Cape Town Convention and Its Implementation in India

On November 16, 2001, 53 countries supported the adoption of Convention on International Interests in Mobile Equipment and Protocol to the Convention on Matters Specific to Aircraft Equipment. India deposited articles of accession to the Cape Town Convention and the Aircraft Protocol in Rome on March 31, 2008. Though India is a signatory to the Cape Town Convention, in the absence of any municipal law to give effect to the provisions of the Convention, repossession of the aircraft from India has been subject to Indian laws. The purpose of the Cape Town Convention is to harmonise private laws in respect of financing, lease/sale of mobile equipment and ensure greater confidence and predictability through ‘a uniform set of rules’ guiding the constitution, protection, prioritisation and enforcement of certain rights in aircraft objects such as aircraft and aircraft engines. The Convention intends to establish primacy in matters within its scope relating to the creation, enforcement, perfection and priority of interests in aircraft objects. To the extent applicable, it supersedes the “Geneva Convention” on the International Recognition of Rights in Aircraft signed in Geneva on June 19, 1948.

Provisions of the Convention

Cape Town Convention applies to airframes, aircraft engines and helicopters which constitute “aircraft objects” described as:

• “Airframes” type-certified to transport up to eight persons or goods over 2,750 kilograms.
• “Aircraft engines” with minimum 1,750 pounds of thrust if jet powered or minimum 550 take-off shaft horsepower if turbine-powered or piston-powered.
• “Helicopters” type-certified to transport total of five persons or goods over 450 kilograms.

Creation of the International Registry for the recordation of “international interests” relating to aircraft objects is central to the purpose of the Cape Town Convention. All security-type interests subject to Security Agreements, Lease Agreements and Title Reservation Agreements relating to uniquely identifiable aircraft objects known as “international interests”, may be recorded on the International Registry by reference to the manufacturer’s name, generic model designation and serial number with respect to such aircraft object. Subject to certain declared local priorities arising by law (not contract), such interests are accorded priority based upon the order of registration. To constitute an “International Interest” under the Cape Town Convention, such interest must relate to an aircraft object and be:

• Granted by a Chargor under a Security Agreement.
• Vested in a person who is a Conditional Seller under a Title Reservation Agreement.
• Vested in a person who is a Lessor under a Leasing Agreement.
• One of the prerequisites to the constitution of a valid International Interest or Contract of Sale covering an aircraft object is that the Chargor, Conditional Seller, Lessor or Seller, as applicable, must have the power to dispose of such aircraft object by Sale, Lease or Conditional Sale or by way of Security.

The fact that a Creditor or a Buyer under a Contract of Sale is situated in a non-Contracting State does not affect the applicability of the Cape Town Convention

Nature of the debtor specifically where it is “situated” and the state of registration of aircraft object are two connecting factors to decide on the applicability of the Cape Town Convention. The Convention applies at the time of the “conclusion of the agreement” creating or providing for an International Interest in an aircraft object, the Debtor i.e., the Lessee, the Chargor or the Conditional Buyer under an Agreement or Seller under a Contract of Sale, is situated in a Contracting State. The fact that a Creditor or a Buyer under a Contract of Sale, is situated in a non-Contracting State does not affect the applicability of the Cape Town Convention. A debtor or Seller is deemed situated in a Contracting State if any one of the following factors is applicable:

• It is incorporated or formed under the laws of a Contracting State. Its registered or statutory seat is located in a Contracting State.
• Its centre of administration is located in a Contracting State.
• Its principal place of business is located in a Contracting State.
• The Protocol provides that the Cape Town Convention shall also apply in relation to an airframe or a helicopter if at the “time of conclusion” of the applicable Agreement, is registered or agreed to be registered in a national aircraft registry of a Contracting State.

Under the Cape Town Convention, a registered interest has priority over all other subsequently registered and unregistered interests. A Contracting State, however, may declare that certain categories of non-consensual rights or interests excluding those that are specifically registrable in accordance with the terms of the Cape Town Convention, may be entitled to priority without registration over a registered International Interest. The Cape Town Convention, specifically Articles 39 and 40, contemplates two forms of Non-Consensual Rights or Interests (NCRIs). The first are those that are created by the laws of a Contracting State which have priority without registration, over an interest in an object equivalent to that of the holder of registered international interest and with respect to which a Contracting State has made a declaration under Article 39. Second are those which can be registered by a declaration made by a Contracting State under Article 40. If such an NCRI is registered, it will be treated like a registered international interest and it would have priority over any later registered as well as unregistered interests.

