Introduction

The Narasimham Committee I and II and Andhyarujina Committee were constituted by the Central Government of India during the 1990’s for the purpose of proposing banking sector reforms. These committees, inter-alia, recommended the need for changes in the legal framework of the banking sector to keep up with the ever strengthening and dynamic Indian economy.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter the “SARFAESI Act” or “SARFAESI”) was enacted in the year 2002 on the recommendations of the committees, with the intention of facilitating faster recovery of debts and swift enforcement of securities by secured creditors without intervention of the court.

The SARFAESI has been enacted in the larger public interest and for the economic growth of the country and provides for speedy recovery of defaulting loans and reduction in mounting levels of non-performing assets (“NPA”) of banks and financial institutions. It enables banks and financial institutions (and other institutions as may be notified by the Central Government from time to time) to realize long-term assets, manage problems of liquidity, asset liability mismatch and to improve recovery of debts, inter-alia, by exercising powers to take possession of secured assets and sell them.

For the implementation of the provisions of the SARFAESI relating to securitization and asset reconstruction, banks and financial institutions (and other institutions as may be notified by the Central Government from time to time) may seek the support of private agencies like securitisation and reconstruction companies.

Enforcement of Security Interests under the SARFAESI

Chapter III of the SARFAESI Act deals with enforcement of security interests. Section 13 provides for the enforcement of security interests by a Secured Creditor and confers independent powers on the Secured Creditor to take possession of securities and even sell them without intervention of a court.

Section 13(2) provides for classifying a debt as a NPA. In that event, the Secured Creditor may require the borrower, by notice in writing, to discharge in full his liabilities to the Secured Creditor within sixty days from the date of notice. In case of further default, it provides, inter-alia, the power to take possession of the secured assets of the borrower. The section provides for the procedural process as well.

The provisions of the Act also provide for priority of the interest of the Secured Creditor over all revenues, taxes etc. owed to authorities once the security interest is registered.[1]

Applicability of the Act to Financing of Aircraft

By virtue of Section 31 (c) of the Act, the provisions of the Act have specifically been excluded in relation to the creation of any security in an aircraft as defined under the Aircraft Act, 1934. The Aircraft Act, 1934 defines Aircraft as “any machine which can derive support in the atmosphere from reactions of the air, other than reactions of the air against the earth’s surface and includes balloons, whether fixed or free, airships, kites, gliders and flying machines.”

 Hence, security interest holders in an aircraft are unable to enforce their security as per the Act (including repossession without the order of a court) due to the above-mentioned exclusion in the Act.

This exclusion has a direct and negative bearing on the ability and willingness of Indian banks and financial institutions to finance aircraft in India.

Conclusion

The Commercial Aircraft Leasing – Global Market Trajectory & Analytics Report by Global Industry Analysts, Inc. estimates that despite the COVID-19 pandemic, the global market for commercial aircraft leasing stood at US$ 33.7 billion in the year 2020 and that it is projected to reach a revised size of US$ 47.1 billion by 2027, growing at a CAGR of 4.9% over the period 2020-2027.

India is forecasted to be the third largest aviation market globally by 2030. Given the voluminous orders placed by its airlines with various OEM’s, there is a sizeable opportunity for banks and financial institutions in India to provide financing to the ever-growing airlines.

The enactment of the SARFAESI Act has been a major factor in improving the health of banks and financial institutions in India as it has enabled them to reduce their NPAs. However, the lack of applicability of the Act to security interests in aircraft as well as the perishable nature of aircraft (thereby being unable to survive long court proceedings) has virtually prohibited Indian banks from participating in the lucrative aircraft financing business.

[1] Section 26E of the Act. “26E. Priority to secured creditors.

Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

Explanation.-For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.”