Enforcement of Default Remedies in Aviation Finance and Leasing Transactions

This is part 3 of a series of articles on the law of aviation finance and leasing in Malaysia. The authors have written part 1, an overview of the legal framework governing aviation finance and leasing in Malaysia, and part 2, registration requirements applicable to aircraft and the financiers’ and lessors’ interests in aircraft. In this part 3, the authors will discuss about the enforcement of financing and leasing documents and remedies available to chargors and lessors.

Introduction

One of the most critical considerations in any aviation finance and leasing transaction is the ability of a financier, lessor or secured party to effectively enforce its rights over an aircraft asset in the event of a default. This issue is of particular significance given the unique characteristics of aircraft assets, where are highly mobile and valuable, capable of being operated across multiple jurisdictions within a short period of time.

Unlike conventional asset financing transactions, where the subject assets are typically located and remains within the jurisdiction, aviation assets present a distinct enforcement challenge. The physical location and operational mobility of an aircraft can significantly affect the practical ability of a financier or lessor to take possession, exercise security rights, or realise the value of the asset.

International Interests in Mobile Equipment (Aircraft) Act 2006

In Malaysia, the enforcement of financiers’ and lessors’ rights is generally regarded as relatively efficient and creditor friendly. This is largely attributable to Malaysia’s comprehensive adoption of the Convention on International Interests in Mobile Equipment (commonly known as the Cape Town Convention) and its Aircraft Protocol into domestic law, through the International Interests in Mobile Equipment (Aircraft) Act 2006 (“the IIME Act”).

Essentially, the IIME Act incorporates the provisions of the Cape Town Convention and the Aircraft Protocol so that the international legal framework for secured financing and leasing transactions on aircraft objects operate as the Malaysian law. It provides a mechanism for registration of international interests, prospective interests and non-consensual rights through the International Registry, with priority being determined on a “first-to-file” basis.

While the IIME Act incorporates the Cape Town Convention almost in its entirety, its application is expressly confined to “aircraft objects” only, which means “any airframe, aircraft engine and helicopter as defined under Article I(2) of the Aircraft Protocol”.

Under the IIME Act, an “international interest in mobile equipment” is defined to include an interest in airframes, aircraft engines and helicopters: (1) granted by the chargor under a security agreement; (2) vested in a person who is the lessor under a leasing agreement; or (3) vested in a person who is the conditional seller under a title reservation agreement.

An interest is constituted an international interest when the agreement creating or providing for the interest: (1) is in writing; (2) relates to an object of which the chargor, conditional seller or lessor has power to dispose; (3) enables the object to be identified in conformity with the Protocol; and (4) in the case of a security agreement, enables the secured obligations to be determined, but without the need to state a sum or maximum sum secured.

Default

Before a financier, lessor or secured party may exercise its right to repossess an aircraft object, it must first establish that an event of default has occurred. Typically, the parties to an aviation financing or leasing transaction will expressly define, in their contractual arrangements, the events that constitute a default and the circumstances in which the creditor may exercise its contractual rights and remedies, including those available under the Cape Town Convention and the Aircraft Protocol. These events of default may include, among others, failure to make payment when due, breach of contractual obligations, insolvency-related events, or other circumstances that materially affect the creditor’s rights in respect of the aircraft object.

Depending on the terms of the relevant agreement, the exercise of contractual rights and remedies may also be subject to procedural requirements. For instance, certain agreements may require the creditor to issue a notice of default to the debtor, providing the debtor with an opportunity to remedy the default within a specified period before enforcement action may be taken. Such contractual cure periods are intended to balance the creditor’s right to protect its interests with the debtor’s opportunity to rectify the breach.

Enforcement

Once an event of default has occurred, a financier, lessor or secured party may exercise its rights to take possession or control of any aircraft object charged to it. Generally, the enforcement of the international interests in aircraft objects would still require a court order. This is not because of legal limitation but due to operational realities. Aircraft objects are ordinarily located within highly regulated and restricted zones, such as airport aprons, hangars and airside facilities, where access is tightly controlled by airport authorities and aviation regulators.

Accordingly, self-help remedies that are contractually available to financiers or lessors, for example, the pre-signed irrevocable deregistration and export request authorisation (IDERA), may in practice have limited standalone utility, even though IDERA is recognised in domestic law through the IIME Act.

