assignment and novation india

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Sub-contracting and Assignment : Resolving the Legal Conundrum

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to “sub-contract” or “assign” their rights and obligations to a third party depending upon the nature of the contract.

In common parlance, sub-contracting and assignment are used interchangeably, however, a significant difference lies between the two when one examines the terms from a legal stand point. This post aims to discuss the concept of Sub-Contracting and Assignment and explains the key difference between the two concepts.

Sub-contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black’s Law Dictionary, a sub-contract is “where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor .” [1] A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Sub-contracting is generally undertaken in complex projects where the contract has a prolonged life cycle or multiple components for completion of a project, for instance, infrastructure contracts, construction contracts, renewable energy contracts or certain information technology-related contracts. However, the rights and duties of the sub-contractor under the sub-contracting agreement are relatively similar to that of the principal contractor in the main agreement.

Furthermore, while drafting a contract, one must ensure to incorporate a clause on sub-contracting which clearly spells out that parties to the contract shall sub-contract the rights and obligations only after seeking prior written consent from the other party. The sub-contracting arrangement maybe two-fold, depending upon the nature of the main contract:

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor’s agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments [2] upheld that in the absence of a back-to-back covenant in the main contract, “ the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate” . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party’s concurrence. Section 37 of the India Contract Act, 1872 (“ Contract Act ”) enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a “complete transfer of rights to receive benefits” accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of “rights” vis à vis assignment of “obligations”. The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited [3] categorically distinguished between assignment of “rights” and “obligations”. The court upheld that, “ an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties” . Primarily, the court clarified that obtaining prior consent to assign “obligations” under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan [4] , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison [5] , the defendant’s wife pledged to perform piano at a concert on a specific date. Due to “her illness”, she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant’s wife’s good health and personal talent, and the defendant’s wife’s illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract’s non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the “promisor’s expertise” in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the “agreement to sell” in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

The apex court has time and again reiterated that the best policy is to unequivocally state the intent with respect to assignment in the agreement to avoid litigation in the future. The contracting parties must expressly specify the rights and obligations stemming from assignment under a contract. Any agreed limitation on such an assignment must be expressly laid down in the contract to avoid adverse consequences.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While “sub-contracting” is delegating or outsourcing the liabilities and obligations, “assignment” is literally transferring the obligations. It will be not fallacious to say that an “assignment” transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

Archana Balasubramanian (Partner), Vaishnavi Vyas (Associate)

[1] Black’s Law Dictionary 4th ed. (St. Paul: West, 1951).

[2] 2006 SCC OnLine Mad 1107

[3] MANU/SC/0428/1962

[4] Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

[5] (1871) LR 6 Ex 269

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Assignment vs Novation: Everything You Need to Know

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. 4 min read updated on February 01, 2023

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of the original counterparty.

The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee.

The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced.

Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.

In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada , or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.

Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.

Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.

It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.

A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.

Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.

Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:

The purchaser accepts complete liability
The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
The creditor to the original contract accepts the new contract as the replacement for the old one

Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.

If you need help determining if assignment vs. novation is best for you, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Deed of Assignment v Deed of Novation - When and how to use them

Updated: Aug 26, 2023

Regarding the transfer of rights and obligations within a contract, two frequently employed legal methods are deeds of assignment novation. Even though both approaches encompass the transfer of rights and responsibilities, they contrast in several ways, such as their effects on the original contract and the requirement of the necessary consent by the parties involved.

Rights and Obligations

In the context of a deed of assignment, the assignor transfers its rights and responsibilities to the assignee, while the initial contract remains valid. Conversely, novation entails establishing a fresh agreement that replaces the original one, forming a new agreement involving the transferor, transferee, and obligor.

Requirement of Consent

To ensure the validity of an assignment deed, the assignor needs to notify the obligor about the assignment, although the obligor’s consent isn't necessary. Conversely, novation demands agreement from all parties—transferor, transferee, and obligor.

Novation in detail

How it works

Novation mandates the approval of every party engaged, including the fresh entrant adopting the responsibilities and rights. The procedure encompasses these stages:

Agreement: All involved parties need to reach a consensus on the novation's terms and the new setup.

Paperwork: A novation agreement needs preparation and endorsement from all parties concerned.

Notification/approvals: All pertinent entities, such as financial institutions or insurers, must be informed of the novation and provide their consent/approval.

Execution: The novation becomes operational once all parties have inked the agreement and the requisite paperwork is finalized.

Novation in action:

· When a fresh contractor assumes control of a construction venture from the original contractor, taking on all the rights and duties specified in the initial agreement.

· In the context of a construction project, if a subcontractor, grappling with financial issues, intends to transfer their responsibilities to another subcontractor, the primary contractor can agree to novate the contract. This process allows the new subcontractor to inherit the obligations and commitments of the original subcontractor.

· An engineering company, commissioned by a municipality to design and build a new road, decides to sell the design and construction contract to another firm. The municipality approves a novation, permitting the new firm to take over the contract and conclude the project

· If a supplier holding a contract with a contractor to deliver construction materials opts to sell their business to another entity, the contractor can consent to a novation. This facilitates the transition of the contract to the new company, ensuring the new entity fulfills the supplier's duties as stipulated in the contract.

Assignment in detail

How an assignment works

The typical procedure for assignment includes these stages:

The initial contracting parties need to reach a consensus on the assignment.

The assignor (the entity transferring rights and obligations) is required to formally inform the other party in writing about the assignment.(typically)

The assignee (the new party assuming rights and obligations) must acknowledge the assignment in written form. (again, typically)

Assignment in action

· A subcontractor transfers their entitlement to payment for their services to a third party, often a lender, as collateral for a loan.

· A contractor delegates their right to receive payment from the project owner to a supplier or vendor, aiming to settle expenses for materials or equipment utilized in the undertaking.

· A property developer relinquishes their right to collect payments from buyers of individual units within a development to a lender, thereby obtaining financing for the venture.

· A contractor relinquishes their right to receive payment from the owner and assigns it to a joint venture partner, distributing the risk and reward of the project.

Grasping the distinctions between assignment deeds and novation is vital for selecting the right method of transferring rights and responsibilities. Prior to making a decision, it's advisable to consult legal experts for guidance on which approach to adopt.

Let's Chat

If you need help in further understanding the distinction between assignment and novation, or require some assistance in transferring certain rights and obligations, feel free to contact us to schedule a complementary consultation.

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India Corporate Law

Rbi’s move to revamp loan transfers in india.

On June 08, 2020, the Reserve Bank of India ( RBI ) released two draft frameworks — one for securitisation of standard assets ( Draft Securitisation Framework ) and the other on sale of loan exposures ( Draft Sale Framework ). In our previous article (available here ), we had dealt with key revisions introduced by the RBI under the Draft Securitisation Framework. This article contains a brief summary of the Draft Sale Framework.

The Draft Sale Framework is addressed to the same constituents as the Draft Securitisation Framework and is expected to operate as an umbrella framework, which will govern all loan transfers (standard and stressed assets).

The Draft Sale Framework is broadly divided into three parts viz., (i) general conditions applicable to all loan transfers; (ii) provisions dealing with sale and purchase of standard assets; and (iii) provisions dealing with sale and transfer of stressed assets (including purchase by ARCs).

The core principles of transfer appear like the previous guidelines on direct assignment. However, the scope of transfer has now been expanded to include various kinds of economic transfers of loan assets, including participation arrangements and transactions in which the loan exposure remains on the books of the transferor even after the said transactions.

Three types of transfers that have been recognised under the Draft Sale Framework viz., (i) assignment; (ii) novation; and (iii) loan participation (which includes both risk participation and funded participation). Whilst loans can be transferred via any of the aforesaid transfer methods, (a) revolver loans and loans with bullet payments of principal and interest can only be transferred through novation and loan participation; and (b) stressed assets can only be transferred through assignment and novation. Transfer by way of novation is exempt from the applicability of the guidelines, except for a diktat that approval of all parties, including the borrower, is required for novation.

RBI has indicated that all these transfers are required to result in immediate legal separation of the transferor from the assets, which are transferred and put beyond the reach of the transferor as well as the creditors of the transferor. RBI has also suggested that these should be bankruptcy remote and a legal opinion should be obtained in this regard.

In line with the position in the 2012 guidelines, transferors are not permitted to offer any credit enhancement or liquidity facility for loan transfers. Diligence requirements continue to be strict and the purchasing lender is required to apply the same standard of care while assessing the asset, as if it were originating the asset directly and cannot outsource its due diligence.

The RBI has also permitted transfer of a single loan asset or part of a single asset to a financial entity through novation or loan participation. Only financial entities carrying on business in India will be eligible to participate. Loans acquired from other entities can also be assigned.

Participation Agreements

The Draft Sale Framework also seeks to permit and regulate participation arrangements. Participation arrangements though popular in certain other jurisdictions were not common here, except inter alia , in accordance with the guidelines issued by the RBI on December 31, 1998. The1998 guidelines permitted two types of participations, inter-bank participations with risk sharing and inter-bank participations without risk sharing. While the assignment agreements that were entered into earlier were akin to participation agreements in spirit, the permissibility of participation is an interesting development and a regulatory headway made in the growth of the loan market. The Draft Sale Framework seeks to allow both risk participation and funded participation in loans. Participation agreements in respect of stressed assets has not been specifically permitted.

The Draft Sale Framework specifically recognizes transfer of external commercial borrowings by ‘eligible lenders’ (as defined under the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations), subject to any loss or hair cut being to the account of the transferor.

It is expected that the RBI will provide further clarity on whether all lenders (i.e. overseas branches, onshore branches, etc.) can purchase such assets and whether the exposure must continue to remain in foreign currency, both for standard and stressed assets

The RBI has not stipulated the requirement for a transferor to maintain minimum risk retention for loan transfers. This will enable the transferee to deal with the loan independently. However, transferors will have to comply with the ‘minimum holding period’ requirement.

Transfer of loan accounts at the instance of the borrower, inter-bank participations, trading in bonds, sale of entire portfolio of assets consequent upon a decision to exit the line of business completely, sale of stressed assets and consortium and syndication arrangements continue to remain exempt from the applicability of Chapter III of the Draft Sale Framework (which only applies to transfer of standard assets).

Stressed Assets

Stressed assets have been defined as: ‘ assets that are classified as NPA or as special mention accounts, and generally includes accounts, which are in default, as well as where lenders have given concessions for economic or legal reasons relating to the borrower’s financial difficulty ’.

Currently, the Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning (pertaining to advances), 2015, detail the criteria for standard assets, special mention accounts and non-performing assets. The classification has also been replicated in the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 ( Prudential Stressed Asset Directions ).

The Draft Sale Framework does not replace or limit the application of existing RBI directions (especially the Prudential Stressed Asset Directions). Any regulated entity (that is permitted to take on loan exposures by its statutory or regulatory framework), can purchase stressed assets directly.

Promoters and Similar Persons Not Eligible to Buy Stressed Assets

The transferor is required to ensure that the transferee is not disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016, and is not otherwise a promoter, associate, subsidiary or related person of the underlying obligor. Therefore, if there is an existing option to put loans on a promoter / similar entity, then the same may not be possible if the loan is a stressed asset.

In case of standard assets, the Draft Sale Framework has stipulated a table for MHP based on tenure of the loan. However, stressed assets are required to be held in the books of the lender for a period of 12 months.

Asset Classification and Provisioning

A purchased stressed asset can be classified as a ‘standard asset’ by the purchasing entity, in cases where the purchasing entity has no existing exposure to the borrower. However, in case, the purchasing entity has an existing exposure to the borrower whose stressed loan account is acquired, the asset classification of the purchased exposure shall be the same as the existing asset classification of the borrower with the transferee.

Transfer of Stressed Assets to ARCs

The Draft Sale Framework also deals with sale of stressed assets to asset reconstruction companies ( ARC ).

While Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI ) always provided that ARCs could issue debt instruments in lieu of the consideration payable for the acquisition of assets, RBI has now specifically provided for the same in the Draft Sale Framework. If such deals are done, it must clearly be established that the sale is effective. However, the Draft Sale Framework also provides that these instruments will have to be considered as debt on the books of the ARC, therefore implying that the ARC has an obligation to repay the debt and such oblgation cannot be linked to realization of the underlying asset. While this enabling provision is useful, ARCs are unlikely to opt for this route given that there is an obligation to repay the debt, the present structure of PTC may be the preferred option.

