Unwinding The Vicious Loop of Aircraft F
Unwinding The Vicious Loop of Aircraft F
Unwinding The Vicious Loop of Aircraft F
I. Introduction
* The author is an associate at AZB & Partners, Mumbai, India and an Ad-
junct Professor at Government Law College. The author would like to thank
Soumyadri Chattopadhyaya for his invaluable suggestions and assistance on
the paper.
1 Convention on International Interests in Mobile Equipment, opened for
signature Nov. 16, 2001, 2307 U.N.T.S. 285 (entered into force Apr. 1,
2004) [hereinafter Cape Town Convention].
2 Protocol to the Convention on International Interests in Mobile Equip-
ment on Matters Specific to Aircraft Equipment, opened for signature
Nov. 16, 2001, 2367 U.N.T.S. 517 (entered into force Mar. 1, 2006).
56 Issues in Aviation Law and Policy [Vol. 13:1
asset and liability recognition by the lessee and a receivable by the lessor,
whereas operating leases result in expense recognition by the lessee, with
the asset being recognized by the lessor.
7 Corinne Cooper, Identifying a Personal Property Lease Under the UNN,
49 OHIO ST. L.J. 195 (1988); Laura J. Paglia, U.C.C. Article 2A: Distin-
guishing between True Leases and Secured Sales, 63 ST. JOHN’S L. REV.
69 (1988).
8 Due to the inadequate standards for evaluating the facts, classification has
been difficult. Crest Inv. Trust, Inc. v. Atlantic Mobile Corp., 252 Md.
286, 289, 250 A.2d 246, 248 (1969) (facts are controlling to show parties’
intent); IFG Leasing Co. v. Schultz, 217 Mont. 434, 436, 705 P.2d 576, 577
(1985) (facts of case determine character of transaction). See All-States
Leasing Co. v. Ochs, 42 Or. App. 319, 327, 600 P.2d 899, 904 (1979); if title
is to pass to the lessee, the transaction is likely to constitute a sale. See
Transcon. Refrigeration Co. v. Figgins, 179 Mont. 12, 17, 585 P.2d 1301,
1304 (1978) (describing sale as a “passing of title from the seller to the
buyer”). Further, some courts consider the existence of a lessee’s equity
interest in the property as significant in drawing the lease-sale-security
interest distinction.
9 RCA Corp. v. State Tax Comm’n, 513 S.W.2d 313 (Mo. 1974); see also
Brokers Leasing Corp. v. Standard Pipeline Coating Co., 602 S.W.2d 278,
280–81 (Tex. Ct. App. 1980) (Option, rather than obligation, to purchase
does not create sale.).
10 Cooper, supra note 7. The courts in the United States have developed
three tests to determine whether the option price is nominal: (i) the eco-
nomic compulsion test, under which exercising the purchase option is the
only reasonable alternative for the lessee; (ii) the relationship between the
option price and the original purchase price; and (iii) the relationship be-
tween the option price and the value of the goods at the time the option is
exercised; this test should focus on the residual as anticipated by the par-
ties at the time the lease transaction is entered which grants the option
and sets the option price. In Appleway Leasing, Inc. v. Wilken, 39 Or.
App. 43, 591 P.2d 382 (1979), the court dealt with a disparity between the
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 59
anticipated and actual fair market value of the leased goods. The lease
contained an option specifying that the anticipated fair market value of
the goods was $1900. The court considered the option nominal when the
evidence showed that the actual fair market value was between $9000 and
$10,000. There was no evidence that this disparity was the result of an
unanticipated change in market value; the court correctly discerned that
the anticipated residual value set by the parties was an attempt to evade a
finding that the lease was a security interest.
11 Countries where requirements for statutory accounts are fiscally driven
(for example France and Belgium), make no distinction in the category of
lease and rely on the legal title of the asset for accounting the lease trans-
action and it is the owner who depreciates the financed asset and the
lessee deducts rentals, even though it acquires a vested equity interest in
the asset. Whereas, tax systems that distinguish between leases according
to the economic substance of a transaction generally focus on the alloca-
tion of risks and benefits associated with the parties’ interests in the
residual value of the leased assets. Therefore, nations such as Germany,
Canada, and the United States characterize lease transactions based on
identifying the party with an interest in the asset at the end of the lease
term.
12 William W. Park, Tax Characterization of International Leases: The Con-
tours of Ownership, 67 CORNELL L. REV. 103 (1981).
13 See International Accounting Standards, IAS 17–Leases, available at
http://www.iasplus.com/en/standards/ias/ias17.
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14 The Transfer of Property Act, 1882 provides for the laws that govern lease
of immovable property.
15 Chapter IX of the Indian Contract Act, 1872; Asiatic Gases Ltd. v. State
of Orissa & Ors, [2001] 121 STC 405 (Orissa); Rastriya Ispat Nigam Ltd.
v. Commercial Tax Officer, Company Circle, [1990] 77 STC 182 (AP).
