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Repossession of Aircraft in : Practical and Legal Issues 1

Client briefing July 2015

Repossession of Aircraft in Russia: Practical and Legal Issues Key issues This briefing gives an overview of the main steps  Requirements to register involved if seeking to repossess an aircraft leased to a aircraft operated by the Russian operator or and operated from the lessee and choice of law governing the lease territory of the Russian Federation, with a focus on the agreement major issues that are likely to arise.  Choice of an Arbitrazh Court/ international arbitration and procedural matters  Type of claim and monetary This briefing does not intend to give a and operated in Russian airspace, are claims available during detailed overview of all issues that registered outside the Russian aircraft repossession may come up during any aircraft Federation, as this has proved to be  Set-off of security deposit repossession. Specific advice should more efficient for regulatory, technical, against amounts owned by be sought before any actions are tax and purposes.2 the lessee taken for the purpose of individual The current market practice in leasing  Detention/arrest of the aircraft repossession. of aircraft registered abroad and the  Export of a repossessed financing of such transactions is to aircraft Requirements to make the aircraft lease agreement and other transaction documents enforceable in the Russian Federation, register an aircraft subject to English or New York law. and the assistance of a Russian Disputes arising out of or in Arbitrazh Court will most likely be operated by the connection with the lease agreement required to repossess the aircraft. and other transaction documents are lessee expressed to be submitted to the Russia is a party to the Cape Town Convention (the Cape Town In order for the Russian lessee to be jurisdiction of a foreign court agreed by the parties (often the English or Convention on International Interests able to use the aircraft in Russian in Mobile Equipment) and the related airspace, the aircraft must be New York courts) and/or an international arbitration forum. Protocol (the Protocol on Matters registered in the State Register of specific to Aircraft Equipment) and the Civil Aircraft of the Russian Most lease agreements (whether Convention entered into force for Federation or in the relevant register operating or finance leases) provide Russia with effect from 1 September of a foreign state, provided such state that, following a default by the lessee, 2011. One of the declarations made has concluded an agreement for the lessee must return the aircraft to by Russia is that any remedy maintenance of continuing the lessor if the lessor (or the lenders available to a creditor under any airworthiness with the Russian to the lessor) so requests, and if the 1 provision of the Cape Town Federation. lessee fails to do so, the lessor has a Convention, which does not expressly The majority of aircraft leased by non- right to repossess the aircraft. require an application to the court, Russian lessors to Russian lessees However self-help remedies in the may be exercised out-of-court. At this case of aircraft repossession are not stage it is not entirely clear how the Cape Town Convention and the "self- 1 2 Article 33 of the Air Code of the Russian Currently most frequently used jurisdictions for Federation. registration are Bermuda and Ireland.