It is relevant to note that FPI entities continue to have the right to invest in security receipts and will also have the right to invest in the bonds issued by the ARC.

It is specifically clarified that transfer of stressed assets to non-ARCs can only be on a cash-consideration basis.

Swiss Challenge Method

In an attempt to de-regulate price discovery, the mandatory Swiss Challenge Method has been done away with. Lenders are now expected to put in place board approved policies on adoption of an auction-based method for price discovery.

Right of First Refusal

Under the current Guidelines on Sale of Stressed Assets by Banks, issued by the RBI on September 1, 2016, a bank selling a stressed asset is required to offer the right of first refusal to an ARC, which has already acquired the highest and significant share (~25-30%) in the asset. Such ARC is required to be provided the right to match the highest bid. In line with these guidelines, the Draft Sale Framework also provides the right of first refusal to ARCs, which hold a significant stake in the asset. Additionally, the Draft Sale Framework also provides that in the event such ARC does not want to purchase the asset or if no ARC holds a significant portion, then such right of refusal will have to be extended to a ‘financial institution’, if such institution holds a significant stake in the asset.

The Draft Sale Framework is a significant move by the RBI and is expected to streamline loan transfers in the country. This framework reinforces the RBI’s focus on addressing the health of banks and bad debt in the country, whilst remaining committed to a balanced approach on sale of assets. If passed in its current form, it will be a positive move by the regulator in developing a robust market for secondary transfers.

*Authors would like to thank Vidhi Sarin , Associate for her inputs.

Submission Guidelines

Impact of Assignment and Novation on Arbitration Agreements

[ Kunal Kumar is 4th Year B.A., LL.B. student at National Law University, Jodhpur]

Introduction

In light of the judgment delivered by the Supreme Court in BALCO , Part I of the Indian Arbitration and Conciliation Act, 1996 (the “Act”) has no applicability to foreign-seated arbitration (except in case of agreements concluded prior to the judgment), and the parties shall be referred to arbitration under section 45. The only bar to refer parties to foreign-seated arbitrations are those which are specified in section 45 of the Act, [1] which makes it clear that if there is prima facie evidence of a valid arbitration agreement, the dispute should be referred to arbitration.

In World Sport Group , the Supreme Court held that a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44 shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

Determining the validity of the agreement: does the assignment or novation of the agreement make it invalid?

If the agreement entered between the parties does not suffer from any lacuna, there is no fraud or misrepresentation which could have led the agreement to be null and void, and consent given by the appellant therein is qualified consent, the arbitration agreement will be a valid agreement and the parties shall have to be referred to arbitration. The Delhi High Court held in Mcdonalds that if the arbitration agreement is affected by some invalidity since its inception, such as lack of consent due to misrepresentation, duress, fraud or undue influence, then it is said to fall within the meaning of the expression ‘null and void’ under section 45.

The word “inoperative” can be said to cover those cases where the arbitration agreement has ceased to have effect, such as revocation or when an arbitral award has already been passed. The words “incapable of being performed” applies to those cases where the arbitration cannot be effectively set into motion. [2]

Assignment & Novation : Assignment of an arbitration agreement by substituting a third party is a valid procedure. It was observed in Kotak Mahindra Prime Ltd. v. Sanjeev that the assignability depends on the subject matter of the arbitration agreement and the assignment is regulated under the law of assignment of contractual rights and obligations.

But, under section 62 of the Indian Contract Act, 1872 ,when the main agreement is novated, rescinded or altered, it loses its validity and hence the arbitration agreement becomes void. The principle is that if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it.

However, courts have relied on the doctrine of severability to refer the dispute to arbitration. As held in Delhi Metro case, an arbitration agreement when assigned to a substituted third party will not novate the agreement and the obligations will flow from the main agreement which would have to be observed.

Severability of the arbitration agreement from the main contract

It is a well accepted jurisprudence that the arbitration agreement can be severed from the main agreement subsequent to its termination. [3] As severability tends to insulate the arbitration clause, it ensures that the arbitration shall be given effect provided severability of the arbitration clause is possible.

It was observed by the Supreme Court in Today Homes and Infrastructure Pvt. Ltd. , the arbitration agreement being a separate agreement does not stand vitiated if the main contract is terminated, frustrated or is voidable at the option of one party. The contrary opinion that the parties should not be referred to arbitration as all rights and liabilities flowing from the agreement get extinguished with termination of the main agreement, and nothing is left for the tribunal to decide, is not sustainable.

Article 6(4) of the ICC Rules of Arbitration permits the arbitral tribunal to continue to exercise jurisdiction and adjudicate the claims even if the main contract is alleged to be null and void or non-existent because the arbitration clause is an independent and distinct agreement.

The crucial test, as laid down in the case of Enercon (India) Limited , places reliance on the intention of the parties to arbitrate. If parties have agreed to resolve all their disputes by arbitration, they cannot at a later stage avoid such an arbitration agreement. In Chatterjee Petroleum Company & Ors . , it was observed that once the parties have agreed for arbitration, the Court should give effect to the arbitration agreement and litigation should not be resorted to.

Thus, in a foreign-seated arbitration, under section 45 of Act the courts shall have to refer the dispute to arbitration unless the arbitration agreement has become null and void , inoperative or incapable of being performed. As discussed above, an assignment and novation of the main agreement shall not be treated as a bar to refer the dispute to arbitration. Even if the main agreement gets terminated because of novation, the arbitration agreement can be severed from the main agreement to give effect to the intention of the parties.

Party autonomy is a foundation stone in the success of building the whole process of arbitration. Intervention by the national courts, if excessive or too intrusive, will defeat the whole arbitration process, destroying its sanctity and benefits; and in the long term may lead to crumbling of the institution of arbitration.

– Kunal Kumar

[1] Shin-Etsu Chemical Co. v Aksh Optifibre , (2005) 7 SCC 234.

[2] Albert Jan Van Den Berg, The New York Convention, 1958: An Overview at p. 11.

[3] Mulheim Pipe coatings GmbH v. Welspun Fintrade Ltd. and Anr. (Bom HC, 2013).

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UK: Contracts: The Critical Difference Between Assignment and Novation

Introduction.

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the "Lidl Contract"). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the " Trustee Contract") and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones' obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones' obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don't take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants' contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164 .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/06/2010.

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Novations in India

Nitin sarin.

Managing Partner

[email protected]

Sitting at the recent Cape Town Convention Academic Project Conference held in Oxford in September 2017, an interesting discussion was taking place between New York law experts on one hand and English Law experts on the other.

The quality of discussions was crisp, immaculate and informative. The panel of the hour was being moderated by Sir Roy Goode (the brainchild of the Cape Town Convention) and Mr. Jeffrey Wool, Secretary General of the Aviation Working Group.

The New York practitioners were representing that under New York law, “ assignments ” of aircraft agreements are recognized while the English Law practitioners were arguing as to how “ novations ” were recognized in their jurisdiction.

Interestingly, the English law specialists highlighted the fact that the term “ novation ” remains undefined ( which is understandable considering the English legal system ). This got me thinking that the closest the British ever got to defining a “ novation ” was through enacting the Indian Contract Act, 1872 (Act No. 9 of 1872).

In 1872, India was still a colony of the British ( it would gain independence only 75 years later in 1947 ) and its laws were still made by England ( the Imperial Legislative Council ).

The Indian Contract Act 1872 contains section 62 which reads as under:

“ Contracts which need not be performed

62. Effect of novation, rescission, and alteration of contract:

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1, 000 rupees, and no new contract has been entered into.”

The Indian judicial system has, through precedent, certainly built on Section 62 over the last 145 years or so, however, it would still be somewhat of an erroneous statement to state that the British have never defined a “novation”.

Perhaps some food for thought for those English practitioners mentioned above?

Also, it is apt to answer one of the most commonly asked questions by our clients: “Would an Indian court accept a novation of a lease agreement?”

The answer, put succinctly is that Indian law recognizes the concept of a “ novation ” and especially in aircraft transactions, a valid novation of an agreement, which satisfies all the other tests of the Indian Contract Act, 1872 to be a valid contact ( offer, acceptance of offer, consideration and competency to contract, etc. ) would be treated as a valid and binding document in the eyes of law.

Assignment and Novation: Spot the Difference 12 November 2020

Transfer of rights
Contribution
EPC Contract

The English Technology and Construction Court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an EPC contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits.

In doing so, Mrs Justice O’Farrell has emphasised established principles on assignment and novation, and the clear conceptual distinction between them. While this decision affirms existing authority, it also highlights the inherent risks for construction contractors in step-in assignment arrangements.

"This decision shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position."

This preliminary issues judgment in the matter of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others¹ , is the latest in a long series of decisions surrounding the Energy Works plant, a fluidised bed gasification energy-from-waste power plant in Hull². The defendant, MW High Tech Projects UK Ltd (“MW”), was engaged as the main contractor by the claimant and employer, Energy Works (Hull) Ltd (“EWHL”), under an EPC contract entered into in November 2015. Through a sub-contract, MW engaged Outotec (USA) Inc (“Outotec”) to supply key elements for the construction of the plant.

By March 2019, issues had arisen with the project. EWHL terminated the main contract for contractor default and, pursuant to a term in the EPC contract, asked MW to assign to it MW’s sub-contract with Outotec. The sub-contract permitted assignment, but MW and EWHL were unable to agree a deed of assignment. Ultimately, MW wrote to EWHL and Outotec, notifying them both that it was assigning the sub-contract to EWHL. EWHL subsequently brought £133m proceedings against MW, seeking compensation for the cost of defects and delay in completion of the works. The defendant disputed the grounds of the termination, denied EWHL’s claims, and sought to pass on any liability to Outotec through an additional claim under the sub-contract. Outotec disputed MW’s entitlement to bring the additional claim on the grounds that MW no longer had any rights under the sub-contract, because those rights had been assigned to EWHL.

The parties accepted that a valid transfer in respect of the sub-contract had taken place. However, MW maintained that the assignment only transferred future rights under the sub-contract and that all accrued rights – which would include the right to sue Outotec for any failure to perform in accordance with the sub-contract occurring prior to the assignment – remained with MW. In the alternative, MW argued that the transfer had been intended as a novation such that all rights and liabilities had been transferred. As a secondary point, MW also claimed eligibility for a contribution from Outotec under the Civil Liability (Contribution) Act 1978 for their alleged partial liability³.

An assignment is a transfer of a right from one party to another. Usually this is the transfer by one party of its rights and remedies, under a contract with a counterparty, to a third party. However, importantly, the assignor remains liable for any obligations it owes under the contract. As an example, Party A can assign to Party C its right to receive goods under a contract with Party B, but it will remain liable to pay Party B for those goods. Section 136 of the Law of Property Act 1926 requires a valid statutory assignment to be absolute, in writing, and on notice to the contractual counterparty.

Key contacts

Rebecca Williams

Partner London

Mark McAllister-Jones

Counsel London

"In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights."

In this case, the precise scope of the transferred rights and the purported assignment of contractual obligations were in issue. Mrs Justice O’Farrell looked to the House of Lords’ decision in Linden Gardens⁴ to set out three relevant principles on assignment:

Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract;
In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights; and
It is possible to assign only future rights under a contract (i.e. so that the assignor retains any rights which have already accrued at the date of the assignment), but clear words are needed to give effect to such an intention.

Hence, in relation to MW’s first argument, it is theoretically possible to separate future and accrued rights for assignment, but this can only be achieved through “careful and intricate drafting, spelling out the parties’ intentions”. The judge held that, since such wording was absent here, MW had transferred all its rights, both accrued and future, to EWHL, including its right to sue Outotec.

Whereas assignment only transfers a party’s rights under a contract, novation transfers both a party’s rights and its obligations . Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the original, unless expressly agreed otherwise by the parties.

Another key difference from assignment is that novation requires the consent of all parties involved, i.e. the transferring party, the counterparty, and the incoming party. With assignment, the transferring party is only required to notify its counterparty of the assignment. Consent to a novation can be given when the original contract is first entered into. However, when giving consent to a future novation, the parties must be clear what the terms of the new contract will be.

"Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.”"

A novation need not be in writing. However, the desire to show that all parties have given the required consent, the use of deeds of novation to avoid questions of consideration, and the use of novation to transfer ‘key’ contracts, particularly in asset purchase transactions, means that they often do take written form. A properly drafted novation agreement will usually make clear whether the outgoing party remains responsible for liabilities accrued prior to the transfer, or whether these become the incoming party’s problem.

