Aviation & Leasing 2020

A practical cross-border insight into aviation finance law First Edition

Featuring contributions from:

Blum&Grob Attorneys at Law Ltd Jurvneshservice MV Kini Camilleri Preziosi K&L Gates LLP Vedder Price P.C. Cox Hallett Wilkinson Limited Kartal Law Firm Veirano Advogados Han Kun Law Offices LIFT Consulting Group Waselius & Wist Herbst Kinsky Rechtsanwälte GmbH Maples Group IBA Group – Aviation Consultancy Mori Hamada & Matsumoto Table of Contents

Expert Chapters

Aviation Finance & Leasing – A Perspective in 2020 1 Philip Perrotta, K&L Gates LLP

Aircraft Repossession Planning – Practical Considerations 6 Phil Seymour, IBA Group – Aviation Consultancy

Q&A Chapters

Austria 9 Herbst Kinsky Rechtsanwälte GmbH: Dr. Christoph 72 Mori Hamada & Matsumoto: Taro Omoto & Makoto Wildmoser Sakai

Bermuda Malta 17 Cox Hallett Wilkinson Limited: Janice Gutteridge & 79 Camilleri Preziosi: Steven Decesare & Krista Ellul Ernest Morrison Switzerland Brazil 87 Blum&Grob Attorneys at Law Ltd: Michael Eitle 26 Veirano Advogados: Marcela Alves Corrêa, João Paulo Servera & Maria Eduarda Mendonça 96 Kartal Law Firm: Ali Kartal China 35 Han Kun Law Offices: Wang Shu & Ding Yi Ukraine 103 Jurvneshservice: Dr. Anna Tsirat Finland 44 Waselius & Wist: Maria Lehtimäki & Ann-Marie 113 Eklund K&L Gates LLP: Philip Perrotta

India USA 124 52 MV Kini: Ravi Kini & Khushboo Jain Vedder Price P.C.: Adam R. Beringer, Michael J. Edelman, Melissa W. Kopit & Matthew P. Larvick Ireland 60 Maples Group: Donna Ager, James Kinsley, William Vietnam 134 Fogarty & Robin McDonnell LIFT Consulting Group: Dr. Michael Loc Pham & Julien Tran Chapter 1 1

Aviation Finance & Leasing – A Perspective in 2020

K&L Gates LLP Philip Perrotta

A.2 Introduction i) Original Equipment Manufacturer Finance The manufacturer of the aviation stimulates the purchasing of its products through a variety of financial support instru- Aviation finance leasing – A perspective in a new decade ments, ranging from a form of ‘backstop’ , providing guar- antees to third-party financiers as regards the ongoing value Aviation finance and leasing, more specifically the economic of the asset itself, or in more extreme circumstances agreeing activity of providing funds for the purpose of acquiring and to re-purchase at a specified fixed price subject to certain utilising aviation (in particular, aircraft), is at this stage a conditions. mature and sophisticated business activity. The maturity comes from the lessons learned from multiple ii) Commercial cycles in the industry going back over several years now, during This form of financing is supplied by a specialist lender on either which significant ‘boom’ and ‘bust’ periods (and all points in a secured or (less commonly) unsecured basis, and is applied by between) of demand for aircraft and other aviation assets have the (or an operating lessor often in conjunction with a been experienced, and to sometimes painful degrees. The specific airline) to pay its purchase price obligations on delivery sophistication is a product of the collision of many factors in a of the aircraft and/or its milestone payments to the manufac- single business activity, ranging from the phenomenal amounts turer prior to the delivery of the aircraft during its production of capital involved, the associated multi-layered attitude to risk, a programme. On a secured basis, recourse is to the underlying highly-regulated operating environment worldwide, the impact aviation equipment usually by way of a mortgage or other form on local and global economies, and both ongoing macro-eco- of ‘in rem’ right in the same. nomic and socio-political developments, all wrapped up in a package which is necessarily focussed on assets representing iii) Securities/Capital Markets some of the most advanced engineering and design technologies Often subject to additional scrutiny due to additional security on the planet and indeed beyond. exchange and other compliance regulations (particularly in the As we stand now at the beginning of a new decade, one which case of asset backed security, or ABS, transactions), this type already has the sense of structural uncertainty and an increased of financing is heavily structured and therefore costly and the pace of change as a result of world events such as climate change, domain of the larger players such as the leasing companies. the US/China politico-trade war, and as we go to print an unprec- Tradable loan notes are issued to representing a repay- edented attack on the way the planet lives by a hitherto unknown ment right which is then collateralised against a revenue stream virus named COVID-19, it is interesting to take stock of aviation such as that of a substantial aircraft portfolio, while the finance both as a discipline and as an economic enabling tool. capital contribution the aircraft acquisition. Today, both those aspects benefit from, and are indeed probably enhanced by, a robust and developed international legal frame- iv) Export Credit Finance work emanating from conflict of laws resolution, contractual This is a historically significant form of financing which has flexibility and treaty-based law such as the International Register seen export credit agencies in the relevant countries, being established pursuant to the Cape Town Convention and the Cape quasi-governmental agencies set up to promote home product Town Protocol and Regulations made under it. trade, support aircraft sales by particularly Boeing (in the case of the US Eximbank) and Airbus (in the case of the European B.2 Types Of Aviation Finance (Including Export Credit Agencies in , Germany and the United Kingdom). Support has typically taken the form of guaran- Leasing) tees of portions of commercial provided by third party Before looking at the various streams of aviation finance, it is worth lenders; however, for various political reasons, such overt finan- remembering always that the primary demand for it remains at all cial support has become uncertain in the last few years and has times the world’s . A variety of statistics can be used to in fact been effectively superseded by -based products highlight the extent of that demand but one of the most resonant such as AFIC structures for Boeing equipment and Balthazhar is an estimate that somewhere in the region of US$ 185 billion’s for Airbus aircraft where the insurance markets effectively worth of new aircraft combined at Airbus and Boeing alone are substitute the export credit agencies in order to obtain similar contractually committed to delivery in 2021. This fosters a relent- cost of funds for the airline or leasing company borrower. less search to drive down the cost of this capital resulting in the development and deployment of a variety of different financing, v) (Operating) Leasing structures and returns, best summarised below. Leasing has and will remain a popular form of aircraft financing for airlines which do not have the financial strength or the fleet

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development programme to enter into on- treat- of the regulations involved is also to preserve collateral value to ment of all its aviation assets, typically as regards new aircraft the benefit of the financiers involved, which is particularly valu- by selling to an established leasing company and immediately able where there is little involvement until such time as they may leasing back the aircraft concerned. More flexibility is avail- decide to invoke their rights to repossess the aircraft concerned. able in the leasing segment of the market as regards lease terms, Other attractive elements include a generally resilient asset rental fluctuations and required redelivery conditions at the class as regards depreciation in value, particularly the new end of the lease leading to continuing significant demand for narrow-body aircraft variants mentioned elsewhere in the the product, and the leasing companies have therefore become context of the high demand from low-cost carriers. Add to that important facilitators in the aviation market as distributors for the fact that many financing transactions can and are there- the manufacturers, financiers for the airlines and borrower fore structured to ensure that the financing exposure is actually customers for the . increased through the term of the financing, where the repay- Derivatives of the operating lease product have over time ments are made at a faster rate than the associated deprecia- included various aggressive tax-driven structures such as the tion, plus the stability of the aircraft collateral in a truly global German and Japanese Leveraged Lease and latterly the Japanese market, and the attraction for financiers who ‘know’ is clear. Operating Lease (including with Call Option) with the effect of further reducing the cost of the financing by utilising depreci- D.2 Threats ation benefits in various jurisdictions involved; however, while the JOLCO market continues to boom, most have had loopholes Having highlighted the positive aspects of the activity of aviation closed by relevant revenue authorities and the advent of the financing as the current scene is surveyed, it is even more neces- OECD’s BEPs initiative makes similar further product devel- sary in order to attempt to provide a balanced view of the market opment problematic. in that sense to give some examples of how things can be – and are being – disturbed. Some are easier to predict than others, With reference to some of the points made elsewhere, it is also while some are genuinely unexpected and threaten to materi- worth noting that the inherent need to innovate in this sector ally affect the availability of capital as we have seen in the recent and the sophistication and flexibility which is a feature of the phase. What is certain is that all of them demonstrate the down- aviation finance market give rise to the fact that any number side of the truly global nature of the market referenced above. of the foregoing can and often are combined. So, for example, Firstly, the ongoing debate in relation to climate change there have been successful aircraft financing involving export- and the effect of the carbon footprint of most aircraft types credit backed Japanese Operating Lease financings for aircraft threatens to ostracise prominent participants in aviation which, given the hybrid nature of the structure involved, only finance and indeed in the aviation industry more generally. reinforces the value of specialist input given the complexity and Not even the development by the industry of mechanisms level of sophistication. to counter the effects of aircraft operation, such as the EU ETS (Environmental Trading Scheme), can halt the view that C.2 Popularity aircraft are increasingly seen as part of a bygone age and that The growing global economy has contributed to many develop- promoters of that sector are out of tune with the need to focus ments in recent years, and the upwardly mobile populations in on saving the planet at best and at worst putting profit ahead of various parts of the world embracing lifestyle changes including that imperative. While this is clearly over-simplistic, until such increased mobility and combining the desire with the economic time as real developments in hybrid engine technology are seen ability to travel extensively have directly contributed to a genera- in the market it is likely to act as a genuine disincentive for some tion of the largest aircraft orders ever in terms of volume. These aviation financiers who are coming under pressure from other departments in their institutions who are responsible for social have emanated principally – although not exclusively – from the st low-cost carrier segments of the market which has pursued a responsibility and similar issues in the 21 Century. volume-based approach to orders for significant numbers of Another threat to the positive outlook generally relates both Boeing 737 and Airbus 320/321 narrow-body aircraft. to the effect product risk can have on markets. Specifically, These orders set up, among other things, a continual need for this relates to the domino effects of the decision by the avia- finance for these capital outlays by the airlines. tion regulators at the Federal Aviation Authority At the same time, aviation finance has happily remained a and the Agency to order the grounding of the B737-800MAX aircraft following tragic acci- popular proposition for many and this confluence, dents in relatively quick succession in and Ethiopia generally speaking, with the appetite for capital on this scale in 2019. Leaving aside the likely causes for those events from globally continues to generate significant benefits all round. a technical and operating point of view, the impact of both the There are a number of reasons for the inherent popularity of accidents and the subsequent uncertainty as the manufacturer aviation finance. Firstly, it is by definition an international busi- at Boeing revealed its inability to manage the fallout and reme- ness where the investment assets, that is the aircraft themselves, dial steps required has been severe. After more than 12 months operate around the world and are located in different territories since the first disaster, the aircraft type was still grounded, the from time to time, as indeed are the customers of the lenders order backlog was severe and building, Boeing’s decision to halt making use of the credit lines made available to them. While manufacturing of the aircraft had rebounded and there was still that might be counter-intuitive in circumstances where valuable no road map concerning the return of the aircraft to scheduled collateral is subject to different legal systems and the ability to operations. The consequence of all of this means that residual take action against defaulting customers becomes at least more value projection for the aircraft, one of the fundamental metrics complex if not more difficult, a more expansive review reveals a applied by prospective aircraft financiers as they evaluate their global market available for the remarketing of that asset if neces- security and overall aircraft portfolio values, is in disarray and sary, compared with at any rate a typical financing across several hundred aircraft either previously delivered and where the market is very much limited to the local one. operated or as they were in the process of being built. If nothing Then there is the highly regulated nature of the aviation else, the episode is sure to bring a more technical engineering industry, which not only ensures a highly-developed aware- component to the analysis of aviation financing and the deliber- ness and commitment to safety issues generally in relation to ations of credit committees everywhere. the aircraft themselves and those operating them. The effect

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Last but not least, the severity of the potential for extraneous while landing and taking off from a number of additional events on the aviation industry generally, and therefore aviation countries depending on its route network. The legal issues finance and leasing specifically, has recently been demonstrated are therefore necessarily complex and the ability to focus to an unprecedented level with the emergence of a previously on those aspects of the conflicts of laws which are signifi- unknown health threat in the shape of the Corona (COVID-19) cant, such as the validity and enforceability of the aviation virus. Books will be written in the future about the phenom- financier’s security at all times, are paramount and call for enon, however the inter-connectivity of today’s world due in experienced specialist professional advice. a large part to the mobility given to it through the size of the c) The multiple sub-segmentation of the aviation finance and world’s fleet, as well as the upwardly mobile generations in many leasing market is a feature which should not be overlooked, parts, has rebounded to promote the spread of this phenom- particularly as regards an awareness that approaches and enon which has so far resulted in the demand for air travel being techniques which have proved effective in one does not decimated. Around 4,000 aircraft operated by Chinese carriers automatically translate to all others. Those sub-segments have been withdrawn from service, airlines across the world are occur across aviation asset types, such as regional aircraft experiencing revenue drops in the order of 30% already and the being smaller variants designed for regional (rather than pressure on leasing companies and aviation financiers to relax long-haul) domestic and international operations with rental and loan repayment obligations is immense. It is likely their own operating and depreciation characteristics. that a number of airlines may not survive this period and while Indeed, aircraft types produced by the likes of Embraer lawyers get on with the job of analysing contractual provisions and Bombardier historically and the even more historic relating to force majeure and frustration which have hitherto been regional aircraft products of Fokker, BAE SYSTEMS regarded as wholly standardised, existing transactions as well as and SAAB have typically been regarded as ‘sticky’ assets the ability of airlines and leasing companies to raise financing requiring their own particular analysis. The business of in the future will be called into question as their business plans, financing aero-engines has proved more reliable but again balance sheets and P/L accounts look fundamentally different. has its own particular characteristics and challenges. The different approaches can also be seen across financing types themselves, where, for example, tax-driven trans- E.2 Specialisation Required actions such as the Japanese Operating Lease mentioned Much of the methodology involved in dealing with the afore- elsewhere demand a specific approach to be taken to risk mentioned risks and ensuring the availability of competi- allocations between the parties including Japanese tive financing products is the deployment of heavily-special- participants which may not be consistent with the position ised skills with a deep understanding of the industry context in more traditional secured debt aviation financing. in which they are deployed, including engineers, credit analysts, treasury and corporate finance, risk managers and fiscal and F.2 What the Next Phase Could Bring legal professionals. At this point in time and after a significant growth period There are a number of cornerstone aspects of the business of reflecting significant returns for aviation financiers, it is correct financing and leasing aviation assets which require a combina- to note that a broad slow correction of this so-called ‘Super tion of these capabilities to come together, which also highlights Cycle’ is now visible notwithstanding (or perhaps because of) the necessity to be well-prepared before entering the market the exceptional shock events which have occurred recently. from a financier’s point of view (and which in the past some This is typical of such a cyclical industry, which for a while now new entrants have found to their cost). has benefitted greatly from a number of converging factors. We In no particular order of importance, these include: have noted elsewhere the flight of investment from lower-yield a) The importance of asset values and in particular tech- and/or obviously regulated sectors in recent years into aviation niques to ensure their maintenance and protection. finance, and this phenomenon firmly established its mainstream The negotiation of robust, well-drafted obligations on status which in turn made it an even more attractive proposition. the part of the airline borrower or lessees in the rele- Add in a huge appetite for capital emanating from an unprece- vant financing and leasing agreements goes a long way dented new order backlog for aircraft at the Original Equipment to setting a benchmark for the required maintenance and Manufacturers, (principally Airbus and Boeing), driven by spec- operating behaviours which will protect the value of the ulative orders driving discounted pricing and the phenomenon relevant assets. However, the practical contribution of of the low cost carrier across the globe, and a wider availability technical staff as part of a risk management and moni- of competitively priced debt in recent years in its various forms toring programme featuring regular inspections of the then it is perhaps not surprising that activity levels broke records aircraft itself as well as the associated maintenance records through this latest cycle. Myriad new leasing companies have is a critical part of the required approach. Equally impor- formed as a result of equity’s decision to invest in aviation assets tant in that respect is a well-rehearsed aircraft reposses- to complement the availability of liquidity in the debt markets, sion plan for the eventuality of taking enforcement steps and the prioritisation of liquidity created a genuine ‘bull’ of a when a financing experiences an irretrievable problem as market for capital and deep reserves for those who needed it. regards performance. This requires a detailed overview This overheating was clearly going to discontinue at some and transparency of the aircraft’s movements, operating point very soon and the industry is getting prepared for what the requirements and the legal and regulatory environments increasingly uncertain macroeconomic signals are likely to result involved, all of which are liable to be extremely dynamic in in. In addition to those mentioned elsewhere, the return of an nature and changing at any moment. oscillating crude oil price which underpins the cost to airline b) The movement of an expensive capital asset such as operators of its aviation fuel and is linked to political and mili- a modern aircraft involves operations across interna- tary instability in the Gulf region is unlikely to make it easier to tional boundaries while registered in one country, owner- predict the prospects for an aviation financing or leasing trans- ship by an entity in another country, subject to financing action of any magnitude. arrangements governed by the laws of another country and The next phase of the cycle is therefore likely (and regardless possibly with dispute forums in a different jurisdiction, all of the effects of the COVID-19 pandemic which are likely to be

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macro-structural in any case) to see a return of some extreme G.2 Conclusions conservatism to the aviation financing market, a contracting of the liquidity across the board and a number of re-negotiations Aviation financing and leasing is a complex, multi-disciplined of existing aircraft orders to be a feature of the landscape. The activity which is well-established and which will continue to effect on the demand for capital will go hand-in-hand with the fascinate and be in strong demand. The aviation industry itself outcome of those re-negotiations. History suggests that this is one of the strongest economic contributors to the planet, and will see those participants who have been active in the industry one which touches just about everyone on it. The capital avail- faring better than most as having a broader long-term perspec- able to facilitate that and the skills which ensure it is deployed tive and the relevant skills and experience to navigate those effectively, including those of sophisticated legal professionals, challenges, while others struggle and possibly exit the market will remain highly-valued in the foreseeable future regardless of altogether. the scope and nature of the challenges it faces.

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Philip Perrotta is a senior partner in the Firm’s London office, where he is responsible for the Aviation Finance team and is a member of its Banking & Asset Finance group. The nature of his practice is truly international and he frequently works globally with clients across Europe and South Asia, including out of Milan and as part of the service to clients in this practice area. He is an aviation and aviation finance specialist and recognised as a “leading expert”, regularly receiving both commendations for his ability, focus and commerciality as well as accolades in the legal directories, for example for being “very strong” and “dealing with all the big points without ever over-lawyering them”. He is noted as “experienced and skilled” and for providing “an excellent and accessible service” to clients (The Legal 500). Philip acts for a broad range of significant aviation businesses across the world and he has an impressive track record of successful transac- tions, some being landmark deals in the industry. He has successfully concluded literally hundreds of transactions involving commercial and business aircraft, aero-engines and other aviation assets in jurisdictions in every continent. Philip is a regular contributor at industry events, and is often sought after to comment on developments in a variety of segments of the aviation sector and the aviation finance market, where his insight as a commentator is highly valued.

K&L Gates LLP Tel: +44 20 7360 8205 One New Change Email: [email protected] London EC4M 9AF URL: www.klgates.com United Kingdom

K&L Gates LLP is a fully integrated global law firm with lawyers located across five continents. Our broad global platform allows us to guide clients through the legal challenges inherent in the ever-changing international landscape. The deep latticework of relationships across our offices and practices enables our clients to respond to diverse legal issues and risks, through the services of one law firm with a single point of communication. K&L Gates LLP represents leading global corporations in every major industry, capital market participants, and ambitious middle-market and emerging growth companies. Our lawyers also serve public sector entities, educational institutions, philanthropic organisations and individuals. We are leaders in legal issues related to industries critical to the economies of both the developed and developing worlds – technology, manufacturing, financial services, healthcare and energy, among many others. www.klgates.com

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Aircraft Repossession Planning – Practical Considerations

Phil Seymour IBA Group – Aviation Consultancy Company President, IBA Group

Introduction case, although each member of the repossession team has to be well briefed and be prepared for any eventuality. Every repossession case is different in terms of the ease of process. The key factors are the location of and completeness of Legal Costs the aircraft and records, the Operator/Pilot/Employee’s good- will, the cost of return to service with another Owner, and ease with which the assets can be moved. The likely costs for the legal process will depend on whether The purpose of this chapter is to allow the reader a better a court order is required, or if the legal Owner/Bank can just understanding of the processes required to successfully exit serve a termination notice. There is little difference in the cost from a repossession scenario. whether the aircraft is large or small. Much can vary depending on whether major maintenance is required, i.e. if the engines are on programme/due a shop visit, Securing the Aircraft or the airframe is due a heavy check. An “odd ball” interior configuration can also lead to additional costs to prepare the aircraft for optimal remarketing. The aircraft will need to be made secure until moved to the In a balanced market, the downtime expectation for remar- storage location. This may require the physical presence of a keting a five-year old A320/B737-800 to a price to within 95% security team at the to ensure the safety and security of the expected market value for this category of aircraft is six of the aircraft. Local arrangements will need to be made with months. This includes the time required for any maintenance or the airport and ground handling facilities to establish a towing delivery requirements of the next purchaser/lessee. procedure. A review of defaults and repossessions in this market category 24/7 security should ideally be obtained to protect the asset over a period of 10 years gives remarketing timeline extremes especially if local companies are owed monies since history has from as little as one month to sell through to 12 months. Clearly shown that they may take it upon themselves to take aircraft the downtime is a function of aircraft pricing, aircraft condition parts as their own security. Log books and certificates should and the market condition. be removed from the aircraft and a Notice of Ownership affixed In previous deeper downtimes, such as post 9/11 and the global to the cockpit door, with tape masked around the door seals. financial crisis, it took around two years for some values to recover. Older aircraft are often the first to be permanently retired. Pre Ferry Flight Parking and Maintenance

Operational and Cost Considerations The local CAA will need to be consulted if the period of down- Gaining possession of the aircraft and its records following a time from repossession to departure exceeds a defined period. default situation can be an unpredictable process. As mentioned This may be as little as 24 hours and will require proof that the above, the process can be easily and quickly affected if the aircraft remains airworthy and that no crucial maintenance is Operator is co-operative, but for the purpose of the budget one outstanding. In some cases, the CAA may require maintenance should assume that the process will not always go according to to be performed prior to the ferry flight. This is a further reason plan. why the retention of key maintenance documents is useful, since without them it will be impossible to establish the maintenance The Legal Process status to prove to the authorities what should be required in the absence of a “going concern” operator. The contingency plan will need to involve and be ratified by the legal team. It is our experience that working closely with the lawyers, aviation authorities, insurers and back-up maintenance Suitable Parking Facility providers can occur prior to the immediate need to repossess. Defaults do not normally happen instantly but they develop over Arrangements will be made to move the aircraft to a suitable time and the specific act of repossession is merely a part of the storage facility. The determination of the storage facility will be “distress” cycle. made as a result of understanding the situation surrounding the Once the legal clearance and permission to repossess has been repossession. For example, if the process is supported by the given, the physical process can begin. Some believe that the act Operator, the jurisdiction is flexible and the facilities exist to of repossession takes place under the cover of darkness with a store aircraft and provide a welcoming environment to remarket team of camouflaged pilots and technicians; this is rarely the the aircraft then the Operator’s base could be used.