2 Repossession of Aircraft in Russia: Practical and Legal Issues

help" concept in particular will be In that case there is a risk that the right to claim possession of the applied in practice in Russia. parties’ choice of law may be aircraft upon notification to the lessee. disregarded, and Russian law may be However, if the lessee does not return Choice of law applied to the lease agreement (in the aircraft voluntarily to the lessor, which case the validity and the lessor will be unable to exercise governing the enforceability of the lease agreement self-help remedies and will have to will be determined in accordance with seek a judgment from the Arbitrazh lease agreement Russian law). Court. The lessee can agree that the If an Arbitrazh Court applies Russian If a lessor wishes to seek termination relevant lease agreement will be law and determines that the lease of a lease agreement through the governed by foreign law, provided agreement is invalid as a matter of Arbitrazh Court, then it must first of all that a foreign element (such as a Russian law, it may dismiss a put the lessee on notice to perform its foreign entity or a foreign asset) is contractual claim for repossession obligations and be able to present in the relations between the under the lease agreement. In that demonstrate that it has done so to the parties to the lease agreement. The event the lessor will have to file a Arbitrazh Court which will otherwise Russian Arbitrazh Courts3will claim for restitution of the aircraft, and refuse to grant a decision for recognise the parties’ choice of law repossession will be delayed. termination. unless the law chosen is contrary to If an Arbitrazh Court applies Russian the public policy of the Russian law and determines that the lease Choice of Federation or imperative norms of agreement is valid and enforceable, it Russian legislation (which cannot be may apply Russian law to other Arbitrazh Court or overridden by the rules applicable provisions of the lease agreement, 4 under the law chosen by the parties). including those dealing with international One of the declarations made by termination of the lease and arbitration. Russia in the Protocol to the Cape redelivery of the aircraft. Town Convention relates to the free It is not clear to what extent Jurisdiction of the choice by the parties of the law termination of the lease and a governing the contract between them. contractual claim for redelivery is Arbitrazh Courts in The choice of foreign law as the enforceable under Russian law. The governing law of the lease agreement most effective way to repossess an relation to claims should not be considered in itself as aircraft in this case is likely to be by contrary to Russian public policy. terminating the lease agreement and under a lease However Russian law provides that a filing a claim for restitution. lease agreement over immovable Under Russian law, termination of an agreement property located in Russia must be agreement in the absence of the The lessor should consider which governed by Russian law, and, as a mutual consent of the parties is forum would be most convenient for matter of Russian law, the legal possible upon an Arbitrazh Court's the purpose of repossession of the regime for immovable property may decision or by way of unilateral aircraft. apply to aircraft, as explained below. rescission if so stipulated by law or by the agreement itself (for example in As mentioned above, parties to lease 3 State commercial courts with jurisdiction in the case of material breach of agreements often refer disputes to economic disputes between parties that are obligations by the counterparty). international arbitration and/or to the Russian or foreign legal entities or individual entrepreneurs. In few cases the Airbitrazh Courts jurisdiction of a foreign court, such as have jurisdiction in a dispute even if it involves If the lease agreement provides for the English courts or the New York an individual. unilateral rescission by the lessor and 4 courts. In some cases, parties to the agreement the lessor exercises this right, then cannot choose foreign law as governing. For Despite the choice of foreign law to example, agreements in relation to land plots lease agreement will be treated as located in Russia shall be governed by Russian terminated, and the lessor will have a govern the lease agreement, and the law.

Repossession of Aircraft in Russia: Practical and Legal Issues 3

agreement to submit disputes to enforcement of foreign judgments.7 If proceeding or litigation must file an foreign courts or arbitration, there is a there is no international treaty application for recognition and risk that the Arbitrazh Courts may between Russia and the state where enforcement of the award or judgment assume exclusive jurisdiction over the foreign judgment was rendered, in the Russian Federation with the disputes arising under it. theoretically such foreign judgment Arbitrazh Court at the place where the can still be recognised and enforced debtor (the lessee in our case) is In practice, the lessor is usually left in Russia based on the principle of located9, or, if its place is unknown, at with three options for dispute reciprocity. There were a few the location of the lessee's assets. resolution: instances in which a judgment The applicant must submit the (a) An international arbitration rendered by the English courts was following documents, among other tribunal (if envisaged by the recognised and enforced in Russia on things, to an Arbitrazh Court, with lease agreement); the basis of a combination of the translations10 into Russian (if principle of reciprocity and the (b) A foreign court; or necessary): (c) The Arbitrazh Court.5 existence of a number of other bilateral and multilateral treaties to  an original or a duly certified copy In deciding which option to choose, which Russia and the of the award or judgement; the Lessor should take into account were both parties. In the absence of  an original or a duly certified copy the following. established court practice, however, of an arbitration agreement (in there is a substantial risk that a the case of an arbitral award); Enforceability of foreign foreign judgment will not be 6  a document certifying that the judgments and arbitral recognised and enforced in Russia if award or judgment has come into awards in Russia there is no international treaty force, unless it is clear from the between Russia and the country award or judgment itself; If a foreign arbitral award or court where such foreign judgment was  an original or a duly certified copy judgment is made or given, entitling rendered. the lessor to repossession of an of a document certifying that the aircraft which is situated in Russia, The situation is significantly better in lessee was notified of the arbitral the award or judgment will need to be relation to arbitral awards, as Russia or court proceedings correctly recognised and enforced by an is a party to the New York Convention and in a timely manner; Arbitrazh Court. (the 1958 New York Convention on  a power of attorney authorising a the Recognition and Enforcement of signatory to sign an application The procedure for enforcing arbitral Foreign Arbitral Awards) which on recognition and enforcement awards and judgement differs. establishes grounds for recognition of the award or judgment. As a general rule, a foreign judgment and enforcement of foreign arbitral Arbitrazh Courts tend to enforce will only be recognised and enforced awards in the Russian Federation. foreign arbitral awards. Russian law in Russia if there is a treaty on mutual Most of the countries in which does not prohibit the enforcement of recognition and enforcement of court frequently used arbitration institutions 8 arbitral awards which grant specific judgements between the state where are located are parties to the New performance (for example which order the foreign judgment was rendered York Convention, and awards the lessee to re-deliver the aircraft). and the Russian Federation. There is rendered by them are usually a number of states with which the recognised and enforced in Russia. However, there have been cases in Russian Federation has concluded which the Arbitrazh Courts have To have a foreign arbitral award or refused to enforce arbitral awards on treaties for recognition and foreign judgment recognised and enforced in Russia, a party to arbitral 9 For these purposes, the debtor is presumed to