That said, IDERA remains an important and widely used instrument in aviation finance and leasing transactions. It continues to serve a valuable evidential and facilitative function, including demonstrating the authority granted to financiers or lessors over the aircraft assets. It may be used to prove the authority given to the financiers or lessors over the aircraft objects. This would ease the process of obtaining a court order for the repossession of the aircraft objects.

It is noteworthy that a financier, lessor or secured party may seek speedy interim relief from the Malaysian courts, subject to the proof of default, pending the final determination of its claim for the following purposes:

(1) preservation of the object and its value;
(2) possession, control or custody of the object;
(3) immobilisation of the object; and
(4) lease or management of the object and the income therefrom.

It is also noteworthy that the Malaysian courts do not require the relevant security interest or underlying financing agreement to be governed by the Malaysian laws before granting relief under the Cape Town Convention.

Authors’ experience

The authors have, on two separate occasions, successfully obtained injunctive relief from the Malaysian courts, restraining the departure of a leased aircraft and an aircraft with leased engine from the Kuala Lumpur International Airport, arising from unpaid lease obligations. Both cases were subsequently resolved through out-of-settlements, with an outcome that was favourable to the lessors.

In these two cases, the lessors commenced legal proceedings by originating summons premised on their contractual rights pursuant to the respective lease agreements. The Cape Town Convention provides for several default remedies to a financier or lessor in the event of default by a borrower or lessee of aircraft objects. One of the default remedies is that the financier or lessor may take possession or control of aircraft objects.

The leased aircraft and the leased aircraft engine in question were regularly used by the lessee for several international routes. Hence, an injunctive relief for the detention of the aircraft and aircraft engine within Malaysia pending the disposal of the originating summons was essential.

Such a need was envisaged by the drafters of the Cape Town Convention as it provides for interim relief pending the final determination of disputes where a lessor or creditor may obtain a speedy relief from the court for the purposes of preservation, possession, control, custody or immobilisation of aircraft objects.

Injunction applications were filed simultaneously with the originating summonses. Due to the urgency, the hearing was scheduled and heard expeditiously by the Malaysian court. Ex-parte injunction orders were granted by the Malaysian court on the same day of the hearing. On both occasions, it merely took less than three days from the filing of the injunction applications until the issuance of the injunction orders.

The execution of the injunction orders was difficult. On one hand, it was necessary to ensure that the lessee was not being alerted to the existence of the injunction order (as the aircraft might not “fly” to Malaysia if the lessee knew that it would be arrested); on the other hand, it was also necessary to ensure that the relevant authorities who were required to assist on the arrest would be notified in advance. In this regard, time management and planning were imperative.

On both occasions, the enforcement team was on standby at the airport a few hours before the estimated arrival time of the aircraft and closely tracked their location. After the enforcement team’s explanation with the presence of the court orders, the relevant authorities were cooperative, and the execution of the injunction orders were successful.

Shortly after the arrest, the lessee approached the lessor to negotiate for settlement and lifting of the ex-parte injunction order. The negotiation yielded fruitful results almost immediately where the lessee settled the outstanding rents to secure the release of the aircraft. The lessor eventually agreed to withdraw the originating summons where, as a result, the ex-parte injunction order was lifted by the Malaysian court.

The two cases demonstrate that Malaysia is a platform where international parties may rest assured that their contractual rights pursuant to cross-border agreements, including those commonly used for leasing of aircraft objects in the aviation industry, would be upheld by the Malaysian courts. Interim remedies may be sought to preserve their contractual rights pending the final determination of the dispute in the Malaysian courts.

Conclusion

The ability to effectively enforce rights over an aircraft object remains a fundamental consideration in any aviation financing or leasing transaction. Given the mobile nature of aircraft and the cross-border operations of the aviation industry, the existence of contractual rights and remedies alone are insufficient. The true value of those rights and remedies lie in the ability of financiers, lessors and secured parties to obtain timely and effective remedies when a default occurs.

Ultimately, the strength of an aviation finance and leasing regime is measured not only by the rights and remedies it creates, but by the effectiveness and speed with which those rights and remedies can be enforced. Malaysia’s adoption of the Cape Town Convention, coupled with the supportive approach of its courts, provides confidence to aviation industry stakeholders that their interests in high-value mobile assets can be effectively preserved and enforced.

This article is authored by our Partner, Mr Cheah Soo Chuan and Senior Associate, Mr Khor Wei Wen. The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice.

Cheah Soo Chuan
Partner
T: +603 2050 1987
soochuan.cheah@taypartners.com.my

Khor Wei Wen
Senior Associate
weiwen.khor@taypartners.com.my