As with any contractual agreement, the words used by the parties are key. Mrs Justice O’Farrell found that the use of the words “assign the sub-contract” were a strong indication that in this case the transfer was intended to be an assignment, and not a novation.

This decision reaffirms the established principles of assignment and novation and the distinction between them. It also shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position. Here, it was found that MW had transferred away its right to pursue Outotec for damages under the sub-contract, but MW remained liable to EWHL under the EPC contract. As a result, EWHL had the right to pursue either or both of MW and Outotec for losses arising from defects in the Outotec equipment, but where it chose to pursue only MW, MW had no contractual means of recovering from Outotec any sums it had to pay to EWHL. Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.” A contractor in MW’s position can still seek from a sub-contractor a contribution in respect of its liability to the employer under the Civil Liability (Contribution) Act 1978 (as the judge confirmed MW was entitled to do in this case). However, the wording of the Act is very specific, and it may not always be possible to pass down a contractual chain all, or any, of a party’s liability.

Commercially, contractors often assume some risk of liability to the employer without the prospect of recovery from a sub-contractor, such as where the sub-contractor becomes insolvent, or where the sub-contract for some reason cannot be negotiated and agreed on back-to-back terms with the EPC contract. However, contractors need to consider carefully the ramifications of provisions allowing the transfer of sub-contracts to parties further up a contractual chain and take steps to ensure such provisions reflect any agreement as to the allocation of risk on a project.

This article was authored by London Dispute Resolution Co-Head and Partner Rebecca Williams , Senior Associate Mark McAllister-Jones and Gerard Rhodes , a trainee solicitor in the London office.

[1] [2020] EWHC 2537 (TCC)

[2] See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331, reported in our article here .

[3] The Civil Liability (Contribution) Act 1978 allows that “ any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise .”

[4] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

Aviation Finance & Leasing 2023

Law and practice, trends and developments.

Sarin & Co is one of the oldest firms in India. Originally established in 1932 in Lahore (now in Pakistan), the firm has been in existence for over 90 years. Traditionally a firm of litigators, Sarin & Co branched out into the field of aviation with the joining of Mr Nitin Sarin in 2008. Since then, the aviation team (consisting of six lawyers) and a head of operations have represented some of the largest banks and aircraft leasing companies, handled transactions worth billions of dollars, and also carried out some of the most complex aircraft leasing and financing transactions including aircraft repossessions in the country. In 2022, the firm was offered a position on the Legal Advisory Panel of the Aviation Working Group. The firm primarily advises foreign aircraft lessors, banks and financial institutions. It also represents select foreign airlines in India.

1. Aircraft and Engine Purchase and Sale

1.1 sales agreements, 1.1.1 taxes/duties payable upon execution of the sales agreement.

A sales agreement, if executed while the asset is in India, runs the risk of being levied with several taxes in India, such as goods and services tax and stamp duty. Where an original document (executed outside of India) is not stamped with the requisite stamp duty, it must be affixed with the requisite stamp duty within three months after it has been received in India. Certain states also impose stamp duty on copies of sales agreements.

1.1.2 Enforceability Against Domestic Parties

The enforceability of a sales agreement will not be affected by the language it is written in. However, should a sales agreement need to be submitted to a court or a government entity, it is recommended that it is translated into English and notarised. Furthermore, if a document is not properly stamped, courts in India have the power to detain the document and refuse to admit it into evidence unless and until it is properly stamped.

1.2 Transfer of Ownership

1.2.1 transferring title.

Under Indian law, if there is an offer by one party which is accepted by another for consideration, such an act or series of acts shall constitute "transferring title", and this holds for all installed parts, including an auxiliary power unit (APU).

Under the general applicability of Indian law, the sale of an ownership interest in an entity that owns an aircraft or engine shall be recognised as a sale of that entity only.

1.2.2 Sales Governed by English or New York Law

There is no prohibition on bills of sale in relation to aircraft or engines being governed by any foreign law in India.

A bill of sale should ideally note that a valid contract has been entered into, ie, that there has been an offer by the seller, acceptance by the purchaser, and the seller has received consideration.

1.2.3 Enforceability Against Domestic Parties

If a bill of sale is executed in any language other than English, it is recommended that a translated copy be provided for its proper enforcement. Further, notarisation is also recommended.

1.2.4 Registration, Filing and/or Consent From Government Entities

Generally, a bill of sale is not required to be registered or filed or subject to any consent from any government entity. At the time of registration of an aircraft, the registration authority may require a notarised copy of the bill of sale.

1.2.5 Taxes/Duties Payable Upon Execution of a Bill of Sale

Execution of a bill of sale or the consummation of the sale of the ownership interest may be taxed in India while an aircraft is located in India. Most such transactions are undertaken when the aircraft is flying over international waters or flying over or parked on the territory of another country.

2. Aircraft and Engine Leasing

2.1 overview, 2.1.1 non-permissible leases.

If validly executed, operating/wet/finance leases or leases concerning only engines or parts are permissible and will be recognised under the law of India. Wet and finance leases require specific approval of the regulatory authorities in advance of execution.

2.1.2 Application of Foreign Laws

It is fairly common for a foreign law-governed lease to be recognised in India. A court shall apply such law as long as the parties' rights deriving from such a lease are not opposed to public policy and are not in breach of Indian law.

2.1.3 Restrictions Concerning Payments in US Dollars

India is an exchange-controlled country; therefore, any remittance of foreign exchange (including US dollars) requires the approval of the Reserve Bank of India (RBI) or any authority it prescribes. Most of these approvals have been delegated by the RBI to its commercial banks – known as authorised dealer (or AD) banks, making it easier for a domestic lessee to make rent payments to foreign operating lessors in foreign exchange. Specific approval is required from the RBI in case of remittance of payments under finance leases.

2.1.4 Exchange Controls

Repatriation of foreign exchange as rent payments requires the indirect approval of the RBI. In relation to operating leases, the power to approve is delegated to authorised dealer (AD) banks – however, the remittance of payments for finance leases requires the specific approval of the RBI. Similarly, in cases where a lease is enforced by a foreign lessor (operating or finance), it also would require the RBI's approval before the repatriation of any realised proceeds.

2.1.5 Taxes/Duties Payable for Physical Execution of a Lease

Execution of a lease agreement physically in India would typically attract the levy of stamp duty. Even for lease agreements executed overseas, the stamp duty on them must be paid within three months of such a document’s entry into India.

2.1.6 Licensing/Qualification of Lessors

A lessor does not need to be licensed or otherwise qualified in India to do business with a domestic lessee. However, a foreign lessor based in a prohibited or sanctioned country would not be permitted to do business in India.

2.2 Lease Terms

2.2.1 mandatory terms for leases governed by english or new york law.

No mandatory terms are required to be in a lease; the lease itself must be a valid and binding contract between two parties competent to contract.

2.2.2 Tax and Withholding Gross-Up Provisions

Tax and "grossing up" clauses are permissible and may be enforced by the courts provided they form part of the binding contract entered into between the parties.

2.2.3 Parts Installed or Replaced After a Lease’s Execution

A lease agreement can cover parts installed or replaced on an aircraft or engine after its execution, provided the agreement contemplates such inclusion/coverage. For parts not covered under the lease, the parties may enter a simple side letter or short lease amendment agreement.

2.2.4 Risk of Title Annexation

India will recognise the separate (and distinct) rights of both the owner(s) of the airframe as well as the owner(s) of each engine. As such, with India being a common law jurisdiction, title annexation does not apply.

2.2.5 Recognition of the Concepts of Trust/Trustee

Indian law recognises the concept of a trust and the role of an owner trustee.

2.3 Lease Registration

2.3.1 notation of owner’s/lessor’s interests on aircraft register.

The Directorate General of Civil Aviation (DGCA) is the authority responsible for maintaining the aircraft register in India and records the details of the owner, lessor, operator and mortgagee (if applicable). The effect of such notation on the aircraft register shall amount to notice to all third parties regarding the existence of such an interest in that aircraft.

2.3.2 Registration if the Owner Is Different From the Operator

Registration is possible even if the owner differs from the operator. An aircraft, once registered, is issued a certificate of registration by the DGCA, which contains various details such as name, address and nationality of the owner, lessor, operator and mortgagee (if applicable) of the aircraft.

2.3.3 Aircraft/Engine-Specific Registers

At the time of registration of an aircraft taken on lease, the applicant is required to submit a copy of the lease agreement to the DGCA. DGCA requirements state that any lease amendments or novations must also be filed with the DGCA. There is no engine-specific register nor any requirement to submit a lease in relation to an aircraft engine to any authority in India.

2.3.4 Registration of Leases With the Domestic Aircraft Registry

An aircraft taken on lease by an Indian operator from a foreign lessor cannot be registered in India unless the applicant has submitted a copy of the lease to the DGCA. Leases are not subject to any consent from any government entity.

A copy of the lease agreement, the electronic CA-28 aircraft registration form, and other documents shall be filed for registering aircraft with the DGCA. This process may take anywhere from two to four weeks.

Before a lessee may import an aircraft into India, it must seek the consent of the DGCA. The DGCA first grants "in principle" approval for the import of the aircraft, subject to satisfaction regarding the safety of the aircraft intended to be imported, and then accords its final approval. While no consent is required as a pre-requisite to the execution of a lease, the "no objection" of the DGCA is required before the import of an aircraft on lease will be permitted.

2.3.5 Requirements for a Lease to Be Valid and Registrable

There is no specific form in which a lease must be registered on the aircraft registry. A lease needs to be translated into English, where it is executed in a different language. Further, a notarised copy of the lease would suffice to be valid and registrable on the aircraft registry.

2.3.6 Taxes/Duties Payable for Registering a Lease

There is a fee for registration of an aircraft on the Indian aircraft registry based on the aircraft's weight. Apart from this fee, no other taxes or duties are payable for registering a lease.

2.3.7 Registration of Aircraft in Alternative Countries

Aircraft habitually based in India must be registered in the country. There are very few circumstances in which a foreign-registered aircraft is permitted to operate habitually in India, the most common being in relation to a wet lease (when a foreign-registered aircraft is permitted to operate in India). Wet leases are also only permitted in the country in exceptional circumstances.

2.3.8 Requirements for Documents Concerning Registration

Copies of these documents must be uploaded on the DGCA's online platform, e-GCA, along with the completed CA-28 aircraft registration form (notarisation of the documents is recommended):

customs clearance certificate/bill of entry of the aircraft;
certificate of deregistration from the previous registering authority;
evidence to the effect that the aircraft has been purchased or is wholly owned by the applicant;
in case of aircraft purchased from a previous owner, then an affidavit to that effect;
where aircraft is taken on a dry lease, then a copy of the lease agreement is to be annexed;
where a company or corporation owns the aircraft, then a document of registration of the company and the names, addresses and nationalities of the directors;
a copy of the import licence issued by the Directorate General of Foreign Trade or permission for the import of aircraft issued by the Ministry of Civil Aviation/DGCA;
in cases where the aircraft has been mortgaged/hypothecated, the owner/operator shall submit their consent for this and the papers to this effect; and
letters from the owner, lessor, operator and mortgagee (if applicable) confirming the names and nationality of their directors; and requesting for or consenting to (as the case may be) aircraft registration.

2.4 Lessor’s Liabilities

2.4.1 tax requirements for a foreign lessor.

A foreign lessor may be required to pay income or other taxes upon leasing an aircraft or engine to an Indian lessee depending upon the domicile of the foreign lessor as well as the provisions of the specific double taxation avoidance treaty with the country of domicile of the foreign lessor and India. Ordinarily, where a lessee is required to withhold tax but does not do so, the onus would remain with the lessee, and the responsibility would not shift to the foreign lessor.

2.4.2 Effects of Leasing on the Residence of a Foreign Lessor

A foreign lessor would ordinarily not be deemed to be resident, domiciled in or carrying out any business in India by virtue of being a party to a lease or because of enforcement of a lease. However, it is always prudent to have a tax expert study the relevant double tax avoidance treaty between the country of domicile of the foreign lessor and India.

2.4.3 Engine Maintenance and Operations

Unless the direct involvement and consequent negligence of the foreign lessor are proven in respect of aircraft or engine maintenance and operations, no liabilities would be imposed on the foreign lessor as a result of their being a party to such a lease.

2.4.4 Damage or Loss Caused by an Asset

A lessee under a dry lease remains primarily liable for loss or damage caused by the aircraft to third parties, injuries to the person or property of third parties or passengers, and is responsible for breach of environmental laws - albeit, in the event of a claim, both the lessor and the lessee would generally get sued. Needless to add, both the lessor and the lessee will be liable for negligence in relation to the aircraft arising as a result of their own acts and omissions.