5 7 be located at its legal address, which is indicated Even if the parties did not submit the Disputes For instance, the Russian Federation has such in its charter documents. to the jurisdiction of the Arbitrazh Courts. treaties with Cyprus, Spain, Italy, but does not 10 6 If an Arbitrazh Court requires that a document The Russian term "arbitrazh" must be have such treaties with the United Kingdom and is translated into Russian language, it will only distinguished from the English "arbitration", as the of America, jurisdictions to accept translations performed by a certified which Disputes are often referred to. the latter is an independent tribunal whose 8 translator whose signature is evidenced by a jurisdiction requires the consent of the parties. E.g. , UK, France Russian notary.

4 Repossession of Aircraft in Russia: Practical and Legal Issues

purely formalistic grounds or invoking to repossess an aircraft if it is located Probable timing of 13 a broad interpretation of public policy. in Russia. proceedings before the There is also risk that an Arbitrazh Jurisdiction of Arbitrazh Arbitrazh Courts Court may refuse to recognise and Courts enforce a foreign award or judgement Under the Arbitrazh Procedure Code, if it finds that the relevant claim falls Depending on the circumstances of a a judgment is to be rendered within within the exclusive jurisdiction of particular case, a claim may be heard three months of receipt of a claim by Arbitrazh Courts and/or is not by an Arbitrazh Court at the location an Arbitrazh Court. In practice, this "arbitrable".11 of a lessee's headquarters or at the requirement is sometimes ignored. As location of the aircraft. There is no a practical matter, the Arbitrazh In particular, under Russian law, uniform approach to the determination Courts tend to pass judgment on the disputes relating to rights to of the location of an aircraft under first date of the hearing on the merits immovable property situated and/or Russian law. The aircraft's location (unless the issues raised in a claim registered in Russia fall within the may be determined by an Arbitrazh are sufficiently complex to require exclusive jurisdiction of the Arbitrazh Court at its discretion, in accordance adjournment). Courts. Clarifications from the with14 (i) its place of registration; (ii) Supreme Arbitrazh Court ("SAC RF") As a general rule, a judgment enters its base in the territory of confirm that exclusive jurisdiction into force one month after the date it the Russian Federation or (iii) its means that when such disputes are is rendered in full. If appealed, a physical location. In some cases the referred to state courts, they should judgment does not enter into force Arbitrazh Courts have found that an be settled by Arbitrazh Courts rather until the date when an Arbitrazh Court aircraft is considered to be in Russia if than foreign courts. As mentioned resolves the appeal. the lessee is located15 in the territory above, aircraft are considered to be of the Russian Federation.16 In our Documents to be filed at immovable property under Russian view the aircraft's location should be law and there is a view that even if an the Arbitrazh Courts determined in accordance with its aircraft is registered outside Russia it place of registration. together with the Claim should be treated as immovable property under Russian law if it is Proceedings before the Arbitrazh located12 in Russia. Courts are commenced by filing a statement of claim. Non-recognition of a foreign judgment 13 Unlike many other jurisdictions, the or arbitral award does not prevent a We represented Embarcadero Aircraft party from filing a claim with the Securitization Trust Ireland Limited (an SPV Arbitrazh Procedure Code requires serviced by Macquarie Aircraft Leasing Services that the statement of claim is very Arbitrazh Court. In this case, the (Ireland) Ltd.) in repossession proceedings Arbitrazh Court will not be bound by a against "Krasnoyarsk " relating to an detailed and specific, including inter aircraft registered in Ireland. On 2 March 2009 alia, the following: foreign judgment or arbitral award and the Arbitrazh Court of the Krasnoyarsk Region will review the case on its merits. ruled in favour of our client and ordered  The remedy which the claimant is Krasnoyarsk Airlines to re-deliver the aircraft. 14 In conclusion therefore, given the The same approach to the determination of seeking (if there are several the Aircraft's location can be applied by other defendants, then, the remedy a concerns regarding recognition by the authorities (e.g. customs authorities). 15 claimant is seeking against each Arbitrazh Courts of the jurisdiction of And then, regardless whether the Aircraft is a foreign court or arbitral tribunal, an grounded outside Russia, the Arbitrazh Court of the defendants must be may assume its jurisdictions over the Dispute. separately identified); application to an Arbitrazh Court is 16 We are aware of one case where the  rule(s) of law on which a claimant the most advisable method of seeking Arbitrazh Court found itself competent to consider a claim relating to an aircraft registered relies. If a claim is based on a in Belarus (decree of the Federal Arbitrazh Court foreign law, the statement of ("FAC") for West-Siberian District in case No. F04-786/2006(20237-A45-17) dated 9 March claim must cite the rule(s) of that 2006; similar considerations are noted in the foreign law which a claimant is Decree of the FAC for Far East District dated 14 11 February 2006 in case No. F03-A59/05-1/4118. referring to; Meaning that only state courts have a right to We represented the lessor repossessing an hear certain disputes. 12 aircraft registered in Ireland from KrasAir in a "location" definition will be considered further. Russian arbitazh court.

