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Nithya Narayanan, Unwinding the Vicious Loop of Aircraft Finance Leases, 13 Issues
AVIATION L. & POL'y 55 (2013).

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Nithya Narayanan, 'Unwinding the Vicious Loop of Aircraft Finance Leases' (2013) 13
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2013] Unwinding the Vicious Loop of Aircraft Finance Leases 67

In order to prevent any such claims that could be made by the

creditors of the lessee company or any such orders passed by the
court, foreign lessors could consider terminating the lease agree-
ments and procuring the physical possession of the aircraft prior
to the appointment of any liquidator to monitor and control the
property of the lessee. This would enable the aircraft to be repos-
sessed without a direction from the court, which is definitely
preferred.

B. Fraudulent Preference and Voluntary Transfers

Apart from the foregoing, lessors and financiers of aircraft have

to bear in mind other issues, which rear their ugly heads only
after insolvency proceedings have commenced against the lessee
company. There are provisions in the Company laws of India
which empower the liquidator to avoid or disregard the actions of
officers of a company, including directors, if such transactions are
found to contain any element of fraudulent preference or moti-
vated by an intention to defraud creditors of their legitimate
claims to the assets of the company. 37 They enable the liquidator
to "look back" and examine transactions entered into by the com-
pany in the past, i.e., prior to the commencement of winding-up
of the company, and take retrospective actions.
The principle of "fraudulent preference" allows a court to set
aside any transfer of property, payment, or other act relating to
property, that is effected within the six months prior to the com-
mencement of the winding-up with the intention of preferring a
particular creditor. In the event of a fraudulent preference, the
liquidator is entitled to recover money or property paid to any
person who has been so fraudulently preferred. 38 While there are

37 The courts in India have held that certain transactions of the nature set
out herein below would be sufficient to refute a claim of fraudulent pref-
erence: (i) payment made with the object of saving the company from liq-
uidation; (ii) payment/transfer made pursuant to a threat or a payment/
transfer under pressure of a suit or legal proceeding; (iii) a transfer for
adequate consideration; (iv) a transfer by a company whose position on
the date of a transfer was far from insolvent; and (v) a transfer made by a
debtor of some of his assets and sufficient assets remain with him to meet
his other debts.
38 For instance, in case of an involuntary winding-up, in the event a petition
is filed on June 1, 2013 and the winding-up order is passed by the court on
July 1, 2013, the look-back period of six months would commence from
the date of filing of the petition (i.e., June 1, 2013), and could affect trans-
68 Issues in Aviation Law and Policy [Vol. 13:1

no specific guidelines as to the factors determining whether a par-

ticular transaction would be construed as a fraudulent prefer-
ence, 3 9 it appears from judicial precedents, that in order to
establish "fraudulent preference," the dominant intent of the
debtor must be to prefer a particular creditor; and the preference
must be the result of an act of free will, i.e., a voluntary act.40
What is important to note is that fraudulent preference could
also be the result of omission to do an act, which has the effect of
preferring one creditor to the others. In the context of a finance
lease, the failure by the lessee to exercise the purchase option and
the return of the aircraft to the lessors could be viewed by the
creditors of the lessee as a fraudulent transaction, not being in the
best interest of the lessee and its creditors.
Additionally, the liquidator can also set aside voluntary trans-
fers made by the lessee company, within a period of one year
before the commencement of the winding-up, if such transfer was
not made in the ordinary course of business, or if such transfer
was not made in good faith and for valuable consideration. 4 1
Thus, the courts have held that a bona fide transaction entered
into and completed in the ordinary course of company's current
trade should be protected, for otherwise the commencement of
winding-up would ipso facto paralyze the trade of the company,
injuring those interested in assets of the company. 42 The courts in
India have clarified that in the circumstances mentioned above,
the initial burden would be on the person who wants to avoid the
transaction, to establish that the transaction was not made in the
ordinary course of business and that it lacked good faith. 43
Thereafter, the burden is on the liquidator (or any other person
who seeks to avoid the transaction) to prove that the transactions
have been made: (i) with a view to defraud creditors; (ii) outside

actions that have been consummated in the six-month period prior to that
date.
39 See supra note 37.
40 The payment of dues to creditors, pursuant to the exercise of powers by a
creditor against a company in winding-up (essentially powers granted at
the inception of a contract, which would include the right of a lessor to
terminate a leasing arrangement) would not ordinarily result in a prefer-
ence, since such payment is not a voluntary act of the debtor.
41 Companies Act, supra note 23, § 531A.
42 Andhra Bank Ltd. v. D.P. Narayana Rao, ProvisionalLiquidator, Goda-
vari Sugar & Refinaries Ltd., AIR 1955 Mad 247. See supra note 36.
43 O.L. of Trimline Health & Resort Ltd. v. GSFC & 4, [2009] 92 SCL 323
(Guj).
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 69

the scope of the ordinary course of business of a company; and/or

(iii) without good faith or valuable consideration.44

C. Lien Risk

The foregoing sections of this Part of the article, examined the

probable issues that foreign aircraft lessors and lenders might
confront while repossessing their aircraft from the Indian terrain,
under Indian corporate laws. Given that a lessor of aircraft, will
rely to a substantial extent on the marketability of the aircraft
being financed, it is important that if at any given time the lessor
wishes to dispose of that aircraft, it should be freely available for
sale or lease. A lessor wishing to retrieve possession of the air-
craft would face a number of risks including the lien risk, in addi-
tion to the insolvency risks, which have been dealt with in Part
III and Part IV of this article. Lien risk means that, when en-
deavoring to retain repossession, the lessor finds that either tax
authority has a lien over the aircraft for unpaid taxes or a re-
pairer has a lien on the aircraft for repairs, or that an airport has
a lien on the aircraft for landing charges, or that some other au-
thority has a right of detention for unpaid fines or charges. The
nature and the circumstances of a particular lien would deter-
mine whether such liens would attach to the aircraft for a specific
debt incurred by the operation of that aircraft, or whether such
liens cover debts incurred by other aircraft in the operator's fleet.
It is pertinent to underscore that owing to the nature of a fi-
nance lease transaction, the tax authorities in India may seek to
argue that as the lease is reflected as an asset of the lessee in his
balance sheet, on which he claims depreciation, and upon certain
risks and rewards incidental to ownership is transferred to the
lessee, the owner's legal title to the aircraft may be viewed as
nominal and symbolic and the lessee may be considered as the
owner/co-owner of the aircraft. Accordingly, the tax department
may seek to contest that the aircraft should be considered as be-
longing to or under the control of the lessee in order to recover tax
dues from the sale of such aircraft. However, the Indian civil
aviation laws do not allow co-ownership of an aircraft, the air-

44 Morepen Fin. Ltd. v. Reserve Bank of India, [2005] 60 SCL 410 (Delhi);
Monark Enters. v. Kishan Tulpule & others, [1992] 74 Comp Cas 89
(Bom); N. Subramania Iyer v. Official Receiver (1958) 1 SCR 257.