The Indian law on vicarious liability confines the liability of the master only to the torts committed by their servants and agents where these were within the scope of the servant’s/agent’s authority. As the relationship between the lessor and lessee is on a principal-to-principal basis, there will be no vicarious liability either. However, there are four exceptions to the above rule:

where the lessor retains control over the lessee, and interferes with and/or makes himself a party to the tortious act;
where the act contracted to be done is wrongful or illegal;
where a legal or statutory duty is imposed on the lessor; and
where the act contracted to be done is, by its nature, likely to cause danger to others – in such a case, there is a duty on the part of the lessor to take all reasonable precautions against such a risk.

2.4.5 Attachment by Creditors

Creditors of a domestic lessee may exercise a lien over the aircraft. However, such creditors do not have the right to sell the leased aircraft.

2.4.6 Priority of Third Parties’ Rights

The following third-party rights would take priority over a lessor’s rights under an aircraft or engine lease:

the Airports Authority of India can exercise a lien on the aircraft for any unpaid dues such as landing and parking charges – this also includes the private airport operators exercising under the powers vested to the Airports Authority of India;
an unpaid bailee can exercise a mechanics lien;
similarly, statutory dues such as taxes, workmen's wages, etc, form the first charge on the asset;
the government or its agencies can confiscate, detain or requisition aircraft (whether foreign-owned or otherwise) under certain circumstances, such as if the central government declares an emergency or if the aircraft is involved in criminal activity.

2.5 Insurance and Reinsurance

2.5.1 requirement to engage domestic insurance companies.

Indian registered aircraft may be insured by an Indian insurer, who in turn would seek reinsurance on the international insurance market – provided, however, that there is a 5% reinsurance retention, ie, obligatory cession, which is mandatorily required to be reinsured with the General Insurance Company of India.

2.5.2 Mandatory Insurance Coverage Requirements

The operator must have insurance coverage for liability towards the hull, crew, passengers and third parties. Insurance is also mandatory for baggage, etc, as may be required under the Carriage by Air Act, 1972.

2.5.3 Placement of Insurances Outside of Jurisdiction

A 5% reinsurance retention is mandatorily required with the General Insurance Company of India.

2.5.4 Enforceability of “Cut-Through” Clauses

"Cut-through" clauses are enforceable in India.

2.5.5 Assignment of Insurance/Reinsurance

Assignments of insurances and reinsurances are routinely carried out in aircraft transactions in India.

2.6 Lease Enforcement

2.6.1 restrictions on lessors’ abilities.

A foreign lessor may terminate an aircraft lease should the lessee be in default of their obligations under the lease. As long as the foreign lessor is acting within the terms of the lease, there are no restrictions on their ability to terminate. A foreign lessor would be required to obtain permission from the customs authorities to re-export the aircraft from India. The sale of the aircraft following such termination is permissible.

2.6.2 Lessor Taking Possession of the Aircraft

There is no procedure for exercising self-help remedies under local laws in India. Peaceful repossession of the aircraft can, of course, be obtained without judicial intervention. Legally, the lessor may terminate the agreement and take possession or control of the aircraft. In cases where there is no cooperation, the lessor has the option to approach the court.

2.6.3 Specific Courts for Aviation Disputes

There are no specific courts that are explicitly competent to decide aviation disputes. The value, facts and circumstances of the aviation dispute would determine the forum.

2.6.4 Summary Judgment or Other Relief

The Code of Civil Procedure, 1908 (CPC) provides for summary procedures under Order XXXVII. Summary procedures may only be effective in cases where a foreign lessor seeks to recover unpaid rent and other monies under the lease and not to enforce the lease. The courts of law are ready to intervene upon proper proceedings being filed.

Interim measures such as the grounding of the aircraft can be obtained fairly quickly and usually within a week or two of the initiation of the legal action. Where there is an arbitration clause, the court and the arbitral tribunal have the power to pass an interim protection order.

In India, as elsewhere, the grant of an injunction under the CPC is a discretionary remedy. It may be granted unconditionally or upon the court's imposed terms. In exercising its jurisdiction, the court will not enter upon a pre-trial assessment of the lessor's claim. If the court is satisfied that the lessor has a prima facie case against the lessee and that, in the absence of an injunction, "irreparable injury" or loss, which cannot be compensated in the form of damages, is likely to be caused to the lessor, it will grant the injunction. Before granting an injunction, the court will direct that notice of it be given to the lessee, except in cases where it appears that the object of granting the injunction would be defeated by such delay as would result from this.

2.6.5 Domestic Courts’ Approach to Foreign Laws and Judgments

India would recognise a lease governed by foreign law and will enforce its terms and sustain claims arising under it as long as the rights are not in breach of Indian law or public policy. Submission to a foreign jurisdiction would also be recognised.

2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards

Reciprocating Territories

Only in certain cases can a foreign decree be executed in India directly as if it had been passed by a court in India. Section 44A CPC provides, inter alia, that where a foreign judgment has been rendered by a superior court in any country or territory outside India, which the government has by a notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the relevant court of India had rendered the judgment.

Conditions for Enforceability of Foreign Judgments

Courts in India may refuse execution if the decree falls within any of the following exceptions specified in Section 13 of the CPC, which inter alia provides that a foreign judgment shall be conclusive of any matter directly adjudicated upon, except where:

a court of competent jurisdiction has not pronounced it;
it has not been given on the merits of the case;
it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases where such law is applicable;
the proceedings in which the judgment was obtained were opposed to natural justice;
it has been obtained by fraud; and
it sustains a claim founded on a breach of any law in force in India.

Section 44A, however, only refers to decrees or judgments under which a sum of money is payable. Essentially, it must be a money decree to fall within the purview of Section 44A.

Enforcement of Judgments from Non-reciprocating Territories

In the absence of any reciprocal arrangement or treaty, a suit will have to be filed to enforce any such judgment or order obtained. The United Kingdom and Northern Ireland have been declared as reciprocating territories for the purpose of Section 44A. Curiously, there is no such arrangement with the USA.

In a suit on a foreign judgment, the Indian court cannot go into the merits of the original claim or question its correctness or propriety. Through precedent, the courts have held that the word "judgment" in the expression "foreign judgment" has been assigned the same meaning given to it in English law and refers to the decree or order of a foreign court. A foreign judgment must be final and conclusive in the court in which it is passed to be considered a valid cause of action.

In order to establish that a final and conclusive judgment has been pronounced, it must be shown that, in the court in which it has been pronounced, it conclusively, finally and forever established the existence of the right of which it is sought to be made conclusive evidence in this country (ie, in India) to make it res judicata (ie, a thing conclusively decided between parties).

2.6.7 Judgments in Foreign Currencies

Indian courts would render a judgment in a foreign currency upon request and satisfaction of sufficient cause.

2.6.8 Limitations on Lessors’ Actions Following Termination

As long as the court does not form the opinion that the default interest or the penalty imposed on the lessee is excessive or uncalled for, there are no limitations on a lessor's ability to recover default interest or to charge additional rent following the termination of the lease for default. If a court concludes that the default interest or penalty on the lessee is not sustainable, it may levy a rate of interest on its own accord which would ordinarily be the prevailing market rate of interest.

2.6.9 Lessor’s Requirement to Pay Taxes/Fees

A lessor under an aircraft lease seeking enforcement of such a lease would not be required to pay any taxes or fees. The lessor may, however, have to pay any unpaid taxes, which were the lessee's responsibility to export the aircraft from the country.

2.6.10 Mandatory Notice Periods

If the lease terms provide a notice period, then such a notice period must be adhered to unless specifically waived by the lessee.

2.6.11 Lessees’ Entitlement to Claim Immunity

In India, the doctrine of sovereign immunity does not apply to statutory corporations or bodies incorporated under the (Indian) Companies Act, 2013 or to any government-owned entities. This doctrine applies only to exercising certain sovereign functions the state performs.

2.6.12 Enforcement of Foreign Arbitral Decisions

India has ratified the Geneva Convention and New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Any foreign award under the New York Convention can be enforced in India in accordance with the provisions of Part II of the (Indian) Arbitration and Conciliation Act 1996. Where the concerned court in India is satisfied that such a foreign award is enforceable under the Act, the award is deemed to be a decree of that court and enforceable as such. The courts will not revisit the issues involved in the arbitration or sit as a court of appeal.

2.6.13 Other Relevant Issues

In general, it is prudent to factor in a significant amount of time to properly enforce one’s rights in India, mainly due to the country's complex bureaucracy. In case of any contest by the lessee, enforcement may be delayed.

2.7 Lease Assignment/Novation

2.7.1 recognition of the concepts of contractual assignment and novation.

India recognises the concept of both a contractual assignment and novation.

2.7.2 Assignment/Novation of Leases Under Foreign Laws

As long as the New York or English law-governed assignment and assumption agreement or novation agreement is a valid contract under Indian law, the courts in India will uphold the validity of such an agreement. The consent of the lessee will also be required for such an agreement to be valid and enforceable. As long as the agreement itself is not opposed to public policy, there are no mandatory terms that such an agreement must contain to be valid under Indian law.

2.7.3 Enforceability of Lease Assignments/Novations

The aircraft and/or engine lease assignment and assumption/novation agreement should be translated in the event that it is not in English and then notarised.

2.7.4 Filing/Registration of Lease Assignments/Novations

The DGCA recently mandated that all aircraft lease assignment and novation agreements must be filed with the regulator. As such, there is no requirement for an engine lease assignment and novation agreement to be filed with the DGCA, but it is recommended. Such agreements are not subject to any consent from any government entity.

The procedure for filing an aircraft or engine lease assignment and assumption/novation agreement is fairly simple; a notarised copy of the agreement may be filed under a covering letter with a request that it be placed on the aircraft file. A change in the ownership of an aircraft needs to be recorded in the aircraft register and on the certificate of registration of the aircraft; the rules and regulations also state that it is illegal for any person to fly or assist in flying such an aircraft until the name of the new owner is endorsed on the certificate of registration. Permission must specifically be sought from the DGCA to continue flying the aircraft until such activity is carried out.

No consent is required in advance; however, it is usual practice to apply to the DGCA seeking permission to continue flying the aircraft in case of a change of ownership.

2.7.5 Taxes/Duties Payable on Assignment/Novation

No taxes or duties are payable in respect of such an assignment and assumption/novation agreement. As is usual practice with lease agreements, the original assignment and assumption/novation agreement, if brought into India, must be "stamped" within three months of it first being received in the country. Certain states also require copies of agreements to be "stamped".

2.7.6 Recognition of Transfer of Ownership Interests

In cases where the ownership interest of an entity owning an aircraft is transferred with legal title to the asset remaining with that entity, a change on the certificate of registration of the aircraft would not be required, and, therefore, the aircraft may continue flying unhindered.

2.8 Aircraft Deregistration and Export

2.8.1 deregistering aircraft in this jurisdiction.

An aircraft in India may be deregistered on the application of the lessee/operator, the owner, the lessor, the IDERA holder or its certified designee.

DGCA Suo Moto

The DGCA may also suo moto cancel the registration of an aircraft:

if it no longer satisfies the ownership test;
if the registration has been obtained by furnishing false information;
if the aircraft could more suitably be registered in some other country;
if the lease in respect of the aircraft has been terminated in accordance with the terms of the lease agreement;
if the certificate of airworthiness in respect of the aircraft has expired for a period of five years or more;
if the aircraft has been destroyed or permanently withdrawn from use; or
if it is inexpedient in terms of the public interest that the aircraft should remain registered in India.

Lessee/Operator or Foreign Lessor/Owner

The lessee/operator or foreign lessor/owner may apply to the DGCA for the deregistration of an aircraft where the lease in respect of the aircraft has expired or has been terminated in accordance with the terms of the lease. The applicant would have to approach the DGCA with a written application requesting deregistration and the reason for such a request. The consent of all the parties named on the certificate of registration should also be enclosed.

IDERA Holder

An IDERA holder or their authorised signatory or certified designee is required to lodge an IDERA with the DGCA as per the extant guidelines.

An IDERA holder may also apply to the DGCA for the deregistration of the aircraft in light of the Cape Town Convention and Aircraft Protocol.

The IDERA holder would have to approach the DGCA with an application as prescribed under the Aeronautical Information Circular (AIC) 12 of 2018 issued by the DGCA.

