Aircraft procurement is a big project for any airline company in Indonesia, the stakeholders, and the financing parties. Not only big in the value of the money involved, but also by the scale of the financing.
It is common that the financing scheme takes the form of a lease. And it is more common that the lease would involve foreign lessor.
With the big value of the project, it is common that the lease arrangement for an aircraft be made for a long term period. For the lessor, long term financing would certainly have a big risk on the fulfillment by the lessee (the airline company) of its payment obligations. Lessor would obviously take some measures with the purpose to safeguard its asset (the aircraft) until the time the payment terms are fully satisfied by the lessee.
Mostly a lease agreement would retain the ownership of the aircraft with the Lessor. The asset (aircraft) would be delivered to the Lessee, conveyed to the hand of the Lessee and to be operated by the Lessee.
Lessor would seek sort of security interest to secure its ownership and to guarantee full payment of the aircraft lease value and all other payment obligations of the Lessee under the lease agreement.
Here comes the widely known a piece of document so called Guarantee Agreement.
In many transactions, Lessee would be supported by the ultimate stakeholder, the shareholder/parent company. The shareholder or parent company gives a guarantee (corporate guarantee) for the benefit of the Lessor, which in the guarantee document would usually be defined as Beneficiary, mainly for the due, punctual and complete payment of the payment obligations under the Lease Agreement.
The Indonesian Law recognizes the nature of a guarantee as to support the underlying transaction. The existence of a guarantee would be depending on the existence (and validity) of the underlying transaction document. Thus a guarantee will not be in existence without the presence of the underlying obligations under the underlying transaction document.
Whilst under the (corporate) guarantee agreement, the guarantor (parent company) warrants that it will pay to the Beneficiary when so requested, any amount payable by the Lessee were the Lessee fails to fulfill its payment obligation when due and payable, a guarantee will not become a security interest for the Lessor of a lease agreement. Unlike mortgage, pledge, or fiduciary security, a guarantee would rely on the voluntary obedience by the guarantor of its warranty and covenants.
A complete thorough guarantee agreement nonetheless does not put a security interest on a particular asset of the guarantor. The Lessor that owns the aircraft leased and operated by the Lessee does not hold a security interest for the life of the lease.
It is often the case that the underlying aircraft lease agreement is governed by foreign law. The use of foreign law in a transaction document is widely known and practiced, and off course will relate to the principles of Private International Law. So long the rights and obligations under the aircraft lease agreement are fully satisfied and acceptable to (mainly) the Lessor, the Lessor could expect the agreement would run and mature smoothly, without the need to come to the Guarantor.
Enforceability of the foreign law governed aircraft lease agreement, and the (corporate) guarantee agreement will become a crucial concern and question if there is a need to seek enforcement of those agreements.
Whilst Indonesian legal system and the Law on Aviation (Law No. 1 of 2009) recognize the principles of Private International Law, the implementation of Private International Law principles to the documents (the performance of rights and obligations) in concerned would yet to be examined at the relevant court. Enforceability of foreign judicial decision in Indonesia would also depend on the ruling of the Indonesian court where enforcement is sought.
The Law on Aviation provides support to a Lessor through recordation with the Directorate General of Civil Aviation of an irrevocable power of attorney from a Lessee to a Lessor for deregistration and exportation of the leased aircraft or helicopter. Irrevocable Deregistration and Export Request Authorization (IDERA) will enable the Lessor to request for deregistration of the leased aircraft when the Lessee is in breach of the aircraft lease agreement, and exporting the aircraft. This concept of IDERA has its root in the international convention known as Cape Town Convention in 2001.
There is no doubt that a (corporate) guarantee of the parent company would provide some comfort to the Lessor of an aircraft lease. Issuance of a corporate guarantee will also put the parent company to a big responsibility to maintain the company’s sound financial condition and well standing reputation. So whilst the Lessor may face a risk of not being able to come to the guarantor, the guarantor put itself on a risk of being brought to the court and declared bankrupt.
All may have consequence. Therefore prior to entering into the transaction, the Lessor must have a deep and thorough review on the finance as well as the legal terms and conditions, and seek a strategy to add some comfort to its position as a Lessor of an aircraft lease transaction.
SAID, SUDIRO & PARTNERS
Indonesian Attorneys at Law
Sampoerna Strategic Square
South Tower, Level 18
Jl. Jend. Sudirman Kav. 45 - 46
Phone: (62-21) 575.0983
Fax: (62-21) 575.0803