After a period of confusion, IDERA protection in Indonesia now extends to offshore lenders

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As the aviation industry around the world continues to suffer from the impact of COVID-19, many airlines are struggling to meet their obligations under aircraft lease and finance agreements. Given the current uncertainties, in this ABNR legal update, we take a look at Indonesia’s position with respect to a key protection for creditors under the Cape Town Convention (CTC), namely the IDERA (IDERA: Irrevocable De-Registration and Export Request Authorization). Established by the Cape Town Convention (CTC), this mechanism is designed to protect a creditor by preventing a debtor from flying an aircraft to a jurisdiction where the Cape Town Convention does not apply, and by helping to ensure that the creditor can take possession of the aircraft in the event of a fault.

First of all, the bad old days

The first thing to say is that although the IDERA mechanism is specifically recognized by the Aviation Law of 2009 and although Indonesia is a signatory to the CTC, the country has long lacked a clear procedure for the registration of foreign mortgages on aircraft leased in Indonesia. This meant that foreign creditors would normally be unable to avail themselves of self-help remedies, such as unilateral repossession, leaving them with nothing but IDERA to rely on.

However, an IDERA was not very useful to them either because previously the document could only be issued in favor of a direct lessor or an aircraft owner under the policy applied by the Directorate General of civil aviation (DGCA) of the Ministry of Transport (MOT). . This policy was deemed necessary because the aviation law enforcement legislation was unclear and open to conflicting interpretations. The DCGA’s strict stance in this regard was primarily driven by the need to guard against the possibility of disgruntled parties suing it, based on the lack of regulatory clarity.

In view of the increasing sophistication of aircraft leasing structures, often involving multiple levels of leasing, the policy of the DGCA has given rise to serious difficulties for the Indonesian aviation industry. As the lender is not the direct lessor, he was unable to benefit from the advantages of an IDERA. Therefore, they had to rely on the direct lessor or owner to enforce IDERA.

To deal with this problem, the DGCA officially set up the Certified Letter of Approval (CDL) mechanism at the end of 2018. IDERA to a third party, usually the lender. So although the lender cannot trust IDERA, it is protected by CDL. Thus, a two-step process was involved, whereby IDERA was issued initially in favor of the lessor / owner of the aircraft, and then the holder of IDERA issued a CDL to the lender.

Unfortunately, the new system did not work well either, as it relied on the prior issuance of an IDERA by the DGCA, which could be a long and uncertain process. Delays in issuing IDERAs therefore led to corresponding delays in issuing CDLs.

Now the good news

At the end of 2019, the DGCA finally gave in to its long-standing policy of refusing offshore lenders to benefit from IDERA due to their direct non-participation in the rental contract. To qualify for IDERA, a lender must demonstrate that there is a legal or contractual relationship between it and the Indonesian renting airline. Although the DGCA does not specify what documentation is acceptable as proof of such relationships, in our experience, a rental agreement and a loan agreement will normally suffice, provided that it is expressly stipulated that IDERA must be issued to the lender. Thus, thanks to the change in approach of the DGCA, a lender can now hold and execute an IDERA in its own capacity in order to protect its interests.

ABNR Commentary

The long-standing IDERA “saga” described above is a salutary lesson in how things shouldn’t be done and a classic example of why the government’s emphasis on procedural reform. authorization and regulation is if necessary.

On a positive note, it is fortunate (from the perspective of offshore lenders) that the DGCA changed its policy on IDERA before Covid-19 wreaked havoc on the global aviation industry. They are undoubtedly in a much stronger position in Indonesia now than they otherwise would have been.

Overall, it must be recognized that there have been significant improvements in the regulatory environment for aviation in recent years, and the DGCA is now quite open to suggestions for practical and political improvements from stakeholders. and industry stakeholders, including major aviation law firms such as ABNR.

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