11 Feb 2021
After Period of Confusion, IDERA Protection in Indonesia Now Extends to Offshore Lenders
With the aviation industry around the world continuing to reel from the impact of COVID-19, many airlines are struggling to meet their obligations under aircraft leasing and financing agreements. Given the current uncertainties, in this ABNR Legal Update we look at the position in Indonesia as regards a key protection for creditors under the Cape Town Convention (CTC), namely, the IDERA mechanism (IDERA: Irrevocable De-Registration and Export Request Authorisation). 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 helping ensure that the creditor can gain possession of the aircraft in an event of default.
First, the Bad Old Days
The first thing to be said is that, despite the IDERA mechanism being specifically recognized by the Aviation Law of 2009 and notwithstanding Indonesia being a signatory to the CTC, for a long time the country lacked a clear procedure for the registration of foreign mortgages over aircraft on lease in Indonesia. This meant that offshore creditors would normally be unable to avail of self-help remedies, such as unilateral repossession, leaving them with nothing other than IDERA to rely on.
However, an IDERA was not much good to them either as previously the document could only be issued in favor of a direct lessor or aircraft owner under the policy applied by the Ministry of Transportation (MOT)’s Directorate General of Civil Aviation (DGCA). This policy was deemed necessary as the implementing legislation for the Aviation Law was unclear and open to conflicting interpretations. DCGA’s strict stance in this regard was primarily motivated by the need to protect itself against the potential for disgruntled parties to bring claims against it, using the lack of clarity in the regulations as a basis.
Given the increasing sophistication of aviation leasing structures, often involving multiple layers of leases, DGCA’s policy gave rise to serious difficulties for Indonesia’s aviation industry. As the lender is not the direct lessor, they were unable to enjoy the benefits of an IDERA. Consequently, they had to rely on the direct lessor or owner to enforce the IDERA.
To deal with this issue, DGCA officially introduced the Certified Designee Letter (CDL) mechanism in late 2018. A CDL, a derivative of the IDERA, is given by the IDERA beneficiary (the authorised signatory) for the purpose of assigning its rights under the IDERA to a third party, usually the lender. So, while the lender cannot rely on the IDERA, it is protected by the CDL. Thus, a 2-step process was involved, under which the IDERA was issued initially in favor of the aircraft lessor/owner, and then the IDERA holder 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 DGCA, which could be long and uncertain process. The delays in the issuing of IDERA thus resulted in corresponding delays in the issuance of CDL.
Now, the Good News
In late 2019, DGCA finally relented on its long-standing policy of refusing to allow offshore lenders to benefit from IDERA due to their not being direct parties to the leasing agreement. To benefit from an IDERA, a lender must show that there is a legal or contractual relationship between it and the Indonesian lessee airline. While DGCA does not specify what documentation is acceptable as proof of such relationships, in our experience, a lease agreement and loan agreement will normally be sufficient, provided that it is expressly stipulated that the IDERA should be issued to the lender. Thus, thanks to the change in approach by DGCA, a lender can now hold and enforce an IDERA in its own capacity so as to protect its interests.
The long-running IDERA “saga” described above is a salutary lesson in how things should not be done and a classic example of why the Government’s focus on reforming licensing and regulatory procedures is so badly needed.
On a positive note, it is fortunate (from the perspective of offshore lenders) that the DGCA changed its policy on IDERA prior to Covid-19 taking a wrecking ball to the global aviation industry. They are undoubtedly in a much stronger position in Indonesia now than they would have been otherwise.
Overall, it has to be acknowledged that there have been significant improvements in the regulatory environment for aviation in recent years, and DGCA is now quite open to suggestions for practical and policy improvements from industry players and stakeholders, including leading aviation-sector law firms such as ABNR. Consequently, should you require legal advice on any issues related to civil aviation in Indonesia, or should you need clarification on some matter from the authorities, ABNR is in an ideal position to assist.
This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.