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A “” facility may need to be sourced since it is often may often physically prevent the movement of the case that the Operator’s base is targeted by the media, cred- aircraft that are associated with the Operator’s non-payment of itors and disgruntled employees. airport landing fees and other support fees. Sources of Ferry flight crews if required include the current operator since many of their pilots will be looking for work. Securing the Records This is the most efficient source since the crews should be knowledgeable and current on the aircraft types operated. The location of aircraft records is normally at the operational Other sources will be various flight crew agencies and opera- base of the Owner. It will be important to fully understand the tors of similar types. whereabouts of the key records. It would not be unusual for the The CAA will need to verify the licensing credentials of crews. technical records staff to request payment to collate and package the aircraft records prior to their release. The process of validation can be relatively quick so long as the Whilst this practice may not be ethical or even legal, it is our proposed crew’s training and medical records are complete and experience that it is essential to keep the goodwill of records transmitted in a timely fashion to the authorities. Such valida- staff (or those that remain) during the phase of repossession. tion does not normally occur at weekends! Of course the diligent upkeep of copies of the aircraft records Submission of flight plans is normally by the ferry crews, in the “pre-repossession phase” will ensure that in the worst as well as the determination of fuel requirements and overfly case scenario, that sufficient records will be available in any case. permissions. If the aircraft is on a CAMP programme, critical records will then be available online with access available for a fee. Engine Repossession Considerations A repossession of one or more engines may be necessary if the Inspection of Aircraft titled engines are not fitted to the aircraft and are either fitted to The aircraft should be thoroughly surveyed before the repos- another aircraft, in storage or undergoing maintenance. session to provide evidence of the physical condition. This is In planning an engine repossession, a number of aspects need important for two reasons: to be considered: Firstly, if there is any chance that the aircraft may be placed ■ If the engines are fitted to another aircraft, is this part of a back with the original Owner, the evidence of condition will permitted pooling provision in the lease? ensure that there is no claim against the “Repossessor” for ■ Is a recognition of rights agreement in place with that damaging or degrading the aircraft whilst in its possession. aircraft’s Owner? Secondly, further claims against the Owner may be made if ■ Are engines undergoing maintenance and if so, are the there is any evidence of misuse. rights of owners recognised under the respective mainte- nance agreements? Regulatory Considerations ■ Is maintenance complete and if not, how can this be managed? Close liaison with the applicable authority will be necessary in ■ If engines are stored, are they serviceable or unserviceable? order to secure an Export C of A and/or ferry . ■ What is the maintenance and preservation status? Placing an Australian registered aircraft outside the country ■ Are there component shortages? may lead to a need for avionic modifications or other equip- ■ If stored, what type of stands are the engines fitted to? Are ment installation. they suitable for transportation and who owns the stands? ■ Are maintenance payments and flight hour agreements up Maintenance and Refurbishment to date? There will always be an element of maintenance required and ■ Copies of engine records will normally be with the aircraft we have included an element of “buyer” consideration in this. records but there may be situations where the more There may be changes according to how the overall market is recent records will need to be sought from maintenance at the time of the sale. When demand exceeds supply an as-is providers. where-is sale may be an easy option but in “softer” times the buyer will often be required to enhance the condition of the Possible aircraft, such a new paint or upgrade of interior. In the course of operations, several debtors may have been able Unfortunately, a default usually means that the airline has to impose liens against the aircraft. neglected some of the maintenance tasks in the same period. This is one area that would need to be assessed during any Hopefully these will not be important technical areas but the pre-default stage to assess the overall indebtedness of the interior of the cabin may well be much more heavily worn if operator. costs have been cut. Maintenance facilities such as component overhaulers, Airports and Aerospace Control may require to be cleared Insurance prior to the release of aircraft. It is important to establish the insurance status of the aircraft It is possible that titled engines and landing gears could be prior to repossession taking place, since insurance may be inval- on another aircraft or in various states of disassembly. Also, idated in the event of default or repossession under the policy the aircraft may contain parts to which other parties hold title. terms. Standby insurance may need to be put into place to cover It may be necessary to work closely with other parties to ensure the exposure to ground risk and ferry flight cover will need to that they do not remove parts that immobilise the aircraft. be in place prior to the ferry flight taking place. Aerospace Control powers are wide, and the pursuit of debts As part of the next phase, discussions with the Operator’s includes the ability to claim against the aircraft owners and not insurers should take place to understand the process in event of just the failed operator. Does the Bank/Owner have the authority to repossession, e.g., grace period may apply. regularly check the outstanding debts of the Operator? The debts are specific to the aircraft registration/serial number.

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Ongoing Asset Management Post Repossession Action Items The process of repossession and remarketing will be a quicker Following the repossession of any aircraft, we strongly recom- and more efficient process if the aircraft is monitored prior to mend to the Client that they undertake the following work to repossession and key records and log books copied. ensure the asset is brought up to a condition where it can be The monitoring programme also serves the following purposes: flown and remarketed at the optimal selling price: 1. Collation of data allows the creation of a useful back-up ■ Arrange for a specialist engineer to visit the Owner base if any key documents are lost, damaged or stolen. Even and review all hard copy records, maintenance statuses and without default this can aid the process of selling the manuals plus obtain the latest log books. aircraft (or the debt) to other parties. ■ Compile the scope of work and estimated costs for the 2. Regular visits provide useful contact points within the next three months of storage and essential maintenance. operation and will create a rapport with key Owner staff. ■ Determine whether the airframe and engines can remain This can provide useful “shopfloor” insights into the under any manufacturers support programmes (if so how operation and to the attitudes held by staff. long are these valid) and whether there are any remaining 3. The procedure shows the Operator that the financier takes warranties. a serious view towards its assets and will instil disciplines ■ Clean the aircraft of all food and toilet matter if not already within the operation. done so. We have to consider also a worst-case scenario where the ■ Check with the CAA on the continuing validity of the Operator may not co-operate in the process of repossession. If Certificate of Airworthiness and whether any arrange- records are found to be missing, the value of the aircraft will be ments need to be made to protect this. impaired. ■ As the aircraft has operated under the approvals, manuals If such evidence is not available, expensive work tasks may and certificates of the previous Operator, obtain an then have to be performed. In some cases this has meant major opinion as to the most practical and financially advanta- airframe, engine, landing gear and component overhauls being geous way it can be maintained and stored if the Mortgagor required. Not only is direct cost incurred, but the additional wishes to sell the aircraft. non-revenue downtime could be as much as six months to take ■ When the aircraft is in a presentable condition inside and into account the maintenance planning phase, sourcing of suit- out, prepare specifications, maintenance status and photos able facility, performance of the tasks and liaison between the for re-marketing. manufacturer and the aviation authorities.

Phil Seymour Tel: +44 7768 454882 / +44 1372 224481 / Company President of IBA Group +44 1372 224488 ISTAT Senior Appraiser Fellow Email: [email protected] URL: www.iba.aero

Established in 1988, IBA is a leading aviation consultancy. We operate glob- ally, which means that we are privileged to work with a variety of clients across the aviation asset spectrum to identify and drive profitable growth, maximise value and mitigate risk. Whether implemented to support strategic , manage or repossess aircraft, our technical and aviation expertise delivers value across aircraft, engines, helicopters and freighter opportunities. www.iba.aero

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Austria Austria

Herbst Kinsky Rechtsanwälte GmbH Dr. Christoph Wildmoser

12 General and Contractual pay-out leasing or residual value leasing). Under full amorti- sation , the lessee pays during the lease term the owner/ lessor’s investment costs plus a profit, while under partial amor- 1.1 What are the typical structures available for tisation leases, the lessee does not cover the owner/lessor’s financing the purchase of an aircraft? entire . Finance leases are either full amortisation leases or partial Typical structures are operating leases and finance leases either amortisation leases. Another typical feature of finance leases standalone or as part of aircraft financing structured as sale and are the minimum, or initial fixed, lease term, during which transactions or ECA financing. neither party may terminate the lease contract, and the transfer of the risk of accidental loss or damage of the asset to the lessee. 1.2 What are the key advantages/disadvantages Essentially, owner-like risks and obligations are transferred to and main issues arising in relation to these financing the lessee without transfer of legal ownership. At the end of the structures? leasing term, a potential residual value is repaid by realising the leased asset either through the purchase of the asset by the lessee or by a third party nominated by the lessee. Possible losses from Under an operating lease, the owner/lessor owns the aircraft the sale are borne by the lessee. that is leased to a lessee. At the end of the lease term, the aircraft Although under an operating lease the lessee is also liable in is returned to the owner/lessor for release or sale. The owner/ lessor is in most cases a leasing company. particular for the risks of accidental loss, accidental damage and There are two types of operating leases: for the agreed condition of the leased asset at the end of the ■ A dry lease where the owner/lessor provides the term, the lessee is not liable for the realisable proceeds after while the lessee is responsible for operating, maintaining, return of the leased asset. Furthermore, at the end of the lease insuring, and providing a crew for the aircraft. term, the purchase of the leased asset by the lessee is usually not ■ A wet lease where the owner/lessor retains operational envisaged and the lessee is only liable for the condition of the control of the aircraft, operates flights for the airline with leased asset upon return as agreed in the lease contract. crew provided by the owner/lessor and maintains and insures the aircraft. The costs for these services are paid 1.4 Are there any proposals for reform in the area of by the lessee under the lease. aviation finance? The advantages of the operating lease include giving lessees greater flexibility in managing their fleet because they can react on increased capacity needs and lease aircraft only as and when Currently, there are no proposals for reform in relation to avia- needed. However, operating leases can be a more expensive tion finance. alternative in relation to other forms of financing. Under a , an owner/lessor purchases the aircraft 1.5 Is it possible according to the laws in your from a manufacturer at their own cost which it then leases to the jurisdiction to enter into non-binding or partially lessee, while through the lease payments the entire or substantial binding pre-contractual agreements (e.g. ‘letters of part of the purchase price is re-financed. At the end of the lease intent’) which will NOT take effect as fully enforceable term, the lessee is required to purchase aircraft. agreements?

1.3 What types of leasing are possible under the Under Austrian law it is possible to enter into non- or partially laws of your jurisdiction? What are their essential binding pre-contractual agreements which do not take effect as characteristics? fully enforceable agreements.

The types of leasing under Austrian law ranges from mere rental 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction agreements to concealed hire purchase agreements. The distinc- which applies to all pre-contractual agreement, tion between these types of leasing arises primarily in the case of financing and leasing transaction documents, and the finance lease agreements which replace the traditional form of conduct of parties connected to them? investment financing. The two general types of leasing are full amortisation leases General bona fide principles are set out in Sec 879 Austrian (full pay-out leasing) and partial amortisation leases (non-full Civil Code (Allgemeines bürgerliches Gesetzbuch). Agreements in

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contravention of Austrian bona fide requirements are generally 2.6 Is the authority at question 2.1 likely to establish void and unenforceable in Austria, irrespective of the law by a ‘look-through’ right or similar as regards a lender or a which they purport to be governed. lessor which is a special-purpose vehicle involved for the purpose of tax treaty access? 22 Taxation and Related Matters No, it is not. 2.1 Which government authority in your jurisdiction has primary responsibility for the for and 2.7 Will the import of an aircraft into your jurisdiction regulation of revenue control and taxes? and/or the sale or leasing of the aircraft give rise to any VAT, sales or use taxes or any import or excise The respective tax office at the seat of the relevant entity. duties?

Depending on the applicable jurisdiction with regard to the 2.2 What are typically the taxes in your jurisdiction delivery of the aircraft, as well as on the type of the aircraft, which may arise in relation to a sale, a lease or a financing of an aircraft or an engine? VAT as well as customs duties may be payable in connection with the import of an aircraft into Austria. In the case of an intra-community purchase of an aircraft by an Subject to the applicable jurisdiction with regard to the delivery Austrian purchaser, the VAT exemption may apply, in which case of the aircraft, as well as the type and use of the aircraft, VAT the supply of the Aircraft might be exempt from VAT in Austria. might be applicable. However, subject to the structure of the purchase, VAT may be avoided (e.g. through delivery of the aircraft in international airspace). 2.8 Are there any documentary taxes (for example, Income from the lease may be subject to Austrian (corporate) stamp duty payable on the execution of documents)? income tax depending on whether the lessor or financier has its registered seat or permanent establishment in Austria. Lease agreements executed in Austria or relating to an asset located in Austria are subject to Austrian stamp duty. In such cases, Austrian stamp duty is calculated as a multiple of the 2.3 Is the provision of a current tax-residency certificate by a payee sufficient for a lessee or a annual rent including VAT and ancillary costs. The multiple borrower potentially subject to withholding taxes in your depends on the terms of the lease. jurisdiction on rental or payments to avail itself of treaty access and the mitigation of tax liability? 32 Registration and Deregistration

Withholding tax does not apply to lease payments (principal or 3.1 Which government authority in your jurisdiction interest). has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry or an operator registry? If the aircraft register is an 2.4 Has the advent of BEPS (the Base Erosion and operator register, is it possible to record the details of Profit Shifting initiative of the OECD) had any effect as an owner or lessor and any financier with an aircraft regards structures in aviation finance and leasing or mortgage? their interpretation?

The Austrian aircraft register is operated by Austro Control There are no effects from the BEPS action plan as regards the Österreichische Gesellschaft für Zivilluftfahrt mit beschränkter Haftung structures in aviation finance and leasing in Austria yet. (Austro Control), which is a government subsidiary that has been vested with sovereign rights. 2.5 What are the typical thresholds in your jurisdiction The following information is registered in the Austrian for which a permanent establishment may be triggered aircraft registry: under the terms of any relevant double-tax treaty or ■ the ordinal number of the aircraft; similar? ■ the nationality and registration mark of the aircraft; ■ the manufacturer and serial number of the aircraft; A permanent establishment is a fixed place of business through ■ the maximum permissible take-off mass; and which the activities of an enterprise are wholly or partly carried ■ the name and address of the operator. on and, thus, requires: The Austrian aircraft register is an operator register. Thus ■ the authority to dispose of certain facilities (owned or ownership, lease and/or security are not registered. rented), premises or machinery; Other than with respect to the commercial operators (who ■ that it is located at a specific place for a certain period of are required to have an operating licence), there are no restric- time; and tions on the nationality of the legal owner of an aircraft. ■ that the undertaking must pursue its commercial activities Consequently, foreign legal entities as well as natural persons at this fixed place. may be owners of aircraft that are registered in Austria. A “permanent establishment” in particular comprises the place of management, a branch, an office, a factory and a work- 3.2 What is the effect of registration of the aircraft? shop. Facilities that serve exclusively preparatory and auxiliary Does registration on your national aircraft register functions are not qualified as a permanent establishment. confer proof of ownership of the aircraft and/or engine? However, the double tax treaties which Austria has adopted do not always follow the OECD model convention in full, so that it is essential to consult the applicable double tax treaties in The registration in the Austrian aircraft register is an adminis- each individual case. trative requirement and does not impact the legal ownership of

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an aircraft and does not evidence or constitute legal ownership of a pledge requires a valid underlying contractual obligation of the aircraft. (pledge agreement). The pledge agreement itself does not The consequences of registration in the Austrian aircraft require any specific form or formality, nor is it required to be register in particular is the entitlement to operate the aircraft written in any particular language. An Austrian court or other under Austrian nationality, that no bona fide acquisition of title in competent Austrian authority, however, may request delivery of the aircraft is possible, if the aircraft is acquired from a person certified translations of the pledge agreement or other docu- other than the owner, and that according to Sec 33 Austrian ments, if not drafted in the German language. International Private Law Act (IPR-Gesetz), rights in rem In addition, and as a principle of pledging tangible assets including ownership rights and pledges are subject to and shall under Austrian law, the pledgor is required to physically hand be constituted in accordance with the relevant provision of the over the aircraft to the pledgee or an agent of the pledgee (in laws of the state of registration of an aircraft. While the title for practice the operator holding possession over the aircraft for the transfer of ownership of an aircraft (e.g. the purchase agree- the pledgee). ment) can be made subject to any law, the mode (i.e. the delivery) Usually, if a pledge is used, the aircraft is in the possession of must be carried out in accordance with mandatory provisions of the operator at the time of granting the pledge by the owner as Austrian law. pledgor to the financier as pledgee. Delivery of the aircraft can be affected by way of instruction of the operator (by the owner as pledgor) to hold and possess the aircraft for and on behalf of 3.3 Can foreign-owned aircraft be registered on your national aircraft register and are there limits or the pledgee. In practice, metal plates are in addition affixed to restrictions on the age of aircraft that may be registered the airframe and the engines, indicating that the airframe and or operated? engines are subject to an Austrian law pledge in order to create external visibility of the pledge. Foreign-owned aircraft can be registered in the Austrian aircraft register. There are no limits or restrictions as to the age of the 4.2 Can spare parts, including future parts, be subject aircraft; however, a certificate of airworthiness issued by Austro to the aircraft mortgage or engine mortgage (as the case Control is required for the operation of an aircraft. may be)? If not, are there any other forms of security that can be taken over spare parts?

3.4 Can aircraft leases be registered? If so, in what circumstances? Must the lease be in a particular form The pledgor and pledgee may agree in the pledge agreement that if it is to be valid and enforceable (for example, must it the pledgee shall be obliged to also pledge spare parts and future be in a particular language or be notarised, legalised or spare parts. In any event, perfection of a pledge with regard to apostilled)? those (future) spare parts requires an act of publicity by physical delivery to a pledgee (please see question 4.1). Leases cannot be registered in the aircraft register under Austrian law. 4.3 Is there a register of mortgages or rights over aircraft and/or engine? 3.5 How is deregistration affected and what steps can a lessor take to de-register the aircraft on termination of Austrian law neither provides for, nor offers the possibility of, the lease? registration of a with any register.

The operator and the owner are both involved in the deregistra- 4.4 What other forms of security can be taken over tion process. Whilst the operator is principally responsible and an aircraft and/or engine and can these other forms be competent for registration and deregistration of an aircraft, the registered? operator is dependent on the cooperation and consent of the owner, because the owner is required to sign the relevant appli- Under Austrian law the most relevant form of security over cation forms to be submitted to the aircraft register. an aircraft is a pledge (Pfandrecht). Another form of secu- The owner and lenders (or other finance providers) usually rity would be the transfer of ownership by way of security request a deregistration power of attorney from the operator (Sicherungsübereignung). enabling them to amend the registration of or to de-register an aircraft. 4.5 What claims and rights would take priority in your 42 Security jurisdiction over a registered mortgage?

4.1 Is it possible to create a mortgage over an aircraft The priority of the pledgee may only be safeguarded by respec- or engine in your jurisdiction? If so, what are the types tive provisions in the pledge agreement. The priority of pledges of aircraft mortgage and engine mortgage available and under Austrian law depends upon the time the act of publicity what formalities are required in order to perfect it? was made (and thereby the publicity requirement met) in a particular pledging situation. Pursuant to Sec 33 para 1 Austrian International Private Law Act, all rights in rem over aircrafts are subject to the laws of the 4.6 What other forms of security can be granted over state in which the aircraft is registered, i.e. Austrian law in case an aircraft and/or engine lease? of aircraft registered in the Austrian aircraft register. A mortgage over tangible assets, including aircraft, is Please see question 4.4. unknown to Austrian law. However, it is possible to create a pledge (Pfandrecht) over an aircraft under Austrian law. Creation

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52 Enforcement and Repossession July 2007 on the law applicable to non-contractual obligations (Rome II), provided, however, that according to the Austrian Private International Law Act, rights in rem pertaining to aircraft 5.1 What are the circumstances in which a mortgagee registered in the Austrian aircraft register (such as a pledge) are or owner can take possession of the aircraft and/or sell in any case subject to Austrian law. the aircraft? What requirements must the mortgagee or owner comply with? 5.4 Will local courts recognise and enforce a foreign As a general principle under Austrian law, the owner/lessor is court judgment in favour of a mortgagee or lessor? Are any interim relief measures available? not entitled to repossession as long as the operator/lessee is validly entitled to operate the aircraft, i.e. as long as no event of default has occurred under the respective lease contract. A judgment, decree or order of a foreign court is recognised Thus, as a first step, the owner/lessor would be required to and can be enforced in Austria in accordance with Sec 2 para terminate the lease contract. In such case it must be consid- 2 Austrian Enforcement Act (Exekutionsordnung), if it is directly ered, however, that Sec 25(a) Austrian Insolvency Code enforceable in Austria pursuant to EC Regulation No 805/2004 (Insolvenzordnung) restricts the termination rights of the owner/ of the European Parliament and of the Council of 21 April 2004 lessor if insolvency proceedings have been opened with regard creating a European Enforcement Order for uncontested claims. to operator/lessee (please see question 8.4). Judgments outside the scope of EC Regulation 805/2004 In case the aircraft is subject to a pledge, the pledgee may can be enforced in Austria if (i) their enforceability is provided enforce the pledge if the payment obligations secured by the for in an international treaty or EC Regulation 1215/2012 of pledge are not paid when due. In the event of such default, the 12 December 2012 on Jurisdiction and the Recognition and pledgee is obliged to request in writing from the pledgor to settle Enforcement of Judgments in Civil and Commercial Matters, the obligations and shall inform the pledgor in such request that and (ii) if the court rendering the judgment had jurisdiction, a public auction or a private sale will take place if the obligations the defendant was properly summoned by the relevant court, are not settled in full within a period not less than seven days. and the judgment is enforceable in the state where such court is Enforcement can be made by way of public auction or freehand located. Furthermore, enforcement of such judgment requires sale (Freihandverkauf ). an order of enforcement (Vollstreckbarkeitserklärung) by the In the case of a public auction, the pledgee would not be enti- municipal court (Bezirksgericht) at the Lessee’s (or the person’s tled to sell the Aircraft by way of private sale, but must appoint an against who enforcement is sought) registered office. auctioneer publicly authorised in accordance with the Austrian Trade Code (Gewerbeordnung). 5.5 Are powers of attorney from a local airline in favour of a lessor or mortgagee likely to be effective to allow 5.2 What is the procedure for repossession of the the lessor or mortgagee to deregister the aircraft? Can aircraft? such powers be irrevocable, be governed by a foreign law and/or do they need to be in any particular form for local recognition? Unless the aircraft is redelivered by an operator/lessee upon termination of the lease agreement, or the owner/lessor was able Deregistration powers of attorney granted from a local airline in to take the possession of the aircraft by exercising the remedies favour of a lessor or pledgee are effective. Basically, a deregis- as agreed in the lease agreement, the owner/lessor would require tration power of attorney can be governed by a foreign law and court assistance for repossession. can be granted for an indefinite period and/or irrevicably. In the The owner/lessor would have to sue the operator/lessee for event of the opening of bankruptcy proceedings over the grantor redelivery of the aircraft and would need to obtain a final judg- of the deregistration power of attorney, however, such indefinite ment by the competent regional court (Landesgericht), unless or irrevocable power of attorney will lapse in accordance with the owner/lessor and the operator/lessee have entered into an mandatory provisions of the Austrian Insolvency Code. irrevocable and unconditional undertaking of the operator/ Besides, a deregistration power of attorney which has been lessee to surrender the aircraft to the owner/lessor in the form irrevocably granted may nevertheless be revoked by the prin- of an immediately enforceable notarial deed (sofort vollstreck- cipal in accordance with Austrian ordre public. barer Notariatsakt). Such undertaking substitutes a final court No specific form requirements apply to deregistration powers judgment and entitles the owner/lessor to directly apply for an of attorney; in practice, however, such powers of attorney are enforcement court order by the municipal court (Bezirksgericht) always made in the form of a written document. at the Lessee’s place of business or at the place where the aircraft is located to repossess the aircraft. Self-help enforcement will in any event not be permitted. 5.6 If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the 5.3 Will local courts recognise a choice of foreign law aircraft? in an aircraft mortgage? Are there any mandatory local rules that apply, despite a choice of foreign law? Court proceedings for enforcement of a court judgment take two to four weeks but may take much longer if the lessee uses all The Austrian courts would give effect to the choice of foreign remedies available to him. law to govern the Austrian pledge agreement subject to the provisions of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the 5.7 Are there any restrictions on the ability of the law applicable to contractual obligations (Rome I) and, where it lessor to export the aircraft from your jurisdiction on concerns non-contractual obligations arising out of such pledge termination of the leasing? agreement, subject to the provisions of the Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 There are no restrictions in relation to the export of the aircraft

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from Austria upon termination of the lease. However, an export 6.4 Has your jurisdiction adopted the remedies on certificate of airworthiness (Lufttüchtigkeitszeugnis für die Ausfuhr) insolvency provided under Article XI of the Protocol to will be required in certain cases. the Cape Town Convention?

