Unwinding the Vicious Loop

of Aircraft Finance Leases

by Nithya Narayanan*

I. Introduction

The global aviation industry is facing tough times, amid eco-

nomic as well as political uncertainties in different parts of the
world. The last two years have been a rather stormy period for
Indian airline companies and foreign aircraft financiers and les-
sors alike. Unable to honor its financial obligations and repay
debts, India’s third largest airline operator, Kingfisher Airlines
(Kingfisher), whose flying license was suspended in October last
year, recently submitted a revival plan to the Indian aviation reg-
ulator, the Directorate General of Civil Aviation (DGCA). The
death knell for Kingfisher was sounded as lender banks took pos-
session of the airline’s head office property in Mumbai and the
DGCA directed Kingfisher to clear all its debts and salaries of its
employees before resuming operations.
Kingfisher’s suspension of operations has had a flow-on impact
on the global leasing and financing sector, highlighting some of
the challenges facing aircraft financiers and lessors in the Indian
market and raising concerns regarding regulatory safeguards for
international investment in India.
A security interest is created by way of a charge over an air-
craft, in favor of the lenders who provide financing for its acquisi-
tion, before the aircraft is leased by its owner to an airline
operator. The Convention on International Interests in Mobile
Equipment1 and the Protocol2 referred to therein (Cape Town

* The author is an associate at AZB & Partners, Mumbai, India and an Ad-
junct Professor at Government Law College. The author would like to thank
Soumyadri Chattopadhyaya for his invaluable suggestions and assistance on
the paper.
1 Convention on International Interests in Mobile Equipment, opened for
signature Nov. 16, 2001, 2307 U.N.T.S. 285 (entered into force Apr. 1,
2004) [hereinafter Cape Town Convention].
2 Protocol to the Convention on International Interests in Mobile Equip-
ment on Matters Specific to Aircraft Equipment, opened for signature
Nov. 16, 2001, 2367 U.N.T.S. 517 (entered into force Mar. 1, 2006).
56 Issues in Aviation Law and Policy [Vol. 13:1

Convention), gives a remedy to the chargee lender to take posses-

sion of the aircraft from the lessee in an event of default. Though
India is a signatory to the Cape Town Convention, there is no
local legislation that gives effect to the provisions of the Conven-
tion, and thus the repossession of the aircraft from India is sub-
ject to extant Indian laws.3
The auditors of Kingfisher’s parent entity, United Breweries
(Holdings) Ltd., have expressed their concern that a threat of liq-
uidation in the foreseeable future cannot be ruled out owing to
the financial stress faced by Kingfisher. Lenders and owners of
aircraft are already battling it out in courts to have the aircraft,
which had been leased to Kingfisher, deregistered and repos-
sessed from India. Liquidation of the company could give rise to
additional hurdles, which are presently uncertain. Winding-up
and insolvency petitions filed against the airline company, either
by its creditors or by unpaid employees, could be tantamount to
an indeterminate struggle for the foreign lessors in repossession.
In light of the current situation, it becomes important to under-
stand and appreciate different aircraft leasing arrangements and
to ascertain the manner in which the nature of the lease can influ-
ence the results of such insolvency proceedings. This paper seeks
to address the practical issues faced by foreign lessors in reposses-
sion of aircraft from India that are leased to Indian lessees facing
insolvency proceedings. More specifically, it delves into the con-
cept of a “finance lease,” which confers vested ownership rights to
the lessee, and analyzes the repercussions of winding-up proceed-
ings commenced against the Indian lessees on such finance leases,
vis-à-vis the aircraft and the rights of the owners and chargee
lenders. It highlights the potential risks and possible impedi-
ments encountered by the lessors in reclaiming their aircraft due
to the unique characteristics of a finance lease. In addition, it
explores various options that the lessors could exercise in relation
3 Article 253 of the Constitution of India states:
Legislation for giving effect to international agreements:
Notwithstanding anything in the foregoing provisions of [Part
XI Relations Between the Union and the States, Chapter 1 –
Legislative Relations, relating to the distribution of legislative
powers], Parliament has power to make any law for the whole or
any part of the territory of India for implementing any treaty,
agreement or convention with any other country or countries or
any decision made at any international conference, association or
other body.
INDIA CONST. art. 253.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 57

to their leasing arrangements, in light of the extant corporate in-

solvency regime in India.