2.8.2 Lessee’s/Operator’s Consent

The consent of the lessee or operator is required in all situations except when an IDERA holder or its certified designee applies to the DGCA for deregistration, annexing the original or notarised IDERA.

2.8.3 Required Documentation

In cases where deregistration is sought under an IDERA, the IDERA holder or its certified designee must submit an application form as per AIC 12 of 2018, annexing the original or notarised copy of the IDERA. The IDERA holder or its certified designee must also provide evidence that all international interests ranking in priority to that of the IDERA holder in relation to the aircraft have been discharged or, alternatively, provide the consent of the entity named as the priority interest holder in the aircraft as per the International Registry.

Alternatively, when deregistration is not sought under the IDERA route, the owner, mortgagee or lessor must apply to the DGCA annexing the original "no objection" letters from each of the entities named on the aircraft's certificate of registration. The DGCA always has the power to request any additional documentation that it may deem fit during the scrutiny of an application for deregistration.

2.8.4 Duration of Deregistration Process

Deregistration under the IDERA route as per AIC 12 of 2018 and Rule 30(7) of the Aircraft Rules, 1937 shall be carried out within five working days from the date of receipt of application from the IDERA holder or its certified designee. However, in recent experiences, the DGCA took closer to 28 days to deregister certain aircraft. Further, in the circumstances pertaining to insolvency, the DGCA has also refused to process applications made under the IDERA route in light of a moratorium declared by the National Company Law Tribunal (NCLT) upon the admission of an insolvency application. As of the date of publication of this guide, the aircraft is yet to be deregistered, and the matter is now sub-judice. Deregistration under any other method may take anywhere from one to four weeks, assuming the DGCA does not request any additional documents, which may be sought on a case-to-case basis.

2.8.5 Aviation Authority’s Assurances

There is no concept of the DGCA providing advance assurances to an aircraft owner, mortgagee or lessor regarding the prompt deregistration of an aircraft.

2.8.6 Costs, Fees and Taxes Relating to Deregistration

There are no fees or taxes chargeable in respect of the deregistration of an aircraft. Costs are also minimal.

2.8.7 Deregistration Power of Attorney

A deregistration power of attorney should satisfy the general principles of powers of attorney – ie, it should not confer any power that the issuer itself does not possess. Further, a power of attorney must be executed on Indian stamp paper and attested by a notary public. Also, it is recommended that it be executed in English or any language the grantor can fluently understand. Advance recordation of the deregistration power of attorney with the DGCA is not required but is recommended.

2.8.8 Documents Required to Enforce Deregistration Power of Attorney

The person exercising powers under the deregistration power of attorney would need to demonstrate that he or she is duly authorised by the attorney (in the case of a corporate entity) to sign and act on behalf of such an attorney. A board resolution or officers certificate issued by the attorney would usually suffice.

2.8.9 Choice of Laws Governing Deregistration Power of Attorney

It is recommended that deregistration powers of attorney be governed by Indian law.

2.8.10 Revocation of a Deregistration Power of Attorney

Usually, if a deregistration power of attorney is stated to be irrevocable, the grantor would not be able to revoke it. However, in practice, the grantor could always dispute a power of attorney on the grounds of fraud, coercion or misrepresentation.

2.8.11 Owner’s/Lessor’s Consent

Under India's regulations, an IDERA holder or its certified designee can deregister and export an aircraft from India without the lessee's consent. If the mortgagee of an aircraft is the IDERA holder or the certified designee, it may also export the aircraft without the owner's or lessor's consent. The asset need not be located in India at the time of deregistration.

2.8.12 Aircraft Export Permits/Licences

Permissions that are required for the export of an aircraft from India include:

permission from the DGCA under AIC 12 of 2018 (after the IDERA holder pays government dues accrued against the aircraft for three months prior to the date of application for deregistration); and
permission from the customs and tax authorities as well as from the Reserve Bank of India.

These permissions cannot be issued in advance, and the time required to grant each license may range from two to three weeks.

2.8.13 Costs, Fees and Taxes Concerning Export of Aircraft

There are no taxes payable in respect of the export of an aircraft from India; costs and fees may vary on a case-to-case basis.

2.8.14 Practical Issues Related to Deregistration of Aircraft

The DGCA usually requests proof of de-activation of the Mode S code from the aircraft. Also, all original documentation (request letters, etc) should be notarised, and adequate proof should be included to demonstrate that the signatory of original documents submitted to the DGCA is duly authorised to do so by their company/employer. In another recent matter, the DGCA refused to deregister aircraft within five working days from the date of receipt of the application from the IDERA holder and requested various documentation instead. Adequate responses had to be filed and paperwork provided to overcome the objections raised by the DGCA.

2.9 Insolvency Proceedings

2.9.1 overview of relevant laws and statutory regimes governing restructurings, reorganisations, insolvencies and liquidations.

The present statutory regime for the reorganisation and insolvency resolution of a corporate entity is governed by the Insolvency and Bankruptcy Code, 2016 (the "Code"), some of the provisions of which came into force in November 2016. The Code brings the insolvency laws in India under a single umbrella with an objective to, inter alia, maximise the valuation of the corporate debtor's assets by corporate restructuring or liquidation in a time-bound manner.

2.9.2 Overview of Relevant Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership

The Corporate Insolvency Resolution Process (CIRP) can be initiated on the occurrence of default of a minimum of INR10 million by a financial or operative creditor or at the instance of the corporate entity itself. The corporate entity can initiate the voluntary liquidation process where no default has been committed.

Companies incorporated in India can also be wound up by order of the NCLTunder the provisions of the Companies Act, 2013 on an application being filed by the company, or if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, etc; or under circumstances where the affairs of the company have been conducted in a fraudulent manner, etc; or if the company has made a default in filing with the Registrar its financial statements or annual returns for the immediately preceding five consecutive financial years; or if the tribunal is of the opinion that it is just and equitable that the company should be wound up.

2.9.3 Co-ordination, Recognition or Relief in Connection With Overseas Proceedings

There is no clear framework for cross-border cooperation in the instance of overseas insolvency proceedings under any statute in India. The provisions under the Code dealing with cross-border insolvency are based on the scheme of entering into separate bilateral agreements with the government of foreign countries and issuance of letters of request (LOR) by the competent tribunal.

However, in the CIRP of Jet Airways India Limited ("Jet Airways"), which commenced in India in June 2019, it was brought to the attention of the tribunal in India that a competent court in the Netherlands had already initiated insolvency proceedings against Jet Airways wherein a Boeing 777-300ER aircraft had also been seized by a creditor at Amsterdam's Schiphol airport. The tribunal ordered the resolution professional appointed in India to consider the prospect of coordinating with the Dutch trustee, and consequently, a "cross-border insolvency protocol" was executed between both parties to promote cooperation and coordination among the two authorities in different jurisdictions on the matter.

There has been judicial activism and reports from the committee constituted by the government to make provisions under the Indian statute in line with the UNCITRAL Model Law on Cross-Border Insolvency.

2.9.4 Effect of Lessee’s Insolvency on a Deregistration Power of Attorney

An order admitting an insolvency application filed by the Lessee would result in the deregistration power of attorney and IDERA no longer being effective. While in the past, the process from initiation of such proceedings until actual passing of such an order has taken several months or even years, in a recent voluntary insolvency application filed by an airline in India, the application was admitted by the NCLT on the eighth day from the date of filing; therefore, lessors, owners and mortgagees of aircraft must be prudent and act swiftly on initiation of such insolvency proceedings but prior to the application being admitted and the moratorium being applied.

2.9.5 Other Effects of a Lessee’s Insolvency

If a liquidator is appointed or if a similar process is initiated, it is not necessarily the case that the lease will be set aside, although it is always in the power of such an authority to do so. Once the period of moratorium is over, there is no reason why a lessor would be prevented or delayed from repossessing the aircraft on termination of the lease. The aircraft owner and its rights (under an operating lease) will be recognised, and the aircraft will not be deemed part of the lessee's property. Government dues, taxes, wages, etc, will always take precedence over the lessor's rights in terms of recovery of monies.

2.9.6 Risks for a Lender if a Borrower, Guarantor or Security Provider Becomes Insolvent

In an operating lease, the owner of the aircraft will always be recognised as the title holder. The main risk for a lender in the insolvency of the borrower, guarantor or entity providing security is the inability to recover its debt.

2.9.7 Imposition of Moratoria in Connection With Insolvency Proceedings

Under the Code, the tribunal may pass an order commencing a corporate insolvency resolution process – this triggers a moratorium of 180 days, extendable by a maximum further period of 90 days (or any further time the tribunal may deem fit, not exceeding 330 days in total).

2.9.8 Liquidation of Domestic Lessees

If the debt owed by a debtor is above INR100,000 (increased to INR10 million in March 2020, due to the COVID-19 crisis), then the Code proposes two independent processes:

an insolvency resolution process; and
liquidation.

A creditor or the corporate debtor itself must apply to the NCLT to initiate the CIRP of the debtor company. Once a corporate debtor is admitted into the CIRP, its board of directors is suspended, and its management is placed under an independent "interim resolution professional". Simultaneously, a moratorium takes effect, which prohibits:

the continuation or initiation of any legal proceedings against the corporate debtor;
the transfer of its assets;
the enforcement of any security interest;
the recovery of any property from it by an owner or lessor; and
the suspension or termination of the supply of essential goods and services to it.

The moratorium lasts for the duration of the CIRP period – ie, 180 days extendable by another 90 days (or any further time the tribunal may deem fit, not exceeding 330 days in total). The interim resolution professional will then invite and verify claims made by the corporate debtor's creditors, classify them, and form a committee of creditors comprised of all the financial creditors of the corporate debtor, who shall, in turn, appoint an independent professional to function as the "resolution professional". Any resolution plan for the revival of the company needs to be approved by financial creditors holding 66% of the voting share.

If no plan is approved by the committee within the timeframe available, it may opt for liquidation. The NCLT is then required to order the liquidation of the corporate debtor. If an order of liquidation is passed, a liquidator will be appointed to sell the assets of the corporate debtor and distribute the assets among the creditors.

2.9.9 Ipso Facto Defaults

Ipso facto defaults are regular inclusions in lease transactions relating to aircraft in India and would be recognised to repossess an aircraft during lessee insolvency proceedings. Defaults under the Code that arose during the COVID-19 pandemic have been excluded from the period from 25 March 2020 to 24 March 2021.

2.9.10 Impact of Domestic Lessees’ Winding-Up

In cases where a domestic lessee is wound up, an aircraft on an operating lease may be taken back by its owner, and the lease agreement would no longer subsist. All rights flowing from the lease – namely, rent, security deposit and maintenance reserves – would also end.

2.10 Cape Town Convention and Others

2.10.1 conventions in force.

The Convention on International Interests in Mobile Equipment, Cape Town 2001 (CTC) and the Protocol on Matters Specific to Aircraft Equipment (Aircraft Protocol) (together with the "Cape Town Convention") are in force in India. However, several implementation issues have been dealt with over the years by the MoCA, which has been holding frequent consultations with the Aviation Working Group. Various amendments have been made to India's subordinate legislation – ie, the Aircraft Rules, 1937, Civil Aviation Requirements (CARs) and AICs which enshrine the tenets of the Cape Town Convention.

Several conflicts remain between local municipal law and the Cape Town Convention – in such a scenario, local law shall prevail over international obligations. To remedy this issue, the government introduced a draft of the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 on 13 April 2022 and invited comments and suggestions from the general public. The Government further notified another draft on the 20th of July 2022 and has received all public comments as of the date of drafting this document.

2.10.2 Declarations Made Concerning Conventions

The Convention

India has made extensive declarations under the Convention, as listed below.

Specific Declaration under Article 39(1)(a)

“The following categories of non-consensual right or interest have priority under its laws over an interest in an aircraft object equivalent to that of the holder of a registered international interest and shall have priority over a registered international interest, whether in or outside insolvency proceedings, namely:

liens in favour of airline employees for unpaid wages arising since the time of a declared default by that airline under a contract to finance or lease an aircraft object;
liens or other rights of an authority of India relating to taxes or other unpaid charges arising from or related to the use of that aircraft object and owed by the owner or operator of that aircraft object, arising since the time of default by that owner or operator under a contract to finance or lease that aircraft object; and
liens in favour of repairers of an aircraft object in their possession to the extent of service or services performed on and value added to that aircraft object.”

General Declaration under Article 39(1)(b)

"Nothing in the Convention shall affect its right or that of any entity thereof, or any intergovernmental organisation in which India is a member, or other private provider of public services in India, to arrest or detain 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 service or services provided by it in respect of that object or another aircraft object."