5.8 Are exchange controls prevailing in your This is not applicable. jurisdiction as regards payments in foreign currency? Will any consents be required for the remittance of the 6.5 What is the procedure to file an irrevocable sale proceeds abroad? deregistration and export request authorisation under the Cape Town Convention (IDERA)? In general, payments to foreign recipients, including remittance of sale proceeds abroad, are not subject to exchange control. This is not applicable. However, the Austrian National Bank may issue regulations or resolutions by which certain transactions with foreigners are 72 Liability for Damage and Environmental restricted. If a transaction is subject to prior approval, such approval must be obtained from the Austrian National Bank. Transactions 7.1 Can the owner be strictly liable – liable without a requirement to prove fault or negligence – for any made without approval are void unless such transaction was damage or loss caused by the aircraft assuming the permitted retrospectively. owner is an innocent owner with no operational control of the aircraft? 5.9 If the lease is governed by English law and a judgment is obtained by the lessor in the English courts, The owner without operational control over the aircraft is not can that judgment be automatically enforced in your liable for damages caused by an aircraft under Austrian law. jurisdiction or will the case have to be re-examined on its merits? 7.2 Does the EU Emissions Trading System (EU ETS), or any similar scheme, apply to aircraft and aircraft Please see question 5.4. operators in your jurisdiction? Will charges levied according to the EU ETS, or its equivalent, give rise to 5.10 What is the applicable procedure for repossession any in rem rights in relevant aircraft which are part of the of an aircraft under other forms of security interests? fleet of the operator concerned and, if so, will such rights rank in priority ahead of any mortgage interests properly registered in the relevant aircraft and/or engine? Please see questions 5.1 and 5.2. The EU Emissions Trading System has been incorporated in the 62 Conventions Austrian Emission Certificate Act (Emissionszertifikategesetz 2011) and applies to aircraft and operators of aircraft. 6.1 Has your jurisdiction ratified any of the following: Under Austrian law, charges under the EU ETS do not create (a) The Chicago Convention of 1944 on International in rem rights in relevant aircraft which are part of the fleet of the Civil Aviation (the Chicago Convention); (b) The 1948 operator concerned. Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 Convention for the Unification of Certain Rules Relating 7.3 What liabilities (actual or potential) could an owner, to the Precautionary Arrest of Aircraft (the 1933 Rome lessor or financier of an aircraft incur in your jurisdiction Convention); and (d) The Convention on International because of a failure to comply with local environmental Interests in Mobile Equipment on Matters Specific to law and/or regulations on the part of an operator of Aircraft Equipment (the Cape Town Convention) and the aircraft leased or financed by it? Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment? Under Austrian law, the owner, lessor or financier of an aircraft are not liable for breaches of local environmental law and/or regulations. Austria has only ratified the Chicago Convention of 1944 on Relevant environmental regulations, such as in particular International Civil Aviation effective as of 26 September 1948. the Austrian Emission Certificate Act and the Austrian The Geneva Convention, the Rome Convention and the Cape Civil Aircraft Noise Acceptance Ordinance (Zivilluftfahrzeug- Town Convention have not been ratified. Lärmzulässigkeitsverordnung), apply to the operator. The regulations of the Austrian Emission Certificate Act 6.2 Has ratification of the Cape Town Convention impose penalties on the operator of the aircraft for the failure caused any conflicts or issues with local laws? to provide adequate monitoring of emissions from aviation activity, to submit a monitoring plan, to report emissions from aviation activity, to submit a certificate from an independent This is not applicable. verifier and to report within the prescribed time limit. In addi- tion, sanctions will be imposed on the operator of the aircraft, 6.3 What is the legal position regarding in case he has not surrendered a sufficient number of emission non-consensual rights and interests under Article 39 of certificates in time to cover his emissions. the Cape Town Convention? The Austrian Civil Aircraft Noise Acceptance Ordinance includes sanctions if the operator of an aircraft does not provide This is not applicable. appropriate evidence that the operation of the aircraft does not cause excessive noise.

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82 Insolvency and Searches Acceptance of rent or lease payment is permitted unless the payor itself is insolvent. Thus, in case insolvency proceed- ings are opened over the lessee, any payment of the lessee to 8.1 Are there any public registers in your jurisdiction the owner made after the lessee has become illiquid or over-in- where a search can be carried out to determine whether debted may be challenged by the insolvency administrator. an order or resolution for any bankruptcy, bankruptcy protection or similar insolvency proceedings has been The giving of notice of default is not restricted. registered in relation to an operator or lessee? Upon commencement of insolvency proceedings, legal actions against the lessee for unpaid lease payments are not permitted. Pending lawsuits against the lessee will be stayed. The owner The Austrian insolvency register is owned and maintained by would have to assert his claim to be taken into account during the Austrian Federal Ministry of Justice. It contains informa- the insolvency proceedings. tion on the initiation of insolvency proceedings and key proce- The termination of a contract by a creditor within a period dural steps in the process. of six months after the opening of insolvency proceedings is The Austrian insolvency register is accessible via the website only permitted for good cause, if the termination of the contract of the legal notices database (Ediktsdatei) under www.edikte. could endanger continued operation of the business of the oper- justiz.gv.at. ator/lessee. The deterioration of the operator/lessee’s economic position and the default of the operator/lessee concerning 8.2 In the event that an operator or lessee were to claims that have become due prior to the opening of insolvency become insolvent either on a balance sheet basis proceedings do not qualify as a “good cause”. (assets less than liabilities) or is unable to pay debts as During the first six months of the insolvency proceedings, fall due, would an operator or lessee be required to file the owner is not entitled to demand re-delivery of the aircraft or for insolvency protection? exercise any rights for repossession in case this would endanger the continuation of the business of the lessee. An operator/lessee must file for insolvency without undue delay, but in any case within 60 days of the operator/lessee becoming 8.5 Can the commencement of insolvency proceedings illiquid or over-indebted pursuant to the respective provisions have retrospective effect in relation to any such actions of the Austrian Insolvency Code. taken before commencement? If so, for what period can A debtor is illiquid within the meaning of Sec 66 Austrian there be a look back? Insolvency Code when it is permanently unable to pay all of its liabilities that are currently due. Liabilities that will be due in the future are not taken into account for this test. The commencement of insolvency proceedings does not have A debtor is over-indebted within the meaning of Sec 67 retrospective effect. However, the insolvency administrator Austrian Insolvency Code if (i) the aggregate amount of its may challenge certain legal actions taken by the debtor with or liabilities exceeds the aggregate liquidation value of its realisable in favour of a creditor to the detriment of other creditors. The assets, and (i) a business forecast shows that the debtor is likely time period for such challenge varies from six months up to 10 to become illiquid within the current or the following . years in specific cases.

8.3 Do the available forms of insolvency protection 8.6 Is there, either under law or as a matter of practice in your jurisdiction involve the appointment of either in your jurisdiction, a period of time within which the an officer of the court or a specifically court appointed Insolvency Official will either ‘adopt’ the lease and official to take control of the operator or lessee (an pay rent and other lease payments as an ‘Insolvency Official’) while in insolvency protection? of the insolvency or ‘reject’ the lease and permit the owner to enforce such rights as it may have under the lease? (a) If the lease is ‘adopted’, will the Insolvency Upon the opening of insolvency proceedings, an insolvency Official also pay any unpaid lease payments due as at administrator is appointed by the competent insolvency court commencement of the insolvency protection? (b) If not who will take over the management of the debtor and the debt- or if the lease is ‘rejected’, would the owner’s claim for or’s business operations. any outstanding sums rank equally with other ordinary unsecured creditors of the lessee?

8.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official Under Austrian law, the lease agreement will be continued with in your jurisdiction have the effect of prohibiting the the insolvency estate upon commencement of the insolvency owner from taking the following actions to enforce proceedings. The insolvency administrator is entitled to termi- the lease after commencement of such protection: (a) nate the lease agreement any time within the statutory notice applying any security deposit held by the owner against period or a shorter notice period if and as agreed in the lease any unpaid amounts due under the lease; (b) accepting agreement. payment of rent or other lease payments from the Unpaid lease payments due at the commencement date will lessee, a guarantor or a shareholder; (c) giving notice not be paid by the insolvency administrator but must be filed of default under the lease; (d) obtaining a judgment or arbitral award for unpaid lease payments; (e) giving as insolvency claims. The same applies in case the insolvency notice to terminate the leasing of the aircraft and/or administrator should decide to terminate the lease agreement. engine; or (f) exercising rights to repossess the aircraft In any case, such claims will rank equally with other ordinary and/or engine? unsecured creditors of the lessee.

The application of security deposits depends on the structuring of such deposit and may be restricted.

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8.7 Are there certain types of preferred creditors whose claims will rank above claims of the owner? 92 Detention and Confiscation

9.1 Other than insolvency laws (see section 8), Costs of the insolvency proceedings, expenses incurred by the are there any laws which may have the effect of insolvency administrator in connection with the operation of defeating the owner’s right in the aircraft – for example, the debtor’s business, including taxes, wages and creditors’ Government requisition? Do the laws of your jurisdiction claims arising after commencement of the insolvency proceed- provide for any compensation in such circumstances? ings rank above unsecured claims of the owner. In case the claims of the owners are secured (e.g. by a pledge), Customs authorities and criminal courts may detain and seize the owner may demand separation of the pledged asset from the the aircraft in the course of criminal proceedings or proceedings insolvency estate and separate liquidation. The owner’s claims for fiscal offences. Also, tax authorities may initiate enforce- will then be satisfied out of the liquidation proceeds. ment proceedings to enforce collection of tax payables (these proceedings would in principle follow the same procedure as the 8.8 If the aircraft is in the possession of a person enforcement of the lease agreement or the pledge). other than the operator or lessee at the commencement of Insolvency Protection of the operator or lessee, for example, an independent maintenance facility, will such 9.2 Are there any rights in relation to third parties to person be entitled, under the laws of your jurisdiction, detain or sell the aircraft pursuant to illegal activities, to assert a arising under law or contract over the tax or any other laws if the operator or lessee fails to pay aircraft in respect of amounts then due and unpaid to when due? If so, can the aircraft be forfeited and sold such person by the operator or lessee? without the owner being made aware?

No – such person would not be entitled to assert a lien. See question 9.1.

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Dr. Christoph Wildmoser is a partner of the firm. He specialises in M&A, private equity and finance transactions. Christoph has acted for national and international clients on domestic and cross-border private and public M&A and private equity transactions as well as acquisition and asset financings. In particular, he has extensive experience in rail and aviation financings. Education and Career: Mag. iur. (Vienna 2000); Dr. iur. (Vienna 2002); LL.M. (Frankfurt School of Finance and Management 2013); law practice with Field Fisher Waterhouse (London), Clifford Chance (Frankfurt), Hausmaninger Herbst (Vienna); and Herbst Kinsky since 2005. Admitted to the Austrian Bar (Vienna 2006). Languages: German, English and French. Herbst Kinsky Rechtsanwälte GmbH Tel: +43 1 904 2180152 Dr. Karl Lueger Platz 5 Email: [email protected] 1010 Vienna URL: www.herbstkinsky.at Austria

The Firm Herbst Kinsky is one of Austria’s leading law firms. Its specialised and highly committed lawyers combine many years of experience, gained abroad and in other reputable Austrian law firms. The firm’s practice covers a full range of services including banking and finance, capital markets, insurance, corporate, M&A, private equity and venture capital, IP/IT and life sciences, merger control, anti-trust and competition, real estate, dispute resolution and arbitration. Our Clients The firm’s clients range from large domestic and international privately held and publicly listed companies, banks, insurance companies and private equity investors to small and mid-size business entities. Clients cut across many different industries, including financial institutions, insurance, transport, infrastructure, life sciences, food and information technology. www.herbstkinsky.at

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Bermuda Bermuda

Janice Gutteridge

Cox Hallett Wilkinson Limited Ernest Morrison

12 General and Contractual and costly conditions imposed by the increased European regu- lations introduced by the Market Abuse Regulation (MAR) while delivering a high level of market protection that investors expect. 1.1 What are the typical structures available for Some of the advantages of listing on the BSX are as follows: financing the purchase of an aircraft? ■ it is the world’s largest offshore fully electronic securities exchange; As a result of Bermuda’s reputation as an offshore financing ■ it is internationally respected and recognised by UK, US, centre, entities incorporated or formed under Bermuda law Irish, Canadian and Australian tax authorities and regula- have commonly been used when establishing aircraft financing tory bodies; structures. Bermuda special purpose vehicles (SPVs) have been ■ it is an affiliate member of the International Organisation used in both ‘off-balance sheet’ and ‘on-balance sheet’ financing and Securities Commissions; structures where the owner will own the aircraft directly in its ■ it is flexible, responsive and sensitive to confidentiality own name in asset-backed securitisations. requirements; Asset-back securitisations often employ a Bermuda orphan ■ it is well placed between Europe and the US, which structure, which are particularly suited to establishing bank- provides real-time same-day access to both markets; and ruptcy remoteness. The use of an orphan structure ensures that ■ it is designated as a ‘recognised exchange’ by HM Revenue both the Bermuda SPV and the aircraft are removed from the and Customs (UK) and Revenue – Irish Tax and Customs. balance sheet of the originator. Typically, the Bermuda SPV consists of a Bermuda exempted company, incorporated for 1.2 What are the key advantages/disadvantages the purpose of acting as the owner and lessor or as lessee and and main issues arising in relation to these financing sub-lessor of the aircraft. The shares of which are owned by the structures? trustees of a specially created purpose trust. Under Bermuda law, the purpose trust will not hold the trust assets for a specified class of beneficiaries, but is established for the sole purpose of The key advantages to using a Bermuda SPV in aircraft financing holding the shares in the Bermuda SPV. The trustees duties are structures are: to fulfil the stated purposes that are in accordance with the inten- ■ the international reputation of the Bermuda register, clas- tions of the parties. These purposes are normally to: sified as a Category I register under the United States ■ promote the incorporation of the Bermuda exempted Federal Aviation Administration’s Flight Standard Service company; International Aviation Assessment Programme is particu- ■ subscribe to and hold the shares of the company; larly attractive to owners who require high standards of ■ support the company in pursuing the activity of the airworthiness and an inspection record; particular transaction in question; and ■ the good reputation of the Bermuda Register helps to ■ enter into any agreements that may be appropriate in preserve high residual values for aircraft registered in connection with the transaction. Bermuda; It is common practice for an enforcer or protector to be ■ the BCAA accepts internationally recognised airwor- appointed to ensure that the purposes of the trust are enforced. thiness and operational standards of other jurisdictions, The enforcer is usually a representative of an interested party to enabling the operation of Bermuda registered aircraft the structure, transaction or any independent professional. under a combination of such standards; At the end of the financing period when the loan has been ■ the BCAA has an ICOA 83-bis agreement in place with repaid, the orphan SPV will sell the aircraft for a nominal fee to , in effect since 1999, permitting Russian-operated the operator. The SPV is then liquidated and the purpose trust aircraft to be registered in Bermuda; is terminated. ■ the VP-B or VQ-B nationality mark is a low-profile mark, Traditional securitisations are also common where a Bermuda which is often advantageous to operators; exempted company is incorporated to act as the owner of the ■ Bermuda offers a full range of supporting professional aircraft and enters into a traditional asset-back securitisation advisors to assist in meeting all legal, accounting, manage- granting security over both the company and assets of the rial and operational requirements associated with aircraft Bermuda company. registration and financing; A popular alternative for entities looking to list debt asso- ■ companies incorporated in Bermuda pay no corporation, ciated with and intercompany loan note trans- profit, capital gains or withholding taxes to the Bermuda actions is to make an application for a listing on the Bermuda Government. Profits can be accumulated and dividends Stock Exchange (the BSX). Such a listing avoids the onerous need not be paid;

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■ business disputes can be settled in Bermuda by arbitration 22 Taxation and Related Matters or via the legal system which permits a right of appeal to the Privy Council of the United Kingdom, its highest judi- cial body; and 2.1 Which government authority in your jurisdiction ■ international companies incorporated or licensed to carry has primary responsibility for the accounting for and on business in Bermuda are not subject to any exchange regulation of revenue control and taxes? control regulations and are free to deal in any currency. Disadvantages include the cost of setting up the structure in The Ministry of Finance is responsible for the accounting and Bermuda and ongoing professional service costs. The offshore regulation of revenue control and taxes. world faces increasing regulation, including the recent intro- duction of economic substance requirements. Such financing 2.2 What are typically the taxes in your jurisdiction and leasing structures may be deemed to be a relevant activity which may arise in relation to a sale, a lease or a under the Bermuda regime and would fall into the scope of the financing of an aircraft or an engine? Bermuda regime.

No taxes or duties are payable in Bermuda as a consequence of 1.3 What types of leasing are possible under the the execution of an aircraft or engine sale agreement, unless laws of your jurisdiction? What are their essential the agreement is physically executed in Bermuda and one of the characteristics? parties is a local Bermuda company. No Bermuda taxes or duties are payable in connection with Leases do not need to be in a specific form. Bermuda law does executing and/or delivering a bill of sale or consummating the not require any mandatory terms be included in a lease (or ancil- sale of the ownership interest in respect of an aircraft or engine lary documents thereto) that is governed by either English or while said aircraft or engine is located in Bermuda, over interna- New York law that would not typically already be included. tional waters or in transit to/from Bermuda.

1.4 Are there any proposals for reform in the area of 2.3 Is the provision of a current tax-residency aviation finance? certificate by a payee sufficient for a lessee or a borrower potentially subject to withholding taxes in your There are currently no proposals for reform in the area of avia- jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability? tion finance.

As Bermuda does not impose taxes on income or capital 1.5 Is it possible according to the laws in your gains, the Bermuda government does not issue tax-residency jurisdiction to enter into non-binding or partially certificates. binding pre-contractual agreements (e.g. ‘letters of intent’) which will NOT take effect as fully enforceable agreements? 2.4 Has the advent of BEPS (the Base Erosion and Profit Shifting initiative of the OECD) had any effect as It is possible to enter into non-binding or partially binding regards structures in aviation finance and leasing or pre-contractual agreements which will not take effect as fully their interpretation? enforceable agreements under Bermuda law. Bermuda committed to satisfying the EU’s Intergovernmental Code of Conduct (Business Taxation) Group (the “Code of 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction Conduct Group”) imposing legislative requirements on certain which applies to all pre-contractual agreement, financing and leasing transaction documents, and the jurisdictions with regards to the economic substance of enti- conduct of parties connected to them? ties incorporated/formed in such jurisdiction. Such legislation is intended to address concerns arising from perceived harmful tax practices that have become the focus of increased scrutiny The Bermuda Courts have yet to pronounce authoritatively on across the European Union and have the aim of counteracting the scope of the duty of utmost good faith under Bermuda law. the effects of preferential tax regimes around the world. Parties can expressly agree on a good faith obligation in The Economic Substance Act 2018 (the ESA) came into force a contract. Where a party chooses to do this, it is important that the scope and substance of that obligation is made clear on 21 December 2018 and became operational on 1 January to avoid any ambiguity as to what it means or to which provi- 2019. Finance and Leasing is designated as a relevant activity sions of the contract it applies. There are certain contracts, such under the ESA and will include the provision of credit facilities as insurance, employment and partnership contracts and those of any kind for consideration to any person of any kind, such governing other fiduciary relationships, in which such a duty as loans, hire purchase arrangements, finance leases (excluding will be implied. land) and conditional sale or credit sale arrangements. However, the Bermuda courts generally remain reluctant to imply a duty of good faith in dealings between commercial 2.5 What are the typical thresholds in your jurisdiction parties. for which a permanent establishment may be triggered It should be noted that it is possible that Bermuda Courts or under the terms of any relevant double-tax treaty or arbitration tribunals may prefer the law on non-disclosure as similar? stated by the Court of Appeal in C.T.I. v. Oceanus, or may be persuaded that there are good reasons of principle why damages This is not applicable. should be awarded for a breach of the duty of good faith.

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2.6 Is the authority at question 2.1 likely to establish 3.3 Can foreign-owned aircraft be registered on a ‘look-through’ right or similar as regards a lender or a your national aircraft register and are there limits or lessor which is a special-purpose vehicle involved for restrictions on the age of aircraft that may be registered the purpose of tax treaty access? or operated?

The Bermuda government has entered into a number of tax Foreign-owned aircraft may be registered on the Bermuda information exchange agreements which permit requests from Register provided that the foreign owner is a qualified person tax authorities to the Ministry of Finance for information under the Aviation Navigation (Overseas Territories) Order pertaining the owner of a Bermuda SPV. 2013 (AN(OT)O). Qualified persons include: ■ a person must be a United Kingdom national and/or Commonwealth citizen; 2.7 Will the import of an aircraft into your jurisdiction ■ a national of any European Economic Area State; and/or the sale or leasing of the aircraft give rise to any ■ a body incorporated in any part of the Commonwealth VAT, sales or use taxes or any customs import or excise duties? (includes Overseas Territories and Crown Dependencies) and which have their registered office or principal place of business in any other part of the Commonwealth; or The importation of an aircraft into Bermuda will give rise to ■ an undertaking formed in accordance with the law of an customs import duties. European Economic Area State and which have their If an aircraft is physically located in Bermuda when the sale registered office, central administration or principal place agreement is executed and the purchaser is an entity incorpo- of business within the European Economic Area. rated or formed under the laws of Bermuda, customs duties may be payable as it could be seen as importation of the aircraft. 3.4 Can aircraft leases be registered? If so, in what circumstances? Must the lease be in a particular form 2.8 Are there any documentary taxes (for example, if it is to be valid and enforceable (for example, must it stamp duty payable on the execution of documents)? be in a particular language or be notarised, legalised or apostilled)? Stamp duty is generally not payable by Bermuda-exempted companies incorporated in Bermuda. However, stamp duty may The interests of the owner (legal or beneficial) or charterer by be payable if the bill of sale is physically executed in Bermuda. demise of an aircraft will be noted on the Bermuda Register. At the time of registering an aircraft in Bermuda in the name of the 32 Registration and Deregistration charterer by demise, the BCAA must be provided with a certi- fied true copy of the lease together with an affidavit that the lease is a true copy. 3.1 Which government authority in your jurisdiction Leases are not required to be in a specific form, nor translated, has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry served, notarised or legalised in order to be filed with the BCAA. or an operator registry? If the aircraft register is an operator register, is it possible to record the details of 3.5 How is deregistration affected and what steps can an owner or lessor and any financier with an aircraft a lessor take to de-register the aircraft on termination of mortgage? the lease?