II. Understanding a Finance Lease

A lease is a contract between a lessor and a lessee, where the

actual or constructive possession of the assets owned by the les-
sor, along with the right to use such assets, is given to the lessee.
The lessee is under an obligation to return the assets to the lessor
and to deal with them in accordance with directions or terms of
the lease contract. The contract is usually for a specified period
of time – the “lease term” – during which the lessee makes peri-
odic payments of the “lease rentals” for the use of the asset. How-
ever, the lessee acquires no semblance of title to, or ownership of,
the asset. This kind of lease is called an operating or true lease.
In common law, the lessor reserving an economically meaning-
ful interest in the leased goods is the central feature of a lease.4
Thus, if the lessee is obligated to return the goods to the lessor at
termination of the lease period, and the goods are still valuable,
then the lessor has a meaningful residual interest and the transac-
tion is more likely to be recognized as a true lease. However,
there are arrangements when the lease is for the full economic life
of the asset or when the lessee has an option to become the owner
for “nominal” additional consideration. Where either factor ex-
ists, the transaction is not a true lease because the lessor has no
reasonable expectation of a meaningful residual.5
Finance leasing or capital leasing of aircraft, is another kind of
leasing involving a more complicated transaction, in which a les-
sor, often a special purpose company or partnership, purchases
the aircraft through a combination of debt and equity financing,
and then leases it to an airline operator.6 Such leases generally
4 Ordinarily, this means two things: (1) at the outset of the lease, the parties
expect the goods to retain some significant residual value at the end of the
lease term; and (2) the lessor retains some entrepreneurial stake (either the
possibility of gain or the risk of loss) in the value of the goods at the end of
the lease term.
5 One theme that often runs through the cases and authorities is that the
owner/lessor in a true lease at the outset must have some legitimate possi-
bility for return or other disposition of the leased property before the end
of the economic life of the property. See, e.g., In re Marhoefer Packing
Co., 674 F.2d 1139, 1143, 1145 (7th Cir. 1982).
6 As per International Accounting Standards (IAS 17), finance leases trans-
fer substantially all the risks and rewards of ownership, and give rise to
58 Issues in Aviation Law and Policy [Vol. 13:1

have a bargain purchase option, which allows the lessee to

purchase the leased asset for a price that is significantly lower
than the asset’s expected fair value at the date the option be-
comes exercisable. Unlike operating leases, in many jurisdictions
the lessee under a finance lease is considered the owner of the
leased asset and such leases are construed to be “conditional
sales” or “security interests,” disguised as a lease.7 Courts have
traditionally encountered difficulty in classifying transactions
that have been labeled as leases and in drawing a distinction be-
tween a classic lease and a finance lease.8 A mere option to ac-
quire the leased assets upon expiration of the lease term does not
transform the lease agreement into a contract of sale.9 If, how-
ever, the lessee has the opportunity to become the owner of the
leased assets for nominal or no additional consideration, then the
transaction is likely to be deemed a sale.10

asset and liability recognition by the lessee and a receivable by the lessor,
whereas operating leases result in expense recognition by the lessee, with
the asset being recognized by the lessor.
7 Corinne Cooper, Identifying a Personal Property Lease Under the UNN,
49 OHIO ST. L.J. 195 (1988); Laura J. Paglia, U.C.C. Article 2A: Distin-
guishing between True Leases and Secured Sales, 63 ST. JOHN’S L. REV.
69 (1988).
8 Due to the inadequate standards for evaluating the facts, classification has
been difficult. Crest Inv. Trust, Inc. v. Atlantic Mobile Corp., 252 Md.
286, 289, 250 A.2d 246, 248 (1969) (facts are controlling to show parties’
intent); IFG Leasing Co. v. Schultz, 217 Mont. 434, 436, 705 P.2d 576, 577
(1985) (facts of case determine character of transaction). See All-States
Leasing Co. v. Ochs, 42 Or. App. 319, 327, 600 P.2d 899, 904 (1979); if title
is to pass to the lessee, the transaction is likely to constitute a sale. See
Transcon. Refrigeration Co. v. Figgins, 179 Mont. 12, 17, 585 P.2d 1301,
1304 (1978) (describing sale as a “passing of title from the seller to the
buyer”). Further, some courts consider the existence of a lessee’s equity
interest in the property as significant in drawing the lease-sale-security
interest distinction.
9 RCA Corp. v. State Tax Comm’n, 513 S.W.2d 313 (Mo. 1974); see also
Brokers Leasing Corp. v. Standard Pipeline Coating Co., 602 S.W.2d 278,
280–81 (Tex. Ct. App. 1980) (Option, rather than obligation, to purchase
does not create sale.).
10 Cooper, supra note 7. The courts in the United States have developed
three tests to determine whether the option price is nominal: (i) the eco-
nomic compulsion test, under which exercising the purchase option is the
only reasonable alternative for the lessee; (ii) the relationship between the
option price and the original purchase price; and (iii) the relationship be-
tween the option price and the value of the goods at the time the option is
exercised; this test should focus on the residual as anticipated by the par-
ties at the time the lease transaction is entered which grants the option
and sets the option price. In Appleway Leasing, Inc. v. Wilken, 39 Or.
App. 43, 591 P.2d 382 (1979), the court dealt with a disparity between the
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 59

