All questions

Security and enforcement

The ECB guidelines permit Indian borrowers to grant security of their choice to foreign lenders. Primarily, ships and aircrafts for the acquisition of which the ECB is borrowed are secured in favour of the lenders. No approval is required from the RBI or authorised dealer for creation of a mortgage or charge over the ships and aircraft, as well as for the assignment of insurance, charter hire income of such ships and aircraft. Security over aircraft may also be created by way of hypothecation, fixed or floating charge, lien, pledge, retention of title, conditional sale and assignment.

Pursuant to the MSA, multiple mortgages can be created over a vessel, but the sole mortgagee of a vessel can enforce its rights over the vessel without the intervention of the court, whereas, in the case of multiple mortgages registered over a vessel, a mortgage can only be enforced by applying to the competent court.

i Financing of contracts

Under Indian law, a mortgage can only be created over a vessel that has been provisionally or permanently registered with the Registrar of Ships and cannot be created over a hull under construction. Hence, financing of newly built ships is secured by the assignment of the shipbuilding contract executed between the shipbuilder and the borrower (i.e., purchaser) and the refund guarantees issued by the banks of the shipbuilders in favour of the lenders until such time as the ship is constructed and delivered to the borrower and registered with the Registrar of Ships.

ii EnforcementShipping

A mortgage registered over an Indian vessel may be enforced in India or outside India. In India, a vessel can be arrested and sold through the admiralty courts in India by public auction, thereby vesting in the purchaser a clean title to the vessel, free and clear of all claims, liens and encumbrances. Port dues, admiralty marshal's costs and maritime liens ranking in priority, however, must be paid.

Under the MSA, the sole mortgagee may also enforce a mortgage by taking possession of the vessel and selling it to a third party without the involvement of the courts. Although in law a sole mortgagee has the right to proceed against and sell a vessel without the intervention of the court, in reality the cooperation of the master and crew is necessary. Also, a private sale does not clear the title of the vessel of all claims and encumbrances, and the buyer of the vessel has to acquire the vessel subject to such claims and encumbrances.

A mortgage registered over an Indian vessel can also be enforced outside India, provided the loan documentation permits such enforcement. If the mortgage is enforced outside India, the foreign lender who has obtained a decree from a court in a foreign country can approach an Indian court for enforcement of the decree under the Civil Procedure Code, 1908.

If a judgment has been obtained in any reciprocating territory, the same will be recognised and enforced by the courts in India without re-examination of the issues, provided the judgment is pronounced by a competent court and is on the merits and based on principles of international law, and not opposed to natural justice, or founded on fraud or a breach of any Indian law.

Aviation

The Cape Town Convention confers remedial rights on a lender when the facility has been charged and registered as per the Convention. The chargee can take possession of the aircraft from the lessee in the event of default. Because India is a signatory to the Cape Town Convention, the Directorate General of Civil Aviation (DGCA) will cancel the registration of the aircraft, thereby permitting the chargee to take possession of it.

In the event of financial default, the lessor may unilaterally terminate the agreement and repossess the aircraft or obtain an order from the district court having jurisdiction over the place at which the aircraft is located, for its repossession. The lessors are also required to get the aircraft deregistered from the DGCA prior to repossessing the aircraft. Unless there is an explicit provision in the Cape Town Convention requiring the chargee to seek leave of the court, India has declared that a chargee will not require leave of the court. This can be construed to imply that, even in the case of a bankruptcy of an Indian lessee, such chargee will not be required to obtain leave of the court to repossess the aircraft.

The DGCA requires the consent of the lessee to deregister the aircraft. It may also receive objections to such cancellation from government departments if they are owed money by the defaulting airlines. Moreover, even after deregistration of the lessor's aircraft by the DGCA, the Airports Authority of India may impose a lien on the aircraft for unpaid dues by way of ground rent, landing charges, etc., and has the right to detain the aircraft. Also, the aircraft are sometimes impounded by the custom authorities for non-payment of custom duties, which can be a problem in the repossession of an aircraft by lessors.

The power to detain aircraft and other assets is derived from Section 142(c)(ii) of the Customs Act, 1962 and Section 87(c) of the Finance Act, 1994 (the Finance Act), which allows attachment of 'any movable or immovable property belonging to or under the control' of a defaulter. In a matter brought by the service tax authorities, relating to the attachment of engines belonging to Natixis, the High Court rejected the lien exercised by the service tax authorities. In another similar matter, the International Lease Finance Corporation challenged the attachment order passed under Section 87(c) of the Finance Act by the service tax authorities – the engines have now been redelivered. In the Natixis decision, the court held that property owned by a third party cannot be attached for the dues payable by Kingfisher Airlines.

