain property (hak retensi) is a defense for the creditor; he has the right to retain the property until he has received full payment. Only upon payment is he obliged to surrender possession of the goods.
Please note that there is no general provision in the law on the right to retain property, but there are some specific articles in the Indonesian Civil Code on this right. These include an article stating that employees, who have access to a property, to perform work thereon, shall be entitled to retain such property, until the total costs and employees' wages have been paid, unless the client has provided sufficient security for such costs and employees' wages. For example, a debtor brings its aircraft to the hangar for maintenance. Under Indonesian law, the party carrying out the maintenance is entitled to hold on to the aircraft until he is paid by the debtor for the work done.
It should be noted that the CTC has not been fully implemented into national legislation. In addition, although the Aviation Law acknowledges international interest that can be established on an aircraft, Indonesia currently does not have an implementation mechanism. Therefore, it is questionable if an international interest could be effective and enforceable within the Indonesian legal system. However, apart from the practical limitations to self-help remedies, as well as the retention right acknowledged by the Indonesian Civil Code, Indonesia’s failure to fully implement the CTC into national legislation should not mean that repossession cannot be carried out in Indonesia.
To the extent that repossession is carried out within the framework of insolvency proceedings, it is important to note that Indonesia has made a declaration under Article XXX(3) of the Protocol. As a result, the liquidators can refuse to give consent to release the aircraft during a maximum waiting period of 60 days.
For the avoidance of doubt, Indonesia is not a party to the 1948 Geneva Convention on the International Recognition of Rights in Aircraft, or the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft.
As de-registration and export for an aircraft through the IDERA is the most common and feasible type of remedy, this will be the focus of the remainder of this legal update.
De-registration and export of an aircraft through the IDERA
De-registration and export of an aircraft through the IDERA consists of the following steps:
- default and grounding notice in respect of the aircraft
The first step in the repossession of an aircraft is for the aircraft owner, lessor or security trustee to serve a notice of default, in accordance with the contractual terms, specifying the relevant default, demanding that such default is cured by a specified time or, if that is not possible, that the underlying agreement(s) is/are terminated and the lessee must fly the aircraft to and ground it at a specified airport.
Although most lease agreements involving aircraft registered in Indonesia are governed by foreign law (normally UK or US law), it would be prudent to follow the Indonesian practice of serving a total of 3 notices of default, preferably sent by courier/registered mail, allowing the lessee reasonable time to remedy the default, before taking the next step of arresting the aircraft. In addition, any other formal or informal communication, such as telephone or video conferences, email and other means of communication would help to function as evidence that the owner, lessor or security trustee would be considered to have made the maximum effort to allow the lessee to remedy the default. Indonesian law also requires that an Indonesian language version is made available of any agreement to which an Indonesian individual or entity is a party, even if the agreement is governed by foreign law. Failure to prepare an Indonesian version of the transaction agreements may give rise to additional complications during the repossession process, especially when dealing with Indonesian courts.
Should the lessee not remedy the default within a reasonable time after sending the notices of default, the aircraft owner, lessor or security trustee may issue a grounding notice to the lessee, in accordance with contractual provisions. The grounding notice will state the location where the lessee is to keep the aircraft. Should the lessee comply with this voluntarily, the owner, lessor or security trustee may proceed with deregistration and export of the aircraft. However, if the lessee refuses to comply with the grounding notice, it will be necessary to seize or arrest the aircraft with the assistance of the courts.
- arrest or seizure of the aircraft
It will in principle be possible for an owner, lessor or security trustee to seek interim relief for the arrest or seizure of the aircraft. However, as mentioned above, court proceedings are typically slow and formalistic in Indonesia, and decisions that follow are also difficult to enforce. So where possible, it would be advisable to avoid court proceedings and instead to try and reach a friendly settlement with a lessee before trying to arrest or seize an aircraft with the assistance of the courts.
The arrest or seizure of an aircraft will in practice require the assistance of the airport authorities. Most of Indonesia’s airports are owned and managed by state-owned enterprises. As a result, arrest or seizure may be more difficult if the lessee is also a state-owned enterprise.
- deregistration of the aircraft
The procedure for deregistration and export of aircraft is under the policy of the authorities, and in practice, is initiated by a request from the Authorized Party (or the lessee) of a registered and acknowledged IDERA or Certified Designee Letter, for deregistration and export of aircraft.
The DGCA will require the Authorized Party to submit the 47-26 form (Application for aircraft deregistration by utilizing IDERA or CDL) by also attaching the original registered IDERA or CDL in relation to the relevant aircraft. In this case. the DGCA will allow the Authorized Party’s attorney to assist with the submission.