Moreover, taxation law and accounting rules of different coun-

tries employ different characterization standards for leases,11
leading to asymmetrical treatment of trans-border leases and
causing an inefficient and distorted international flow of goods
and credit.12 For the purposes of lease accounting, characteriza-
tion of lease transactions hinges on “ownership” – it’s either the
legal ownership or economic ownership of the leased asset that
determines in whose hands it gets capitalized.13 Unlike an oper-
ating lease, in which property rights are transferred from one
party to another for a limited period, in a finance lease transac-
tion the parties may agree to a transfer of the leased asset for a
period of time equal to the useful life of the asset, or may fix a
purchase option at a price so low that no reasonable person
would fail to exercise it at the end of the lease term. Such a fi-
nance lease that transfers substantially all of the economic bene-
fits and risks of the asset is recognized by the lessor in its balance
sheet as a receivable, at an amount equal to its net investment in
the lease; whereas such leases are recorded as an asset and liabil-
ity to make future payments in the books of the lessee, entitled to
claim depreciation on the same. This approach is consistent with
the International Accounting Standard (IAS 17) and the Indian
Accounting Standard (Ind AS 17).

anticipated and actual fair market value of the leased goods. The lease
contained an option specifying that the anticipated fair market value of
the goods was $1900. The court considered the option nominal when the
evidence showed that the actual fair market value was between $9000 and
$10,000. There was no evidence that this disparity was the result of an
unanticipated change in market value; the court correctly discerned that
the anticipated residual value set by the parties was an attempt to evade a
finding that the lease was a security interest.
11 Countries where requirements for statutory accounts are fiscally driven
(for example France and Belgium), make no distinction in the category of
lease and rely on the legal title of the asset for accounting the lease trans-
action and it is the owner who depreciates the financed asset and the
lessee deducts rentals, even though it acquires a vested equity interest in
the asset. Whereas, tax systems that distinguish between leases according
to the economic substance of a transaction generally focus on the alloca-
tion of risks and benefits associated with the parties’ interests in the
residual value of the leased assets. Therefore, nations such as Germany,
Canada, and the United States characterize lease transactions based on
identifying the party with an interest in the asset at the end of the lease
term.
12 William W. Park, Tax Characterization of International Leases: The Con-
tours of Ownership, 67 CORNELL L. REV. 103 (1981).
13 See International Accounting Standards, IAS 17–Leases, available at
http://www.iasplus.com/en/standards/ias/ias17.
60 Issues in Aviation Law and Policy [Vol. 13:1

III. Aircraft Finance Leasing in India

Though several aircraft leasing arrangements with Indian air-

line operators are modeled as finance leases, one cannot deny the
fact that Indian laws are grossly inadequate to address the possi-
ble issues that could arise. There is no specific statute in India
governing lease of movable properties.14 The principles of bail-
ment under Indian contract laws are applicable to lease of mova-
ble properties.15 Moreover, the features of a finance lease are
similar to that of a hire-purchase arrangement.16 A circular of the
Reserve Bank of India,17 in relation to remittance of lease rentals
for import of aircraft taken on lease, has defined a finance lease
transaction to mean a “lease transaction containing [an] option to
purchase the asset [i.e., the aircraft] at the end of the lease pe-
riod. . . .18 Thus, Indian regulation of finance leases is still at a
nascent stage, with only an approval required from the Reserve
Bank of India sanctioning the execution of such finance lease
transactions; the legislature or the judiciary in India have not wit-
nessed the potential complications that could arise in ascertaining
the proprietary status of an asset leased pursuant to a finance
lease. Furthermore, the accounting treatment of a finance lease
in India recognizes the lessee’s ownership rights in the asset from
the date the finance lease becomes effective and treats it as a debt

