Deregistration Of Aircraft Under Indian Law

Radhika Mathur

18 July 2020 8:10 AM GMT

  • Deregistration Of Aircraft Under Indian Law

    India's aviation sector has been hit by the Covid-19 pandemic just as the rest of the world and recovery are likely to be slow. Nonetheless, the incorporation of India's declarations under the Cape Town Convention into India's laws is a progressive step to attract financing and growth of Indian airlines.

    Indian aviation law relating to the operation of aircraft is enshrined in the Aircraft Act, 1934, and the Aircraft Rules, 1937. The civil aviation sector is overseen by the Ministry of Civil Aviation through the national regulatory body, the Directorate General of Civil Aviation ('DGCA') which deals with registration of aircraft, regulation of air transport services by Indian and foreign operators, certification of aerodromes, licensing of pilots, aircraft maintenance, enforcement of civil air regulations, air safety and airworthiness standards, amongst others.

    Aircraft are expensive assets which need to be operated, maintained and serviced in accordance with specific regulations. In India, as in other nations, aircraft are not always owned by the aircraft operator (a scheduled airline or a non-scheduled operator) instead they are leased from foreign owners/lessors. Agreements for leasing and financing of aircraft cover matters such as customs duty, Double Taxation Avoidance Agreements, insurance and rights of owner/lessors/security holders. Repossession of aircraft by foreign owners/ lessors which are leased and operated by Indian airlines is one of the crucial issues of aircraft financing.

    There may be certain instances where due to non-payment of rent or a default per terms of leasing agreements, a dispute is triggered between the operator and owner/ lessor. The operator who possesses the aircraft could continue operating it, racking up rent and other dues whereas the owner/lessor would want to ensure that the operator ceases to use the aircraft and take possession of the aircraft themselves. If an operator does not cease operating the aircraft on their own, or satisfy the rent and remedy the default, then the owner/lessor may ultimately terminate the lease and approach courts for dispute resolution per the relevant agreement. In such a situation, regardless of when the dues between the parties are settled, the foremost issue for an owner/lessor would be halting the operator's use of the aircraft. In India deregistration and repossession becomes a contentious issue.

    Cape Town Convention and amendments to the Aircraft Rules

    The Cape Town Convention and its Aircraft Equipment Protocol (together the Cape Town Convention) only applies to high-value aircraft objects in civilian use. It brings certainty and efficiency in repossession, deregistration and export of aircraft objects, owned, leased and operated in different countries. The Irrevocable Deregistration and Export Request Authorisation or IDERA is an instrument created under the Article XIII of the Protocol to the Cape Town Convention. The IDERA is an irrevocable authorisation, coupled with interest, which is signed by the operator of an aircraft and is addressed to the aircraft registry authority in the relevant jurisdiction (i.e. the DGCA in India). It requests the aircraft registry to recognise the authorised party named thereunder (i.e. the IDERA Holder) as a 'designee' of the operator to procure deregistration and export and physical transfer of the aircraft from the country, without any additional consent. The IDERA compels the registry authority to co-operate with the authorised party and provides a direct recognition of the aircraft's owner/lessor right to physically possess the aircraft.

    Although India acceded to the Cape Town Convention in 2008, only in 2015 and 2018 crucial amendments were made to the Aircraft Rules to implement India's declarations made thereunder regarding deregistration of aircraft and recordation of IDERAs by the DGCA. The Rule 30 of the Aircraft Rules enshrines rules governing issuance of a 'Certificate of Registration' or a 'CoR', whereby aircraft are registered in India and the amendments brought in sub-rule 30(7) in accordance with the Cape Town Convention which recognises deregistration of aircraft by way of the IDERA. An IDERA Holder can directly approach the DGCA to mandatorily deregister an aircraft.

    Rule 30(7) "The registration of an aircraft registered in India, to which the provisions of the Cape Town Convention and Cape Town Protocol apply, shall be cancelled by the Central Government, within five working days, without seeking consent or any document from the operator of the aircraft or any other person, if an application is received from the IDERA Holder along with:—

    (i) the original or notarised copy of the IDERA recorded with the Director-General; and

    (ii) a priority search report from the International Registry regarding all Registered Interests in the aircraft ranking in priority along with a certificate from the IDERA Holder that all registered interests ranking in priority to that of the IDERA Holder in the priority search report have been discharged or that the holders of such interests have consented to the deregistration and export of the aircraft:

    Provided that such cancellation of registration of the aircraft shall not affect the right of the Central Government or of any entity thereof, or any inter-governmental organisation in which India is a member, or other private provider of public services in India, to arrest or detain or attach or sell an aircraft object under its laws for payment of amounts owed to the Government of India, any such entity, organisation or provider directly relating to the services provided by such aircraft in respect of that object.

