Enforcement measuresRepossession following lease termination
Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?
An aircraft may be repossessed through the DGCA (DGCA process) or by initiating legal action (court process).
Under Indian law, the validity of the certificate of registration is co-terminus with the validity of the lease deed. Hence, after termination of the lease, all parties with an interest in the aircraft are required to submit to the DGCA separate plain-paper applications along with the necessary documents seeking the deregistration of the aircraft. Thereafter, an approval from the Bureau of Civil Aviation Security is required to obtain physical custody of the aircraft.
In the case of a hostile repossession, the owner, lessor or security trustee may repossess the aircraft on the basis of a duly stamped and notarised DPOA, an IDERA or both, if such instruments have been issued by the lessee in their favour. See question 12 for further information in this regard.
In the event that the lessor chooses not to follow the DGCA process or the DGCA fails or refuses to deregister the aircraft, the lessor may initiate legal action to repossess the aircraft. As the DGCA is a government body, the lessor can file a writ petition in the High Court, within whose jurisdiction the DGCA’s order was passed, seeking to quash the DGCA’s order and asking for a direction to be issued to the DGCA to rehear the application for deregistration and repossession.Enforcement of security
Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?
The manner of enforcement of a security interest largely depends upon the type of interest to be enforced.
Creditors in India can take security over immovable property by way of mortgage. In India, mortgages are commonly in the form of an equitable mortgage or English mortgage. A mortgagee’s right depends on the type of mortgage in question.
In an equitable mortgage, the mortgagee may enforce his or her security by filing a civil suit for either sale of the mortgaged property, or to sue the mortgagor personally for the mortgage money subject to the fulfilment of certain conditions. A mortgagee may also request the court to appoint a receiver for the mortgaged property in certain circumstances.
In an English mortgage, the mortgagee may enforce his or her security by filing a civil suit for either sale of the mortgaged property, or to sue the mortgagor personally for the mortgage money subject to the fulfilment of certain conditions. In addition, in an English mortgage, a mortgagee may also have the power to sell the mortgaged property without the intervention of the court if certain conditions are satisfied.
Movable properties are most commonly charged by way of execution of a ‘deed of hypothecation’. A deed of hypothecation usually contains provisions entitling the creditor (beneficiary of the hypothecation) to appoint a private receiver (to take possession of the hypothecated properties) and sell the hypothecated properties without requiring the intervention of a court. Courts in India have, by and large, been consistent in upholding the lender’s right to thus take possession of hypothecated properties and sell the same, provided the deed of hypothecation so empowers the lender.
Cash or bank accounts
Cash and bank accounts are charged in the same manner as movable properties, namely by way of execution of a deed of hypothecation. Upon default, if the bank accounts being charged are maintained with the lending bank itself, the lending bank shall have the right to appropriate monies lying credited in the account towards its dues. A charge by way of hypothecation may be created over account balances and bank accounts maintained with banks other than the lending bank as well. The manner of enforcement of a hypothecation created over bank accounts maintained with banks other than the lending bank will depend upon the process and procedure that had been followed at the time of creation of the hypothecation.
There are two separate regimes under which securities are pledged under Indian law, depending on the form of securities (ie, whether the securities are evidenced by physical certificates, or whether the securities are electronic or dematerialised). In the event that physical securities have been pledged, the lender has the right to sell the pledged securities and adjust the consideration received against its dues. In the event that dematerialised securities have been pledged, then the lender must first acquire the securities in its own name and thereafter transfer the securities to a buyer and appropriate the consideration for the sale towards its dues.
Effect of insolvency
Under the Insolvency and Bankruptcy Code, 2016 (IBC), if an order has been passed by the National Company Law Tribunal (NCLT) to commence a corporate insolvency resolution process (CIRP) against a corporate debtor (insolvency commencement date), a moratorium becomes applicable for a period of 180 days (extendable by up to a maximum of 90 days) (CIRP period). During the CIRP period, no suit or legal proceeding can be commenced (including any action to enforce security interest) against the corporate debtor and no pending proceeding can be proceeded with against the corporate debtor. Additionally, recovery of any property by a lessor where such property is in the possession of the corporate debtor is also prohibited during the moratorium.
However, in liquidation proceedings, a lessor is permitted to repossess its property. Section 36(4) of the IBC specifically lays down that assets owned by a third party, which are in the possession of the corporate debtor, shall be excluded from the liquidation estate. In liquidation proceedings, a secured creditor may either:
- relinquish its security, in which case its entire debt ranks second in the waterfall of payments made for liquidation of the general assets of the corporate debtor (after liquidation-related costs); or
- opt to stay out of the liquidation and enforce its security outside the IBC liquidation process. To the extent that the secured debt is not discharged by the enforcement proceeds, the remaining debt of the secured creditor will rank much lower in the waterfall of payments (ranking after liquidation costs, secured creditors who have relinquished their security, employee or workmen’s dues and unsecured financial debts).