14 The Transfer of Property Act, 1882 provides for the laws that govern lease
of immovable property.
15 Chapter IX of the Indian Contract Act, 1872; Asiatic Gases Ltd. v. State
of Orissa & Ors, [2001] 121 STC 405 (Orissa); Rastriya Ispat Nigam Ltd.
v. Commercial Tax Officer, Company Circle, [1990] 77 STC 182 (AP).
16 In a hire purchase arrangement, the ownership rights in the goods do not
pass at the time of the agreement or the lease, but pass when the option of
sale/purchase is exercised, in accordance with the terms of the agreement
or the lease. The hirer has the option to return the goods or to become
owner thereof by payment in full of the stipulated price for exercising the
option; whereas in a plain vanilla leasing agreement the lessee or the hirer
has no such option. D. V. Corp. v. State of Bihar, AIR 1961 SC 449; 20th
Century Fin. & Consultancy Servs. Ltd. v. Khanna Rayon Indus. Ltd.,
1991 (4) Bom CR 301; Ass’n of Leasing & Fin. Serv. Cos. v. Union of
India and Ors (decided by Supreme Court of India on October 26, 2010);
K.L. Johar & Co. v. Deputy Commercial Tax Officer, [1965] 2 SCR 112;
Sundaram Fin. Ltd. v. State of Kerala, AIR 1966 SC 1178.
17 India’s central banking institution.
18 Import of Aircraft/Aircraft Engine/Helicopter on Lease Basis, A.P. (DIR
Series), Circular No. 24, Mar. 1, 2002 (emphasis added), available at http://
rbidocs.rbi.org.in/rdocs/notification/PDFs/28584.pdf.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 61

on its balance sheet, even when the purchase option therein

hasn’t been exercised.19
Though the courts in India, with their pragmatic approach,
have come to the rescue of some of the distrait lessors and finan-
ciers when handling cases in relation to deregistration and repos-
session of aircraft,20 from an analysis of the court rulings, it is
pertinent to note that in all these cases, either the lease agree-
ments had already been unilaterally terminated or the aircraft in-
volved were flown out of Indian territory at the time when the
deregistration request was made. The aircraft being physically
located outside the Indian jurisdiction curtails the powers of the
Indian regulatory authorities, including the DGCA, the Indian
courts, and the lessee from taking any unfavorable steps towards
the lessors. Also, a failure by the DGCA to deregister the aircraft
would be violative of the Indian aviation laws, which require it to
cancel the certificate of registration if the lease in respect of the
aircraft is not in force.21
In a recent ruling of the Delhi High Court, DVB Aviation Fi-
nance Asia PTE Ltd. v. Directorate General of Civil Aviation,22
for the first time, a lessee (here, Kingfisher) objected to the repos-
session of the aircraft by claiming ownership rights in the leased
aircraft. DVB Aviation Finance Asia PTE Ltd. (DVB), the acqui-
sition financier of the two Airbus A320-232 that were leased to
Kingfisher, exercised its right of termination of the leases and is-
sued several letters to the DGCA to deregister the same. When

19 Aswath Damodaran, Leases, Debt and Value, 4 (1) J. APPLIED RES. ACCT.
& FIN. 3 (2009).
20 In Corporate Aircraft Funding Company LLC v. Union of India (decided
Mar. 14, 2013), the Delhi High Court directed the DGCA, by way of a
writ of mandamus, to deregister an aircraft which was leased to Golden
Wings Private Ltd., on the basis of the Irrevocable Deregistration and
Export Authorization (IDERA) and Deregistration Power of Attorney
(DPOA), both granted in favor of Corporate Aircraft Funding Co. LLC.
The court held that the powers of attorney are coupled with interest and
the power of deregistration conferred therein may be exercised by the at-
torney at its sole discretion, in the exercise of remedies provided in under
the extant laws in India and Article IX of the Protocol to the Cape Town
Convention.
21 Aircraft Rules, 1937, Rule 30(6)(iv); Civil Aviation Requirements: Proce-
dures relating to Registration/Deregistration of Aircraft, Section 2, Air-
worthiness, Series F, Part I of Sept. 10, 1998, cls. 9.1 & 9.2 [hereinafter
Registration/Deregistration Procedures], available at http://dgca.nic.in/ftp-
pub/D2F-F1.pdf.
22 W.P. (C) 7661/2012 & CM No.4208/2013 (Apr. 8, 2013).
62 Issues in Aviation Law and Policy [Vol. 13:1