The Governor of Bermuda has responsibility for the regula- De-registering of an aircraft, normally affected upon the sale of tion of aviation and the registration of aircraft. The Governor the aircraft, is affected on the written application to the BCAA has delegated his authority to the Director of Civil Aviation in requesting cancellation of the Certificate of Registration of the Bermuda acting in conjunction with the Bermuda Civil Aviation Aircraft. In support of the application, the owner must enclose Authority (the BCAA). a resolution of the board of directors of the registrant company authorising the cancellation. The original Certificate of 3.2 What is the effect of registration of the aircraft? Registration and other documents issued at the time of registra- Does registration on your national aircraft register tion must be returned to the BCAA for cancellation. The avia- confer proof of ownership of the aircraft and/or engine? tion regulatory authority of the next intended state of registra- tion will be informed of the deletion by the BCAA. The BCAA Registration of the aircraft is not evidence of ownership and the will issue a confirmatory letter of the de-registration confirming Certificate of Registration will state so on its face. Registration the de-registration of the aircraft from the Bermuda register. and the Certificate of Registration indicate the BCAA consider Should the purchaser be re-registering the aircraft in a juris- the registered applicant to be qualified for registration and diction that requires an export certificate of airworthiness, we therefore may be considered prima facie evidence of ownership encourage you to seek further advice. or the holding of a qualified charter by demise interest. Where an aircraft is registered by its owner, the Register of Aircraft 42 Security in Bermuda (the Bermuda Register) will contain the name and address of every person who is entitled to a legal interest in the 4.1 Is it possible to create a mortgage over an aircraft aircraft or a share in it. Where an aircraft is registered pursuant or engine in your jurisdiction? If so, what are the types to a charter by demise, the name and address of the charterer by of aircraft mortgage and engine mortgage available and demise will be noted on the Register. what formalities are required in order to perfect it?

Aircraft mortgages give the lender priority over unsecured cred- itors of the aircraft’s owner, permit the lender to take possession

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of the aircraft in the event of a default by the borrower, and 4.5 What claims and rights would take priority in your permit the lender to sell the aircraft to realise monies to pay the jurisdiction over a registered mortgage? lender’s debt. It is possible to create a mortgage over an aircraft or engine A possessory lien for work done on the aircraft (whether before in Bermuda against aircraft registered in Bermuda and aircraft or after the mortgage was created), over persons lawfully enti- engines which are either owned by or otherwise in the posses- tled to possession of the aircraft or with a right to detain the sion of a Bermuda incorporated company. aircraft, will have priority over a registered mortgage. Parties to an aircraft financing may agree what governing law In addition, a preregistered mortgage or a mortgage created they want for an aircraft mortgage and the norm is to use the prior to the coming into force of the Mortgaging of Aircraft same governing law as the loan documentation. As a matter of and Aircraft Engines Act 1999 would have priority over a subse- Bermuda law, there is no need to register a mortgage to provide quently registered mortgage. perfection. Registration ensures priority over any non-regis- tered mortgages or subsequently registered mortgages. 4.6 What other forms of security can be granted over an aircraft and/or engine lease? 4.2 Can spare parts, including future parts, be subject to the aircraft mortgage or engine mortgage (as the case may be)? If not, are there any other forms of security that Other forms of security that can be taken over an aircraft and/ can be taken over spare parts? or engine lease include: ■ assignments of any charter agreements, , The statutory definition of ‘aircraft engine’ in the Mortgaging of warranties or aircraft leases relating to the aircraft; and Aircraft and Aircraft Engines Act 1999 includes all parts, equip- ■ leasing or charter by demise arrangements, where the ment and data, and manuals and records relating to them. A owner gives control and possession of the aircraft to the registered mortgage may cover any store or spare parts for the charterer. aircraft but does not include a mortgage created as a floating charge or a mortgage of spare parts on their own. 52 Enforcement and Repossession Where a mortgage grants a security interest over assets other than the aircraft or aircraft engines, the mortgage may be regis- 5.1 What are the circumstances in which a mortgagee tered at the Registrar of Companies in Bermuda under the or owner can take possession of the aircraft and/or sell Companies Act 1981, as amended (the Companies Act). the aircraft? What requirements must the mortgagee or owner comply with? 4.3 Is there a register of mortgages or rights over aircraft and/or engine? Aircraft registered in Bermuda are rarely physically present in Bermuda, so the laws of where the aircraft is physically situated Aircraft mortgages and aircraft engine mortgages can be regis- will need to be considered. The Supreme Court of Bermuda tered under the Mortgaging of Aircraft and Aircraft Engines is the first instance court in Bermuda and has unlimited juris- Act 1999 and related regulations. There are two specialised diction and is therefore competent to hear aviation disputes. registers, one for the registration of aircraft mortgages and the There have not been any reported cases of aviation disputes in other for the registration of aircraft engine mortgages. The rele- Bermuda. vant registers are maintained by the BCAA. International assets registered on the International Registry If the mortgage is to be registered on the International take priority over subsequently registered interests and over Registry under the Cape Town Convention, the mortgage must non-registered interests over the same assets. be in such a form as to constitute an international interest under the Cape Town Convention. To constitute an international 5.2 What is the procedure for repossession of the interest, the agreement must be in writing, relate to an object aircraft? of which the debtor has the power to dispose, enable the object to be identified for the purpose of the Cape Town Convention and, if a security agreement, enable the secured obligations to There are no statutory Bermuda law provisions for the proce- be determined. dure of repossession of the aircraft. The procedure for reposses- sion will be governed by the provisions of the mortgage and the provisions of the governing law of the mortgage. 4.4 What other forms of security can be taken over an aircraft and/or engine and can these other forms be registered? 5.3 Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local rules that apply, despite a choice of foreign law? Other forms of security that can be taken over an aircraft and/ or engine include: ■ assignments of any insurances or warranties relating to the Pursuant to the provisions of the Judgments (Reciprocal aircraft; Enforcement) Act 1958, a final and conclusive judgment in the ■ charges over the shares of the company owning the superior courts of , the Bahamas, Barbados, Dominica, aircraft; and Gibraltar, Grenada, Guyana, Jamaica, the Leeward Islands, ■ leasing or charter by demise arrangements, where the Nigeria, St. Lucia, St. Vincent or the United Kingdom against owner gives control and possession of the aircraft to the a Bermuda company under which a sum of money is payable charterer. (not being in respect of multiple damages, or a fine, penalty, Such security interests may be registered against the company tax or other charge of similar nature) and would, upon registra- owning the aircraft at the Registrar of Companies in Bermuda tion, be enforceable in the Supreme Court of Bermuda against under the Companies Act. a Bermuda company without the necessity of any retrial of the

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issues that are the subject of such judgment or any re-examina- ■ that the award has not yet become binding on the parties, tion of the underlying claims. or has been set aside or suspended by a competent authority The courts of Bermuda would recognise as a valid judgment a of the country in which, or under the law of which, it was final and conclusive judgment in personam obtained in any court made. other than the foreign courts listed above against a Bermuda company based upon documents under which a sum of money 5.4 Will local courts recognise and enforce a foreign is payable (other than a sum of money payable in respect of court judgment in favour of a mortgagee or lessor? Are multiple damages, taxes or other charges of a like nature or in any interim relief measures available? respect of a fine or other penalty) and would give a judgment based thereon, provided that: A lease would usually contain express terms giving the lessor ■ such courts had proper jurisdiction over the parties, the right to take possession of the aircraft following an event of subject to such judgment; default by the lessee, pursuant to the terms of the lease. ■ such courts did not contravene the rules of natural justice Under Bermuda law (which follows English common law), the of Bermuda; lessor can exercise its contractual right of possession by self-help ■ such judgment was not obtained by fraud; without a court order, provided that peaceful methods are used. ■ the enforcement of the judgment would not be contrary to If the lessor chooses to pursue the judicial procedure for the public policy of Bermuda; possession, they would not be able to take possession before ■ no new admissible evidence relevant to the action is judgment unless there is a proven probability of damages arising submitted prior to the rendering of the judgment by the in relation to the aircraft in addition to the event of default courts of Bermuda; and under the lease. After acknowledgment of service of originating ■ there is due compliance with the correct procedures under process, the lessor would need to obtain a summary judgment. the laws of Bermuda. Final judgments for a sum of money will normally be registered in Bermuda under the Judgments (Reciprocal Enforcement) Act 5.5 Are powers of attorney from a local airline in favour 1958, without re-examination of the merits. If there is no treaty of a lessor or mortgagee likely to be effective to allow between Bermuda and the corresponding country for the recip- the lessor or mortgagee to deregister the aircraft? Can rocal enforcement of judgments, it would be necessary to launch such powers be irrevocable, be governed by a foreign law and/or do they need to be in any particular form for a writ action in Bermuda suing on the debt obtained in the fore- local recognition? going judgment to obtain summary judgment in Bermuda in respect of the writ action. Res Judicatas and/or issue estoppels arising from the foreign law judgment would normally prevent With the introduction of the Bermuda International Interests in the re-examination of the merits in Bermuda. Mobile Equipment (Cape Town Convention) Act 2016, powers Pursuant to the Bermuda International Conciliation and of attorney from a local airline in favour of a lessor or mortgagee Arbitration Act 1993 (which incorporates the 1958 Convention are no longer effective to allow a lessor or mortgagor to dereg- on the Recognition and Enforcement of Foreign Arbitral ister the aircraft for mortgages granted after 1 January 2018. It Awards), an award granted pursuant to arbitration proceed- is now necessary to file a Bermuda “Irrevocable De-registration ings in a jurisdiction other than Bermuda and conducted in and Export Request Authorisation” (IDERA) with the BCAA for accordance with the laws of such jurisdiction against a Bermuda mortgages and security interests entered into from 1 January 2018. company based upon the documents being considered by the For those mortgages granted prior to 1 January 2018, a de-reg- Bermuda courts would be enforceable in Bermuda either by istration power of attorney will be effective to allow a mortgagee action or by leave of the Supreme Court or a judge thereof, in or lessor to de-register the aircraft from the Bermuda Register. the same manner as a judgment or order to the same effect, and where leave is so given, judgment may be entered in the terms 5.6 If recovery of the aircraft is contested by the lessee of the award. Enforcement of an award may be refused if the and a court judgment is obtained in favour of the lessor, person against whom it is invoked proves: how long is it likely to take to gain possession of the ■ that a party to the arbitration agreement was (under the aircraft? law applicable to him) under some incapacity; ■ that the arbitration agreement was not valid under the law Aircraft registered in Bermuda are rarely physically present in to which the parties subjected it or, failing any indication Bermuda, so the laws of where the aircraft is physically situated thereon, under the law of the country where the award was will need to be considered. made; If the lessor chooses to pursue the judicial procedure for ■ that he was not given proper notice of the appointment possession, they would not be able to take possession before of the arbitrator or of the arbitration proceedings, or was judgment unless there is a proven probability of damages arising otherwise unable to present his case; in relation to the aircraft in addition to the event of default ■ that the award deals with a difference not contemplated under the lease. After acknowledgment of service of originating by or not falling within the terms of the submission to process, the lessor would need to obtain a summary judgment. arbitration, or contains decisions on matters beyond the scope of the submission to arbitration (except that in such case an award on matters submitted to arbitration may be 5.7 Are there any restrictions on the ability of the lessor to export the aircraft from your jurisdiction on enforceable to the extent these matters can be separated termination of the leasing? from those not submitted); ■ that the composition of the arbitral authority or the arbi- tral procedure was not in accordance with the agreement Pursuant to question 5.6 above, under Bermuda law (which of the parties or, failing such agreement, with the law of follows English common law), the lessor can exercise its contrac- the country where the arbitration took place; or tual right of possession by self-help without a court order, provided that peaceful methods are used.

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5.8 Are exchange controls prevailing in your 6.2 Has ratification of the Cape Town Convention jurisdiction as regards payments in foreign currency? caused any conflicts or issues with local laws? Will any consents be required for the remittance of the sale proceeds abroad? Presently, there is no case law in Bermuda supporting the appli- cation of the Cape Town Convention. As a result, most creditors Bermuda has exchange controls, which apply to residents will adopt the more cautious route of dual registrations. pursuant to the Exchange Control Act 1972 and the Exchange Control Regulations 1973. Bermuda-exempted companies are deemed to be non-resident for exchange control purposes. 6.3 What is the legal position regarding non-consensual rights and interests under Article 39 of The present policy of the Bermuda Monetary Authority is to the Cape Town Convention? give consent for a Bermuda dollar award made by the Supreme Court of Bermuda to be paid in the original judgment currency. The following categories of non-consensual right or interest have priority over a registered international interest, whether 5.9 If the lease is governed by English law and a in or outside insolvency proceedings, to the extent that these judgment is obtained by the lessor in the English courts, rights or interests had priority under Bermuda law over inter- can that judgment be automatically enforced in your jurisdiction or will the case have to be re-examined on its ests in an aircraft object equivalent to that of the holder of a merits? registered international interest before the entry into force of the Convention in Bermuda: ■ liens on an aircraft object in favour of repairers of, or those Yes, judgments obtained by the lessor in the English courts will providing services to, an aircraft object, provided that be automatically enforced in Bermuda pursuant to the Bermuda these repairs or services add value to the aircraft object Judgments (Reciprocal Enforcement) Act 1955 without the case and the repairer or service provider retains possession of having to be re-examined on its merits. the aircraft; ■ a right or interest in an aircraft object in respect of wages 5.10 What is the applicable procedure for repossession due to employees relating to services fairly allocated to the of an aircraft under other forms of security interests? use of an aircraft object from the date that remedies have been exercised under the Cape Town Convention by the Aircraft registered on the Bermuda Register are rarely physically holder of a registered interest; and present in Bermuda. Therefore, it is common for the lex situs ■ rights of the Government of Bermuda to arrest or detain and the other relevant foreign laws to be applied to repossess the an aircraft object for violation of safety-related or criminal aircraft in a favourable jurisdiction. law. The mortgagee may commence proceedings in the Bermuda However, nothing in the Convention affects the right of courts by serving a writ setting out the claim for the mortgage the Government of Bermuda or any other provider of public debt and delivery of the mortgaged aircraft. services (whether an intergovernmental organisation, a private or public entity or otherwise) to arrest or detain an aircraft 62 Conventions object under the laws of Bermuda for payment of amounts owed to such an entity directly relating to services in respect of that aircraft object or another aircraft object. 6.1 Has your jurisdiction ratified any of the following: A right or interest of a category covered by the declaration (a) The Chicago Convention of 1944 on International Civil Aviation (the Chicago Convention); (b) The 1948 made under Article 39(1)(a) must have priority over an interna- Convention on the International Recognition of Rights tional interest registered before the date of ratification, accept- in Aircraft (the Geneva Convention); (c) The 1933 ance, approval of, or accession to, the Convention. Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft (the 1933 Rome 6.4 Has your jurisdiction adopted the remedies on Convention); and (d) The Convention on International insolvency provided under Article XI of the Protocol to Interests in Mobile Equipment on Matters Specific to the Cape Town Convention? Aircraft Equipment (the Cape Town Convention) and the Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Bermuda has adopted Alternative A under Article XI of the Equipment? Protocol to the Cape Town Convention.

The United Kingdom has extended the Convention on 6.5 What is the procedure to file an irrevocable International Interests in Mobile Equipment on Matters Specific deregistration and export request authorisation under to Aircraft Equipment (the Cape Town Convention) and the the Cape Town Convention (IDERA)? Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Cape For an IDERA to be recorded with the BCAA, the following Town Convention) to Bermuda. prerequisites must be satisfied: Bermuda is not a party by extension from the United Kingdom It must be made in relation to an “International Interest” to (a) the Chicago Convention of 1944 on International Civil which was created on or after 1 January 2018 and is registered at Aviation (the Chicago Convention), (b) the 1933 Convention for the International Registry of Mobile Assets. the Unification of Certain Rules Relating to the Precautionary It must not be made in connection with a pre-existing right Arrest of Aircraft (the 1933 Rome Convention), or (c) the 1948 or interest, which retains the priority it enjoyed under the law Convention on the International Recognition of Rights in of Bermuda before 1 January 2018 (the effective date of the Aircraft (the Geneva Convention). regulations).

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It must be made in relation to an aircraft that is covered by the 82 Insolvency and Searches convention and protocol; aircraft (other than helicopters) which can carry at least eight persons or goods in excess of 2,750 kg, and helicopters carrying five or more persons. 8.1 Are there any public registers in your jurisdiction Completed IDERAs may be filed in electronic form with the where a search can be carried out to determine whether an order or resolution for any bankruptcy, bankruptcy BCAA Operations team. protection or similar insolvency proceedings has been registered in relation to an operator or lessee? 72 Liability for Damage and Environmental Public searches at the Registrar of Companies in Bermuda and/ 7.1 Can the owner be strictly liable – liable without or the Supreme Court Cause Book maintained at the Supreme a requirement to prove fault or negligence – for any Court Registry will confirm whether any steps have been, or damage or loss caused by the aircraft assuming the are being, taken in Bermuda for the appointment of a receiver owner is an innocent owner with no operational control or liquidator to, or for the winding-up, dissolution, reconstruc- of the aircraft? tion or reorganisation of a Bermuda company or any of its assets.

The owner of the aircraft would be subject to strict liability by virtue of section 40(2) of the UK Civil Aviation Act 1949 8.2 In the event that an operator or lessee were to become insolvent either on a balance sheet basis extended to Bermuda. Section 40(2) of the Act places strict (assets less than liabilities) or is unable to pay debts as liability on the owner of an aircraft for damage caused to persons fall due, would an operator or lessee be required to file or property on land or water by an aircraft in flight. There is for insolvency protection? indemnity available to the owner against the actual wrongdoer. Section 49(2) of the UK Civil Aviation Act 1949, now section 76(4) of the Civil Aviation Act 1982, provides an exception to The terms ‘solvency’ or ‘insolvency’ are not defined in the this strict liability in the case of an owner where there has been Companies Act. Rather it refers to a company being unable to a bona fide demise letting or hiring out of the aircraft for any pay its debts. A company is unable to pay its debts if: (i) the period exceeding 14 days to any other person and where no pilot, court is satisfied that the company is unable to do so taking into commander, navigator or operative member of the crew of the account contingent liabilities of the company; (ii) the company aircraft is in the employment of the owner. This exception was fails to discharge an undisputed statutory demand exceeding extended to Bermuda via the Civil Aviation Act 1982 (Overseas $500 within 21 days; or (iii) an execution of judgment or order Territories) (No. 2) Order 2001. against the company is returned unsatisfied. There is no statutory requirement in Bermuda for a company that is insolvent or likely to become insolvent to commence winding-up 7.2 Does the EU Emissions Trading System (EU ETS), procedures. However, the directors have a statutory and fiduciary or any similar scheme, apply to aircraft and aircraft duty to act in the best interests of the company. Additionally, a operators in your jurisdiction? Will charges levied director who knowingly continued on trading in such circum- according to the EU ETS, or its equivalent, give rise to stances may be personally liable in respect of breach of duty. any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights rank in priority ahead of any mortgage interests properly 8.3 Do the available forms of insolvency protection registered in the relevant aircraft and/or engine? in your jurisdiction involve the appointment of either an officer of the court or a specifically court appointed The AN(OT)O and the Air Navigation (Overseas Territories) official to take control of the operator or lessee (an ‘Insolvency Official’) while in insolvency protection? (Environmental Standards) Order 2014 (as amended from time to time) (the AN(OT)O 14) regulates matters pertaining to noise and emissions standards for aircraft registered in Bermuda. The In a compulsory winding-up, a petition will be made to the AN(OT)O 14 prohibits an aircraft registered in Bermuda from Bermuda courts for the winding-up of the insolvent company. flying unless it has received a Type Acceptance Certificate under A liquidator or provisional liquidator (the PL) will be appointed OTAR 21 or holds a certification by the competent authority of by the Court. Following the appointment, the PL will displace another Contracting State recognised by the BCAA. the board of directors, unless the Court orders the appoint- Failure to comply with the emission standards may invalidate ment of the PL with limited powers and that the directors be the Certificate of Airworthiness of the non-compliant aircraft. permitted to implement a restructuring which may return the company to solvency.

7.3 What liabilities (actual or potential) could an owner, lessor or financier of an aircraft incur in your jurisdiction 8.4 Does the commencement of insolvency protection because of a failure to comply with local environmental involving the appointment of an Insolvency Official in law and/or regulations on the part of an operator of your jurisdiction have the effect of prohibiting the owner aircraft leased or financed by it? from taking the following actions to enforce the lease after commencement of such protection: (a) applying any security deposit held by the owner against any unpaid Bermuda registered aircrafts are almost never physically present amounts due under the lease; (b) accepting payment of in Bermuda. As such, it is unlikely that an incident/damage rent or other lease payments from the lessee, a guarantor arising from a breach of local environmental laws or regula- or a shareholder; (c) giving notice of default under the tions would occur. As Bermuda registered aircraft are likely to lease; (d) obtaining a judgment or arbitral award for be operating in various foreign jurisdictions, the likelihood of unpaid lease payments; (e) giving notice to terminate such instances arising under foreign laws is exponential and it the leasing of the aircraft and/or engine; or (f) exercising rights to repossess the aircraft and/or engine? is anticipated that any claims for breaching environmental laws and regulations would be filed in the jurisdiction in which the incident occurred. The commencement of a Bermuda winding-up and the

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appointment of a PL, will generally result in an automatic stay or company is beneficially entitled. The secured debts are satisfied moratorium on any claims or proceedings against the insolvent from the proceeds of sale of the property. If the proceeds from company in Bermuda without the leave of the court to continue the sale of the property do not fully satisfy the debt secured by or issue proceedings. the creditors, the secured creditor’s ranking for the remaining The impact on the lease security deposit and maintenance balance is that of an unsecured creditor. reserves, unpaid rent and giving notice of default under the lease Creditors and shareholders are paid in the following order: will depend on the terms of the lease, to which the liquidator ■ costs of insolvency proceedings; will be bound. ■ employees’ debts; ■ preferential payments, such as unpaid taxes; ■ debts secured by a floating charge; 8.5 Can the commencement of insolvency proceedings have retrospective effect in relation to any such actions ■ unsecured debts; taken before commencement? If so, for what period can ■ shareholders’ debts; and there be a look back? ■ shareholders’ equity.

Transactions involving payments made within six months of the 8.8 If the aircraft is in the possession of a person winding-up may be set aside as fraudulent preference if it can be other than the operator or lessee at the commencement established that the transaction was undertaken with the inten- of Insolvency Protection of the operator or lessee, for tion to fraudulently prefer one or more of the company’s credi- example, an independent maintenance facility, will such person be entitled, under the laws of your jurisdiction, tors and at the time of the transaction, the company was unable to assert a lien arising under law or contract over the to pay its debts. Under the Companies Act, the six-month aircraft in respect of amounts then due and unpaid to period is deemed to commence upon the date of the presenta- such person by the operator or lessee? tion of the winding up petition to the Court. Yes, third-party service providers, such as an independent main- 8.6 Is there, either under law or as a matter of practice tenance facility, may assert a possessory or contractual lien over in your jurisdiction, a period of time within which the the aircraft in respect of any unpaid fees. Insolvency Official will either ‘adopt’ the lease and pay rent and other lease payments as an expense of the insolvency or ‘reject’ the lease and permit the 92 Detention and Confiscation owner to enforce such rights as it may have under the lease? (a) If the lease is ‘adopted’, will the Insolvency 9.1 Other than insolvency laws (see section 8), Official also pay any unpaid lease payments due as at are there any laws which may have the effect of commencement of the insolvency protection? (b) If not defeating the owner’s right in the aircraft – for example, or if the lease is ‘rejected’, would the owner’s claim for Government requisition? Do the laws of your jurisdiction any outstanding sums rank equally with other ordinary provide for any compensation in such circumstances? unsecured creditors of the lessee? The Governor of Bermuda has the authority to requisition In the event of a winding-up commenced in Bermuda, the PL aircraft in the event of a state of war or national emergency. will generally be bound by the provisions of the lease. The Bermuda courts will typically enforce the contractual arrange- ments, such as lease termination provisions and self-help reme- 9.2 Are there any rights in relation to third parties to dies, by which the counterparties may take possession of the detain or sell the aircraft pursuant to illegal activities, tax or any other laws if the operator or lessee fails to pay aircraft. when due? If so, can the aircraft be forfeited and sold without the owner being made aware? 8.7 Are there certain types of preferred creditors whose claims will rank above claims of the owner? Under Bermuda law, third parties may detain, and in some cases sell, an aircraft for: (i) non-payment of airport charges; (ii) Assets secured by a mortgage or fixed charge are outside the contraventions of licensing and air navigation; (iii) provisions of scope of an insolvency as they are not assets to which the the AN(OT)O; (iv) forfeiture under Bermuda customs law; and (v) criminal convictions, such as terrorism or drug trafficking.