Declaration under Article 40

"The following categories of non-consensual right or interest shall be registrable under the Convention as regards any category of aircraft object as if the right or interest were an international interest and shall be regulated accordingly, namely:

liens in favour of airline employees for unpaid wages arising prior to the time of a declared default by that airline under a contract to finance or lease an aircraft object;
liens or other rights of an authority of India relating to taxes or other unpaid charges arising from or related to the use of an aircraft object and owed by the owner or operator of that aircraft object, arising prior to the time of a declared default by that owner or operator under a contract to finance or lease that aircraft object; and
rights of a person obtaining a court order permitting attachment of an aircraft object in partial or full satisfaction of a legal judgment."

General Declaration under Article 52

"The Convention shall apply to all its territorial units."

Declaration under Article 53

"All the High Courts within their respective territorial jurisdiction are the relevant courts for the purposes of Article 1 and Chapter XII of the Convention."

Mandatory Declaration under Article 54(2)

"Any and all remedies available to the creditor under the Convention which are not expressed under the relevant provision thereof to require an application to the court may be exercised without court action and without leave of the court."

The Protocol

India has made extensive declarations under the Protocol, as follows.

Declaration under Article XXX (1) in Respect of Article VIII

India will apply Article VIII.

Declaration under Article XXX (2) in Respect of Article X Providing for the Application of the Entirety of Article X

India will apply Article X of the Protocol in its entirety, and the number of working days to be used for the purposes of the time limit laid down in Article X(2) of the Protocol shall be that equal to no more than:

ten working days in respect of the remedies specified in Article 13(1)(a), (b) and (c) of the Convention (respectively, preservation of aircraft objects and their value; possession, control or custody of aircraft objects; and immobilisation of aircraft objects); and
30 working days in respect of the remedies specified in Article 13(1)(d) and (e) of the Convention (respectively, lease or management of aircraft objects and the income thereof; and sale and application of proceeds from aircraft objects).

General Declaration under Article XXX (3) in Respect of Article XI Providing for the Application of Alternative A in its entirety to all Types of Insolvency Proceeding

India will apply Article XI, Alternative A, of the Protocol in its entirety to all types of insolvency proceedings, and the waiting period for the purposes of Article XI(3) of that Alternative shall be two calendar months.

Declaration under Article XXX (1) in Respect of Article XII

India will apply Article XII.

Declaration under Article XXX (1) in Respect of Article XIII

India will apply Article XIII.

2.10.3 Application of Article XIII of the Protocol on Matters Specific to Aircraft Equipment

Article XIII of the Protocol does apply domestically. For the DGCA to record an IDERA in relation to an aircraft, an IDERA holder or their authorised signatory or certified designee of the authorised signatory shall submit an application as per Appendix B of CAR Section 2, Airworthiness Series F Part I Issue II. Along with the application, the applicant must submit an original IDERA or two notarised copies thereof.

2.10.4 Enforcement of Conventions

Indian courts have had limited opportunities to deal with issues pertaining to the enforcement of the Convention and Protocol. By way of recent judgments, especially the AWAS 39423 Ireland Ltd and Others v DGCA and Another case, the Delhi High Court, on 19 March 2015, inter alia recognised the mandatory nature of Rule 30(7) of the Aircraft Rules, 1937 and upheld the duty cast upon the DGCA to deregister an aircraft on the basis of an IDERA. All the case law to date deals extensively with India's international obligations under the Convention/Protocol and with deregistration; however, no court has directly dealt with the issue of the physical export of an aircraft from India under the Convention and Protocol.

As of the publication date, multiple applications pending before various Courts were filed by lessors impacted by the insolvency proceedings initiated by an Indian airline.

2.10.5 Other Conventions

India has neither ratified the 1948 Geneva Convention on the International Recognition of Rights in Aircraft nor the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft.

3. Aircraft Debt Finance

3.1 structuring, 3.1.1 restrictions on lending and borrowing.

There are very strict regulations and restrictions on loans from foreign lenders, especially in foreign exchange. The RBI is the relevant regulator; before any borrowings can be made, the prior approval of the RBI is required.

3.1.2 Effect of Exchange Controls or Government Consents

India is an exchange-controlled country. The relevant enactment is the Foreign Exchange Management Act of 1999, and the rules and regulations made thereunder, which are administered by the RBI. Any financing or repatriation of realisation of proceeds under a loan, guarantee or security document would require the approval of the RBI.

3.1.3 Granting of Security to Foreign Lenders

Guarantees, especially for foreign exchange-denominated transactions, are regulated by the RBI's Foreign Exchange Management (Guarantees) Regulation, 2000 and other regulations. The borrower would require prior approval from the RBI to grant security to foreign lenders.

3.1.4 Downstream, Upstream and Cross-Stream Guarantees

Prior approval of the RBI would be required in case of any guarantee involving the guarantee of debt owed to a foreign entity by an Indian entity.

3.1.5 Lenders’ Share in Security Over Domestic SPVs

In practice, there is never a domestic special-purpose vehicle involved which never owns the finance aircraft.

3.1.6 Negative Pledges

A negative pledge is recognised.

3.1.7 Intercreditor Arrangements

The question of whether material restriction/requirement is imposed on inter-creditor arrangements is dependent on a case-to-case basis.

3.1.8 Syndicated Loans

The concept of agency and the role of an agent under a syndicated loan is recognised.

3.1.9 Debt Subordination

The usual practice permitted is the issuance of bonds as subordinated debt instruments. There are extensive RBI guidelines on what forms of subordination are permissible and restrictions on the percentage of debt that may be subordinated.

3.1.10 Transfer/Assignment of Debts Under Foreign Laws

The transfer of outstanding debt is permissible and recognised, subject to RBI approval, which may be required on a case-to-case basis.

3.1.11 Usury/Interest Limitation Laws

There are no usury or interest limitation laws. However, courts in India always have the power to fix interest rates if an opinion is formed that the applied interest is harsh or excessive.

3.2 Security

3.2.1 typical forms of security and recourse.

Typical forms of security granted in aviation finance transactions in India could include taking over the security of the immovable property by way of a mortgage or movable property/bank accounts, etc, by way of a deed of hypothecation.

3.2.2 Types of Security Not Available

A security agreement, if executed properly – and if it satisfies the test of being a valid contract between two parties competent to contract – would be upheld as being valid in relation to the aircraft, engines, warranties or insurance.

3.2.3 Trust/Trustee Concepts

Indian Law recognises the concept of trust, and the relevant national legislation is the Indian Trusts Act, 1882. India is not a party to the Hague Convention on Trusts, 1986.

3.2.4 Assignment of Rights to an Aircraft by a Borrower to a Security Trustee

Pursuant to a security assignment or mortgage, the borrower may assign their rights to the aircraft under an aircraft lease to a security trustee.

3.2.5 Assignment of Rights and Benefits Without Attendant Obligations

It is possible to assign the rights and benefits only without also assigning the attendant obligations of the lessor as long as such assignment is valid under the governing law.

3.2.6 Choice of Foreign Law

A security assignment or a guarantee may be governed by English or New York law and does not need to be governed by Indian law to be fully enforceable.

3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments

No particular form of security assignment is required in India, nor does it need to be registered in India. However, it is recommended that the security assignment should preferably be filed and recorded with the DGCA. The DGCA will endorse on the Certificate of Registration the name of the mortgagee and/or details of the hypothecation. The English language security assignment document will suffice and shall be accepted by the DGCA.

It is advisable to notarise the security assignments; where they are executed abroad, they should preferably be authenticated by an Indian consular or other diplomatic officer. In recent experience, it has been observed that most government departments, including the DGCA, accept notarised copies of documents, making the requirement for consularisation more or less redundant.

With the aircraft being a movable asset, there is no mandatory requirement to register any mortgages, liens, encumbrances, etc, on it in India. However, the aircraft mortgage can be registered with the Sub-Registrar of Assurances under the Indian Registration Act, 1908 within four months of its execution. The registration with the Sub-Registrar of Assurances (of movables) constitutes persuasive value against a claim by a bona fide purchaser without notice. Registration with the Registrar of Companies is also possible; however, it is not compulsory if the mortgagor of the aircraft is not an Indian entity having its registered place of business in India.

3.2.8 Domestic Law Security Instruments

Domestic law security instruments are not required. Where the aircraft's owner is a foreign entity/citizen, local law filings are not required.

3.2.9 Domestic Registration of Security Assignments Governed by Foreign Laws

Charges in relation to aircraft owned by Indian entities only are required to be registered with the Registrar of Companies as per the provisions of the (Indian) Companies Act, 2013, and rules made thereunder.

3.2.10 Transfer of Security Interests Over Aircraft/Engines

Transfer of security interests over an aircraft and/or engines is recognised in India.

3.2.11 Effect of Changes in the Identity of Secured Parties

In case the identity of the secured parties under a security assignment changes, the document evidencing this may be filed with the DGCA on its creation.

3.2.12 “Parallel Debt” Structures

This is not applicable under Indian law.

3.2.13 Effect of Security Assignments on Residence of Secured Parties

Usually, a secured party under a security assignment would not be deemed a resident, domiciled, carrying on business or subject to any taxes in India.

3.2.14 Perfection of Domestic Law Mortgages

A domestic law mortgage over an aircraft or engine is not required in India.

3.2.15 Differences Between Security Over Aircraft and Spare Engines

Both aircraft and spare engines are moveable objects, so there is no difference between the forms of security required.

3.2.16 Form and Perfection of Security Over Bank Accounts

A bank account can be charged by way of hypothecation. The deed of hypothecation would need to be filed with the bank maintaining the account, which is to be charged for it to be perfected.

3.3.1 Third-Party Liens

The question of whether a third party could take or register a lien over an aircraft or engine would depend on who is trying to discharge the lien. Where the lessee seeks to discharge this lien, it would be liable to pay the total outstanding amount payable to that third-party contractor/repairer. However, if a lessor or secured party seeks to discharge a lien, then in all probability, it would have to bear only the value of the work actually done on that particular aircraft asset. In case of deregistration and export by filing an IDERA under AIC 12 of 2018, the IDERA holder must bear the cost of all charges accrued three months prior to the date of submission of the IDERA, owed to the central government, or any entity thereof, or any inter-governmental organisation in which India is a member, or other private provider of public services in India.

A fleet lien is not recognised under the new Cape Town Convention and Aircraft Protocol regulations.

Third parties, which are government entities, have the right to arrest, detain, attach or sell an aircraft for payment of amounts owed. However, under the new regime in India, these dues are limited to three months prior to the date of application by the IDERA holder.

3.3.2 Timeframe to Discharge a Lien or Mortgage

A lien can be discharged immediately on payment of the monies owed to the party exercising the lien.

3.3.3 Register of Mortgages and Charges

There is a register of charges maintained by the Registrar of Companies. However, only Indian owners of aircraft assets are required to register a charge against such aircraft with the Registrar. The interests of the aircraft mortgagee or security trustee shall be noted on the aircraft's certificate of registration as well as on the aircraft register maintained by the DGCA. Such registration shall result in notice to all third parties regarding the interest of the security trustee or mortgagee in the aircraft. Further, the DGCA shall also always require the consent of the mortgagee/security trustee named on the certificate of registration/aircraft register for any amendment of the entries in relation to the aircraft.

3.3.4 Statutory Rights of Detention or Non-consensual Preferential Liens

Fleet-wise detention of aircraft taken on an operating lease, especially after the termination of the operating lease, would not be recognised.

3.3.5 Verification of an Aircraft’s Freedom From Encumbrances

A potential purchaser of an aircraft must check the aircraft register maintained by the DGCA as well as the International Registry maintained under the Cape Town Convention and Aircraft Protocol.

3.4 Enforcement

3.4.1 differences between enforcing security assignments, loans and guarantees.

In the practical sense, there should be no difference in enforcing a security assignment as opposed to a loan or guarantee.

3.4.2 Security Trustees’ Enforcement of Their Rights

A security trustee may enforce its rights under a security assignment pursuant to only a notice and acknowledgement executed by the lessor and the relevant lessee.

3.4.3 Application of Foreign Laws

Domestic courts in India will uphold foreign law as the governing law as well as submission to a foreign jurisdiction subject to this not being opposed to Indian public policy.

3.4.4 Recognition and Enforcement of Foreign Judgments and Arbitral Awards

Enforcement of foreign judgments and arbitral awards have already been dealt with in the preceding sections (see 2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards ).