the airline objected to the deregistration and the unilateral termi-

nation of the lease on the ground that Kingfisher had a right to
purchase the aircraft and had acquired equity interest in the air-
craft with the payment of lease rentals to the lessor under the
leasing arrangement, and DGCA insisted on Kingfisher’s no-ob-
jection certificate for processing the deregistration of the aircraft,
DVB filed court proceedings against Kingfisher and United
Breweries (Holdings) Limited. The court directed DGCA to dere-
gister the aircraft and held that Kingfisher’s no-objection certifi-
cate was not required if DVB had the deregistration power of
attorney, empowering the bank to deregister the aircraft. How-
ever, the court did not go into the merits of Kingfisher’s conten-
tion that deregistration of the aircraft would not be in consonance
with its right to exercise the purchase option under the lease.
Without delving into Kingfisher’s objection, the court merely
held that inter-se rights of parties thereunder, which gives King-
fisher a right to purchase the aircraft, should not come in the way
of DVB’s right to seek deregistration. Moreover, the court noted
that the aircraft had already been flown to Turkey and were
outside the jurisdiction of Indian courts. Therefore, it remains to
be tested whether the Indian courts would uphold the equity
rights claimed by a lessee on the aircraft by reason of a purchase
option built into leasing arrangements in a situation when the air-
craft is still in India and within its territorial jurisdiction.
India has always been considered one of the most attractive
jurisdictions by the aircraft leasing industry. However, unlike
other developed jurisdictions where courts have explicitly held
against treating a finance lease as a true lease structure, there is a
lack of judicial development in India in relation to finance leasing
and the possible issues that might arise due to the inalienable in-
terests that it vests in a lessee. It is difficult to determine if a
winding-up court would be satisfied by these arguments and con-
strue the leased asset to be the “property” of the company that is
being wound up, and direct the liquidator to take custody of the
same.
Participants in a finance transaction have to be particularly
cautious of the risks involved for a foreign lessor of aircraft on
long-term leasing arrangements to Indian airline operators. Fi-
nancial transactions must be structured in the background of
bankruptcy law. Most defaults in payment of lease rentals are
caused by financial distress of the lessee company and ultimately
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 63

result in the winding-up of such company. The courts in India

haven’t had the opportunity to analyze the impact of an interven-
ing insolvency of a lessee company on the title of the leased asset
and the lessor’s right of repossession of such asset. The next part
of this article elucidates Indian law on liquidation of a company,
which is akin to Chapter 7 of the Bankruptcy Code of the United
States, and the inherent threats therein to a lessor’s rights.

IV. Laws on Winding-Up of a Company in India

The primary legislation dealing with corporate insolvency in

India is the Companies Act, 1956.23 An Indian company can be
wound-up either pursuant to a direction of a high court (compul-
sory winding-up) or a resolution to that effect being passed by its
shareholders or creditors (voluntary winding-up).24 A compulsory
winding-up is deemed to commence at the time of presentation of
the petition of winding-up.25 On the other hand, a voluntary
winding-up shall be deemed to commence at the time when the
resolution for voluntary winding-up is passed.26 It is vital to note
that, from the commencement of the winding-up, the company
ceases to carry on its business, except to the extent required for
the beneficial winding-up of such business. That said, the corpo-
rate state and corporate powers of the company continue until it
is dissolved.
On commencement of such proceedings, the court, in a compul-
sory winding-up, and the members/creditors, in a voluntary
winding-up, appoint a liquidator for the company, who takes into
his custody and control, all “properties, effects and actionable
claims to which the company appears to be entitled.”27 Such liqui-
dator is entitled to sell all the assets of the company (immovable,
moveable, and actionable claims) by public auction or private
contract to any person in the interests of the concerned parties.
A finance lease, conferring proprietary rights over the lessee,
although vested, makes this provision of law a bit tricky. In a
plain vanilla lease or a lease-back, the aircraft given on a bail-
ment or hire could not be construed as the property to which the