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Janice Gutteridge’s practice includes asset financings, particularly aviation and shipping financing and registrations and banking and finance transactions, mergers and acquisitions, the migration of corporate entities and partnerships into and out of Bermuda, and partnership struc- tures, including global restructuring projects involving Bermuda entities.

Cox Hallett Wilkinson Limited Tel: +1441 294 1508 Cedar House, 3rd Floor Email: [email protected] 41 Cedar Avenue, Hamilton HM 12 URL: www.chw.com Bermuda

Ernest Morrison’s practice areas include corporate governance and regulatory issues, mergers and acquisitions (particularly insurance companies and regulated entities), private and public offerings of debt and capital, private equity investments, asset finance (including avia- tion financing and leasing), the establishment of investment finds and managers, and the establishment and regulation of Bermuda insurers, captives, brokers and managers.

Cox Hallett Wilkinson Limited Tel: +1441 294 1503 Cedar House, 3rd Floor Email: [email protected] 41 Cedar Avenue, Hamilton HM 12 URL: www.chw.com Bermuda

Cox Hallett Wilkinson Limited (CHW) is one of Bermuda’s leading commer- cial law firms and provides an extensive range of legal services to a diverse local and international clientele, focusing primarily on corporate and commercial, litigation and dispute resolution, private client, estate plan- ning, real estate and intellectual property related matters in a practical, cost-effective and timely manner. Our business approach is to provide a high standard of professional advice delivered by a core team of attorneys and to develop close working and, in many cases, long-standing relation- ships with our clients and overseas counsel around the globe. The Corporate team has a wide range of experience in ship financing and registrations. We are highly experienced in transactions involving acqui- sitions and sales, mortgages, assignments of insurances, deeds of cove- nants, leasing and chartering arrangements. www.chw.com

Aviation Finance & Leasing 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 26 Chapter 5 Brazil Brazil

Marcela Alves Corrêa

João Paulo Servera

Veirano Advogados Maria Eduarda Mendonça

12 General and Contractual with certain terms and conditions results in significant penalties and/or early termination of the contract. In relation to mortgages, a standard registered mortgage has 1.1 What are the typical structures available for priority over subsequent registered mortgages. Therefore, a financing the purchase of an aircraft? creditor of a standard registered mortgage will be qualified as a privileged creditor in the event of bankruptcy, who has priority Under Brazilian law, the following options established by the over non-privileged creditors. In addition, the credit guaran- Brazilian Aeronautical Code (the “Code”) include: teed by a registered mortgage has priority over any other credits ■ quasi-security options, such as sale-and-lease-back trans- (except for judicial expenses, labour credits, tax credits and action, as leases are recognised by the Code (sections 127 credits resulting of airport taxes). If the default results in the to 132 and 137); bankruptcy of the debtor, the mortgagee will not be paid with ■ a mortgage (sections 138 to 143); and the amount received from the sale of the aircraft but will be ■ a chattel mortgage, also known as a “fiduciary assign- ranked for payment in a privileged position (that is, above the ment” (alienação fiduciária) (section 148). non-privileged creditors). The most common way of financing the purchase of an In normal events of default, apart from the insolvency aircraft is under an operating lease. This is because a Goods scenario, the mortgagee will be paid with the proceeds of sale of and Services Tax (Imposto Sobre Circulação de Mercadorias e Serviços, the aircraft. As the Brazilian system is based on civil law, rights or “ICMS”) tax, similar to Value Added Tax (“VAT”), does not in rem do not entitle one to keep the asset in case the underlying apply to an aircraft imported into the country under an oper- obligation is not fulfilled. The mortgagee will only have the ating lease (usually, under an injunction obtained with a court). right to take the mortgaged asset from the mortgagor if previ- In order to qualify for this benefit, the aircraft must be imported ously consented by the operator pursuant to a separate instru- under the specific ‘‘temporary admission regime’’ (that is, when ment (usually, a notice and acknowledgment of assignment) and the aircraft is imported to remain temporarily in Brazil during subsequently authorised by a court. Possessory rights can be the lease term and will be therefore exported from Brazil once obtained through security assignments and similar documents the lease agreement has expired). In comparison, aircraft manu- rather than a Brazilian law mortgage. factured in Brazil are usually purchased under either a finance In Brazil, a mortgage is considered an “extrajudicial instru- leasing (to avoid the costs of fixed assets) or a chattel mortgage. ment”, which means that the mortgagee has an automatic right to enforce its rights without previous acknowledgment (a judi- 1.2 What are the key advantages/disadvantages cial instrument) from a court confirming that such right is really and main issues arising in relation to these financing valid. In this case, the borrower will be summoned to pay the structures? debt within a certain period of time. If the debtor either does not pay or is not found to be served with summons, the court officers will seize sufficient assets to cover payment of the prin- Buying an aircraft requires a large financial contribution. Thus, cipal debt, interest, and legal fees. leasing allows the company to operate the aircraft and achieve Consequently, upon default of the mortgagor, the aircraft would profit without having to spend millions on its purchase in have to be sold in a public auction, and only the local courts have advance allied to the fact of a more diluted cost. Leasing also power to effect a sale of a mortgaged aircraft. Mortgagees cannot allows the company to be constantly renewing its fleet, since it apply for repossession of an asset pertaining to the borrower does not own the asset and does not have to worry about future unless the mortgagee has the contractual right to “step into the buyers when the aircraft reaches a certain age. Among the advan- shoes” of the mortgagor, which is usually granted through an tages of the aircraft leasing, it is also possible to mention tax acknowledgment of security assignment signed by the Brazilian benefits as explained above for instance. Among the disadvan- operator as explained above. Otherwise, the attached aircraft tages of leasing, it is possible to point out that non-compliance will be appraised by an expert before being finally sold either at

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a private sale or public auction. As such: (i) the debtor may pay the percentage of voting shares held by foreign shareholders its debts and remain the owner of the aircraft; (ii) a third party increased from 20% to 100%) and more changes are expected may acquire title to such asset for the best bid/proposal; or (iii) for the near future. In addition, other rules not strictly related in the event of the situations described in (i) or (ii) above do not to aviation may also bring more changes for the market, such as occur, the judge may then authorise the creditor to become the the new General Data Protection Law. owner of the asset, in lieu of payment of a debtor’s claim. Any balance resulting from the sale of aircraft will be returned to the debtor upon payment of its debt. On the other hand, should the 1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially proceeds be insufficient to cover the whole amount of the claim, binding pre-contractual agreements (e.g. ‘letters of the creditor may proceed with the execution by attaching any intent’) which will NOT take effect as fully enforceable other assets of the debtor. agreements? The security provider protected by a chattel mortgage does not compete with other creditors for the aircraft. In the event of default, the security provider/creditor simply becomes the sole Yes, it is possible to enter into non-binding or partially binding owner of the aircraft. pre-contractual agreements.

1.3 What types of leasing are possible under the 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction laws of your jurisdiction? What are their essential which applies to all pre-contractual agreement, characteristics? financing and leasing transaction documents, and the conduct of parties connected to them?

Finance and Operating leases are the types recognised in Brazil (and as such wet leases or sale and lease back transactions are Yes. The principle of good faith enjoys great prestige of which also possible, for example). Leasing provides for a periodic the national legislator has devoted special attention to it by payment in order to offer resources for the acquisition of assets inserting it in various legal acts and throughout the Brazilian or greater possibilities for the exploration of business, without legal system. Even before it was expressly reflected in Brazilian the need for the lessee to have a significant amount of capital legislation, the principle of good faith had already been widely available to purchase an aircraft through a single lump-sum used by the court precedents for the solution of cases in several payment, for example, as mentioned above. branches of law. As such, the Superior Court of Justice has set In order to be enforceable, the leases must be translated into the principle of good faith as one of the fundamental princi- Portuguese if executed in English or any foreign language, ples of private law, in order to establish an ethical standard of signed by two witnesses, notarised and registered with the conduct for the parties in contractual relationships. Brazilian Aeronautical Register (the “RAB”). In Brazil, finance leases are normally used when the lessee 22 Taxation and Related Matters intends to keep the asset once the term expires, if the lessee exercises a purchase option for the amount provided for in the 2.1 Which government authority in your jurisdiction contract. The risk of obsolescence and expenses for mainte- has primary responsibility for the accounting for and nance, technical assistance and services related to the opera- regulation of revenue control and taxes? tion of the leased asset lies with the lessee as a result. In addi- tion, the lessor usually receives 100% of the value of the leased The Brazilian Federal Revenue has primary responsibility. equipment, without incurring any product risk. However, if the purchase is not exercised, the asset will be sold and the difference between the sale value and the guaranteed residual 2.2 What are typically the taxes in your jurisdiction value will be either: (i) if higher, returned to the lessee; or (ii) if which may arise in relation to a sale, a lease or a decreased, the lessee may reset the lease. financing of an aircraft or an engine? On the other hand, operating leases are more often used in Brazil as the lessee does not intend to acquire the asset at the There is a risk of a capital gains tax being imposed on the end of the contract, with the advantage and possibility of having transfer of title over aircraft located in Brazil, even if neither the maintenance, technical assistance and other services related to transferor nor the transferee is Brazilian. Please note that the the operation of the aircraft divided between the lessor or lessee location of execution and delivery of a bill of sale is irrelevant to or under one party’s responsibility as agreed between them. assess such tax on Brazilian-registered aircraft. Once the contract expires, the operator may renew or just return Other than the above, a foreign lessor will not be subject to the aircraft to the lessor, without incurring in the long term any tax in Brazil as a result only of the execution, delivery and liabilities arising from an acquisition. performance of a lease. Only filing fees apply for registration The duties of the lessor and lessee are also well defined in the of leases with the RAB (currently, at BRL8.49 per page, plus Code, in its articles 129 and 130. It is also important to take other expenses concerning the issuance of a new Certificate of into account that the operating lease falls under the temporary Registration and Certificate of Airworthiness at BRL76.40 and admission regime, with suspension of the taxes normally due on BRL76.55, respectively, if needs be). the import of assets, and it enables greater savings.

2.3 Is the provision of a current tax-residency 1.4 Are there any proposals for reform in the area of certificate by a payee sufficient for a lessee or a aviation finance? borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability? Yes. The process of deregulation of the sector was initiated more than 10 years ago by the National Civil Aviation Agency of Brazil (“ANAC”). In addition, the Code has been adjusted Yes, a certificate of tax resident is usually enough to safeguard recently and amended according to new industry practices (e.g. treaty protection.

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2.4 Has the advent of BEPS (the Base Erosion and or an operator registry? If the aircraft register is an Profit Shifting initiative of the OECD) had any effect as operator register, is it possible to record the details of regards structures in aviation finance and leasing or an owner or lessor and any financier with an aircraft their interpretation? mortgage?

Not as such as BEPS implementation has brought more issues The ANAC is a federal regulatory agency with the responsibility to the offshore industry with the leasing of oil rigs (where the to regulate and supervise the civil aviation activity in Brazil, mismatch of a permanent establishment (“PE”) characterisation either regarding its economic aspects or issues related to the could lead in the past to no taxation in either country). In the technical safety of the sector. The specific register for aircraft aviation finance and leasing industry, the recent black-listing of in Brazil is the RAB, which is maintained by the ANAC, and is Ireland in 2016 has brough more impacts than BEPS itself. both an owner and an operator registry. It also records all kinds of aircraft liens. 2.5 What are the typical thresholds in your jurisdiction for which a permanent establishment may be triggered 3.2 What is the effect of registration of the aircraft? under the terms of any relevant double-tax treaty or Does registration on your national aircraft register similar? confer proof of ownership of the aircraft and/or engine?

Tax treaties signed by Brazil to date reflect the OECD (and UN) The aircraft is considered to be of the nationality of the State guidelines for a PE characterisation, with thresholds of usually in which it is registered. As defined in the Code and in the six months for so-called project PEs. However, Brazil does not Chicago Convention, the aircraft has a single registration really enforce the PE concept and domestic legislation and case number linked to the State in which it is operating. Thus, each law on the subject are scarce. The approach of Brazilian tax Brazilian-registered aircraft is individualised through: a) name authorities for non-resident taxation is more focused on with- of the manufacturer; b) model; c) serial number; d) a registra- holding taxes over gross income. tion mark; and e) details of both the owner and the operator, which are always reflected in the certificates of airworthiness 2.6 Is the authority at question 2.1 likely to establish and registration. a ‘look-through’ right or similar as regards a lender or a Engines are not, per se, registered with the RAB although the lessor which is a special-purpose vehicle involved for the RAB registers engine lease and security agreements and other purpose of tax treaty access? related documents. A spare engine does not have a separate registration mark or number and does not need to be “dereg- Yes, Brazilian tax authorities will investigate whether the bene- istered”. However, a lien certificate issued by the RAB may ficiary of the income is the beneficial owner – this information confer proof of ownership for an engine. is mandatory to any holder of a CNPJ, the Brazilian Taxpayer Identification Number (“TIN”), which is mandatory for lessors 3.3 Can foreign-owned aircraft be registered on of aircraft leased to Brazil. This TIN will not render the lessor to your national aircraft register and are there limits or be a resident taxpayer, but will require ultimate beneficial owner- restrictions on the age of aircraft that may be registered ship (“UBO”) disclosure. If the lessor is located in a black-listed or operated? tax haven or is a (grey-listed) preferential tax regime, the UBO shall also be disclosed. In general, if the lessor is not black- or Yes, a foreign-owned aircraft can be registered with the RAB. grey-listed, has substance and a certificate of residence, no “look- However, Brazilian commercial airlines are not allowed to through” approach shall take place by Brazilian tax authorities. operate foreign-registered aircraft in commercial services, except when there is an interchange agreement in place. 2.7 Will the import of an aircraft into your jurisdiction and/or the sale or leasing of the aircraft give rise to any 3.4 Can aircraft leases be registered? If so, in what VAT, sales or use taxes or any customs import or excise circumstances? Must the lease be in a particular form duties? if it is to be valid and enforceable (for example, must it be in a particular language or be notarised, legalised or Yes, it gives rise to import duties that are usually paid propor- apostilled)? tionally, that is, not over the aircraft value per se but according to the lease term. Please refer to our answer to question 1.1 about Yes, an aircraft lease can and must be registered in the RAB the VAT. in order to provide priority against a subsequently registered interest. In relation to leases generally, the Code does not require 2.8 Are there any documentary taxes (for example, the inclusion of any particular term. The Code does impose the stamp duty payable on the execution of documents)? following statutory obligations on the lessor: (i) delivering the aircraft at the agreed time in the agreed condition, with all docu- mentation for flight operations; (ii) maintaining the aircraft, No stamp duty applies, but filing fees must be paid to the RAB whenever a document must be lodged with the RAB for regis- unless the lease expressly provides otherwise (nearly all leases to tration. Please refer to our reply to question 2.2, for example. Brazilian lessees provide otherwise; that is, the Brazilian oper- ator is usually responsible for maintenance); and (iii) guarantee of quiet enjoyment for the lessee during the lease term. Lessees 32 Registration and Deregistration also have statutory obligations, such as (i) paying rent on a timely basis, to the contractually-negotiated location, (ii) caring 3.1 Which government authority in your jurisdiction for the aircraft as if it were its own property, and (iii) redeliv- has primary responsibility for the regulation of aviation ering the aircraft at the end of the lease term in the same condi- and the registration of aircraft? Is it an owner registry tion as when delivered, fair wear and tear excepted.

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For finance leases, the Code expressly requires inclusion of In addition, the mortgage agreement must contain the the following: (i) description of the aircraft and its value; (ii) following information (section 142 of the Code): term of the lease, amount of each periodic payment (or criteria ■ full name and domicile of the parties; for the determination of such payments), due dates and location ■ secured amount and any other charges and interests; for payments; (iii) purchase option or contract renewal clause, ■ final repayment date; whichever is the preference of the lessee(s); and (iv) indication ■ place of repayment; where the aircraft is to be registered during the lease term (in ■ description of the aircraft with the information contained which the location must be Brazil for leases of Brazilian opera- in the RAB; and tors). The Code expressly allows clauses considered common in ■ details concerning the insurance policy that covers the international lease agreements provided such provisions do not aircraft. violate the Code or the Brazilian Constitution. In addition, the chattel mortgage must contain the following There are also the following general rules that apply to all (section 148 of the Code): documents to be registered in the RAB: ■ full name and domicile of the parties; (i) all documents and signatures must be notarised by a ■ secured amount, the , fees, the monetary local notary. If signed abroad, the signature must be adjustment (if applicable) and penalty clauses; notarised and consularised at the Brazilian Consulate, or, ■ final repayment date; as applicable, apostilled (Brazil is a signatory of the Hague ■ place of repayment; and Convention); ■ description of the aircraft with the information contained (ii) documents that are not executed in Portuguese must be in the RAB. translated by a local sworn translator and then registered Both types of mortgage must be registered at the RAB to be with the RAB accompanied by the official translation into legally enforceable. Portuguese; (iii) documents must be executed by two witnesses for submis- 4.2 Can spare parts, including future parts, be subject sion to the RAB to become enforceable in Brazilian courts; to the aircraft mortgage or engine mortgage (as the case and may be)? If not, are there any other forms of security that (iv) if the documents are signed in Brazil by attorneys-in- can be taken over spare parts? fact, the power-of-attorney must be also notarised and notarised or consularised/apostilled (as applicable). Yes, they can.

3.5 How is deregistration affected and what steps can 4.3 Is there a register of mortgages or rights over a lessor take to de-register the aircraft on termination of aircraft and/or engine? the lease?

Mortgages or rights over an aircraft and/or engine must be When the lease term expires, the lessee must deregister the aircraft registered with the RAB to be perfected. Also, under the from the RAB, not the lessor. Currently, the basic documents terms of the Cape Town Convention the mortgage also creates required to deregister an aircraft either on expiration or early an International Interest that must be filed when local filing is termination of a lease are: (i) termination agreement or a relevant made with the RAB. court order; (ii) an export licence (a Declaração Única de Exportação – “DUE”); (iii) return of the original certificates of airworthi- ness and registration issued by the RAB; (iv) an Export Certificate 4.4 What other forms of security can be taken over of Airworthiness (unless the next registry where the Aircraft will an aircraft and/or engine and can these other forms be be reregistered does not require this document); and (v) a certif- registered? icate showing that the aircraft does not have any amounts due as expenses and airport fees (“Nada Consta”). In order to export the The typical securities are the mortgage and the chattel mort- aircraft, it is also necessary to have a final inspection and approval gage assignment as previously explained. Usually the latter is from the Brazilian Federal Revenue. Usually the lessee would executed when the borrower is the aircraft operator. procure these approvals and registrations. However, if the lease is terminated due to a lessee’s default, 4.5 What claims and rights would take priority in your then the lessor may procure deregistration by using an IDERA, jurisdiction over a registered mortgage? but repossession is only allowed under a Brazilian court order. In a contested lease termination, the intervention of the courts is almost always necessary for physical repossession. The Brazilian Bankruptcy and Liquidation Law (Federal Law 11.101/2005; the “Bankruptcy Law”) provides the order of the 42 Security credits preference on eventual insolvency procedures and pref- erential debts in a winding up are: (i) workers/employees/compensation work-related accidents, 4.1 Is it possible to create a mortgage over an aircraft up to a limit; or engine in your jurisdiction? If so, what are the types (ii) creditors holding security interests, limited to the value of of aircraft mortgage and engine mortgage available and what formalities are required in order to perfect it? the secured asset; (iii) tax debts; (iv) creditors with certain special statutory privileges; Yes, it is possible to create a mortgage over an aircraft or engine. (v) creditors with general privileges; The standard mortgage or the chattel mortgage must be in (vi) unsecured creditors; writing, either in a private or a public (notarial) deed, and always (vii) penalties arising from agreement or law; and governed by Brazilian law. In the form of a private deed, two (viii) subordinate creditors. witnesses must also sign the document.

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4.6 What other forms of security can be granted over 5.5 Are powers of attorney from a local airline in favour an aircraft and/or engine lease? of a lessor or mortgagee likely to be effective to allow the lessor or mortgagee to deregister the aircraft? Can such powers be irrevocable, be governed by a foreign None other than the mortgage and the chattel mortgage/fidu- law and/or do they need to be in any particular form for ciary assignment may be granted over an aircraft or engine. local recognition? Security assignments are permitted, however, and must also be recorded at the RAB. Deregistration powers-of-attorney may be irrevocable, but there is no precedent as to the use of such powers in Brazil. Even if 52 Enforcement and Repossession the lessor holds a previously executed deregistration power of attorney, the repossession will still depend on a court approval 5.1 What are the circumstances in which a mortgagee as explained above. Exception is made to the use of IDERAs, or owner can take possession of the aircraft and/or sell which is fully in force and have been used to deregister aircraft the aircraft? What requirements must the mortgagee or from the RAB. owner comply with?

Please refer to our answer in question 1.2. 5.6 If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the 5.2 What is the procedure for repossession of the aircraft? aircraft? It is likely to take one week, but this is just an estimate, consid- When there is no co-operation from the lessee, the reposses- ering that with a search and seizure it is possible that will take sion will take longer as a lawsuit must be filed to obtain approval less time (one day). On the other hand, sometimes that takes from a Brazilian court. Prior to filing a repossession action, longer due to the bureaucracy of the court. it is necessary to notify the lessee over the breach of the lease and grant it a period of time to remedy the default. If the lessee 5.7 Are there any restrictions on the ability of the remains in default, a second notice must be served confirming lessor to export the aircraft from your jurisdiction on the termination of the lease agreement. These two notices are termination of the leasing? usually served by a notarial office called the Registry of Titles and Deeds (“RTD”) (a process that commonly takes between In a contested lease termination the intervention of the courts 15–20 days). is almost always necessary for physical repossession; however, The repossession order is usually issued quickly (1–5 days since the advent of the Cape Town Convention, it is possible after judicial filing) but the actual enforcement of the order may to use the IDERA to make deregistration by a lessor without take a few more days depending on the exact aircraft location. leave of a court as per our previous replies. The IDERA should It is reasonable to estimate that repossession can be completed also allow the lessor to have the aircraft exported (in normal 10 days after judicial filing or 30–35 days after the first notice conditions, the export papers are only obtained by the oper- is served. ator as importer of record), but the acceptance of IDERAs by the customs authorities have not been regulated yet, leaving 5.3 Will local courts recognise a choice of foreign law the lessor the option to request a court order to determine the in an aircraft mortgage? Are there any mandatory local Brazilian authorities to issue the export licences without the rules that apply, despite a choice of foreign law? lessee’s cooperation.