Repossession of Aircraft in Russia: Practical and Legal Issues 5

 the circumstances on which a  documents evidencing that the Each of the above measures may be claim is based with reference to copies of the statement of claim applied separately, or in combination. particular pieces of evidence; with the documents attached to it If requested and awarded, interim  the amount of the claim (it is were sent to all parties to the measures should correspond to a possible to change the amount of case; claimant's demands. An application the claim at a later stage of the  documents evidencing that the for interim measures may be filed with proceedings but a claimant statutory fees for filing the claim the Arbitrazh Court together with the cannot claim an unspecified have been paid; statement of claim (or indicated in the amount to be determined later);  documents authorising the statement of claim itself) or later, once  a calculation of the amount of the signatory of the statement of the proceedings have commenced, claim (the basis of this amount claim to sign it; this includes for but in any case prior to granting of a must be explained). example the power of attorney or judgment on the merits of the case by an Arbitrazh Court. The following documents should be the documents confirming submitted to an Arbitrazh Court powers of the director to In order for interim measures to be together with a statement of claim represent the claimant in the introduced by an Arbitrazh Court, the with a translation into Russian (if Arbitrazh Courts. claimant must prove that there is a necessary): Other documents, which may need to risk that, if interim measures are not be presented to an Arbitrazh Court, applied, it may be difficult or  copies of the documents which will depend on the nature of the claim impossible to enforce a future are referred to in the statement of and will be confirmed on a case-by- judgment. An Arbitrazh Court may claim and on which the claim is case basis. also, at its own initiative, or upon the based (including the lease application of a respondent, demand agreement, and the acceptance Interim measures counter-security.18 certificate confirming that the aircraft has indeed been The following actions are available to An application for interim measures transferred to the lessee's secure a claim or to secure the should be considered by an Arbitrazh possession); property of a claimant or other Court no later than the day after it participants in the proceedings after  copies of a certificate of state was filed, unless an Arbitrazh Court the statement of the lessee's claim registration of the claimant as a demands counter-security from a has been filed with an Arbitrazh Court: legal entity or an individual claimant. In this case the application entrepreneur or any other 1. attachment of the property or should be reviewed no later than the document confirming that the money of the lessee that is either day after the counter-security is claimant was established as a in its possession or in a third provided by the claimant. legal entity; party's possession,  if a claim is based on foreign law, 2. prohibiting the lessee and/or third Type of claim a legal opinion from a lawyer parties from performing specific Subject to the provisions of the lease authorised to practise in the actions in respect of the subject agreement and the actual termination jurisdiction where such foreign matter of a dispute, of the lease agreement, there are two law is used, or a law professor 3. compelling the lessee to take possible ways of repossessing an specialising in the law of that certain actions to prevent aircraft through the Arbitrazh Court: jurisdiction, as well as any damage to or depreciation of the relevant statutes which such disputed property;  The lessor may file a contractual 17 legal opinion cites; 4. transfer of the disputed property claim requiring the lessee to to the claimant or a third party; return the aircraft in accordance 5. halting the sale of property or the 17 18 In the case of repossession of an aircraft execution of an award; Counter-security is security provided by a opinion usually covers the rights and obligations claimant for the compensation of possible losses of the parties when the Lessee is in default, 6. other measures found of the Lessee arising from the application for concentrating on a right of the Lessor to serve a appropriate by an Arbitrazh Court. interim measures. The amount of counter- termination notice and demand that the Lessee security shall not be less than one half of a shall re-deliver the Aircraft. claimant's property demands.