23 The Companies Act, No. 1 of 1956 (India) [hereinafter Companies Act].

24 See generally id. pt. VII, ch. II & III.
25 Id. § 441.
26 Id. § 486.
27 Id. § 456.
64 Issues in Aviation Law and Policy [Vol. 13:1

lessee company appears to be entitled; thereby disabling the liqui-

dator from taking custody and disposing it as an asset of the com-
pany. However, a finance lease bestows vested ownership rights
in the lessee with every installment of lease rental that it makes
towards the lease and enables the lessee to purchase the aircraft
subject to the terms and conditions thereunder. Usually, such a
right is available to the lessee upon payment of the purchase price
(which is below the fair market value of the aircraft) and other
termination amounts, including any unpaid lease rentals. In such
a situation, the liquidator could take possession of the aircraft on
the premise that such an arrangement creates an interest in the
aircraft in favor of the lessee and could be interpreted to be prop-
erty to which the company appears to be entitled. In respect of
aircraft finance leases, the liquidator should not be able to sell the
aircraft, as the lessee in liquidation does not own the aircraft un-
less and until the purchase option, if any, is exercised. Having
said this, if the liquidator is able to sell the aircraft, the lessors
could apply to the court requiring the liquidator to account to
them from the sale proceeds.
The courts, in order to save recurring liability to pay rent,
could also direct the liquidator to surrender possession of such
property to its owner. There have been several judicial prece-
dents where courts have allowed the owner to repossess its prop-
erty from the liquidator. However, none of these refer specifically
to an aircraft, but deal with the lease of immovable properties.
The liquidator is also empowered to disclaim those contracts re-
lating to the continued use of its property, which impose a heavy
burden upon the company in liquidation, with the leave of the
court, in order to prevent further losses to a company in the pro-
cess of winding-up.28
Therefore, if the lessee goes into liquidation, the consequences
for the lessor in a plain vanilla lease are substantially different
from those for the lessor in a finance lease, even though the par-
ticulars of the two transactions are substantially the same. As
explained in Part III, supra, the law in India in relation to finance

28 In Asoka Ghose v. OL, Remington Rand of India Ltd., [2004] 51 SCL 572
(Cal.), the court granted permission to the liquidator to disclaim an oner-
ous lease, as the company’s liability to pay rent would have continued
until the lease was disclaimed. In terms of applicability of precedent, this
is useful because it inherently recognizes the concept of a company’s abil-
ity to use leased property, subject to the continued payment of lease rent-
als, even when the company in question is in winding-up.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 65

leasing is still at its embryonic stage. The impact of the potential

risks involved in having transactions that create an interest in
favor of the lessee, but in the guise of a lease, haven’t yet been
witnessed by the aviation business in India.
The next part of the paper lays down in detail, the risks to
which lessors are exposed, which could pose impediments in their
efforts to retrieve their leased aircraft.

V. Potential Risks

An aircraft owned by a company incorporated outside India

can be registered in India if such aircraft has been given on a
lease to an Indian operator.29 This registration is made in the
name of the owner/lessor of the aircraft and not of the operator.
Under Indian civil aviation law, the operator is required to carry
the certificate of registration, evidencing such registration, at all
times on board the aircraft.30 The civil aviation requirements
also prescribe the process for registration and deregistration of
aircraft from the Indian civil aviation registry, maintained by
DGCA.31 Pursuant to the discourse on the insolvency laws in In-
dia, enumerated in Part IV, supra, this part of the article under-
lines the impending risks of a finance lease that could either delay
or disrupt the process of aircraft deregistration and repossession
by aircraft financiers and lessors.

A. Disposal of the Aircraft

A provision in the Companies Act stipulates that in the case of

a court-directed winding-up of the company, any disposition of
the property of such company made after the commencement of
the winding-up, without leave of the court, is void unless the
court directs otherwise.32 As stated in Part IV, winding-up by the
court is deemed to commence at the time of presentation of the
petition. However, if such property of the company were to be

