Airline insolvency and repossession – Indonesia

What are the principal types of insolvency proceedings?

In Indonesia, insolvency proceedings are regulated under Law No. 37 of 2004 on Bankruptcy and Suspension of Debt Payment Obligations (the Bankruptcy Law).

Under the Bankruptcy Law, a bankruptcy petition can be submitted by a creditor if there are two or more creditors and the debtor has failed to pay at least one debt that has become due and payable. The court will grant or reject the bankruptcy petition within 60 days. If a bankruptcy petition is granted, within 14 days a supervisory judge will (a) set a time limit for creditors to file claims and (b) appoint a receiver and convene a creditors’ meeting for the receiver to examine the filed claims. Prior to the petition being granted or rejected by the court, the debtor’s board of directors stays in place to run the company. After a petition is granted, with the approval of the creditors committee or the supervisory judge (as applicable), the insolvent company can continue to trade under the receiver’s management. Claims will be discussed at the creditors' meeting and can be contested by the creditors. Following the creditors' meeting, the company will be liquidated and its assets realised to pay the company's debts.

The receiver has the right, with the consent of the commercial court, to cancel certain transactions entered into by the debtor which prejudice the interests of its creditors. Various requirements must be met for a transaction to be set aside, including that the transaction was entered into prior to the opening of bankruptcy proceedings, it adversely affects the interests of the debtor's creditors, and the debtor and the counterparty knew or should have known this.

The Bankruptcy Law also recognizes a restructuring process, the Suspension of Payment. In this process, the debtor submits a restructuring petition to the court. Once the petition is granted, the debtor prepares, negotiates and submits a composition plan to its creditors for approval. This is a debtor-in-possession process, during which the debtor's officers and management stay in place and continue to handle the day-to-day running of the company under the supervision of the court-appointed administrator. The composition plan is used for restructuring outstanding payments such as rent or maintenance reserves arrears. It cannot be used to otherwise amend lease provisions or set aside leases. Until the composition plan is ratified by the court, the debtor cannot make any payments to any of its creditors.

For lessors, there is no stay on enforcement during a Suspension of Payment and they remain free to terminate leases and repossess their aircraft (subject to the Cape Town "waiting period", if applicable). Secured creditors' rights to enforce their security interests and repossess aircraft are generally suspended during a Suspension of Payment. However, in the case of creditors with a registered international interest, the stay on enforcement only applies until the end of the Cape Town “waiting period”. However, if an airline debtor has paid rent in advance, creditors cannot terminate the leases and repossess the aircraft until (a) the expiry of the period for which the rent has been paid or (b) the end of the Cape Town Convention “waiting period” (whichever occurs earlier). If the debtor does not submit a composition plan, the majority of creditors reject the plan, or the court does not ratify the plan, then bankruptcy proceedings would commence instead. Equally, if the debtor fails to fulfill its obligations under the composition plan, then creditors may submit bankruptcy petitions against the debtor.

Has Indonesia adopted the 2001 Cape Town Convention and its Aircraft Equipment Protocol (together, Cape Town)?

Yes. On 20 February 2007 by Presidential Regulation No. 8 of 2007.

From the onset of each of the bankruptcy proceedings under the Bankruptcy Law described above, there is a maximum 60-day waiting period before a creditor may recover possession of the aircraft.

Can creditors use "self-help" to repossess leased or mortgaged aircraft?

No. Self-help remedies are not permitted in Indonesia, and creditors must seek the approval of the Indonesian courts if the return of an aircraft is contested by a lessee. In accordance with the declaration made by Indonesia when ratifying Cape Town, and as further stipulated in the Law No. 1 of 2009 on Aviation (the Aviation Law), the time period for a creditor to obtain a court order for possession, control and custody of the aircraft is 10 calendar days. However, to the best of our knowledge, this has not yet been tested in the courts.

How long does the aviation authority typically take to deregister an aircraft when an IDERA is invoked?

The Aviation Law requires the Indonesian Directorate General of Civil Aviation (the DGCA) to deregister the aircraft within five business days after receiving the relevant documents from the IDERA holder. However, in recent instances of repossession of aircraft from Indonesian airlines, the deregistration process can be slower and took up to one month to complete.

Are there any non-consensual liens which would take priority to an ownership interest/ mortgagee's rights as a secured creditor?

Yes. The following categories of non-consensual right or interest have priority over ownership or security interests and shall also have priority over registered international interests, whether in or out of bankruptcy proceedings:

• liens in favor of airline employees for unpaid wages;
• liens or other rights of an authority of Indonesia relating to taxes or other unpaid charges in respect of the aircraft; and
• liens or other rights in favor of repairers of an aircraft in their possession.

Are there any "fleet liens" (i.e. a lien for debts relating to one aircraft that may be asserted against any aircraft in the airline's fleet, regardless of ownership)?

No.

Key practical considerations for lessors and financiers

• Speed:
  • Default notices and termination: If possible, send a default and grounding notice, terminate the lease and exercise rights under the IDERA to deregister the aircraft before the airline or other creditor submits a bankruptcy petition or begins a "Suspension of Payment" restructuring process, in order to avoid the Alternative A waiting period.
  • Sworn translations: In the case of bankruptcy proceedings, immediately prepare sworn Indonesian language translations of documents supporting the creditor's claim, as the receiver will regularly request this. It can take some time for the sworn translator to prepare the translations, especially if the documents are complex.
• Avoiding detention: If possible, obtain information from the relevant airport, air navigation authorities, fuel and service suppliers with respect to any outstanding payments due from the airline (and consider discharging overdue amounts) to avoid such persons asserting liens over and detaining the aircraft.
• Court petition and police report: If an airline refuses to return the aircraft following deregistration, a creditor may consider (a) filing a petition with the relevant court for the return and repossession of the aircraft, which can be submitted without the need for Indonesian proceedings that discuss the merits of the case, and/or (b) filing a police report alleging embezzlement and/or illegal possession. This can exert pressure on the airline to return the aircraft.

This article was co-written by Osha Adyancha, Senior Associate in our office in Jakarta.