    Explanation.─ For the purpose of this sub-rule, "International Registry" "means the Registry established under Article 16 of the Cape Town Convention"."

    Another Rule 32(A) was inserted whereby, after deregistration is granted to the IDERA Holder, the export of the aircraft would also be facilitated:

    "32A. Export of aircraft. The Central Government shall, consequent upon cancellation of registration of an aircraft under sub-rule (7) of rule 30, if an application is made by the IDERA Holder for export of the same aircraft, take action to facilitate the export and physical transfer of the aircraft, along with spare engine, if any, subject to:

    (i) the payment of outstanding dues in respect of the aircraft; and

    (ii) the compliance of the rules and regulations relating to safety of the aircraft operation."

    Defaulting Operators & Case law

    Before the deregistration via IDERA was introduced, the DGCA was not obliged to deregister an aircraft upon receiving a request to from its owner/lessor. The DGCA would write to the operator and all the parties whose names may be mentioned on the aircraft's CoR as an owner or lessor or security trustees, to inquire whether deregistration may be allowed. The DGCA could also refuse deregistration if revenue, customs, airport authorities and other lien holders objected to it. The operator or any such parties, could try and delay enforcement of the owner/lessor's right to repossess their property and the operator would be able to continue evading payment of rent.

    One such instance resulted in the decision of the Delhi High Court in "AWAS 39423 Ireland Ltd. & Ors. v Directorate General of Civil Aviation & Anr." [MANU/DE/0832/2015 March 19, 2015]. SpiceJet airlines in 2014 triggered defaults under lease agreements for six aircraft. The defaults continued and the owners/hypothecates were compelled to approach the DGCA for deregistration under the IDERA which were in their favour. Original IDERAs, photocopies of Priority Search Certificates (explained below), evidencing that the lessors/owner/mortgagees are the only registered interest holders were submitted to the DGCA, but the aircraft were not deregistered.

    The High Court in its detailed judgment discussed the Cape Town Convention, India's declarations thereunder and the timely amendment to the Aircraft Rules (inserting Rule 30(7) & recognizing the IDERA), as below:

    "A bare reading of the aforesaid would show that with the insertion of sub-rule (7) in Rule 30, the doubt, if any, as to whether the DGCA had any discretion in the matter has got removed. Upon the creditor fulfilling the conditions prescribed in clause (i) and (ii), of sub-rule (7), of Rule 30, the DGCA is mandatorily required to cancel the registration."

    The Court further held and observed that:

    ".....Article 51(c) of our Constitution obliges the State to "foster respect for international law and treaty obligations in dealings of organized people with one another". The provisions of Article 51(c) of the Constitution when read with Article 263, 274 and 315 of the Vienna Convention clearly cast an obligation on the contracting State to not only remain bound by the terms of a treaty entered into by it but also obliges the State not to cite internal law (read municipal law), as a justification for failure to perform its obligation under a treaty. An international Convention, i.e., a treaty, is required to be interpreted in good faith, in accordance with the ordinary meaning given to the terms of the treaty, in their context, and in the light of its stated object and purpose."

    The High Court of Delhi in "Bank One Limited v Directorate General of India and Ors." [Writ Petition (C) No. 3277 of 2018 on May 2, 2019] again permitted deregistration of an aircraft recognizing India's obligations under the Cape Town Convention.

    In this matter, the aircraft was registered in 2011 with the DGCA which issued a CoR recording the names of the owner (British Virgin Islands-based entity), lessor (an Irish entity) and an Indian non-scheduled operator(Air One Aviation Private Limited). In 2012, owner took a loan from Bank One Limited and in turn created security interest in the aircraft in favour of Bank One Limited, which now was a mortgagee.

    The mortgage was between two foreign parties i.e. the owner and the lender and did not have to be recorded as a security instrument in India. The DGCA does endorse the name of a security holder upon an aircraft's CoR when the parties apply for the same and it technically does not qualify as 'registration' of the security. While endorsement on the CoR of the aircraft's security holder is not mandatory under Indian laws, it would still be deemed to be a public notice of the existence of the security interest. In the present matter the security interest of the mortgagee was not endorsed on the CoR of the aircraft in 2012. The Indian operator also executed an IDERA in favour of the mortgagee, however this was not submitted with the DGCA, and such a practice was, at that time, not mandatory.