6 Repossession of Aircraft in Russia: Practical and Legal Issues

with the terms of the lease the lessee is also likely to owe rent unjust enrichment will be calculated agreement (if the lease under the lease agreement as well as based on the usual rates of rent of an agreement is effective and costs and damages to the lessor. aircraft in Russia.23 If the lease contains such a provision); or agreement is concluded on arm's- If the aircraft is repossessed pursuant length terms, we believe that the  The lessor (or aircraft owner as to a contractual claim under the lease amount of rent payable under the well in this case) may file a claim agreement, and the Arbitrazh Court lease agreement will be taken into for restitution of the aircraft recognises the parties’ choice of law, account by an Arbitrazh Court when (which is considered to be a non- then the amounts owed by the lessee calculating such amounts. contractual claim in rem). (including any liquidated damages under the lease agreement) should be Thus, the type of monetary claim A contractual claim for repossession awarded in full. However, if an available to the Lessor will depend on has advantages during enforcement Arbitrazh Court applies Russian law the type of claim filed, but the total against a lessee in bankruptcy to the lease agreement,19 then it is amount actually payable under each proceedings (described below), and likely that liquidated damages will be of the claims remains open to the provides more flexibility for novating treated as a penalty as a matter of discretion of the Arbitrazh Court. the lease agreement to a new lessee Russian law and may be reduced by As a matter of Russian law if a (if one is available). an Arbitrazh Court if the defendant finance lease terminates and the objects and the court concludes that A claim in restitution has a more leased property (such as an aircraft) their amount is not commensurate narrow application, and most is repossessed, under certain with the consequences of the lessee's Arbitrazh Courts believe that it is not circumstances the lessee will be breach under the lease agreement.20 available if contractual relations exist entitled to recover part of the lease between the owner and the possessor If the lease agreement is terminated payments that were paid towards the of the property (which would be the and the aircraft is repossessed purchase price of the leased case if the lease agreement has not pursuant to a claim in restitution, the property.24 The lessor is thus been terminated). Thus a claim for claimant21 may demand that the regarded as both creditor and debtor restitution may not be a solution amounts owed to it by the lessee be of the lessee. Consequently, the where the lessor at the same time calculated according to the provisions lessor may be required to refund to wants to transfer the lease to a new of the lease agreement up until the the lessee some of those payments. lessee or wants to rely on contractual moment when the lease agreement There is a view that this principle is remedies under the lease agreement was terminated, and following considered to be imperative norm of (and therefore is unable to terminate termination according to the rules on Russian law and as such should it). unjust enrichment.22 apply regardless of the law chosen by the parties to the lease agreement. The best type of claim to make for If the lease agreement is found to be should be considered on a case-by- invalid, and following that, a claim in case basis, as each of them has its restitution is filed, the rules on unjust Set-off of security advantages and disadvantages. enrichment will be applied from the moment when the aircraft was deposit against Monetary claims delivered to the Lessee at the start of the lease. available during 23 In such cases, the amounts owed to Decree of the SAC RF dated 8 April 2008 the lessor under the provisions on No. 1051/08; Decree of the Federal Arbitrazh aircraft Court of the Urals District dated 14 April 2005 in case No. F09-858/05-GK; Decree of the Federal 19 I.e. not recognising the Choice of Law. Arbitrazh Court of the Far East District dated 11 20 July 2006 in case No. F03-A24/06-1/2033; repossession On the grounds that they contradict Decree of the Federal Arbitrazh Court of the East imperative provisions of Russian law. Article 333 Siberia District dated If the lessor is entitled to repossess of the Civil Code of the Russian Federation. 21 17 March 2015 in case No. A33-13747/2014. an aircraft due to a default by the According to the prevailing court practice. 24 22 Decree of the Plenum of the SAC RF No. 17 lessee under the lease agreement, Decree of the Presidium of SAC RF dated 25 dated 14 March 2014 "On Certain Questions May 1999 No. 6222/98. Related to a Finance Lease Agreement".