No, as an aircraft mortgage must be governed by Brazilian law 5.8 Are exchange controls prevailing in your and recorded with the RAB to be valid and effective over a jurisdiction as regards payments in foreign currency? Brazilian registered aircraft. Will any consents be required for the remittance of the sale proceeds abroad? 5.4 Will local courts recognise and enforce a foreign court judgment in favour of a mortgagee or lessor? Are There are exchange controls over any remittance made from any interim relief measures available? Brazil to a foreign location, regardless of the nature of the payment. Only foreign judgments in favour of lessors and obtained by The chances of the aircraft being sold in Brazil are usually a foreign court or an arbitral award can be enforced in Brazil remote. The lease is structured to maximise the lessor’s ability after ratification by the Superior Court of Justice, which will not to remove the aircraft from Brazil. In the unlikely event that the re-examine the merits of the case, but will observe if the foreign aircraft were sold in Brazil to a Brazilian purchaser, the remit- judgment: tance of the sale proceeds would have to be approved by the ■ was given by a competent foreign court; Central Bank. Such approval would depend on the existing poli- ■ was effective in the jurisdiction where it was rendered; cies on the purchase of imported assets. Currently, it is usually ■ is duly accompanied by an official translation into possible to obtain Central Bank approval to pay for imported Portuguese; assets in a single payment. But in other times when Brazil’s ■ observes res judicata; and foreign currency reserves have been low, the Central Bank has ■ is not contrary to public policy in Brazil. sometimes required minimum finance terms for imports. Urgent requests may be considered by the Superior Court of Note that for lease payments it is required to obtain an Justice prior to the end of the exequatur. approval from the Central Bank as well, which is known as Registro de Operações Financeiras (“ROF”). No ROF is required for

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sale proceeds, however. ROFs are issued in respect of regular days. However, the Bankruptcy Law has established no stay lease payments only (e.g., rent and maintenance reserves). period concerning the lessors’ rights, but when Avianca filed for judicial recovery, the judge in charge of the case established a period of stay until the first creditors’ meeting for all circum- 5.9 If the lease is governed by English law and a judgment is obtained by the lessor in the English courts, stance and, therefore, did not take into consideration the CTC can that judgment be automatically enforced in your or the Bankruptcy Law. jurisdiction or will the case have to be re-examined on its merits? 6.3 What is the legal position regarding non-consensual rights and interests under Article 39 of Please refer to question 5.4 above. the Cape Town Convention?

5.10 What is the applicable procedure for repossession Brazil declared that non-consensual right or interest has priority of an aircraft under other forms of security interests? over an international interest prior to the registration of such international interest. Please refer to our answer in question 1.2. 6.4 Has your jurisdiction adopted the remedies on 62 Conventions insolvency provided under Article XI of the Protocol to the Cape Town Convention?

6.1 Has your jurisdiction ratified any of the following: (a) The Chicago Convention of 1944 on International Brazil declared that it would apply Alternative A as explained in Civil Aviation (the Chicago Convention); (b) The 1948 question 6.2 above. Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 Convention for the Unification of Certain Rules Relating 6.5 What is the procedure to file an irrevocable to the Precautionary Arrest of Aircraft (the 1933 Rome deregistration and export request authorisation under Convention); and (d) The Convention on International the Cape Town Convention (IDERA)? Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Cape Town Convention) and the The procedure for registering IDERAs follows the standard Protocol on the Convention on International Interests for registering any other document with the RAB. Among the in Mobile Equipment on Matters Specific to Aircraft Equipment? documents to be presented, one must submit together with the IDERA: the standard application requesting registration; the proof of payment of the corresponding filing fee; sworn trans- Yes. Please note that Brazil was a signatory to the 1933 Rome lation whenever it is in a foreign language (if applicable); and Convention (Decree 3978/1939); however, Brazil’s adherence to notarisation of the signatory’s signature, accompanied by proof the Cape Town Convention revoked the Rome Convention. of his/her powers. Please note the RAB will not return the IDERA, but will keep it in their records and will issue a lien 6.2 Has ratification of the Cape Town Convention certificate confirming the IDERA has been duly registered. caused any conflicts or issues with local laws? 72 Liability for Damage and Environmental Yes, Brazil has ratified the Cape Town Convention on International Interests over Mobile Equipment (the 7.1 Can the owner be strictly liable – liable without “Convention”) and the Protocol to the Convention On a requirement to prove fault or negligence – for any International Interests In Mobile Equipment On Matters damage or loss caused by the aircraft assuming the Specific To Aircraft Equipment (the “Protocol”; collectively, owner is an innocent owner with no operational control of the aircraft? the “CTC”). To complete the implementation of the CTC, the Executive Branch of the Government of Brazil had to issue a decree (the “Implementation Decree”) on May 15, 2013, which In accordance with the Code, the responsibility lies with the was published on May 16, 2013. However, the RAB could not registered operator. start to release authorising entry point codes (“AEP Codes”) until the promulgation of specific regulations. Such regulations 7.2 Does the EU Emissions Trading System (EU ETS), were finally approved by the ANAC by Resolution 309 of March or any similar scheme, apply to aircraft and aircraft 18, 2014, which was published on March 21, 2014. The RAB operators in your jurisdiction? Will charges levied acts as an AEP and grants the AEP codes for the international according to the EU ETS, or its equivalent, give rise to filings. Only Brazilian residents previously registered with the any in rem rights in relevant aircraft which are part of the RAB can apply and obtain an AEP code. The codes issued fleet of the operator concerned and, if so, will such rights cannot be used by third parties, so only Brazilian residents are rank in priority ahead of any mortgage interests properly registered in the relevant aircraft and/or engine? allowed to perform international registry filing/discharges over Brazilian registered aircraft. Among the declarations made by Brazil in respect of the CTC, Yes, the EU ETS applies to aircraft flying to/from Europe. Any pursuant to article XI of the Protocol, Brazil declared that it will charges connected to such system do not give rise to any in rem apply Alternative A in relation to insolvency procedures and that rights and will not rank ahead of a mortgagee’s rights according the stay period mentioned in paragraph 3 will be 30 working to the Bankruptcy Law.

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7.3 What liabilities (actual or potential) could an owner, are not subject to the insolvency procedure and should not be lessor or financier of an aircraft incur in your jurisdiction subject to the bankruptcy court or to the Insolvency Official. because of a failure to comply with local environmental The owner/lessor as other non-subject creditors can be tempo- law and/or regulations on the part of an operator of rarily affected by the stay period, where all parallel enforcement aircraft leased or financed by it? cases against the debtor will be suspended. Once the stay is lifted, all of the owner’s rights under the lease are enforceable, Applicable environmental laws provide for joint, several and including the offset of security deposits, accepting payment of strict civil liability. Thus, it applies to those who are somehow rent, giving notice of default and obtaining a judgment for lease connected to the damage or are considered to have obtained payments and aircraft and/or engine repossession. economic benefits from the activity. For this matter, regardless of fault, negligence or wilful misconduct, the owner, lessor or 8.5 Can the commencement of insolvency proceedings financier of an aircraft that fails to comply with environmental have retrospective effect in relation to any such actions rules on the part of an operator of aircraft are considered liable taken before commencement? If so, for what period can for actual and potential environmental damages. there be a look back?

82 Insolvency and Searches Yes. The affected actions are described in article 129 of the Bankruptcy Law as indicated below: 8.1 Are there any public registers in your jurisdiction “The following are ineffective with regard to the bankrupt estate, where a search can be carried out to determine whether whether or not the contracting party was aware of the debtor’s condi- an order or resolution for any bankruptcy, bankruptcy tion of economic and financial crisis and whether or not the debtor protection or similar insolvency proceedings has been registered in relation to an operator or lessee? intended to defraud creditors: I – payment by the debtor within the legal term of debts not yet fallen due, by any means of extinguishment of the credit right, including by Yes. It is possible to request a Certificate of Insolvency to attest discount of the actual instrument; the existence or not of bankruptcy or judicial or extrajudicial II – payment made within the legal term of debts fallen due and recovery. enforceable, in any way not provided for under the contract; III – constitution of an in rem guarantee, including lien, within the 8.2 In the event that an operator or lessee were to legal term, in the case of a debt contracted previously; if the assets become insolvent either on a balance sheet basis given in mortgage are the object of other subsequent ones, the bank- (assets less than liabilities) or is unable to pay debts as rupt estate shall receive the part that should apply to the creditor of the fall due, would an operator or lessee be required to file revoked mortgage; for insolvency protection? IV – acts performed free of charge during the two (2) years preceding the decree of bankruptcy liquidation; No. The operator or lessee will not be required under law to file V – waiver of inheritance or legacy during the two (2) years preceding for insolvency protection in such case. The operator or lessee is the decree of bankruptcy liquidation; entitled to file for insolvency protection at its own discretion. A VI – sale or transfer of an establishment without the express consent creditor of a debt superior to an amount equal to 40 minimum of or payment to all creditors existing at the time, sufficient assets not wages (approximately US$ 8,000 at the current exchange rate) having remained to the debtor to settle his liabilities, unless, within may file for the debtor bankruptcy. thirty (30) days, there is no opposition by creditors after being duly notified, either judicially or by a deeds and documents registry officer; VII – registration of in rem rights and of property transfer inter 8.3 Do the available forms of insolvency protection in your jurisdiction involve the appointment of either vivos, for a consideration or free of charge, or an annotation of real an officer of the court or a specifically court appointed property made after the decree of bankruptcy liquidation, unless there official to take control of the operator or lessee (an is a previous annotation. ‘Insolvency Official’) while in insolvency protection? Sole Paragraph. Ineffectiveness may be declared by the judge on his own initiative, alleged in defense or claimed under a specific action or An officer of the court will be appointed. incidentally during the proceedings.”

8.6 Is there, either under law or as a matter of practice 8.4 Does the commencement of insolvency protection in your jurisdiction, a period of time within which the involving the appointment of an Insolvency Official Insolvency Official will either ‘adopt’ the lease and in your jurisdiction have the effect of prohibiting the pay rent and other lease payments as an expense owner from taking the following actions to enforce of the insolvency or ‘reject’ the lease and permit the the lease after commencement of such protection: (a) owner to enforce such rights as it may have under the applying any security deposit held by the owner against lease? (a) If the lease is ‘adopted’, will the Insolvency any unpaid amounts due under the lease; (b) accepting Official also pay any unpaid lease payments due as at payment of rent or other lease payments from the commencement of the insolvency protection? (b) If not lessee, a guarantor or a shareholder; (c) giving notice or if the lease is ‘rejected’, would the owner’s claim for of default under the lease; (d) obtaining a judgment or any outstanding sums rank equally with other ordinary arbitral award for unpaid lease payments; (e) giving unsecured creditors of the lessee? notice to terminate the leasing of the aircraft and/or engine; or (f) exercising rights to repossess the aircraft and/or engine? No. (a) Nothing is paid in arrears as everything is frozen and is only paid according to the creditors’ classification; and (b) No. Under Brazilian law and under the provisions of the CTC the owner should file a claim in the bankruptcy proceeding as internalised in Brazil, aircraft and engine lease agreements according to the Bankruptcy Law (article 83).

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8.7 Are there certain types of preferred creditors whose claims will rank above claims of the owner? 92 Detention and Confiscation

9.1 Other than insolvency laws (see section 8), Yes, as an example of the lease payments. are there any laws which may have the effect of defeating the owner’s right in the aircraft – for example, 8.8 If the aircraft is in the possession of a person Government requisition? Do the laws of your jurisdiction other than the operator or lessee at the commencement provide for any compensation in such circumstances? of Insolvency Protection of the operator or lessee, for example, an independent maintenance facility, will such Yes. The Federal Constitution allows requisition in events of person be entitled, under the laws of your jurisdiction, war, but no compensation would be provided. to assert a lien arising under law or contract over the aircraft in respect of amounts then due and unpaid to such person by the operator or lessee? 9.2 Are there any rights in relation to third parties to detain or sell the aircraft pursuant to illegal activities, If the aircraft is under possession of an independent mainte- tax or any other laws if the operator or lessee fails to pay when due? If so, can the aircraft be forfeited and sold nance facility, as a service provider to the operator or the lessee, without the owner being made aware? and the agreement between the operator or lessee with such service provider provides the right to retain the asset until the services are fully paid, then yes, such service provider should An aircraft may be forfeited by the customs authorities in the have the right to retain the aircraft until fully paid, either by event of non-compliance with the temporary admission regime the operator/lessee or by the owner/lessor. If the owner/lessor and can remain retained until such situation has been reme- confirms such payment to have the aircraft released, the corre- died by the operator as an importer of the record. The owner, sponding amount can be claimed against the service provider. however, may take judicial measures to have the aircraft back.

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Marcela Alves Corrêa has been working within asset-based finance and for 15 years. She focuses on aircraft finance and has been assisting banks, export credit agencies, lessors and air companies on a wide range of financing transactions concerning executive jets, helicopters used for transportation services for the offshore oil and gas industry and Boeing, ATR, Embraer and Airbus aircraft operated by major Brazilian airlines. Marcela Corrêa also has relevant experience with business law, more particularly general matters related to air service companies, as well as drafting and negotiation of contracts, financing and leasing of aircraft and engines, export credit structures, sales and leasebacks and cross-border syndicated loan facilities.

Veirano Advogados Tel: +55 21 3824 4637 Avenida Presidente Wilson, 231 Email: [email protected] 25th floor Centro, Rio de Janeiro – RJ URL: www.veirano.com.br Brazil

João Paulo Servera heads Veirano’s Aviation & Aircraft Financing group and focuses his practice on aircraft and engine financing, cross-border transactions and general aviation matters. João advises on a variety of matters, including foreign investment and cross-border securitisa- tion, with significant experience in asset financing transactions, especially with respect to commercial aircraft and engines, general aviation, offshore helicopters and spare parts. João assists ECAs, multinational banks, financiers and lessors, as well as borrowers, lessees and oper- ators and holds extensive background in aircraft-related commercial litigation, mostly involving aircraft repossession, insolvency procedures and bankruptcy. Important clients also rely on João for corporate, regulatory and customs matters support relating to the aviation industry.

Veirano Advogados Tel: +55 11 2313 5911 Avenida Presidente Wilson, 231 Email: [email protected] 25th floor Centro, Rio de Janeiro – RJ URL: www.veirano.com.br Brazil

Maria Eduarda Mendonça is an associate in Veirano Advogados’ Aviation & Aircraft Financing practice. She focuses her practice on corpo- rate law, especially in the negotiation and analysis of asset financing arrangements and credit structures. She currently assists investors and air service operators in regulatory and corporate matters of the aeronautical industry and in the financing of projects relating to aircraft assets, where she works for financiers, lessors and certain lessees or borrowers.

Veirano Advogados Tel: +55 21 3824 1397 Avenida Presidente Wilson, 231 Email: [email protected] 25th floor Centro, Rio de Janeiro – RJ URL: www.veirano.com.br Brazil

Founded in 1972, Veirano Advogados is one of the leading and most renowned Brazilian business law firms, focused on developing tailored solutions for multinational companies operating in strategic sectors of the economy. With a diverse team of over 600 people, including 250 lawyers working in an integrated fashion, the firm handles both routine and complex multidis- ciplinary cases that require the coordinated talents of professionals with diverse areas of expertise. Veirano Advogados’ services range from providing assistance in M&A transactions, privatisations and company formation to representing clients in disputes, from offering advice on tax issues and infrastructure projects to guiding oil and gas companies through the challenges inherent in a highly regulated industry, to name a few examples of our broad range of work. The main goal is to identify needs and develop tailored solutions, enabling safe and informed decision making – one client at a time. www.veirano.com.br

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China China

Wang Shu

Han Kun Law Offices Ding Yi

12 General and Contractual parties (lender, borrower/lessor and lessee) may take time and their respective interests and positions need to be carefully considered. 1.1 What are the typical structures available for financing the purchase of an aircraft? 1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential Chinese airline companies may acquire aircraft by purchasing characteristics? the aircraft directly from the manufacturers or via leases with the leasing companies. For the purposes of financing the purchase of the aircraft, airlines may arrange for direct loans Operating leases and finance leases are the common forms of (including PDP financing) with banks or finance leases with aircraft leasing in China. Under an operating lease, the lessor agrees to lease the aircraft leasing companies or other structured financing transactions to the lessee for a given period of time, where the lessor does (such as French optimised lease, JOLCO, ECA or US Ex-Im not transfer all the risks related to the aircraft to the lessee at supported financing) with the relevant financiers. the lease expiry (lessor retains the residual value of the aircraft). For leasing companies leasing aircraft to the airline opera- By contrast, the lessee under a finance lease retains the residual tors under operating leases, they may arrange operating lessor value of the aircraft, for title to the aircraft will usually pass to the financing, usually asset-backed loans, with banks. lessee at the lease expiry (or early termination) on the condition that the lessor will have received a nominal purchase price and, 1.2 What are the key advantages/disadvantages in the case of early termination, the prescribed termination sum. and main issues arising in relation to these financing structures? 1.4 Are there any proposals for reform in the area of aviation finance? Direct loans are comparatively straightforward, as the structure and the documentation are relatively simple or standard. Often, We are not aware of any ongoing reform proposal in the avia- the lender’s primary collateral is the aircraft that is subject to a tion financing sector. mortgage. If the loan is granted by an overseas lender, it will be subject to the foreign exchange regime in China. In PDP financings, the lenders usually take security over the 1.5 Is it possible according to the laws in your purchase agreement in place between the manufacturer and jurisdiction to enter into non-binding or partially the airline, which is to ensure that the lender can step into the binding pre-contractual agreements (e.g. ‘letters of position of the airline should there be an event of default. The intent’) which will NOT take effect as fully enforceable agreements? advantages of PDP financing are that it is less expensive, that it is available in situations where unsecured loans are not available, and that it is available from sources that typically do not make Yes. Non-/partially binding pre-contractual agreements are unsecured loans. permitted under PRC law. For example, a letter of intent may Compared with the direct loans, structured financings such as provide that the terms contained therein shall not create any French optimised lease, JOLCO and ECA/US Ex-Im supported legally binding obligations on the relevant parties with the financings are more complicated in turns of their structures, limited exceptions of the provisions relating to governing law, and they are not always achievable or available to all borrowers. dispute resolution, confidentiality and, sometimes, certain Yet, the all-in costs to the borrower are lower, as the borrower payment obligations (e.g. payment by lessee, and return by may take advantage of the tax treatment in the relevant jurisdic- lessor, of the security deposit). tion or the benefit of the ECA/Ex-Im guarantee. For operating lessor financings, the lessor purchases aircraft, 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction using the funds provided by the financier, and leases the aircraft which applies to all pre-contractual agreement, to the airline. The lessor relies on the aircraft lease for its cash financing and leasing transaction documents, and the flow. While the primary recourse entity is often the aircraft conduct of parties connected to them? lessor, financiers usually take security over the lease so that they can enforce the airline’s lease obligations at the time of Yes. The doctrine of “good faith” is generally recognised under a financing default. Communications between the principal PRC law. For instance, parties who have signed a letter of intent

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will have the obligation to negotiate in good faith to agree on 2.4 Has the advent of BEPS (the Base Erosion and the definitive contract in line with the principles set out in the Profit Shifting initiative of the OECD) had any effect as letter of intent. regards structures in aviation finance and leasing or their interpretation? 22 Taxation and Related Matters BEPS and its principles have effects on the PRC tax regime in the way that the Chinese tax authority has since 2014 promul- 2.1 Which government authority in your jurisdiction has primary responsibility for the accounting for and gated a serial of tax regulations in response to BEPS, including regulation of revenue control and taxes? (i) the General Administrative Measures on Anti-Tax Avoidance (Trial) (in Chinese: 一般反避税管理办法(试行)), (ii) the Announcement on Improving Related Declaration and Data Management in the Same The State Taxation Administration (and its local branches) is Period (in Chinese: 关于完善关联申报和同期资料管理有关 the main government authority responsible for the administra- 事项的公告), (iii) the Announcement on Improving the Management tion of tax collection in China. The General Administration of of Advance Pricing Arrangements (in Chinese: 关于完善预约定价 Customs (and its local bureaus) is the authority that is mainly 安排管理有关事项的公告 responsible for the assessment and collection of customs duties ), and (iv) the Administrative Measures in connection with importation and exportation. for Special Tax Audits and Adjustments and the Mutual Agreement Procedures (in Chinese, 特别纳税调查调整及相互协商程序管 理办法). Such regulations enhance the principles of BEPS, 2.2 What are typically the taxes in your jurisdiction for example, that “profits should be taxed in the place where which may arise in relation to a sale, a lease or a economic activities take place and where value is created” and financing of an aircraft or an engine? that the transfer pricing rules echoed actions 8–10 (Aligning Transfer Pricing Outcomes with Value Creation) of BEPS. Value-added tax/VAT. Sale of an aircraft/engine may subject BEPS’s potential impacts on the aviation finance and leasing the seller to value-added tax/VAT in China. Even where both in China is still an ongoing topic. So far, we are not aware of the seller and the purchaser are overseas entities, so long as the any substantive structural effect on aviation-related transactions title transfer takes place within the territory of the PRC, the in China. transaction will still be subject to the PRC VAT. In transactions of leasing an aircraft/engine, the lessor should pay VAT levied on rentals received by it under the lease. In practice, the VAT 2.5 What are the typical thresholds in your jurisdiction for which a permanent establishment may be triggered on rentals is often grossed up by the Chinese lessees. In relation under the terms of any relevant double-tax treaty or to the financing of aircraft/engine, VAT is levied on the interest similar? received by the lender under the loan agreement. Income tax/withholding tax. A company resident in China pays corporation income tax on its profits. In cross-border According to the double tax treaties between China and the rele- leasing or financing of an aircraft/engine and where the over- vant countries, a foreign company may create a taxable presence seas lessor/lender has no taxable presence in China, the lease in China, if (i) it has a place of business in China, (ii) it has a rentals/interest will be regarded as a source income in China building site, a construction, assembly or installation project or and subject to withholding tax in China. The lessee/borrower related supervisory activities that lasts for a certain period of should withhold certain withholding tax at the rate prescribed time, (iii) it has appointed an agent in China to conclude by law or the preferential rate according to any bilateral tax contracts or accept orders in China, or (iv) it has employees treaty between China and the relevant jurisdiction. In practice, working in China for a certain period of time. withholding taxes are often grossed up by the lessee/borrower under the tax gross-up provisions in the lease/loan agreement. 2.6 Is the authority at question 2.1 likely to establish Customs duties and import VAT. Cross-border leasing of a ‘look-through’ right or similar as regards a lender or a an aircraft/engine and Chinese purchaser’s acquisition of the lessor which is a special-purpose vehicle involved for title to an aircraft/engine from an overseas seller are subject the purpose of tax treaty access? to customs duties and, depending on the details of the asset, import VAT. The tax authority in China will look into the economic Stamp duty. Stamp duty is payable by each party to an substance of the SPV lessor/lender. Yet, normally, it is unlikely aircraft/engine sale and purchase agreement, lease agreement or that a foreign lessor/lender would be denied of its access to the loan agreement to the extent that such transaction document is tax treaty simply because it is in the form of a special-purpose executed or to be used in China. vehicle.

2.3 Is the provision of a current tax-residency 2.7 Will the import of an aircraft into your jurisdiction certificate by a payee sufficient for a lessee or a and/or the sale or leasing of the aircraft give rise to any borrower potentially subject to withholding taxes in your VAT, sales or use taxes or any customs import or excise jurisdiction on rental or interest payments to avail itself duties? of treaty access and the mitigation of tax liability? Yes. Please see our response to question 2.2 above. In addition to the tax-residency certificate of the foreign lessor/ lender, the Chinese tax authority may require the Chinese lessee to provide other evidence, supporting documents or informa- 2.8 Are there any documentary taxes (for example, tion to qualify for the applicable preferential rate under the rele- stamp duty payable on the execution of documents)? vant bilateral double tax treaty between China and the relevant lessor’s/lender’s country. Yes. Please see our response to question 2.2 above.