Safeguards

Irrevocable Deregistration and Export Request Authorisation (IDERA) is one of the most important aspects of the Cape Town Convention. IDERA is an authorisation which gives a designated party the authority to seek deregistration and export of the aircraft. By virtue of the debtor’s submission of IDERA, the person in whose favour it has been issued or its certified designee, becomes entitled and is the only person entitled to procure the deregistration and export of the aircraft in accordance with the terms of the IDERA, subject to applicable safety regulations. The debtor cannot revoke IDERA without the written consent of the authorised party. On the basis of the recorded IDERA, the relevant aviation authority, the Directorate General of Civil Aviation (DGCA) in India is required to enforce the remedies of deregistration and export at the request of the authorised party without the need for a court order. In addition, registry authority and other administrative authorities in the applicable Contracting State must expeditiously cooperate with and assist the authorised party in the exercise of remedies permitted by the Protocol, including application for relief pending final determination. India made following declarations on the applicability of the Cape Town Convention:

• Declaration under Article 39(1)(a) (have priority, without registration).
  • Liens by airline employees for unpaid wages arising since the time of a declared default by that airline.
  • Liens by Authority in India for unpaid taxes/charges arising since the time of a declared default by that airline.
  • Liens by Repairers of the aircraft or engine to the extent of service or services performed on and value added to that aircraft object.
• Declaration under Article 39(1)(b) (have priority, without registration)
  • Definite lien right is given to an inter-governmental organisation, who is a provider of services such as air navigation services, etc.
  • Indian Government or any inter-governmental organisation in which India is a member or other private provider of public service in India can arrest or detain an aircraft object for payment of amounts owed to the Government of India, any such entity, organisation or provider directly relating to the service or services provided by it in respect of that object or another aircraft object.
• Declaration under Article 40 (registrable, as if the right or interest were an international interest having priority over any later interests): Lien in favour of an authority in India (for unpaid taxes/ charges), airline employees (for unpaid wages) arising prior to the time of a declared default by that airline and rights of person obtaining court order permitting attachment of an aircraft.
• Declaration under Article 52: Cape Town Convention applies to all territorial units.
• Declaration under Article 53: High Courts within respective jurisdiction in India to be the relevant courts for lessor to establish its claim (for the purpose of Article 1 & Chapter XII of the Convention).
• Declaration under Article 54(2): Any and all remedies available to the creditor under CTC which 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.

Case Laws

Having discussed the relevant features of the Cape Town Convention let us review the following important case laws:

• DVB Aviation Finance Asia PTE Ltd vs DGCA and Anr. Lessors (DVB) while exercising their right of termination of leases sought deregistration of their aircraft (two Airbus A320) from DGCA. Lessee (Kingfisher Airlines) objected to deregistration and unilateral termination of the lease on the ground that they had the right to purchase the aircraft and had acquired equity interest in the aircraft. DGCA insisted on Kingfisher’s no-objection certificate for processing deregistration of the aircraft. The Delhi High Court ruling was for the DGCA to deregister the aircraft as the no-objection certificate was not required since DVB had Deregistration Power of Attorney. As per the Delhi High Court “Inter-se rights (right to purchase of Kingfisher) cannot come in the way of the petitioner seeking deregistration of the aircraft”.
• AER Lingus Ltd vs Airports Authority of India (AAI) and Union of India. The Bombay High Court held that if the dues are owed by the airline operator to the AAI, the owner of such aircraft cannot be deprived from deregistering and repossessing their aircraft. As per the court: “The owner can be held liable to pay charges to the AAI only if there is a contract between the AAI and the owner for payment of these charges or there is any Law which obliges the owner to pay these charges to the AAI”.
• International Lease Finance Corporation vs Union of India. High Court ruled: “The concerned airport operators (Delhi) shall release all the deregistered aircraft to the respective owners/lessors immediately so that these aircraft can fly out of the country. They are at liberty to collect parking charges from the owners/lessors from the date of deregistration”.

The Indian Scenario

India has been one of the world’s ‘highest operating cost’ aviation markets. Most of India’s airlines except IndiGo have poor balance sheets. CAPA forecasts that the airlines are likely to report losses of $350 million in March 2016. With SpiceJet’s financial and operating performance deteriorating and Jet Airways’ persistent losses, the scenario has been volatile until some respite due to softening of the ATF prices. Entry of Tata-SIA Vistara and expansion of AirAsia India has made the environment more competitive. Competition in prices being one of the main strategies of the new entrants, the new airlines by increasing capacity impacted the bottom lines of the existing carriers. Any further introduction of additional capacity is likely to adversely affect the business sustainability of weaker airlines.