Repossession of Aircraft in Russia: Practical and Legal Issues 7

In bankruptcy proceedings, the lessor only be enforced if the related amounts owed by claims have third priority26, and there judgments have come into force is a substantial risk that the set-off will before commencement of the relevant the lessee prejudice the rights of preferred stage of bankruptcy. creditors, and thus can be challenged Performance of the lessee's The Insolvency Law does not specify during the relevant hardening period. obligations under a lease agreement if enforcement of a writ of execution in is often secured by a security deposit. Once supervision (one of the earliest relation to a contractual claim should When amounts are due from the bankruptcy stages) has commenced be suspended for the duration of the lessee, the lessor may want to apply with respect to the lessee, set-off is bankruptcy proceedings, or until the or set-off such amounts against the prohibited if it leads to the preferential relevant stage has been commenced. security deposit, as this may prove satisfaction of the claims of one The Arbitrazh Courts have taken the more effective than claiming such creditor and prejudices the rights of view that no such suspension should amounts as part of a contractual claim other creditors of the lessee. take place, since suspension is or claim in restitution. applicable only in respect of Although the lease agreement, if Bankruptcy of the judgments over property owned by governed by foreign law, may the debtor, whereas the contractual determine when set-off can be used, lessee claim in this case relates to an aircraft if an Arbitrazh Court applies Russian that does not belong to the debtor If bankruptcy proceedings have law to the lease agreement, it is (the lessee). commenced with respect to the important to comply with certain lessee, and the lease agreement has Russia has made a declaration to the mandatory provisions of Russian law not been terminated either by the Protocol of the Cape Town to make the set-off effective. lessee or its bankruptcy Convention to the effect that the Russian law provides that a set-off is administrator27 or the lessor, then the whole of Alternative A of article XI of effective from the moment when a rights of the lessor under the lease the Protocol be applied in the course debtor was notified of the set-off. It is agreement will continue as against of all stages of insolvency proceeding therefore important for the lessee to the lessee's estate in bankruptcy. The to assets registered in accordance be notified in a timely manner of the aircraft itself, not being the lessee's with the Cape Town Convention. This exercise of set-off, regardless of any property,28 is included in the lessee's means that a bankruptcy provisions of the lease agreement bankruptcy estate. administrator must return the asset to and/or the law governing the lease the creditor within 60 calendar days. Bankruptcy proceedings have several agreement to the contrary. stages under the Insolvency Law (the Detention/arrest of Under Russian law, a set-off is Federal Law on Insolvency dated 26 treated as a transaction, and on that October 2002) and starting from an aircraft on the ground it can be challenged by a supervision,29 writs of execution with bankruptcy administrator of the lessee respect to claims in restitution can ground of the if the set-off was effected after a 26 petition on the lessee's bankruptcy Current payments, claims of employees, lessee's liabilities was filed, or within a period varying claims under copyright agreements, compensation of moral harm, claims secured by from one (1) month to three (3) years mortgages and pledges and certain other claims to third parties before such petition was filed,25 if the will have priority over the Claim of the Lessor. 27 set-off leads to preferential External administrator has a power to If the lessee's creditors other than the terminate transactions of the Lessee within three satisfaction of the claims of one months since the external administration has lessor have claims against it, they creditor and prejudices the rights of been commenced in relation to the Lessee. may attempt to force the lessee to 28 other creditors of the lessee. Under an operative Lease Agreement, title to perform those obligations by detaining the Aircraft is never transferred to the Lessee, and under a financing Lease Agreement, once an aircraft that should be available to title is transferred to the Lessee, then, the the lessee or another person Lessor will not be able to repossess the Aircraft. 25 29 specified by the lessee. Detention of Hardening period depends on the ground for Which is followed by financial rehabilitation, challenging of the particular transaction. external management and receivership. an asset as a security is legal and