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32 Registration and Deregistration not be upheld against the interest of a bona fide third party. For cross-border finance leases particularly, they are considered the “foreign debt” of the Chinese lessee and the lessee must register 3.1 Which government authority in your jurisdiction such lease with the State Administration of Foreign Exchange has primary responsibility for the regulation of aviation (“SAFE”, China’s foreign exchange watchdog). and the registration of aircraft? Is it an owner registry or an operator registry? If the aircraft register is an operator register, is it possible to record the details of 3.5 How is deregistration affected and what steps can an owner or lessor and any financier with an aircraft a lessor take to de-register the aircraft on termination of mortgage? the lease?

The Civil Aviation Administration of China (“CAAC”) is the An aircraft should be deregistered from China in the following authority in China with control and supervises civil aviation in circumstances: (i) the Chinese owner transfers the title to the China as well as the jurisdiction over the registration, airwor- aircraft to an overseas owner and, for such purposes, a certifi- thiness and other matters relating to the aircraft registered in cate of airworthiness for export of the aircraft has been issued China. China is an operator registry jurisdiction. Owner’s and by the CAAC; (ii) the aircraft is scrapped (unfit for use); (iii) the mortgagee’s respective interests in the aircraft are registrable aircraft has crashed or is missing, and the search for it has been with the CAAC. stopped; (iv) the aircraft is subject to a cross-border lease and the lease is terminated; or (v) other circumstances as may be 3.2 What is the effect of registration of the aircraft? required by the CAAC. Does registration on your national aircraft register China maintains an operator-based aircraft registry. Against confer proof of ownership of the aircraft and/or engine? the background of a cross-border lease, it is the Chinese oper- ator/lessee’s responsibility to (and only the lessee may) register the aircraft in China. Likewise, at the lease expiry, the CAAC In short, an aircraft can be registered in China (the nation- normally only accepts the deregistration request made by the ality registration) if it is owned or operated by a Chinese entity lessee (rather than the lessor/owner or any other person), in its (including those Chinese entities who have foreign invest- capacity as the operator of the aircraft. ment elements – the foreign ’s equity interests (calcu- lated by registered or paid-in capital) in such entity, or the foreign investor’s voting powers at such entity’s shareholders/ 42 Security board meeting level, shall not exceed 35 per cent) or a Chinese national. Completion of the nationality registration is a precon- 4.1 Is it possible to create a mortgage over an aircraft dition for the other aircraft related registrations/licensing in or engine in your jurisdiction? If so, what are the types China, such as the aircraft airworthiness registration, the radio of aircraft mortgage and engine mortgage available and station licence, the ownership right registration, the mortgage what formalities are required in order to perfect it? right registration and the possession right registration. The nationality registration itself does not constitute evidence Yes. A mortgage is a recognised security interest that can be of the ownership of the aircraft. The owner should register its created for an aircraft (provided that the aircraft is registered ownership right of the aircraft with the CAAC, and obtain a in China) or an engine under PRC law. The mortgage for the certificate of registration of ownership right in civil aircraft in respect of aircraft/engine is created by contract, usually a mortgage agree- the aircraft from the CAAC. Engines (its nationality, owner- ment between the mortgagor and the mortgagee. Please see our ship, mortgagee right, etc.) are not registrable with the CAAC. response to question 4.3 regarding the mortgage registration.

3.3 Can foreign-owned aircraft be registered on 4.2 Can spare parts, including future parts, be subject your national aircraft register and are there limits or to the aircraft mortgage or engine mortgage (as the case restrictions on the age of aircraft that may be registered may be)? If not, are there any other forms of security that or operated? can be taken over spare parts?

A foreign-owned aircraft can be registered in China if (i) the PRC law does not regard spare parts installed or to be installed foreign owner leases the aircraft to an operator in China (the on the aircraft/engine as separate objects against which a mort- lessee), (ii) the lessee provides its own flight crews for the aircraft, gage can be created. Yet, a mortgagee under an aircraft/engine and (iii) the aircraft is not registered in any other jurisdiction (or mortgage agreement usually requires that the “mortgaged prop- has been deregistered from such other jurisdiction – as Chinese law erty” shall also cover the parts installed or to be installed on prohibits the registration of an aircraft in more than one national the aircraft/engine (to the extent that the mortgagor is or will aircraft register). Chinese law does not have any express limita- become the owner of such parts). tion on the age of a vintage aircraft that can be registered in China.

4.3 Is there a register of mortgages or rights over 3.4 Can aircraft leases be registered? If so, in what aircraft and/or engine? circumstances? Must the lease be in a particular form if it is to be valid and enforceable (for example, must it be in a particular language or be notarised, legalised or The CAAC maintains a register for aircraft mortgage registra- apostilled)? tions. China has traditionally treated engines as accessories, being part of the airframe on which they are installed. As such, a mortgage for an engine alone is not registrable with the CAAC’s For all finance leases and any operating lease with a lease term registry. Occasionally, an engine mortgage may be registered of no less than six months, the Chinese lessee may register its with the State Administration For Market Regulation (“SAMR”), possession right in the aircraft with the CAAC. By failing to depending on the practice of the local bureau of the SAMR. complete such registration, the lessee’s possession right would

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4.4 What other forms of security can be taken over customs authority normally only deals with the Chinese airlines an aircraft and/or engine and can these other forms be for the aircraft import and export matters, lessors who are not registered? familiar with the customs procedures may need to engage an experienced customs declaration agency. The creditor will No such other forms of security are available for an aircraft/ also need to go through the procedures with the airworthiness engine in China. department of the CAAC to arrange for a ferry flight of the aircraft. If the creditor is the authorised person under a duly recorded 4.5 What claims and rights would take priority in your IDERA, the creditor will be entitled to apply for an export jurisdiction over a registered mortgage? certificate of airworthiness as well as the deregistration of the aircraft. Please see our response to question 5.10 below. Two types of creditors may rank prior to a registered mort- gage: (i) creditors having a possessory lien over the aircraft (e.g., airports, MROs, storage service providers, etc.); and (ii) cred- 5.3 Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local itors having the statutory priority claims against the aircraft/ rules that apply, despite a choice of foreign law? engine, including claims for compensation for rescuing the aircraft and claims for necessary costs and expenses relating to the safekeeping/maintenance of the aircraft. Under PRC law, the mortgage created over a PRC registered aircraft must be governed by PRC law.

4.6 What other forms of security can be granted over an aircraft and/or engine lease? 5.4 Will local courts recognise and enforce a foreign court judgment in favour of a mortgagee or lessor? Are any interim relief measures available? Typically, financiers would consider the security package including, apart from the mortgage, a pledge over account receivables (rentals), security assignment of lease and insurances A judgment made by a foreign court against a Chinese lessee and assignment of airframe/engine warranties. would be recognised and enforced by the PRC court, without further consideration of the merits of the case, in accordance 52 Enforcement and Repossession with any bilateral or multilateral treaty concluded or acceded to by the PRC and the relevant jurisdiction, or without such treaty in place, if the following conditions are met: (i) the judgment 5.1 What are the circumstances in which a mortgagee is final and conclusive; (ii) the jurisdiction of the foreign court or owner can take possession of the aircraft and/or sell has not been precluded by any law, order or treaty; (iii) service the aircraft? What requirements must the mortgagee or owner comply with? of process for any proceeding against the Chinese lessee in the foreign court has been lawfully effected on the lessee (other than by public notice), or the lessee have appeared and responded Situations where a mortgagee or lessor may excise its rights on the merits of the case in the relevant proceedings without against the aircraft are usually agreed in the relevant finance receiving service thereof; (iv) the PRC court is satisfied that the or lease agreements. Normally, upon occurrence of a lessee judgment neither contradicts the basic principles of the laws of event of default under the lease, the lessor will have the right to the PRC nor violates its state sovereignty, security and public possess the aircraft and dispose of the aircraft. Nevertheless, interest; and (v) judgments of the PRC courts receive reciprocal the concept of “self-help” is not recognised under PRC law, treatment in the courts of foreign jurisdiction. and, therefore, enforcement of security and repossession of the Worldwide, the main transaction documents used for aircraft aircraft by the lessor will involve PRC courts. financing and leasing are often governed by English law or U.S. For financiers/mortgagees, their right to take possession of law. To date, neither England nor the U.S. has a bilateral treaty the aircraft would be subject to any quiet enjoyment undertaking with China on enforcement of a foreign court judgment. that the financier has provided to the lessee (typically, where the The lessor may arrest the aircraft in China before or after lessee is not in default under the lease, but the lessor/borrower is it initiates litigation before the PRC court, if the lessor can in default under the loan agreement). convince the PRC court that the arrest meets the statutory criteria for a property preservation measure. Further, if the 5.2 What is the procedure for repossession of the Cape Town Convention applies to the lease, the lessor will be aircraft? entitled to the interim relief under the Convention, pending final judgment of its claims and to the extent that the Chinese Repossession of an aircraft from China is a complicated topic. lessee has at any time so agreed. In short, creditors (aircraft owner, lessor or mortgagee) may initiate the process by (i) delivering a default notice or demand 5.5 Are powers of attorney from a local airline in favour letter to the lessee, (ii) communicating with the CAAC, (iii) of a lessor or mortgagee likely to be effective to allow applying to court for certain interim remedies, (iv) initiating liti- the lessor or mortgagee to deregister the aircraft? Can gation against the lessee before a PRC court, (v) initiating liti- such powers be irrevocable, be governed by a foreign gation before a foreign court or initiating foreign arbitration, law and/or do they need to be in any particular form for local recognition? and later applying for recognition and enforcement of the court judgment or arbitral award in China, and/or (vi) applying for de-registration of aircraft under an IDERA (if available). A conventional deregistration power of attorney (not the After the aircraft is repossessed, the creditor must first IDERA) may not be effective in offering “self-help” to the complete the customs declaration for the aircraft before the lessor or mortgagee in relation to deregistering the nationality creditor may export the aircraft outside China. As the Chinese and repossessing an aircraft in China. Based on our experience

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dealing with the CAAC, the aviation authority tends to take a aircraft from China. In order to repossess an aircraft pursuant rather conservative view and it would not allow any person that to IDERA, the authorised foreign creditor will need to present is not the airline operator of the aircraft to apply for the dereg- the following to the CAAC for review: (i) its certificate of istration of the aircraft’s nationality, even if such person is the incorporation (or any other equivalent document); (ii) a verdict owner or mortgagee who has at hand a deregistration power of issued by a PRC court confirming that the authorised person attorney signed by the airline. is entitled to repossess the aircraft pursuant to the Cape Town Convention; and (iii) any other documents that may be required by the CAAC. 5.6 If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the 62 Conventions aircraft? 6.1 Has your jurisdiction ratified any of the following: After the lessor has obtained a PRC court judgment held in its (a) The Chicago Convention of 1944 on International favour, it may apply for enforcement of the judgment with the Civil Aviation (the Chicago Convention); (b) The 1948 court. There is no clear guidance as to how long the enforce- Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 ment process should be. Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft (the 1933 Rome 5.7 Are there any restrictions on the ability of the Convention); and (d) The Convention on International lessor to export the aircraft from your jurisdiction on Interests in Mobile Equipment on Matters Specific to termination of the leasing? Aircraft Equipment (the Cape Town Convention) and the Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft There is no express restriction on the lessor exportation of the Equipment? aircraft from China. However, since self-help remedies are not recognised under PRC law, unless the lessee agrees to cooperate, China is a contracting state to (i) the Chicago Convention of 1944 the lessor will have to first obtain a favourable court judgment on International Civil Aviation (the Chicago Convention), (ii) in China before it can proceed to export the aircraft from China. the 1948 Convention on the International Recognition of Rights in Aircraft (the Geneva Convention), and (iii) the Convention on 5.8 Are exchange controls prevailing in your International Interests in Mobile Equipment on Matters Specific jurisdiction as regards payments in foreign currency? to Aircraft Equipment (the Cape Town Convention), and (iv) the Will any consents be required for the remittance of the Protocol on the Convention on International Interests in Mobile sale proceeds abroad? Equipment on Matters Specific to Aircraft Equipment. China has made a declaration under the Cape Town Unless otherwise permitted by laws and regulations (e.g. rental Convention to the effect that the Convention and the Protocol payments under an aircraft lease between a Chinese airline and shall not apply to the Special Administrative Region a lessor incorporated in certain free trade zones in China are and the Macao Special Administrative Region. allowed to be settled in foreign currencies), domestic transac- tions (such as a leasing of aircraft between a Chinese lessor and a 6.2 Has ratification of the Cape Town Convention Chinese lessee) can only be settled in RMB. On the other hand, caused any conflicts or issues with local laws? cross-border fund remittance (such as rental payments or sale proceeds) is subject to the verification of the relevant remittance Yes. The Cape Town Convention as an international law handling bank in China, as the handling bank is required by the obtained the force of national law in China coinciding with SAFE to verify the authenticity of the payments and the under- China’s ratification. Nevertheless, the effect and application lying transaction. of the Cape Town Convention in China is subject to the decla- rations made by China under the Convention. For instance, 5.9 If the lease is governed by English law and a self-help remedies consequent to a lessee’s default under the judgment is obtained by the lessor in the English courts, Convention are not recognised under PRC law. When ratifying can that judgment be automatically enforced in your the Convention, China made a declaration that “any remedies jurisdiction or will the case have to be re-examined on its available to the creditor under the Convention which are not merits? under the relevant provision of the Convention to require appli- cation to the court may be exercised only with leave of the court Please see our response to question 5.4 above. Chances are of the PRC”. slim that the PRC courts would enforce an English court judg- ment, without re-examination on its merits, for the lack of (i) 6.3 What is the legal position regarding any applicable bilateral/multinational treaty between China and non-consensual rights and interests under Article 39 of England regarding mutual recognition and enforcement of judg- the Cape Town Convention? ments, and (ii) the precedent of reciprocal treatment. China has made a related declaration under Article 39 of the 5.10 What is the applicable procedure for repossession Cape Town Convention so that any non-consensual rights of an aircraft under other forms of security interests? or interests having priority over secured creditors under PRC law shall have priority over registered international interests. Where the creditor is in possession of an IDERA signed by the Such non-consensual rights include claims for bankruptcy Chinese airline and lodged with the CAAC, the creditor may expenses and community debts, employee’s wages, taxes arising utilise the IDERA to take repossession of and deregister the prior to the mortgage, pledge or lien of the aircraft, claims for

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remuneration for rescuing the aircraft, and claims for neces- 82 Insolvency and Searches sary expenses incurred for the custody and maintenance of the aircraft. 8.1 Are there any public registers in your jurisdiction where a search can be carried out to determine whether 6.4 Has your jurisdiction adopted the remedies on an order or resolution for any bankruptcy, bankruptcy insolvency provided under Article XI of the Protocol to protection or similar insolvency proceedings has been the Cape Town Convention? registered in relation to an operator or lessee?

Yes. China made a declaration under Article XI of the Protocol China does not maintain an official, public register for bank- to the Cape Town Convent, and opted to apply Alternative A to ruptcy/insolvency searches. PRC courts, upon acceptance of all types of insolvency/bankruptcy proceedings (with a speci- a bankruptcy petition or declaration of an bankrupt insolvent fied waiting period of 60 days). company, should make a public announcement. Such public announcements may be searchable from public sources. 6.5 What is the procedure to file an irrevocable deregistration and export request authorisation under 8.2 In the event that an operator or lessee were to the Cape Town Convention (IDERA)? become insolvent either on a balance sheet basis (assets less than liabilities) or is unable to pay debts as The aircraft airworthiness department of the CAAC is the fall due, would an operator or lessee be required to file for insolvency protection? authority in charge of the IDERA filing matters in China. The CAAC currently only accepts IDERA filing made by the Chinese airlines as the aircraft operator/lessee. The airline An insolvent operator/lessee may (but is not obligated to) peti- company needs to submit two signed originals of the IDERA tion to the PRC court for bankruptcy, reconciliation or reorgan- together with the other supporting documents required by the isation of the operator/lessee. If the insolvent operator/lessee CAAC. After receipt of the application package completed to failed to pay its debts owing to its creditors, any such creditors its satisfaction, the CAAC will take up to 20 working days to may also petition to the PRC court for bankruptcy or reorgani- complete the IDERA filing. sation of the operator/lessee.

72 Liability for Damage and Environmental 8.3 Do the available forms of insolvency protection in your jurisdiction involve the appointment of either 7.1 Can the owner be strictly liable – liable without an officer of the court or a specifically court appointed a requirement to prove fault or negligence – for any official to take control of the operator or lessee (an damage or loss caused by the aircraft assuming the ‘Insolvency Official’) while in insolvency protection? owner is an innocent owner with no operational control of the aircraft? Once a PRC court accepts a bankruptcy filing, it will appoint an “administrator”, who will act as the bankruptcy adminis- No. Strict liability rules do not apply to an innocent owner trator of the insolvent company in the liquidation process. The without operational control of the aircraft. administrator is in charge of taking over the debtor’s business and managing its property and operation. PRC bankruptcy law has a concept similar to the “debtor-in-possession”, pursuant 7.2 Does the EU Emissions Trading System (EU ETS), to which the debtor may request the court’s permission to or any similar scheme, apply to aircraft and aircraft operators in your jurisdiction? Will charges levied manage its business, under the court-appointed administrator’s according to the EU ETS, or its equivalent, give rise to supervision. any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights 8.4 Does the commencement of insolvency protection rank in priority ahead of any mortgage interests properly involving the appointment of an Insolvency Official registered in the relevant aircraft and/or engine? in your jurisdiction have the effect of prohibiting the owner from taking the following actions to enforce China is outside the jurisdiction of the EU ETS scheme. As the lease after commencement of such protection: (a) such, EU ETS does not apply to aircraft operating in China. applying any security deposit held by the owner against China is in the process of promulgating and implementing some any unpaid amounts due under the lease; (b) accepting payment of rent or other lease payments from the domestic pilot schemes that are similar to the EU ETS, which, lessee, a guarantor or a shareholder; (c) giving notice as pilot schemes currently stand, would not lead to any in rem or of default under the lease; (d) obtaining a judgment or priority right in the aircraft. arbitral award for unpaid lease payments; (e) giving notice to terminate the leasing of the aircraft and/or engine; or (f) exercising rights to repossess the aircraft 7.3 What liabilities (actual or potential) could an owner, and/or engine? lessor or financier of an aircraft incur in your jurisdiction because of a failure to comply with local environmental law and/or regulations on the part of an operator of Assuming the security deposit constitutes a valid security aircraft leased or financed by it? interest in favour of the lessor, the lessor will have the right to apply the security deposit towards the discharge of any due and An innocent owner, lessor or financier of an aircraft is unlikely unpaid amount owned by the bankrupt lessor under the lease. to be held liable for an operator’s/lessee’s non-compliance with Exercise of such right by the lessor, however, may be suspended the environmental laws and regulations in China. during a mandatory automatic stay period.

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Generally, individual repayment by the insolvent debtor to be terminated. Further, if the lessor failed to, in response to during a bankruptcy proceeding is not permitted. An exception the lessor’s request, provide additional collateral to secure the is that the court-appointed administrator may opt to continue lessee’s performance under the lease, the lease would also be the leasing of the aircraft/engine and make rental and other deemed to be terminated. payments to the lessor. Meanwhile, the lessor is not prohib- Where the lease continues, any rental and other lease payments ited from receiving payments by the guarantor or the debtor’s due or incurred thereafter would be regarded as “debts incurred shareholder. for the common good of creditors”, and they may be paid off The owner’s right to serve default notice or lease termination from the debtor’s property at any time. However, there is no notice to the bankrupt lessee would not be affected, provided clear guidance (and thus, the administrator may have discretion that (i) during the bankruptcy proceeding, such notice should be to make the decision) as to whether any unpaid lease payment served to the administrator, and (ii) the owner may not termi- due as at the commencement of the bankruptcy proceeding nate the lease, unless the administrator fails to reply to the should be classified as “debts incurred for the common good owner’s termination request within 30 days or the administrator of creditors”. fails to, upon the owner’s request, provide additional collaterals If the lease is, or is deemed to be, terminated (and for any to secure the lessee’s performance under the lease. unpaid amounts that are not regarded as “debts incurred for the Once a bankruptcy petition has been accepted by the PRC common good of creditors”), an unsecured lessor’s claims for court, any other court or arbitration proceeding against the such unpaid amount would rank equally with other unsecured bankrupt debtor initiated prior to the commencement of the creditors. bankruptcy proceeding will be suspended, but it may resume after the bankruptcy administrator has been appointed by the 8.7 Are there certain types of preferred creditors court. Any new lawsuit against the bankrupt debtor can only whose claims will rank above claims of the owner? be commenced in the same court that accepts the bankruptcy petition. Lastly, the owner’s right to repossess the aircraft/engine may Yes. Secured creditors (e.g. a financier who takes a mortgage be subject to the automatic stay period during the bankruptcy over the aircraft) has priority over an unsecured lessor. proceeding. Expenses arising out of the bankruptcy proceedings such as (i) litigation costs, (ii) expenses incurred in connection with the management, realisation and distribution of the debtor’s prop- 8.5 Can the commencement of insolvency proceedings erty, and (iii) expenses incurred by the court-appointed admin- have retrospective effect in relation to any such actions istrator during the performance of its duties and the administra- taken before commencement? If so, for what period can tor’s remuneration will rank above the lessor’s claims. there be a look back? Furthermore, the following preferred claims will also rank above the lessor’s claims in a bankruptcy liquidation: (i) any Yes. The following bankruptcy clawback provisions would unpaid wages, subsidies for medical treatment, injuries and disa- apply: bility and the pensions for the disabled and the families of the The court-appointed administrator has the right to request deceased; (ii) any unpaid basic pension insurance premiums and the court to nullify any of the following actions undertaken by the basic medical insurance premiums; (iii) any unpaid compen- the bankrupt debtor within one year before the court accepts sation to the bankrupt’s employees; (iv) any unpaid social insur- the bankruptcy petition: (i) transferring of its property gratis; (ii) ance premiums; and (v) any unpaid taxes. trading at an obviously unreasonable price; (iii) providing collat- erals for the previously unsecured debts; (iv) paying off debts that are not due yet; or (v) abandoning claims. 8.8 If the aircraft is in the possession of a person other than the operator or lessee at the commencement Within six months before the court accepts the bankruptcy of Insolvency Protection of the operator or lessee, for petition, if the bankrupt debtor makes repayment to individual example, an independent maintenance facility, will such creditors, the administrator will have the right to request the person be entitled, under the laws of your jurisdiction, court to nullify the repayment, except where such individual to assert a lien arising under law or contract over the repayment is beneficial to the debtor’s property. aircraft in respect of amounts then due and unpaid to such person by the operator or lessee?

8.6 Is there, either under law or as a matter of practice in your jurisdiction, a period of time within which the Yes. A third party (such as MROs, airports and fuel suppliers) Insolvency Official will either ‘adopt’ the lease and who has possession of the aircraft may claim possessory lien pay rent and other lease payments as an expense over the aircraft in the bankruptcy proceeding. of the insolvency or ‘reject’ the lease and permit the owner to enforce such rights as it may have under the lease? (a) If the lease is ‘adopted’, will the Insolvency 92 Detention and Confiscation Official also pay any unpaid lease payments due as at commencement of the insolvency protection? (b) If not 9.1 Other than insolvency laws (see section 8), or if the lease is ‘rejected’, would the owner’s claim for are there any laws which may have the effect of any outstanding sums rank equally with other ordinary defeating the owner’s right in the aircraft – for example, unsecured creditors of the lessee? Government requisition? Do the laws of your jurisdiction provide for any compensation in such circumstances? The court-appointed administrator is authorised to decide whether to rescind or continue the lease. The administrator By law, the Chinese government may – though few precedents shall notify the lessor of its decision within two months after the can be seen – have the right to requisition (for title or for hire) court accepts the bankruptcy petition. Upon failure to do so equipment, facilitates, vehicles and other assets (including by the administrator (or if the administrator fails to respond to aircraft asset) for national defence and security reasons. The the lessor’s enquiry within 30 days), the lease would be deemed government may temporarily acquire (for hire) an aircraft, for

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instance, to facilitate provision of disaster assistance or to support response to an emergency or major disaster. Government requi- sition rarely happens, and PRC law has specific rules regarding compensation for government requisition.