    Upon continuing defaults by the Indian operator, the lease of the aircraft was terminated. The mortgagee did not approach the DGCA as an IDERA Holder under Rule 30(7) as the original IDERA could not be produced and instead deregistration was requested under Rule 30(6)(iv) of the Aircraft Rules:

    "(6) The registration of an aircraft registered in India may be cancelled at any time by the Central Government, if it is satisfied that –

    (iv) the lease in respect of the aircraft, registered in pursuance of sub-clause (iv) of clause (a) of sub-rule (2), has expired or has been terminated in accordance with terms of lease; or"

    The DGCA, refused to allow deregistration even though the aircraft's lease was duly terminated and documents to support this were provided. The Hon'ble Court however directed the DGCA to allow deregistration and made observations regarding the rights of a security trustee under the Cape Town Convention. Additionally, the Court also observed that,

    "30. ……..DGCA does not necessarily require the original IDERA and can act on a notarised copy as well. Ms Gosain had, emphatically, argued that without the original documents or a notarised copy, DGCA could not act any further. However, that issue is not substantial as the documents filed by the petitioner, including IDERAs, are admitted and a part of the record of this Court."

    These decisions of the Hon'ble High Court give great confidence to foreign financers, owners and lessors of aircraft to continue to support Indian aircraft operators without the fear that repossession of aircraft would be a challenge.

    Latest developments

    In 2018 the 'Standard Operating Procedure for Implementation of Rule 32A relating to export of aircraft covered under the Cape Town Convention' was introduced, including a format for application for IDERA deregistration. The Indian Government on June 12, 2020 has also amended the Civil Aviation Requirements ('CAR') Section 2- Airworthiness, Series F - Airworthiness and Continued Airworthiness, Part 1, to bring clarity to implementation of India's declarations under the Cape Town Conventions.

    1. Clause 2(k) inserted: The definition of 'International Registry' was added. This refers to the registry established under Article 16 of the Cape Town Convention which provides registration of "international interests" in aircraft objects at a single register which is web-based and open 24/7.
    2. Clause 7A inserted: Recording of IDERA. The DGCA is now empowered to record IDERAs when an application is submitted by the IDERA Holder (or its authorised signatory or certified designee of the authorised signatory), per a format provided in the CAR (at Appendix B) along with the original IDERA and a notarised copy of the IDERA, or alternatively two notarised copies of the IDERA.
    3. Clause 9.2 amended: Once deregistered, the operator is unable to utilise the aircraft. However, before it is repossessed by an owner/lessor and/or exported out of the country, all dues on such aircraft have to be settled.

    "For de-registration of an aircraft under sub-rule 7 of Rule 30 of the Aircraft Rules, 1937, the IDERA holder will file a request with DGCA as per AIC 12/2018. Provided that the deregistration of an aircraft by the DGCA under para 9.1 and 9.2 shall not affect the right of any entity thereof, or any inter-governmental organization, or other private provider of public services in India to arrest or detain or attach or sell an aircraft object under its laws for payment of amounts owed to the Government of India, any such entity, organization or provider directly relating to the services provided by it in respect of that object."

    1. Cause 9.3 amended: "The registered owner or his authorized representatives may apply to DGCA, New Delhi for cancellation of registration, enclosing original C of R.

    The applicant should also specify the clause of Rule 30 and the relevant paragraph of this CAR under which cancellation is sought. In case, it is proposed to invoke para 9.1(vi) (c) of this CAR, the request for deregistration shall be supported by full explanation regarding the relevant provision of the lease agreement and the justification for using the provisions."

    1. Appendix B added: Application for recording of IDERA is provided.

    In India, international conventions are not deemed to be domestic law unless a legislation is passed to underpin the same. The amendments to the Aircraft Rules and the CAR however give priority to Cape Town Convention and India's declarations, while there is no statute to that effect yet. In the current scenario with the pandemic causing disruption in the aviation business worldwide, Indian government and aircraft operators would be at an advantage by keeping abreast with leading international law and an appealing market for aircraft finance.

    Radhika Mathur is Partner Corporate and Aviation at ANM Global Inc. Views are personal.

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