8 Repossession of Aircraft in Russia: Practical and Legal Issues

valid only if the debtor has willingly supplementary documents31 to the and legally passed such property to relevant local division of the FCS the detaining creditor. If the lessee (Federal ) before the has not transferred the aircraft to the aircraft crosses the Russian border. possession of a detaining creditor As a matter of practice, it may take a willingly and legally, and the lessee’s substantial period of time to liaise with possession of the aircraft is the FCS. Other questions of customs exclusively based on the lease clearance will depend on the agreement, the detention of the circumstances of the aircraft's import aircraft by a creditor may be procedure and the effective customs challenged. procedure applied to the aircraft on the territory of the Russian Federation Customs authorities are entitled to or the Customs Union.32 arrest an aircraft for breach of the customs procedures by the lessee. It may be useful for the lessor The arrest is a precautionary measure simultaneously with repossession to designed to prevent further breach by consider, at the same time as the lessee of the customs repossession, the possibility of legislation.30 leasing the aircraft to another lessee in the territory of the Russian Export of a Federation, rather than exporting it. If the defaulting lessee is cooperative, repossessed the aircraft together with the lease agreement may be transferred to the aircraft new lessee. However, this may be done only before termination of the After an aircraft has been lease agreement and entry into force repossessed the lessor or owner will of any Arbitrazh Court decision on have to deal with export of the aircraft, repossession of the aircraft. The obtaining permission to use Russian possibility of such transfer and the air space to be able to fly the aircraft risks related thereto should be out of Russia and tax and customs considered separately in each case. clearance. A deregistration power of attorney from the lessee allowing the lessor to 31 de-register the aircraft (which is Documents confirming the information containing in the declaration, for instance, the standard practice for aircraft sale-purchase contracts and other agreements, repossession outside the Russian commercial documents available, transportation documents, payment and accounting documents, Federation) may not be a reliable documents confirming the information about the instrument in Russia, as it is not clear person making the declaration, documents confirming the stated customs value and the whether the Russian authorities and method of its determination. 32 the Arbitrazh Courts will recognise Aircraft leased to Russian operators are such a power of attorney. usually transported to the Russian Federation/the Customs Union as basic production assets under the customs procedure To export an aircraft, the lessor will for temporary import. This procedure which is have to file a customs declaration and available to a Lessee, subject to permission of the customs authority, gives an opportunity to import the Aircraft without customs duty and import VAT for a period not exceeding thirty four 30 (34) months and ends with transfer into the We are not aware of recent practice where procedure of internal use with payment of the customs authorities applied arrest against the outstanding amounts of customs duty and import leased Aircraft. VAT or re-export of the Aircraft.

Repossession of Aircraft in Russia: Practical and Legal Issues 9

Authors

Timur Aitkulov Victoria Bortkevicha Julia Popelysheva Partner Office Managing Partner Counsel T: +7 495 797 9892 T: +7 495 725 6406 T: +7 495 725 6444 E: timur.aitkulov E: victoria.bortkevicha E: julia.popelysheva @cliffordchance.com @cliffordchance.com @cliffordchance.com

This publication does not necessarily deal with every important topic or cover Clifford Chance, Ul. Gasheka 6, 125047 Moscow, Russia every aspect of the topics with which it deals. It is not designed to provide © Clifford Chance CIS Limited 2015 legal or other advice. Clifford Chance CIS Limited www.cliffordchance.com

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