16 In a hire purchase arrangement, the ownership rights in the goods do not
pass at the time of the agreement or the lease, but pass when the option of
sale/purchase is exercised, in accordance with the terms of the agreement
or the lease. The hirer has the option to return the goods or to become
owner thereof by payment in full of the stipulated price for exercising the
option; whereas in a plain vanilla leasing agreement the lessee or the hirer
has no such option. D. V. Corp. v. State of Bihar, AIR 1961 SC 449; 20th
Century Fin. & Consultancy Servs. Ltd. v. Khanna Rayon Indus. Ltd.,
1991 (4) Bom CR 301; Ass’n of Leasing & Fin. Serv. Cos. v. Union of
India and Ors (decided by Supreme Court of India on October 26, 2010);
K.L. Johar & Co. v. Deputy Commercial Tax Officer, [1965] 2 SCR 112;
Sundaram Fin. Ltd. v. State of Kerala, AIR 1966 SC 1178.
17 India’s central banking institution.
18 Import of Aircraft/Aircraft Engine/Helicopter on Lease Basis, A.P. (DIR
Series), Circular No. 24, Mar. 1, 2002 (emphasis added), available at http://
rbidocs.rbi.org.in/rdocs/notification/PDFs/28584.pdf.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 61
19 Aswath Damodaran, Leases, Debt and Value, 4 (1) J. APPLIED RES. ACCT.
& FIN. 3 (2009).
20 In Corporate Aircraft Funding Company LLC v. Union of India (decided
Mar. 14, 2013), the Delhi High Court directed the DGCA, by way of a
writ of mandamus, to deregister an aircraft which was leased to Golden
Wings Private Ltd., on the basis of the Irrevocable Deregistration and
Export Authorization (IDERA) and Deregistration Power of Attorney
(DPOA), both granted in favor of Corporate Aircraft Funding Co. LLC.
The court held that the powers of attorney are coupled with interest and
the power of deregistration conferred therein may be exercised by the at-
torney at its sole discretion, in the exercise of remedies provided in under
the extant laws in India and Article IX of the Protocol to the Cape Town
Convention.
21 Aircraft Rules, 1937, Rule 30(6)(iv); Civil Aviation Requirements: Proce-
dures relating to Registration/Deregistration of Aircraft, Section 2, Air-
worthiness, Series F, Part I of Sept. 10, 1998, cls. 9.1 & 9.2 [hereinafter
Registration/Deregistration Procedures], available at http://dgca.nic.in/ftp-
pub/D2F-F1.pdf.
22 W.P. (C) 7661/2012 & CM No.4208/2013 (Apr. 8, 2013).
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28 In Asoka Ghose v. OL, Remington Rand of India Ltd., [2004] 51 SCL 572
(Cal.), the court granted permission to the liquidator to disclaim an oner-
ous lease, as the company’s liability to pay rent would have continued
until the lease was disclaimed. In terms of applicability of precedent, this
is useful because it inherently recognizes the concept of a company’s abil-
ity to use leased property, subject to the continued payment of lease rent-
als, even when the company in question is in winding-up.
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 65
V. Potential Risks
37 The courts in India have held that certain transactions of the nature set
out herein below would be sufficient to refute a claim of fraudulent pref-
erence: (i) payment made with the object of saving the company from liq-
uidation; (ii) payment/transfer made pursuant to a threat or a payment/
transfer under pressure of a suit or legal proceeding; (iii) a transfer for
adequate consideration; (iv) a transfer by a company whose position on
the date of a transfer was far from insolvent; and (v) a transfer made by a
debtor of some of his assets and sufficient assets remain with him to meet
his other debts.
38 For instance, in case of an involuntary winding-up, in the event a petition
is filed on June 1, 2013 and the winding-up order is passed by the court on
July 1, 2013, the look-back period of six months would commence from
the date of filing of the petition (i.e., June 1, 2013), and could affect trans-
68 Issues in Aviation Law and Policy [Vol. 13:1
actions that have been consummated in the six-month period prior to that
date.
39 See supra note 37.
40 The payment of dues to creditors, pursuant to the exercise of powers by a
creditor against a company in winding-up (essentially powers granted at
the inception of a contract, which would include the right of a lessor to
terminate a leasing arrangement) would not ordinarily result in a prefer-
ence, since such payment is not a voluntary act of the debtor.
41 Companies Act, supra note 23, § 531A.
42 Andhra Bank Ltd. v. D.P. Narayana Rao, Provisional Liquidator, Goda-
vari Sugar & Refinaries Ltd., AIR 1955 Mad 247. See supra note 36.
43 O.L. of Trimline Health & Resort Ltd. v. GSFC & 4, [2009] 92 SCL 323
(Guj).
2013] Unwinding the Vicious Loop of Aircraft Finance Leases 69
C. Lien Risk
44 Morepen Fin. Ltd. v. Reserve Bank of India, [2005] 60 SCL 410 (Delhi);
Monark Enters. v. Kishan Tulpule & others, [1992] 74 Comp Cas 89
(Bom); N. Subramania Iyer v. Official Receiver (1958) 1 SCR 257.
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