29 Registration/Deregistration Procedures, supra note 21, cls. 9.1 & 9.2.

30 Id.
31 Id.
32 Companies Act, supra note 23, § 536(2).
66 Issues in Aviation Law and Policy [Vol. 13:1

disposed of during such moratorium period,33 such disposition

would not be void, if no winding-up order is ultimately passed.34
Typically, a lessee does not have ownership rights over assets
that are leased to it. Having said that, particularly in case of fi-
nance leases under which, with every payment of the lease rental
to the lessor, the lessee builds equity interest in the aircraft, the
creditors or employees of the lessee may challenge any disposal of
the asset, made by its owner/lender, contending that the liquida-
tor exercising the purchase option thereunder and liquating the
value of their interests therein would be in the best interest of the
lessee. If such a challenge is successful, the court may set aside
the termination of the lease and the disposal of the asset. The
court may require the aircraft lessors and lenders to account to
the liquidator out of the sale proceeds or may pass orders un-
winding any such sale of the aircraft.
Therefore, an aircraft leased out on a finance lease basis to an
Indian operator, with a purchase option embedded therein, if sold
by the lender who has financed its acquisition by exercising the
rights of a chargee or mortgagee, such disposal may be set aside
by the courts in India, if the winding-up proceedings have com-
menced and if the court subsequently passes a winding-up order
against such lessee company. However, if subsequently no such
order is passed, and the court disposes of the petition, the sale of
aircraft cannot be set aside, i.e., the effect of such order is retro-
spective, and dates back to the commencement of such
proceedings.
Moreover, once an order for winding-up has been made or a
liquidator has been appointed, no legal proceedings can be insti-
tuted against the company, or in a case where the proceedings
have already been instituted, the legal proceeding cannot con-
tinue, except with the leave of the court.35 In the context of pay-
ment of lease rentals after commencement of the winding-up
proceedings, it must be noted that the lessee will remain liable for
the same.36

33 “Moratorium” in this context means the inability to dispose any property

of the company against whom a winding-up petition has been filed but
before the winding-up order is passed.
34 Companies Act, supra note 23, § 536.
35 Id. § 446.
36 Rajah of Vizianagaram v. O.L., Vizianagaram Mining Co. Ltd., AIR 1952
Mad 136.
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,39 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.41
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, Provisional Liquidator, 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.
70 Issues in Aviation Law and Policy [Vol. 13:1

craft is required to be wholly owned by only one entity.45 Hence,

it is not clear how the tax authorities would be taking such a
stand in order to exercise their right of seizing the asset, to re-
cover taxes.
Generally, liens on account of operation of the aircraft (such as
amounts owed to airport operators) should not attach to an air-
craft on the basis that the dues are owed by the operator (i.e., the
lessee) and not the owner. This issue was dealt with in depth in
Aer Lingus Limited v. Airport Authority of India,46 where the
Bombay High Court held that if dues are owed by the airline
operator to the Airport Authority of India, the owner of such air-
craft cannot be deprived from deregistering and repossessing his
aircraft. However, as discussed previously, if the aircraft is
leased to the Indian lessee on a finance lease basis, the creditors of
such lessee may possibly be able to make an argument that the
lessee has an ownership interest in the aircraft, and on that basis,
may be able to exercise liens over the aircraft.
DGCA could consider having a central register of aircraft/navi-
gation charge in India, by taking a leaf out of the arrangement
adopted by the EUROCONTROL member states. The Central
Route Charges Office is a route charge system operating under
the provisions of the EUROCONTROL Convention and the
Multilateral Agreement relating to Route Charges, signed in
1981.47 This system adopts a common policy for en route charg-
ing (which includes terminal and communication charges) and es-
tablishes a joint system for the billing and collection of such
charges. The DGCA would greatly benefit from having a similar
central registry as this will not only record all charges incurred by
an operator, but also eliminate duplication in this regard. Moreo-
ver, it could also provide uniformity and increase efficiency of
cost-recovery over the widest possible area.

45 Aircraft Rules, 1937, Rule 30(2); Registration/Deregistration Procedures,

supra note 21, cl. 3.1.
46 Writ Petition No. 618 of 1997 & Notice of Motion No. 586 of 1997. De-
cided Mar. 9, 2011.
47 EUROCONTROL is the European organization for the safety of air navi-
gation, founded in 1960, working for seamless, pan-European air traffic
management.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 71

