As the Covid-19 pandemic shows no signs of abating and lockdowns across Europe lock set to continue into the early summer, aircraft lessors and financiers have been forced to reconsider their initial strategies thought through at the beginning of the pandemic. This article sets out a brief overview of the steps a lessor or financier needs to take to repossess and detain aircraft on lease if it considers a lessee or borrower to be in default.

Before taking the steps outlined below a lessor or financier should consider our non-exhaustive checklist that outlines the steps that a financier or lessor can take to protect their positions and maximise potential outcomes in repossessing an aircraft here.

Is the Lessee or Borrower in Default?

First, all transaction documentation must be reviewed to ascertain whether there is an event of default. All security documentation should also be reviewed to ensure all necessary filings were made and perfected, in particular the status of any IDERA should be checked. The transaction documentation will describe:

  1. the circumstances in which a lease or facility is deemed to be in default;
  2. the consequences of the default, for example whether the lease or facility is terminated and the aircraft is to be returned to lessor or financier; and
  3. the steps to be taken to notify the lessee or borrower of the default.

Notify the Lessee or Borrower of the Default

Once it has been established there is an event of default, the lessor or financier, should serve a notice of default on the lessee / borrower. It is extremely important that the notice provisions of the transaction documentation are adhered to in notifying the default to the lessee or borrower.

If possible, an amicable and voluntary repossession of the aircraft should be sought, where the aircraft is returned at an agreed location with all aircraft records.

What methods of repossession are available to a Financier if the Lessee/borrower does not voluntarily return the Aircraft?

The Convention on International Interests in Mobile Assets (the “Convention”) provides a body of law that governs the exercise of remedies in respect of Aircraft Object (as defined in the Convection) by a creditor in the face of default by a debtor, including the deregistration of an aircraft by a creditor from an offending debtor’s jurisdiction by an instrument referred to as an IDERA.

In the event a lessee or borrower is not cooperating with the return of the aircraft, utilising the IDERA and de-registering the aircraft from it’s Aviation Authority’s register is usually an effective method of putting pressure on the borrower to return the aircraft. Once deregistered the aircraft is effectively grounded and the financier can take steps to physically repossess the aircraft, arrange a ferry flight to its desired location for maintenance / refurbishment and / or remarketing for sale or lease.

A financier can also seek a court order, on an ex parte basis, to ground an aircraft. This is a default remedy under the Cape Town Convention. Ireland has acceded to this default remedy under the Cape Town Convention that provides in the event of a default a debtor is entitled to take possession of the aricraft and may alternatively apply for a court order to take control of the aircraft.

Additionally, Ireland’s courts will enforce, without re-examination of the case’s merits, a New York Court judgment, an English court judgment and an arbitral award made under the New York Convention. This was recently illustrated by the enforcement of an arbitral award of €4.2 million granted in favour of Just-US Air Srl against Air Moldova, the lessee of the aircraft. The Court order granted by Mr. Justice David Barniville last week prevented the aircraft from leaving Dublin airport as there were fears that Air Moldova would remove the asset from Ireland and beyond the reach of Just-US Air Srl. Just-US Air Srl is also seeking permission to appoint a receiver over the aircraft. The case is back before Mr. Justice David Barniville later this month.

What if the Lessee/Borrower is Insolvent?

If the borrower is insolvent, local law will dictate the conditions under which the repossession may be effected.

In Ireland, the Convention along with Article XI of the protocol to the Convention (the “Protocol”) established a special insolvency regime (“Alternative A Regime”). The regime can be invoked in Ireland in situations where Ireland is the “place of the debtor’s statutory seat[1]” or “the place where the debtor is incorporated or formed”. If the Alternative A Regime is applicable, the aircraft will be placed in the possession of the insolvency administrator for a period of 60 days from the point the borrower goes into insolvency. It is only once this period has elapsed that the aircraft might be returned to the financier.

The Alternative A Regime will only take precedence over Ireland’s domestic insolvency law if it is applicable to the circumstances of the borrower in question. For example when the Nordic Aviation Capital Scheme of Arraignment process came before the Commercial Court last year, NAC submitted that the protections afforded under the Alterative A Regime were not applicable on the basis that an Irish scheme of arrangement did not fall within the Protocol’s definition of “insolvency-related event” or the Convention’s definition of “insolvency proceedings”. While the Court did not make any ruling on this point, it is notable that of the three aviation industry insolvency proceedings before the Irish Courts over the course of 2020, none of the three invoked the Alternative A Regime. In each case an examiner was appointed, providing a protective period of 100 days before any aircraft would be returned to the relevant financier.