3.4.5 Secured Parties’ Right to Take Possession of Aircraft

There is no remedy for self-help in India. Peaceful repossession of the aircraft can be obtained without judicial intervention. In cases where there is no cooperation, the secured party has the option to apply to a court.

3.4.6 Domestic Courts Competent to Decide on Enforcement Actions

The court in which enforcement action under a security agreement/aircraft mortgage is decided would depend on the jurisdiction in India where the dispute arises and the nature and value of the claim.

3.4.7 Summary Judgments or Other Relief

Summary judgment may only be effective in cases where a secured party seeks to recover debt and other monies under the security agreement. There are no conditions that need to be complied with, apart from the fact that court fees will need to be paid on the amount claimed by the defaulting defendant.

3.4.8 Judgments in Foreign Currencies

On the request of a secured party, courts in India would pass judgment in a foreign currency.

3.4.9 Taxes/Fees Payable

There are no major taxes or fees that a secured party would be required to bear in connection with enforcing a security agreement/aircraft mortgage.

3.4.10 Other Relevant Issues

From a practical standpoint, since the courts in India are overburdened with work, lenders have preferred to have security documents governed by English law, and any enforcement takes place in England. The UK is a reciprocating territory, and money decrees passed in the UK may be enforced in India much more easily than decrees from non-reciprocating territories.

4. Other Issues of Note

4.1 issues relevant to domestic purchase, sale, lease or debt finance of aircraft, 4.2 current legislative proposals.

The MoCA had (vide gazette notification dated 13th April 2022) published a draft of the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 for public comments. The Bill aims to implement the provisions of the Cape Town Convention and Aircraft Protocol which were adopted by India in 2008. It is a long-awaited piece of proposed legislation to ensure compliance with the treaty obligations and to avail the full benefits of proper accession to the treaty.

Having taken into account comments received, the MoCA has, vide a subsequent gazette notification dated 20th July 2022, published an amended draft of the Bill for further public comments. The Bill must follow the procedure prescribed to be placed before both houses of Parliament before it can be enacted into law. This act, if passed, is likely to have a huge impact on the processes involved in aviation financing and should streamline the process of repossession of aircraft.

Sarin & Co

Chandigarh office: 48, Sector 4 Chandigarh – 160001 India New Delhi office: 52/96, 2nd Floor CR Park New Delhi – 110019 India

+91 98142 52145

KLA Legal Headquartered in Gurugram, KLA Legal is a full-service law firm serving International and Indian clients from its offices in Mumbai, Gurugram and GIFT City, Gandhinagar. The firm's team has worked on numerous cases representing hundreds of leading global multinational clients as well as Indian corporates. The firm's aviation practice is headed by the Managing Partner, Mr. Ajay Kumar, who has extensive experience in domestic and cross-border transactions covering aircraft leasing, financing, repossession and bankruptcy. We advise major aircraft manufacturers, lessors, leading banks and financial institutions and export credit agencies.

Indian Civil Aviation

Moratorium v Cape Town Convention

The Insolvency and Bankruptcy Code, 2016 (IBC/“Code”), which received presidential assent on 28 May 2016, has consolidated and amended the laws relating to reorganisation and insolvency resolution of Corporate Persons, Partnership Firms and Individuals in a time bound manner. This law empowers certain categories of entities to commence insolvency proceedings against the corporate debtor before the Adjudicating Authority/National Company Law Tribunal (NCLT): a financial creditor (Section 7), an operational creditor (Section 9) and the corporate debtor/applicant itself (Section 10) where the default threshold is INR10 million. Upon admission of the petition under either of the aforesaid sections, the NCLT imposes a moratorium per Section 14 of the IBC.

The Cambridge Law Dictionary defines the term “moratorium” as “stopping of an activity for an agreed period of time”, while the Oxford Dictionary defines it as “a legal authorisation to debtors to postpone payment”. As envisaged in the Code, the moratorium concept refers to a stay against any coercive action against the Corporate Debtor during the moratorium’s period. Essentially, what this means is that the control of the company passes into the hands of the interim resolution professional and prohibition of the following activities:

institution of suits, a continuation of pending suits or proceedings against the corporate debtor;
transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets;
recovery or enforcement of security interest or any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”); and
recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

A moratorium is imposed for a period of six months (180 days), which is further extendable by another three months (90 days). Per the proviso to Section 14(4) of the Code, the moratorium shall cease to have effect once the Corporate Insolvency Resolution Process (CIRP) is complete.

The scheme of a moratorium is designed to retain the corporate debtor’s assets until the completion of the resolution process, thus enabling a smooth and firm revival of the company. The onset of the moratorium helps ensure this. The corporate debtor is protected from any existing claims due to its creditors and any new recovery claims that may be initiated against it. The Hon’ble Supreme Court in Innoventive Industries Ltd v ICICI Bank Ltd characterised the objective of the moratorium as “to give the debtor a breathing spell in which he is to seek to reorganise his business”. In Lanco Infratech Limited, the Supreme Court placed reliance on the report of the Bankruptcy Law Reforms Committee, which submitted that “The motivation behind the moratorium is that it is value maximising for the entity to continue operation even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP. The order for the moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or expected claims from old lawsuits or on new lawsuits, for any manner of recovery from the entity”.

Though the intent of Section 14 and its language is absolute in favour of the corporate debtor, the applicability of the moratorium and its scope has reached Court doors for clarification and interpretation at various stages. The NCLT in Haravtar Singh Arora v Punjab National Bank & Ors held that all pending proceedings before all Courts against the corporate debtor automatically come to a halt and cannot be decided. In Alchemist Asset Reconstruction Company v M/s Hotel Gaudavan Pvt Ltd & Ors, the Supreme Court observed that after the order of the moratorium, no arbitration proceedings could commence or continue against the corporate debtor, and a proceeding so initiated would be non-est in law. Recognising the impact of Section 14 proceedings on existing contracts and their termination, the Calcutta High Court in Gouri Shankar Jain v Punjab National Bank & Anr held that a statutory right of a financial creditor to initiate any action under the provisions of the SARFAESI Act remains suspended for a finite period. However, the existing contracts between the surety, the principal debtor and the creditor remain valid and unaffected. The noteworthy judgment of the Hon’ble Supreme Court in Tata Consultancy Services Ltd v Vishal Ghisulal Jain, RP, SK Wheels Pvt Ltd held that a party could be restrained from terminating the contract only in a scenario wherein the contractual dispute arises in relation to the insolvency of the corporate debtor, and such a contract is essential to the resolution process.

While various Courts have discussed the ambit of Section 14, they have also examined whether properties not owned by the corporate debtor cover the realm of the moratorium. The judgment in M/s Schweitzer Systemtek India Private Limited v Phoenix ARC Private Limited seeks to answer the same wherein the NCLT held that the order of moratorium has no effect on the properties beyond the ownership of the corporate debtor. The same has also been reiterated in the case of Alpha & Omega Diagnostics (India) Ltd v Asset Reconstruction Company of India Ltd & Ors wherein the NCLT (while interpreting Section 14(3) of the Code) held that moratorium should be declared to prohibit any action to recover and/or enforce any security interest created by the company in respect to “its” properties; hence, Section 14 prohibition covers only the properties reflected in the balance sheet of the corporate debtor.

Moratorium vis-a-vis the Indian Aviation Sector

The aviation sector is obviously capital-intensive, which involves leasing and financing aircraft and related equipment to Indian operators. The provisions of Section 14(4) of the Code also hit insolvency proceedings in the sector. Rule 30 (7) of the Aircraft Rules, 1937 (“Aircraft Rules”) empowers aircraft lessors to deregister their aircraft upon the filing of Irrevocable Deregistration and Export Request Authorisation (IDERA) once the leases are terminated. This mandates the Directorate General of Civil Aviation (DGCA) to cancel the registration of an aircraft registered in India within five (5) working days of receipt of an application from the IDERA holder. Once the deregistration is achieved, the aircraft can be exported out of the country in accordance with Rule 32A of the Aircraft Rules, thus enabling lessors to remarket the aircraft to other potential lessees. However, this cycle gets interrupted when an insolvency petition against a lessee is admitted, resulting in the imposition of a moratorium, thus hindering the ability of lessors to regain possession of their equipment, even though the leasing arrangement has been terminated prior to the order.

The ongoing Go First (“Go”) insolvency saga is a classic testament to this. Whether the termination of leasing prior to and during the moratorium secures the lessor is a debatable issue and is yet to find judicial endorsement. While section 14(4) of the Code imposes a blanket embargo on creditors/lessors from recovering any property which is in possession of the corporate debtor/lessee, it is pertinent to note that aircraft are different from any other assets in the sense that considering their capital-intensive nature, grounding them not only results in financial loss but also maintenance expenditure, insurances compromised and not to forget the consequent depreciation of the aircraft.

The Go First Rigmarole

The date of 2 May 2023 will always be a day to remember in Indian aviation history as it marks the voluntary declaration of bankruptcy by any airline in India. With the admission of the insolvency petition and the resulting imposition of a moratorium by the NCLT on 10 May it became the second Indian airline to be buried into insolvency with outstanding dues of millions of dollars to aircraft lessors. While Go attributes the insolvency filing to Pratt & Whitney’s faulty engines, the ongoing drama has worried aircraft lessors about suspending their IDERA rights. Though lessors terminated their respective lease arrangements with Go before the declaration of a moratorium, the DGCA refused to deregister on the grounds that the Court Order of a moratorium was in place. Since lessors were not given a voice to oppose the admission of the petition, various lessors such as BoC Aviation, Jackson Square, SMBC, etc, knocked at the doors of NCLT seeking redressals and clarification in the moratorium order to the effect that aircraft, whose leases were terminated prior to the moratorium, will not fall within the purview of the moratorium. Some lessors also approached the Delhi High Court seeking an Order that the DGCA be directed to deregister and arguing that Rule 30(7) provisions are mandatory in nature, leaving no room for the DGCA to exercise any discretion in deregistration. Therefore, deregistration must take place without any discretion or delay, and if refused, it will have a negative impact on the entire aviation industry in India. These matters are currently sub-judice.

The Aviation Working Group (AWG), which works towards the effective implementation of the Cape Town Convention and its Aircraft Protocol (CTC) in contracting states, issued a CTC Compliance Index Watchlist Notice placing India on a watchlist with a negative outlook by global aviation due to its failure to comply with international aircraft repossession norms set out by the CTC.

The decision of the NCLT to impose a moratorium has an adverse impact on aircraft lessors and the industry as a whole as aircraft remain grounded given the long-haul Court proceedings in India, leading to depreciation of equipment and the inability of the lessors to remarket them with other sound lessees. These factors place India in a “high-risk jurisdiction”, leading to lessors potentially charging high-risk premiums from other lessees.

All of the above can be chalked up to one string which is the non-implementation of the CTC by way of underpinning legislation in India which hampers the ability of lessors to recover possession of their equipment as opposed to other jurisdictions.

The Cape Town Convention

CTC is an essential arm of aviation designed to safeguard the interest of the creditors/lessors in the event the debtor/lessee defaults or becomes defunct. The Convention, concluded in Cape Town in 2001, aims to achieve efficient financing for equipment like aircraft and helicopters to make operations cost-effective. Since different jurisdictions are governed by varied sets of legal rules on leasing, title-retention agreements, etc, this creates uncertainties for lessors and lending institutions, affecting the efficacy of their rights. India acceded to CTC in 2018; however, specific legislation has not underpinned the same, ie, it is yet to take the shape of law in the country. While international treaties and conventions have the force of law in India, municipal laws prevail in the absence of specific legislation. Therefore, other laws assume primacy over CTC in case of a conflict. The Ministry of Civil Aviation, recognising the need for a comprehensive law, introduced the CTC Bill in 2018 to assure foreign lessors that in the event of default, their assets like aircraft would not get struck – and, subsequently, introduced a bill to implement CTC in 2022.

The effective implementation of CTC has become extremely important in the present situation. CTC provides a framework for dealing with airline defaults and airline insolvencies; ie, provides for basic default remedies such as deregistration and export as interim relief. CTC also provides that upon the occurrence of an insolvency law-related event, the insolvency administrator or debtor should give possession of the aircraft object to the creditor, commonly known as Alternate A.