VI. The Vicious Loop

The remedies of an individual in whose favor a mortgage or

charge over an aircraft is created, under the Cape Town Conven-
tion, are subject to specific declarations made by individual coun-
tries thereunder.48 The remedies include the right to take
possession of the aircraft from its lessee. India has declared that
the chargee will not require leave of the court unless there is an
express provision under the Cape Town Convention requiring the
chargee to seek leave of the court. This can be construed to imply
that even in case of a bankruptcy of an Indian lessee, such
chargee will not be required to obtain leave of the court to repos-
sess the aircraft. However, as mentioned before, India not having
enacted any legislation implementing the Cape Town Conven-
tion, the provisions of such convention are subject to the existing
or future laws of India (including delegated legislation).49 As a
result, the remedies prescribed under the Cape Town Convention
may be construed by the Indian courts to be inconsistent with the
extant insolvency laws applicable to companies and may there-
fore require the chargee (in the present case the lenders/financiers
to the acquisition of the aircraft or its lessors) to take leave of the
court in order to repossess the aircraft.50
Prior to court sanction for repossession, the aircraft needs to be
deregistered by the DGCA from its registry. DGCA has been re-
fusing deregistration of aircraft that were leased by foreign leas-
ing companies to Kingfisher, primarily because there are
outstanding dues payable by Kingfisher to several authorities in
India. However, such denial by DGCA falls foul of India’s obli-
gations under the Cape Town Convention and has found criti-

48 Article 8 – Remedies of charge: (1) In the event of default as provided in

Article 11, the chargee may, to the extent that the charger has at any time
so agreed and subject to any declaration that may be made by a Con-
tracting State under Article 54, exercise any one or more of the following
remedies:
(a) take possession or control of any object charged to it;
(b) sell or grant a lease of any such object;
(c) collect or receive any income or profits arising from the management or
use of any such object.
Cape Town Convention art. 8, supra note 1.
49 See INDIA CONST. art. 253, supra note 3.
50 Given that India acceded to certain opt-in provisions of the Cape Town
Convention only in 2008, there are not many instances of enforcement
actions, administrative actions, or judicial decisions in relation to the
Cape Town Convention in India.
72 Issues in Aviation Law and Policy [Vol. 13:1

cism, being violative of the Cape Town Convention. Moreover,

such actions of the regulator do not find sanction in any of the
extant laws of the country.
However, after several letters being written by distressed les-
sors, whose aircraft had been held hostage by government entities
for their unpaid dues, the Ministry of Civil Aviation (Ministry) is
planning to formulate a new policy concerning the de-registration
and repossession of aircrafts. This broad policy initiative, which
will incorporate major international conventions such as the
Cape Town Convention and their aircraft equipment protocols,
would aim at giving aircraft lessors the first right over creditors
to repossess the aircraft. The Ministry is believed to be of the
view that instead of punishing third-party entities such as air-
craft-leasing companies, the airport authorities should insist on
bank guarantees from airlines to use airports, which can be in-
voked in the case of a default, instead of impounding planes and
punishing the owners of the aircraft.
The fear of India being viewed as a “hostile” environment to
the aviation industry in general and international lessors, in par-
ticular, has recently stirred courts, which have been issuing direc-
tives in favor of owner lessors and aircraft financiers. While
analyzing India’s general opt-in declaration, the Delhi High
Court in Corporate Aircraft Funding Company LLC v. Union of
India,51 held that the aircraft could not be detained on grounds of
invasion of custom duty as such levies were to be borne by the
carrier and not the owner; thus the refusal to deregister the air-
craft was unreasonable and unwarranted. Further, the Delhi
High Court in the International Lease Finance Corporation
(ILFC) order permitted ILFC in the successful deregistration of
all six aircraft, which it had leased to Kingfisher, and the exporta-
tion of two of them from India, thereby adhering to the principles
denoted in the Cape Town Convention and international best avi-
ation practices. ILFC is currently facing “bureaucratic and regu-
latory obstacles” in exporting the remaining four aircraft, which
have been removed from Kingfisher’s possession.52

51 Order dated Mar. 14, 2013.

52 See ILFC Faces Obstacles in Exporting Planes Leased to Kingfisher, THE
HINDU, Aug. 20, 2013, available at http://www.thehindu.com/business/In
dustry/ilfc-faces-obstacles-in-exporting-planes-leased-to-kingfisher/article
5041786.ece.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 73

In light of the potential risks of a finance aircraft lease, eluci-

dated in this paper and the uncertainty in the views of the avia-
tion regulator and judiciary in India in this regard, the foreign
leasing companies and international aircraft financiers may find
themselves entangled in a vicious loop, arresting their efforts in
repossessing their aircraft from an Indian lessee. Unwinding and
surpassing this loop hinges upon whether the leased asset under a
finance lease, is treated as the lessee’s equity-built up, sufficient
for the lessee to claim rights over the lessor’s rights of deregistra-
tion, a question which still remains untested and unanswered by
the Indian courts.
74 Issues in Aviation Law and Policy [Vol. 13:1