In the case of Aer Lingus Limited v. Airport Authority of India, the Bombay High Court held that if dues are owed by the airline operator to the Airport Authority of India, the owner of such an aircraft cannot be deprived of deregistering and repossessing its aircraft in circumstances where the lessee has outstanding airport parking fees. However, this case is very different from the Kingfisher case.

iii Arrest and judicial sale

On 21 September 2016, the Union Cabinet gave its approval to the proposal of Ministry of Shipping to enact The Admiralty (Jurisdiction and Settlement of Maritime Claims) Bill 2016 and to repeal five archaic admiralty statutes.

In Notification No. 675 issued on 22 February 2018, the Ministry of Shipping announced that The Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (the Admiralty Act) would come into force on 1 April 2018. Through the Admiralty Act, the application in India of the following enactments have been repealed:

  1. the Admiralty Court Act, 1840;
  2. the Admiralty Court Act, 1861;
  3. the Colonial Courts of Admiralty Act, 1890;
  4. the Colonial Courts of Admiralty (India) Act, 1891; and
  5. the provisions of the Letters Patent, 1865 insofar as they apply to the admiralty jurisdiction of the Bombay, Calcutta and Madras High Courts.

Prior to the coming into force of the Admiralty Act, India followed the Admiralty Act, 1840 read with the Admiralty Courts Act 1861. These two acts defined the jurisdiction of the Admiralty Courts to arrest vessels. In light of this, the Bombay High Court enjoyed pan-India jurisdiction by virtue of the decision of the Appeal Court in Kamla Kant Dubey v. MV Umang. As a consequence of this decision, it was possible to approach the Bombay High Court to arrest a vessel lying in Chennai, Kolkata or any other port in India.

Section 3 of the Admiralty Act, however, states that the jurisdiction of all maritime claims under the Act shall vest in the respective High Courts and can be exercised up to and within their respective territorial jurisdiction. Thus, the Bombay High Court has now lost the pan-Indian jurisdiction.

Courts may, under the Admiralty Act, order the arrest of any vessel within their jurisdiction for providing security against a maritime claim that is the subject of a proceeding. The Act sets out a list of maritime claims that is similar to Article 1 of the Arrest Convention, 1999. The Admiralty Court also incorporates the following additional claims as maritime claims in relation to which a vessel can be proceeded against and arrested. The claims are related to:

  1. port or harbour dues, canal, dock or light tolls, waterway charges and such like;
  2. particular average claims;
  3. claims by master or crew or their heirs or dependents for wages, cost of repatriation or social insurance contributions;
  4. insurance premiums, mutual insurance calls;
  5. commission or brokerage agency fees payable by vessel owner or demise charterer;
  6. environment damage claims or threat thereof; and
  7. wreck removal claims.

For admiralty actions, a ship must be in Indian territorial waters. The prerequisite for an admiralty action for enforcing in rem rights is that the claimant must demonstrate that the res – the ship – is in Indian waters; hence, no action can be filed in anticipation of a ship that is yet to arrive. A substantive admiralty suit must be filed, unlike in other jurisdictions where only a writ need be entered. Further arrest of bunkers is not permissible in India. As per Indian law, bunkers are not considered to be maritime property. Therefore, the courts exercising admiralty jurisdiction do not permit the arrest of bunkers. The Division Bench of the Bombay High Court in Mansel Limited v. The bunkers on board the Ship m.v. Giovanna Luliano & Ors did not accept the contentions of the arrestor that even in England, an admiralty court in exercise of its admiralty jurisdiction can order arrest of bunkers on board a vessel. The Division Bench upheld the view in the matter of Peninsula Petroleum Limited v. Bunkers on Board the vessel m.v. Geowave Commander Ltd. Although the matter has been carried on appeal to the Supreme Court of India, the judgment of the Division Bench of the Bombay High Court, however, has not been stayed.

The suit must be filed in the admiralty division of the High Court by submitting a complaint with full documentation. The High Court will schedule a hearing to consider the merits of the claim for arrest. The arrest warrant is issued by the sheriff's office, and is served on the vessel or the master, ports agent and the customs authorities. A court sale is by public auction conducted by the sheriff, inviting offers through advertisements in leading shipping papers such as Lloyd's List or Tradewinds. If the borrower contests the mortgage claim or other creditors apply to intervene in the proceedings, additional hearings are scheduled and the priorities of claim determined. The order of maritime claims determining the inter se priority in an admiralty proceeding is determined under Section 10 of the Admiralty Act.

With regard to appeals, any judgments made by a single judge of the High Court can be appealed against a division bench of the High Court. Further, the Supreme Court may, on application by any party, transfer an admiralty proceeding at any stage from one High Court to any other High Court. The latter High Court will proceed with the matter from the stage where it stood at the time of the transfer.

To protect owners or demise charterers of the arrested vessel from possible vexatious and frivolous claims, the High Court may, as a condition of arrest of the vessel, require the arrestor (the claimant) to provide an unconditional undertaking to pay damages or provide security for an amount to be determined by the Court for any loss or damage that the owner or demise charter may suffer as a result of the arrest, should the arrest subsequently be found to be wrongful or if the claimant demanded excessive security.