CTC v Moratorium Discord

Provisions of the Code and the CTC are in clear conflict with the lessor’s right to repossess the aircraft. Alternate A of the Protocol (Article XI) provides that upon the occurrence of an insolvency-related event, the debtor or the insolvency administrator should give possession of the aircraft at the end of the waiting period to the creditor. Section 14(1)(d) of the Code stipulates that assets in possession of the debtor cannot be repossessed during the moratorium term, which can extend up to 270 days. Under the declarations made by India, it has chosen to apply Alternate A in its entirety with respect to all insolvency law proceedings, and the waiting period for Article XI(3) of that Alternative shall be two (2) calendar months.

Per the above, during the insolvency of a debtor, the insolvency administrator/ resolution professional shall either cure all the defaults of the corporate debtor or give possession of the aircraft object to the lessor within 60 days from the commencement of CIRP or on any such date when the lessor becomes liable to such possession of the aircraft or the aircraft object as per the agreement, whichever is earlier. Until the creditor is given possession, the insolvency administrator shall preserve the value and maintain its value in accordance with the lease agreement. Another sphere of conflict between these two provisions is the one of overriding effect. The CTC Bill 2018 contains a non-obstante clause which accords primacy to the provisions of the Bill over conflicting laws. However, per Section 238 of the Code, the Code shall have an overriding effect over any inconsistent existing law. Prior to the enactment of insolvency law for India, Indian Courts have referred and relied on the CTC provisions to allow deregistration and repossession of equipment as seen in the cases of AWAS 39423 Ireland Ltd & Ors v Directorate General of Civil Aviation & Anr. The Code thus appears to have unintentionally contradicted India’s agreed position under the Convention and the Protocol, purging some critical protections given to aircraft lessors.

A moratorium is intended to provide a breathing space to the debtor and set the pace for its smooth revival. CTC was introduced to recognise the rights of the creditors/ lessors, thus securing the interest of the lessors in case of debtor insolvency. However, the moratorium casts a shadow on the ability of the lessor to regain possession of its equipment, thereby leading to the depreciation of assets and monetary losses. India has matured from the turbulences faced by the insolvencies of Kingfisher and Jet Airways, yet it lacks a comprehensive framework and certainty in the context of airline insolvencies as it now faces the Go First insolvency. Due to a failure to implement legislation, India’s rating has been downgraded from a score of 69 to 63.5 in the Compliance Index, a rating programme for jurisdictions that have acceded to CTC, established by the AWG. As the Code is sector agnostic, it poses its own challenges in the aviation sector, which require specific solutions for the recovery of equipment. Once enacted into law by the Parliament, the CTC Bill overrides moratorium provisions under the Code and answers many such challenges and issues.

The lack of proper legislation to enforce CTC enables India’s insolvency law to supersede lessor’s repossession requests. With the adoption of CTC Alternate A approach, the Bill will prove to be a landmark change in India’s aviation chapter by including the two-month waiting period for insolvency, which mandates the airline/lessee to return the possession. Due to the conflicts with the Code, it becomes imperative to set up a harmonious interpretation between the two frameworks. Go First’s hasty and unannounced insolvency has already labelled India as a “risky” jurisdiction to lease aircraft and will continue to test the moratorium provisions and its apparent conflict with CTC in the next few weeks and months. The overriding effect of the Bill over any other laws will nullify the effect of the moratorium, thus enabling lessors to recuperate the aircraft. For its growth in the global aviation market, India must legalise and enforce CTC provisions in line with the declaration made by the country.

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What is the Difference Between an Assignment and a Novation in the UK?

By Edward Carruthers

Updated on 21 November 2022 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

What is an Assignment?

What is a Novation?

Two key differences between an assignment and a novation, key takeaways, frequently asked questions.

As a business owner, you may encounter occasions where you must transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer the rights conveyed to you under a particular contract to another party. An assignment or a novation can help you do this. However, they act in very different ways and have differing requirements. This article will explain the main differences between an assignment and a novation and the circumstances where you may wish to use them.

What is an Assignment?

Under the terms of a standard contractual agreement, you or your business partners will receive rights or benefits. You can transfer the right to receive these benefits through an assignment to anyone who is not part of the original agreement. Assignments are made through an assignment deed, which will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your own rights. You cannot assign any other person’s rights conveyed in a contract.

Once you (the assignor) transfer your rights to the third party (the assignee), they can enjoy the benefits of the contract you provided.

Assignments are common in construction contracts where a property developer may enter into a building contract with a contractor. The developer can transfer their rights under that contract to anyone buying the property. Those rights then allow the purchaser to demand the contractor perform their duties under the original arrangement. Otherwise, they can make a claim against the contractor for a breach of contract.

Novations are slightly more complicated than assignments. They transfer both the rights and obligations that you have under a contract. You may use a novation to leave a contract you no longer wish to be a party to and find a replacement. For example, if you stop trading in a specific service or line of goods, you can use a novation deed to remove yourself from a contract to provide these services. The novation deed will then allow you to substitute yourself for someone else willing to do this work.

Technically, a novation cancels the original contract you held with your business partner and creates a duplicate contract. In that duplicate, a third party will take the rights, benefits, and obligations conveyed to you from that agreement.

As the party leaving the contract, you will let go of all your rights to your benefits under the original contract. You will also no longer need to perform your contractual duties. It is worth noting that the burden of finding a replacement party for the novation often falls on the person leaving the contract. Therefore, to set up a novation, you must find the replacement yourself. However, you should be aware that any party involved in the existing contract can veto your decision to bring in a replacement if they are unsatisfied.

Novations often happen where businesses are bought and sold or where debt transactions occur. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party. They can transfer these obligations via a novation.

As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits.

But there are other differences between the two that business owners must be aware of.

1. Novations Require the Consent of All Parties

An assignment does not require the consent of all parties to the contract to transfer the rights. Additionally, you do not necessarily have to notify the other parties to an agreement that an assignment is taking place. However, as a commercial courtesy, it is wise to notify your business partners that you intend to assign your rights to a third party. It is also essential to ensure no contractual terms prohibit you from transferring a benefit to a third party. Doing say may lead to breaching the contract, and you will be liable for damages.

With novations, you must obtain consent from every party to a contract before transferring your contractual obligations and rights. This is because you are transferring your duties to perform obligations to a third party. In addition, as the other businesses involved in a contract rely on the performance of these obligations, they have a right to be notified of the novation arrangements. They must also provide their consent to these arrangements. Therefore, a novation deed must be signed and approved by every party to that original agreement, including the party exiting the contract.

2. Novations Require Consideration

Consideration is an essential element of contract law. It is a legal term for payment of value in exchange for a promise. To have a legally binding contract, you must have some form of consideration passing between parties. For example, in a delivery contract, one party must pay another party for shipping a set of goods. Without that consideration passing between parties, you cannot have a legally binding contract, and you can take action against your business partner for breach of contract.

Novation deeds require you to exchange consideration before terminating the original contract. They also require consideration when making the new novation contract. On the other hand, as assignments do not involve the termination of a contract, you do not have to show that parties to the contract exchanged consideration.

Assignments and novations differ in three important ways. For instance, assignments transfer rights to contractual benefits to third parties, while novations transfer rights and obligations under a contract to a third party. Additionally, novations require the consent of all parties to the contract. On the other hand, you can make assignments without the consent of all parties. Finally, novations require consideration.

If you need help transferring your rights, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page .

Assignments are where business owners can transfer a right or benefit given to them under a contractual arrangement to a third party.

A novation transfers both a business owner’s rights and obligations under a contract to a third party.

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Assignment vs Novation of Contract: What's the Difference?
What Is Novation In Real Estate? Definition & Examples
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What's the Difference Between Assignment and Novation?
What's the Difference Between Assignment and Novation?
How to Write an Assignment? Learn by India Assignment Help Experts

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COMMENTS

Sub-contracting and Assignment : Resolving the Legal Conundrum
Assignment. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
Novation, Rescission, Alteration under the Indian Contract Act
The doctrine of novations is recognized under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation can be effective only when there is a new contract and not a new agreement. Hence, mere agreement to substitute the existing contract will not be binding unless it has been accepted and executed mutually by all ...
Novation of contract : what you need to know
Novation is covered under Section 62 of the Indian Contract Act, 1872. It is a convenient and simplified process that allows contracting parties to modify the terms of the original agreement and replace the old contract with a new one. Novation also allows the parties the option of keeping the terms of the contract the same while changing the ...
Assignment vs Novation: Everything You Need to Know
A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one.
Deed of Assignment v Deed of Novation
In the context of a deed of assignment, the assignor transfers its rights and responsibilities to the assignee, while the initial contract remains valid. Conversely, novation entails establishing a fresh agreement that replaces the original one, forming a new agreement involving the transferor, transferee, and obligor. Requirement of Consent.
Assignment of contract
Section 2 (h) of the Indian Contract Act, 1872 defines a contract as "an agreement enforceable by law". It is characterised by an offer and an acceptance along with consideration and is backed by the power of law. An agreement is a promise by one party to another. A proposal once accepted becomes a promise.
Contracts: The critical difference between Assignment and Novation
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby ...
RBI's move to revamp loan transfers in India
On June 08, 2020, the Reserve Bank of India (RBI) released two draft frameworks — one for securitisation of standard assets ... stressed assets can only be transferred through assignment and novation. Transfer by way of novation is exempt from the applicability of the guidelines, except for a diktat that approval of all parties, including the ...
Novation, Rescission, Alteration under the Indian Contract Act
The term 'novation' literally means to replace with a new contract and the same obligations are performed by different parties. Under novation, the liabilities under the existing contract are extinguished. The doctrine of novations is acknowledged under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation ...
Impact of Assignment and Novation on Arbitration Agreements
Assignment & Novation: Assignment of an arbitration agreement by substituting a third party is a valid procedure. It was observed in Kotak Mahindra Prime Ltd. v. Sanjeev that the assignability depends on the subject matter of the arbitration agreement and the assignment is regulated under the law of assignment of contractual rights and ...
Contracts: The Critical Difference Between Assignment and Novation
Assignment and novation in the Construction Industry. Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. ...
Assignment or Novation: Key Differences and Legal Implications
Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on ...
PDF Assignment of Rights and Its Practical Relevance in Financial
The common law did give effect to three kinds of transactions, viz. novation, acknowledgement and power of attorney, which to some extent did the work of assignment.1 As per the Indian contract law, any type of contract may be assigned as long as there is consent involved in the assignment. It needs
What's the Difference Between Assignment and Novation?
Therefore, it is important to understand those differences. Moreover, assignment is a partial transfer (in respect to the rights of a contract) to a third party. A novation is a complete transfer of that contract (rights & burden) to another party. In both instances of transferring rights or obligations to a third party, consult a contract lawyer.
Novations in India
This got me thinking that the closest the British ever got to defining a "novation" was through enacting the Indian Contract Act, 1872 (Act No. 9 of 1872). In 1872, India was still a colony of the British (it would gain independence only 75 years later in 1947) and its laws were still made by England (the Imperial Legislative Council).
Assignment vs Novation: Everything You Need to Know
Novation is a mechanics where sole party transfers all its obligations and rights under a contract to adenine third celebratory, with the consent of the original counterparty. The associations of rights under ampere contract usually utterly transfers the rights to the assignee till enter the benefits accruing under one contract.
assignment+and+novation+of+contract
The execution of the 1996 Agreement confirms that the 1982 License was assigned by GEDA to GPI. However, an assignment of a contract is not synonymous with a novation. "An assignment differs from a novation in two ways: (1) an assignment creates no contract between lessor and assignee, and (2) an assignment does not discharge the assignor's ...
Assignment and Novation: Spot the Difference
Novation. Whereas assignment only transfers a party's rights under a contract, novation transfers both a party's rights and its obligations. Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the ...
Assignment and novation
If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well. In a novation the original contract is extinguished and is replaced by a new one in which a third ...
Novation vs Assignment: Which One Is The Correct One?
Novation is the act of replacing one party in a contract with another party, while assignment is the act of transferring rights or obligations from one party to another. Novation is the proper term when a new party is being substituted for an existing party in a contract. This new party assumes all of the rights and obligations of the original ...
Aviation Finance & Leasing 2023
As long as the New York or English law-governed assignment and assumption agreement or novation agreement is a valid contract under Indian law, the courts in India will uphold the validity of such an agreement. The consent of the lessee will also be required for such an agreement to be valid and enforceable.
What is the difference between assignment and novation?
If you need assistance with an assignment or novation of a contract, do not hesitate to contact me at [email protected] or give me a call on 1300 033 934 for a no-obligation quote. Like ...
Differences Between Assignment and Novation
As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits. But there are other differences between the two that business owners must be aware of. 1.