Therefore, in view of the persistent high-cost operating environment and experience with Kingfisher and SpiceJet, banks and lessors will be proactive in protecting their interests by re-possessing their aircraft. While the courts in India have been favourably inclined towards lessors and financiers in deregistration and repossession of their aircraft, it is pertinent to note that in most cases, either the lease agreements had already been unilaterally terminated or the aircraft flown out of Indian territory prior to the deregistration request. The aircraft being out of India influenced to a great extent the court’s decisions. Therefore, in future too, similar situation is likely to restrain the Indian regulatory authorities, the Indian courts and the lessee from taking any unfavourable steps towards the lessors. Also, with these court rulings as precedent, it would be difficult for DGCA not to cancel the certificate of registration and deregister the aircraft when the lease has been terminated as this would be in contravention of the Indian laws (Rule 30(6)(iv) The Aircraft Rules, 1937).

Aircraft (Third Amendment) Rules, 2015, has been a much needed step in aligning the domestic laws with the Cape Town Convention

In the case of DVB, the court did not go into the merits of Kingfisher’s contention that the aircraft should not be deregistered as Kingfisher has equity interest in the aircraft and the right to exercise the purchase option under the lease. Therefore, in different circumstances in future, such as the aircraft being in India and the operator being in a financially stronger position, the courts may not take a similar view in such kind of lease agreements having built-in purchase option. Another aspect which would be of importance to the lessors is the risk of liens by various entities under the declaration made by India under Article 39 and Article 40 of the Cape Town Convention. As discussed earlier, the liens in respect of unpaid wages, taxes and charges can be enforced by India under the rights of detention or arrest of the aircraft (India’s declaration under Article 39 & Article 40 of the Cape Town Convention). The declaration under Article 39 regarding the detention rights for dues in respect of that object or another aircraft object is akin to fleet lien. Fleet lien, being incorporated in British and Canadian laws, has been upheld by their judiciaries. UK and Canada have rules to exercise the fleet detention power. For BAA (as an aerodrome authority of a “designated aerodrome”) this power is set out in Section 88 of the Civil Aviation Act, 1982. For the CAA an equivalent power is set out in Section 83 of the Transport Act, 2000. In one of the prominent cases (Global Knafaim Leasing Limited & CGTSN Limited vs The Civil Aviation Authority, BAAA Limited), the court ruled that Eurocontrol and the Civil Aviation Authority properly exercised their rights of detention. With respect to title holders (Global Knafaim) the court quoted from a Canadian case stating that legal title holders are in a better position to protect themselves against losses than airport authorities or other governmental or quasi-governmental agencies because they ‘can select airlines they are prepared to deal with and negotiate appropriate security arrangements as part of their lease transactions with airlines. However, the fleet or general lien not being envisaged for entities like airports under the Indian laws, it can be challenged in the courts in case the airports in India resort to it.

In a recent case involving SpiceJet (Awas 39423 Ireland Ltd & Ors vs DGCA March 19, 2015) the Delhi High Court ruled that DGCA has to mandatorily deregister the aircraft objects once the creditors fulfill the conditions prescribed in Aircraft Rules. Further the Court opined that “with the insertion of sub-rule (7) in Rule 30 of the Aircraft Rules, the position with regard to the manner in which the DGCA has to proceed, once a creditor seeks recourse to the remedy under Article IX of the Protocol, has only acquired greater clarity. The court, therefore, cannot interdict the process of deregistration on the nebulous ground of equity as it would be contrary to the provisions of the Convention and Protocol to which India is a party.”

In view of the above case laws and recent amendments in the Aircraft Rules, it is most likely that the DGCA would in future deregister the aircraft, whenever the designated party seeks deregistration and export of the aircraft, irrespective of the liens and liabilities of the airline operator. Therefore, the airports and concerned authorities need to develop a real-time aircraft-wise monitoring mechanism for timely enforcement against the operators as well as certain additional risk management strategies like bank guarantees rather than resorting to knee-jerk reaction like delaying deregistration or arresting the aircraft when the dues and airline losses become unsustainable. It would be unfair to penalise the lessor or financier by detaining, refusing to deregister their aircraft objects or entangling them in legal process for the dues owed from the operator. India’s reputation as a fair business market with rule of law being of national interest, it is suggested that:

• Aircraft-wise real-time monitoring mechanism which updates the dues, may be setup at airports and duplicated at DGCA and Civil Aviation Ministry. Even foreign lessors need to monitor the liabilities on their aircraft and incorporate relevant clauses in agreements. This will not only promote transparency but also ensure that the financial liabilities are never allowed to cross acceptable threshold.
• Agencies, service providers and financiers may opt for bank guarantees as well as guarantees/collaterals in real value as opposed to equity or mortgaging certain other intangible assets like brand. What would a share or a brand be worth after the airline goes bankrupt?
• The lien and detention rights if at all to be enforced, must be done through the judicial process rather than through regulatory or executive machinery which may be interpreted by foreign lessors or financiers as being influenced and unfair.
• Rights of passengers for compensation for their unused air tickets resulting from airline bankruptcy may be enforced.