The IBC also provides for clawback of transactions in certain instances. Under sections 43 and 45 of the IBC, the NCLT may reverse any transaction that is deemed to be a preferential transaction or an undervalued transaction, respectively, in the period leading up to the commencement of the CIRP. The relevant look-back period for scrutinising suspect transactions is two years in the case of a related party and one year with any other person. Under section 50 of the IBC, the NCLT may reverse any transaction that is deemed to be an extortionate credit transaction, in the two-year period leading up to the commencement of the CIRP.Priority liens and rights
Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?
The laws of India recognise the following liens in favour of third parties:
- airline employees for unpaid wages;
- repairers for repairs of aircraft in the repairers’ possession, to the extent of service or services performed; and
- governmental or other unpaid statutory dues.
In the event that an aircraft has been detained by any authority for the non-payment of dues by the operator, the owner of the aircraft may be required to seek relief from the courts. There have been numerous instances where the courts have held that the aforementioned liens are to be borne by the operator and their failure to pay cannot result in the detention of the aircraft.
In addition, Indian laws permit the central government to empower any authority to detain an aircraft if such detention is necessary to secure compliance with a domestic legislation or when such detention is necessary to prevent a contravention of any such legislation or to implement any order made by any court. For instance, the Airport Authority of India has been authorised to detain an aircraft until all fees owed to it by the operator have been paid.
In addition, the central government has the power to give directions to detain or requisition either foreign-owned or locally owned aircraft in the interest of public safety and security. There is no statutory requirement for the central government to compensate the affected parties. However, as India has entered to bilateral investment agreements with several countries, a foreign investor could resort to legal protection accorded under such agreements, against the government of India for any discriminatory treatment and claim adequate compensation for any such detention or expropriation.Enforcement of foreign judgments and arbitral awards
How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?
The provisions relating to recognition and enforcement of foreign arbitration awards are contained in the (Indian) Arbitration and Conciliation Act, 1996 (the Arbitration Act). India has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed at New York in 1958 (the New York Convention). An award made in a country which is a party to the New York Convention, and which has further been notified as a reciprocating territory by the government of India is treated as a ‘Foreign Award’ under section 44 of the Arbitration Act. Where the place of arbitration is outside India, and held in a New York Convention country or a Geneva Convention country notified as a ‘reciprocating territory’ by the Indian government, the award is enforceable as a ‘foreign award’ under Part II of the Arbitration Act.
The enforcement of a foreign award in India is a two-stage process that is initiated by filing an execution petition. Initially, a court would determine whether the award adhered to the requirements of the Arbitration Act. Once an award is found to be enforceable it may be enforced like a decree of that court. The grounds of challenge of a foreign award are exhaustive and courts are not entitled to expand the grounds for refusal of enforcement. As a result, courts in India are generally reluctant in re-examining the award on merits.
However, enforcement of a foreign award may be resisted by counterparty on any of the following grounds:
- the parties to the arbitration agreement were under some incapacity, or the agreement is not valid under the law to which it was subjected or under the law where the award was made;
- the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present its case;
- the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration; or
- the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or failing such agreement, was not in accordance with the law of the country where the arbitration took place;
- the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made;
- the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
- the enforcement of the award would be contrary to the public policy of India.
Where the court is satisfied that the foreign award is enforceable, the award shall be deemed to be and can be executed as a decree of an Indian court. While a decree holder is ordinarily entitled to choose the particular mode of execution, this is subject to the discretion of the court.
Enforcement of a judgment issued by a foreign court is subject to Sections 13 and 44A of the CPC. Section 44A of the CPC provides that where a decree or a judgment of a court has been rendered for the payment of a sum of money (other than being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty) by a ‘superior court’ in a territory which the government of India has by notification recognised to be a ‘reciprocating territory’, it may be enforced in India by proceedings in execution as if the judgment had been rendered by a relevant court in India without any examination of issues.
However, it is open for the Indian court to refuse the execution of such a decree, if it is shown to the satisfaction of the Indian court that the decree falls within any of the below exceptions, set out in section 13 of the CPC:
- if it has not been pronounced by a court of competent jurisdiction;
- if it has not been given on the merits of the case;
- if it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable;
- if the proceedings in which judgment was obtained are opposed to natural justice;
- if it has been obtained by fraud; and
- if it sustains a claim founded on a breach of any law in force in India.
If the judgment is not passed by one of the superior courts of a reciprocating territory or where the decree or judgment sought to be enforced does not qualify as a money decree, then a fresh suit will have to be filed on the basis of the judgment or decree for seeking enforcement in India and the decree in such a suit will have to be executed, subject to the exceptions contained in section 13 of the CPC.
The United Kingdom has been declared to be a reciprocating territory, and the Supreme Court, the Court of Appeal, High Court in England, Court of Sessions in Scotland, High Court in Northern Ireland, Court of Chancery of India Palatine of Lancaster and Court of Chancery of the Court Palatine of Durham have been declared to be superior courts of the United Kingdom of Great Britain, under section 44A of the CPC. However, the State of New York or other states in the United States of America are not recognised as a ‘reciprocating territory’.