In the event there is no registered IDERA or CDL available for the relevant aircraft, to deregister the aircraft the DGCA will require the relevant lessee or owner to submit the 47-17 form (Application for aircraft deregistration). In this case, the DGCA will only allow the relevant lessee or owner to directly do the submission.
According to the Aviation Law, this entire process should be completed within five business days of the DGCA deeming that all the required documents, including the export certificate of airworthiness discussed below, have been submitted. Upon the issuance of the deregistration certificate, the aircraft will no longer be under Indonesian registration.
- export of the aircraft
In order to export the aircraft, the Authorized Party should apply for an export certificate of airworthiness (“Export COA”).
In the event that the aircraft is within Indonesia when the deregistration certificate is issued, the application for the Export C of A should be submitted before or simultaneously with the application of the deregistration certificate. The Export C of A will state that the aircraft is airworthy to be flown out of Indonesia, and is subject to the aircraft conforming to the laws and regulations as well as the aviation authority’s requirements in the destination country. The Export COA will be issued before the issuance of the deregistration certificate. The Aviation Law does not prescribe a deadline for the issuance of the Export COA, but in our experience it will take around three to five business days to complete the process.
Since the aircraft will be flown out if Indonesia with a non-Indonesian registration, in addition to the above, it will be necessary to obtain: (a) diplomatic clearance from the Ministry of Foreign Affairs; (b) security clearance from the Ministry of Defense; and (c) international flight approvals from the DGCA, to carry out the ferry flight and fly the aircraft out of Indonesian territory.
Finally, it will be necessary to apply for an export permit and a notice of export from the Directorate General of Customs and Excise (“DGCE”). These export documents can be applied for simultaneously with the deregistration process with the DGCA. The aircraft owner, lessor or security trustee will have to engage an Indonesia-licensed customs agent to obtain the necessary export documents from the DGCE without the lessee’s assistance.
In our experience, the aircraft can also be flown out of Indonesia (i.e. a maintenance facility in Singapore) using its existing Indonesian registration, and then issuance of the relevant deregistration certificate may be applied for. Less documentation will be needed if the aircraft is flown out using its existing Indonesian registration, but the Export COA is still required before the ferry flight.
Please note that whether the aircraft should be deregistered when still in Indonesia or already outside will depend fully on the circumstances of the case, as well as the preference of the authorized party, owner and/or security trustee.
Practical experiences and take-aways
In practice, the past repossession actions that ABNR was involved in were all successful. However, Indonesia’s reservations under Articles 39 and 40 of the CTC on the basis of Presidential Regulation No. 8 of 2007, have not yet been further regulated and implemented by national legislation. Consequently, also given the right of retention under the Indonesian Civil Code, and Indonesia’s reservation under Article XXX(3) of the Protocol, the existence of any outstanding charges, fees etc. relating to the aircraft may and in practice usually does delay (and could in theory even prevent) repossession of an aircraft.
It is also helpful to have on the ground staff representing the owner, lessor or security trustee (in addition to legal advisors and agents), if possible, who speak the Indonesian language and understand the local culture, to engage directly with the relevant authorities and stakeholders such as airport(s). Discussion via phone, email and other electronic means with authorities in Indonesia are often a challenge. Note that because of the COVID-19 crisis, Large-Scale Social Restrictions have been imposed and authorities, including the DGCA and DGCE, have implemented a Work-from-Home policy, which will remain applicable at least until late May, making interactions with the relevant authorities even more difficult.
As there is no specific timeline, the time required for repossession of an aircraft in different circumstances can range from a few weeks to a few months, depending on the situation (whether by default or insolvency, or whether or not there is cooperation, either from the authorities and/or lessee, etc.). Another important factor is whether it would need a court decision and proceedings (which generally are not required, but we could not predict this if the circumstances were different), if the lessee is not cooperating).
In sum, aircraft repossession in Indonesia will normally require de-registration and export for an aircraft through the use of an IDERA. If all relevant documentation is available, aircraft repossession through this route should in practice be doable. However, for various legal and other reasons, the process will in practice be time-consuming. In any event, it requires careful planning, based on the right advice and with necessary support on the ground.
The operation (and repossession) of aircraft in Indonesia is no less complex a matter than flying the planes themselves, requiring attention to detail and deft footwork to ensure a desired outcome. The availability of technical assistance backed by local knowledge can ensure that the process reaches a satisfactory conclusion with minimal delay.