9.2 Are there any rights in relation to third parties to detain or sell the aircraft pursuant to illegal activities, tax or any other laws if the operator or lessee fails to pay when due? If so, can the aircraft be forfeited and sold without the owner being made aware?

Chinese government authorities (e.g. customs bureau) have the right to arrest, confiscate or detain an aircraft, if the aircraft operator had engaged in, or had used the aircraft for, illegal activities (such as smuggling or drug trafficking) or if the oper- ator had failed to pay customs duties due. Even so, it is unlikely that the government would forfeit an aircraft that is not owned by the operator or dispose of the title to the aircraft without the owner being informed.

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Wang Shu, before joining Han Kun in October 2012, worked with the Banking and Finance team of King & Wood Beijing for over 12 years. Ms. Wang has advised a large number of domestic and foreign banks in connection with various types of private and corporate banking business, as well as foreign exchange related business. In particular, Ms. Wang has extensive experience in advising domestic and foreign banks on legal issues relating to China market access for new products, as well as other PRC compliance issues foreign banks must deal with in their daily operations in China, including assistance in the drafting or revising of bank standard documentations. Ms. Wang has advised a large number of domestic and foreign aircraft leasing companies, commercial banks and domestic airlines in their leasing and financing of aircraft and aviation equipment. She has been involved in almost all types of transactions such as operating leases, finance leases, sale and lease-backs, China bonded zone leasing, JOLs and French Tax Leasing. These transactions involve almost all domestic airlines’ leasing and financing of hundreds of aircrafts including Boeing, Airbus, private jets and helicopters.

Han Kun Law Offices Tel: +86 10 8525 5526 9/F, Office Tower C1, Oriental Plaza Email: [email protected] 1 East Changan Street, Dongcheng District URL: www.hankunlaw.com Beijing 100738 China

Ding Yi, prior to joining Han Kun, worked at Baker & McKenzie for eight years. He worked at King & Wood Mallesons for four years before joining Baker & McKenzie. Mr. Ding’s practice focuses on asset and structured finance matters where he regularly advises airlines, leasing companies, financial institutions and arrangers on a wide variety of asset financing and structured financing transactions. He has advised a number of banks, financial institutions, corporate and institutional borrowers on cross-border financing, syndicated and bilateral secured and unsecured lending. He also has acted for a number of banks and financial institutions in establishing their respective operations in China and their corporate governance, merger and acquisition and regulatory advisory matters. Mr. Ding’s clients include major banks and financial institutions, international and domestic leasing companies, and many of the major airlines in China.

Han Kun Law Offices Tel: +86 21 6080 0248 33/F, Tower 2, Hong Kong Industrial Centre Fax: +86 21 6080 0999 Industrial Bank Taikoo Hui, 288 Shimen 1st Road Email: [email protected] Jing’an District URL: www.hankunlaw.com Shanghai China

Established in 2004, with offices in Beijing, Hong Kong, Shanghai and , Han Kun Law Offices is a leading full-service Chinese law firm specialising in cross-border and domestic transactions. Our lawyers are graduates from prestigious Chinese or foreign law schools. We provide clients with high quality legal services that incorporate the best of Chinese and Western practices. With a keen understanding of China’s culture and business environment, Han Kun delivers practical solutions and uses expe- rience, insight and innovation to assist clients in achieving their business goals. Our aircraft finance team brings together a core team of specialist practi- tioners as well as specific practice area experts, who are able to take full account of the local dynamics without losing sight of the international dimension. There are over 15 dedicated aviation finance lawyers with detailed product and industry knowledge, led by three partners, working in the major financial and business centres in China and supported by the Firm’s comprehensive practice groups. www.hankunlaw.com

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Maria Lehtimäki

Waselius & Wist Ann-Marie Eklund

1.4 Are there any proposals for reform in the area of 12 General and Contractual aviation finance?

1.1 What are the typical structures available for financing the purchase of an aircraft? Finland has not ratified the Cape Town Convention. The Finnish Ministry of Justice has a long-term project on the ques- tion of Finland’s need to ratify the Cape Town Convention, but Finnish airlines both own and lease aircraft in their fleet. The there have been no developments published by the Ministry of lessors providing services to Finnish airlines are debt as well as Justice on the subject in over a decade. equity financed. The purchase of an aircraft registered in the Separately, a political working group was recently set up Finnish Aircraft Register is typically financed by a loan facility to discuss the possibility of ratification. The working group of the purchaser. The purchased aircraft is typically granted as concluded that the ratification could take place in connection security for the loan facility at closing. with a general overhaul of the Finnish legislation relating to vehicle, vessel and aircraft mortgages in the future. The general 1.2 What are the key advantages/disadvantages overhaul is predicted to have an impact on, among other things, and main issues arising in relation to these financing the process of registration of mortgages and establishing of structures? security over Finnish aircraft, but the nature of the changes has not yet taken shape. Typically, where the purchaser or the lender is not Finnish, the finance documents are governed by the laws of its home juris- 1.5 Is it possible according to the laws in your diction or another jurisdiction commonly used in international jurisdiction to enter into non-binding or partially financing, such as England or New York. Where the finance binding pre-contractual agreements (e.g. ‘letters of documents are governed by the laws of a jurisdiction outside intent’) which will NOT take effect as fully enforceable the European Economic Area (EEA), they are also typically agreements? subject to the jurisdiction of such non-EEA courts. A judg- ment rendered by such non-EEA court is not directly enforce- Yes. Letters of intent are recognised by Finnish law and it is able in Finland and enforcement in Finland requires separate possible to enter into non-binding or partially binding letters proceedings. of intent. Irrespective of the financing structure, a Finnish law mort- gage is the only way to take effective security over the aircraft 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction and its constituent parts (please see section 4 below). which applies to all pre-contractual agreement, financing and leasing transaction documents, and the 1.3 What types of leasing are possible under the conduct of parties connected to them? laws of your jurisdiction? What are their essential characteristics? Yes. Prospective parties are generally required to negotiate and conduct in good faith. Negotiating in bad faith may result in Finnish law does not set specific restrictions on the types of pre-contractual liability. leasing arrangements possible. The choice between different types of leases is typically driven by commercial and accounting 22 Taxation and Related Matters aspects. Operating leases, financial leases, sale and leaseback arrangements and JOLCOs are seen in the market. Wet leases 2.1 Which government authority in your jurisdiction are used by the airlines to cover capacity shortages resulting, has primary responsibility for the accounting for and e.g., from maintenance breaks. regulation of revenue control and taxes? Under Finnish legal principles, any contractual arrangements are assessed on a substance-over-form basis. For example, from The Finnish Tax Administration has primary responsibility a Finnish law perspective, a lease could be recharacterised as a for the tax control and collection of tax revenue. In addition, hire purchase if it had the factual and economic characteristics Finnish Customs is responsible for collecting customs duties of such instead of a lease. and similar charges. National tax legislation is prepared by the Ministry of Finance and enacted by the Finnish Parliament.

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2.2 What are typically the taxes in your jurisdiction 2.5 What are the typical thresholds in your jurisdiction which may arise in relation to a sale, a lease or a for which a permanent establishment may be triggered financing of an aircraft or an engine? under the terms of any relevant double-tax treaty or similar? Aviation finance and leasing transactions in Finland may give rise to certain tax issues. The following is a brief discussion of a Finnish tax treaties generally follow the OECD Model Tax few selected tax issues that are commonly addressed in the case Convention and, consequently, inter alia, a place of management, of a foreign entity selling, financing or leasing an aircraft or an an office or a factory may give rise to a permanent establish- engine to a Finnish resident. ment. For example, a foreign entity that carries on the busi- ness of leasing at a fixed place of business within Finland may Corporate income tax and Finnish-sourced income be subject to Finnish corporate income tax (through the crea- A foreign entity that is engaged in business through a perma- tion of a permanent establishment). However, as mentioned nent establishment in Finland is subject to Finnish corporate under question 2.2 above, the mere cross-border leasing of an income tax at a rate of 20% on any income attributable to the aircraft or an engine by a foreign entity to a Finnish resident has permanent establishment. The taxable income includes broadly in prevailing taxation practice not been deemed to give rise to a both rental income and capital gains. However, the mere cross- permanent establishment in Finland. border leasing of an aircraft by a foreign entity to a Finnish resi- dent has in prevailing taxation practice not been deemed to give 2.6 Is the authority at question 2.1 likely to establish rise to a permanent establishment in Finland. a ‘look-through’ right or similar as regards a lender or a A foreign entity that is not engaged in business through a lessor which is a special-purpose vehicle involved for permanent establishment in Finland may still be liable to Finnish the purpose of tax treaty access? tax on certain Finnish-sourced income unless the applicable double tax treaty restricts Finland’s taxing rights. Generally, As the access to tax treaty benefits requires beneficial owner- rentals payable by a Finnish lessee to a foreign entity (lessor) ship, the Finnish Tax Administration may establish a look- on the lease of an aircraft or an engine would not be regarded through approach. However, tax treaty access is at the outset of as Finnish-sourced income. In addition, interest payable by a less relevance since no tax is generally payable or withheld under Finnish borrower to a foreign entity (non-resident lender) are in domestic Finnish tax laws (see question 2.2 above). turn exempt from tax under Finnish domestic tax laws. Based on the foregoing, foreign entities are normally not subject to any Finnish tax on a sale, a lease or the financing of 2.7 Will the import of an aircraft into your jurisdiction an aircraft or an engine. and/or the sale or leasing of the aircraft give rise to any VAT, sales or use taxes or any customs import or excise duties? Withholding tax As rentals and interest payable by a Finnish lessee or borrower to a foreign entity (lessor or lender) are either not regarded as Assuming that the aircraft is acquired and used by an airline Finnish-sourced income or, alternatively, exempt from tax, no operating for reward chiefly on international routes, there withholding tax applies to such payments. should be no VAT payable in Finland.

2.3 Is the provision of a current tax-residency 2.8 Are there any documentary taxes (for example, certificate by a payee sufficient for a lessee or a stamp duty payable on the execution of documents)? borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself There are at present no documentary taxes (e.g. transfer tax) of treaty access and the mitigation of tax liability? applicable to the sale, a lease or a financing of an aircraft or an engine in Finland. As rental payments to a foreign entity (lessor) are not regarded as Finnish-sourced income, there is, at the outset, no require- 32 Registration and Deregistration ment for the payee (lessor) to provide a tax-residency certificate. With respect to interest payments there is, however, a specific 3.1 Which government authority in your jurisdiction requirement for the payee to provide the lender with informa- has primary responsibility for the regulation of aviation tion supporting its non-tax resident status. The payee should and the registration of aircraft? Is it an owner registry provide the lender with its name, identity code number and the or an operator registry? If the aircraft register is an address in the state of tax residence. From a tax compliance operator register, is it possible to record the details of perspective, it would typically be prudent to obtain a tax-resi- an owner or lessor and any financier with an aircraft dency certificate from the payee. mortgage? Owing to the foregoing, tax treaty access is at the outset of less relevance since no tax is generally payable or withheld under The Finnish Transport and Communications Agency Traficom domestic Finnish tax laws (see question 2.2 above). is the governmental authority responsible for aviation permit, registration, safety and security matters in Finland. Traficom 2.4 Has the advent of BEPS (the Base Erosion and maintains the Finnish Aircraft Register. The Aircraft Register Profit Shifting initiative of the OECD) had any effect as is a register of owner, operator and mortgage information. It regards structures in aviation finance and leasing or is possible to record the details of a mortgage holder in the their interpretation? register, although typically Finnish aircraft mortgages are made out to the bearer, and no mortgage holder information is regis- The advent of BEPS has to date not had any direct effect on tered. It is not possible to record the details of a financier that structures generally applied in aviation finance and leasing. does not hold a mortgage over the aircraft.

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3.2 What is the effect of registration of the aircraft? 3.5 How is deregistration affected and what steps can Does registration on your national aircraft register a lessor take to de-register the aircraft on termination of confer proof of ownership of the aircraft and/or engine? the lease?

The registration of an owner with the Finnish Aircraft Register An application for deregistration is submitted to the aircraft constitutes primary evidence of ownership interest in the aircraft register. The application is signed by the registered owner and its constituent parts and accessories, but such registration is (lessor) of the aircraft. Where a mortgage is registered against challengeable in court proceedings by a party that can demon- the aircraft, the mortgage must be deregistered prior to deregis- strate a better right to the aircraft or its parts. tration of the aircraft. Complex questions may arise in determining the owner- ship rights or other rights in rem to engines and other parts. 42 Security Generally, any transactions involving the main object (aircraft/ airframe) would also concern the constituent parts and accesso- 4.1 Is it possible to create a mortgage over an aircraft ries thereof. For instance, if the main object was sold to a new or engine in your jurisdiction? If so, what are the types owner in good faith, titles to its constituent parts and accessories of aircraft mortgage and engine mortgage available and also transfer to the purchaser of the main object. There are no what formalities are required in order to perfect it? legal precedents in Finland addressing the question of whether an engine would constitute a constituent part of or an accessory It is possible to create security over an aircraft by way of a to an aircraft, but legal doctrine suggests that there are several Finnish law aircraft mortgage. An aircraft mortgage is created arguments against this. by a pledge agreement whereby the owner pledges one or several so-called aircraft mortgage promissory notes to the pledgee. 3.3 Can foreign-owned aircraft be registered on The pledge is perfected by registering the aircraft mortgage your national aircraft register and are there limits or promissory notes against the aircraft in the Finnish Aircraft restrictions on the age of aircraft that may be registered Register and, after registration, transferring them to the pled- or operated? gee’s possession. Once registered, an aircraft mortgage remains in force for 10 years, during which period the promissory notes An aircraft can be registered in the Finnish aircraft register if can be re-used as security as needed. the aircraft’s owner or operator is a legal entity that is domi- Engines cannot be registered with the aircraft register and it is ciled, or a natural person who is habitually resident, in a Member not possible to create a mortgage over engines. State of the European Economic Area (EEA). If the place of residence or domicile is in another EEA country other than 4.2 Can spare parts, including future parts, be subject Finland, registration also requires that the aircraft’s principal to the aircraft mortgage or engine mortgage (as the case place of departure is Finland and that the owner, possessor or may be)? If not, are there any other forms of security that operator has a competent representative in Finland. Further, can be taken over spare parts? Traficom may at its discretion decide to register an aircraft in Finland in special circumstances, provided that the aircraft has Spare parts do not generally fall under the aircraft mortgage. sufficient operational connections with Finland and the aircraft Parts that are installed in and intended for the permanent use owner, possessor or operator has a competent representative in of an aircraft may under Finnish law be deemed as constituent Finland. parts of the aircraft and may under certain circumstances be Any aircraft registered in the Finnish Aircraft Register must subject to the aircraft mortgage. be certified as airworthy. When registering an aircraft, Traficom Security over spare parts can be granted by way of a posses- reviews the airworthiness criteria, which depends on whether sory pledge. Depending on the circumstances, affixing the the aircraft is imported from a European Union Aviation Safety spare parts to an airframe may adversely affect the effective- Agency (EASA) Member State and whether the aircraft is new ness of the pledge. or used. Airworthiness of the aircraft is reviewed annually. Traficom may at any time cancel an airworthiness review certif- icate or ground the aircraft if it is suspected that the aircraft no 4.3 Is there a register of mortgages or rights over longer meets the criteria for airworthiness. aircraft and/or engine?

3.4 Can aircraft leases be registered? If so, in what The Finnish Aircraft Register contains information on aircraft circumstances? Must the lease be in a particular form mortgages. There is no register of engines, engine mortgages or if it is to be valid and enforceable (for example, must it other rights over engines. be in a particular language or be notarised, legalised or apostilled)? 4.4 What other forms of security can be taken over an aircraft and/or engine and can these other forms be Aircraft leases are not registered. There are no language require- registered? ments for the lease to be valid and enforceable in Finland, although Finnish or Swedish language translations may be Generally, only a Finnish law governed aircraft mortgage regis- required in connection with any dispute adjudicated in Finland. tered with the Finnish Aircraft Register is recognised by Finnish In transactions involving non-Finnish parties, lease agreements law as a valid security interest in the aircraft and its constit- are typically made in the English language and governed by uent parts and accessories. No other type of security can be English law. There are no specific formality requirements, such registered. as requiring a notary or apostille. In practice, sometimes engines or other non-registrable parts are pledged or assigned by way of security assignment. Where

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an engine does not constitute a constituent part of the aircraft Where the aircraft is sold with the assistance of public (please see question 3.2 above), the engine would be regarded enforcement authorities, the auctioneer must notify any known as movable property and could be used as security separately mortgage holders prior to the auction. from the airframe. Movable property can be pledged by way In the insolvency of a Finnish operator, procedural moratoria of a possessory pledge (please see question 4.2 above). Finnish may limit the owner’s rights to repossess the aircraft and the law does not have a concept of security assignment. Where an mortgage holder’s rights to enforce the mortgage. Similarly, in assignment and its effectiveness are assessed under Finnish law, the insolvency of a Finnish owner, procedural moratoria may the assessment is made on a substance-over-form basis, in light limit the mortgage holder’s right to enforce the mortgage. of the particular circumstances at hand. 5.2 What is the procedure for repossession of the 4.5 What claims and rights would take priority in your aircraft? jurisdiction over a registered mortgage? Where uncontested, repossession is generally a matter of agree- Under law, claims that have a statutory right of pledge under the ment between the lessor and the lessee. The lessee can contest Finnish Aviation Act, third party claims secured by a right of repossession by applying for a temporary injunction against retention, and claims for damages under the Finnish Aviation repossession with the competent district court under Finnish Act take priority over a registered mortgage. In addition, costs general rules of procedure. Where the court rules in favour of of public enforcement will be deducted from the enforcement the party that is not in possession of the aircraft at the time, such proceeds prior to distribution to the mortgage holder. party can seek the assistance of public enforcement authorities to repossess the aircraft. 4.6 What other forms of security can be granted over an aircraft and/or engine lease? 5.3 Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local rules that apply, despite a choice of foreign law? Security can be granted over the monetary claims under a lease agreement, provided that the lease agreement does not prohibit this. In Finland, monetary claims can be pledged as security. No. Only a Finnish law aircraft mortgage may be registered The pledge is perfected by notifying the underlying debtor and against an aircraft that is registered in the Finnish Aircraft instructing the debtor to make any payments to the pledgee Register. Hence, the governing law of the mortgage is gener- instead of the pledgor. ally Finnish even though the other finance documents would be Finnish law also recognises foreign law governed security over governed foreign laws. monetary claims. Frequently in aircraft finance transactions, the rights of the lessor under the lease agreement are assigned 5.4 Will local courts recognise and enforce a foreign by an English law security assignment. Where the debtor of the court judgment in favour of a mortgagee or lessor? Are assigned claim (the lessee) is Finnish, the security must nonethe- any interim relief measures available? less be perfected as required under Finnish law in order to be effective in relation to third parties. Further, the effectiveness A judgment rendered by a court of an EU Member State is of an assignment of any non-monetary contractual obligations enforceable in Finland in accordance with EU Regulation No. and benefits is unclear under Finnish law. 1215/2012 (Recast Brussels Regulation). A judgment by a Norwegian, Swiss or Icelandic court is enforceable in accord- 52 Enforcement and Repossession ance with the Lugano Convention on jurisdiction and the recog- nition and enforcement of judgments in civil and commercial 5.1 What are the circumstances in which a mortgagee matters of 30 October 2007. Unless an enforcement treaty or owner can take possession of the aircraft and/or sell applies, enforcement of a judgment of a court of any other juris- the aircraft? What requirements must the mortgagee or diction requires a judgment of a Finnish court, or a court of an owner comply with? EU Member State. Arbitral awards are enforceable in accord- ance with the New York Convention on the Recognition and Outside insolvency, repossession of the aircraft is largely a Enforcement of Foreign Arbitral Awards, dated 10 June 1958. matter of the terms of the lease agreement or security agree- ment. Typically, quiet enjoyment covenants limit the mortgage 5.5 Are powers of attorney from a local airline in favour holder’s right to take possession of the aircraft from the lessee, of a lessor or mortgagee likely to be effective to allow unless the lessee is also in default under the lease agreement. the lessor or mortgagee to deregister the aircraft? Can Depending on the terms of the security agreement, a Finnish such powers be irrevocable, be governed by a foreign law mortgage generally becomes enforceable when the secured law and/or do they need to be in any particular form for debt falls due. The mortgage holder can enforce the mort- local recognition? gage by selling the aircraft. The mortgage holder has a general duty of care towards the owner and any third parties, such as An application for deregistration of an aircraft must be made by second ranking mortgage holders. The duty of care entails that the registered owner. Where a mortgage is registered against the mortgage holder is obliged to realise the aircraft at market the aircraft, the aircraft cannot be deregistered until the mort- value and deliver to the owner an accounting of enforcement gage is nullified. proceeds, as well as any surplus proceeds exceeding the value Foreign law powers of attorney are generally recognised. of the secured claim. If the owner contests private enforcement There are no specific form requirements, such as a notary or action, the mortgage holder must obtain an enforceable court apostille. Under Finnish law, a power of attorney is always revo- judgment and apply for enforcement through public enforce- cable by the principal, even where stated to be irrevocable. ment authorities.

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5.6 If recovery of the aircraft is contested by the lessee 6.2 Has ratification of the Cape Town Convention and a court judgment is obtained in favour of the lessor, caused any conflicts or issues with local laws? how long is it likely to take to gain possession of the aircraft? This is not applicable – Finland has not ratified the Cape Town Convention. Where recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, typically the lessor would seek the assistance of public enforcement 6.3 What is the legal position regarding non-consensual rights and interests under Article 39 of authorities to repossess the aircraft by filing the court judgment the Cape Town Convention? with the public enforcement authorities. The public enforce- ment authorities appoint a bailiff to deal with the matter. The timing depends on the specific circumstances at hand, such as This is not applicable. the urgency of the situation and the processing queue of the public enforcement authorities. The bailiff can impose tempo- 6.4 Has your jurisdiction adopted the remedies on rary measures, such as seizure, if there is a risk of loss while insolvency provided under Article XI of the Protocol to matter is being processed. the Cape Town Convention?

5.7 Are there any restrictions on the ability of the This is not applicable. lessor to export the aircraft from your jurisdiction on termination of the leasing? 6.5 What is the procedure to file an irrevocable deregistration and export request authorisation under No, there are no restrictions. the Cape Town Convention (IDERA)?

5.8 Are exchange controls prevailing in your This is not applicable. jurisdiction as regards payments in foreign currency? Will any consents be required for the remittance of the 72 Liability for Damage and Environmental sale proceeds abroad?

7.1 Can the owner be strictly liable – liable without No, they are not. a requirement to prove fault or negligence – for any damage or loss caused by the aircraft assuming the owner is an innocent owner with no operational control 5.9 If the lease is governed by English law and a of the aircraft? judgment is obtained by the lessor in the English courts, can that judgment be automatically enforced in your jurisdiction or will the case have to be re-examined on its Yes. The owner of the aircraft is, in general, strictly jointly and merits? severally liable with the operator and possessor for any damage caused to a person or property not being carried on board the Please see question 5.4 above. aircraft. However, the owner’s liability may be in practice limited by the fact that air carriers and aircraft operators are generally required to have adequate insurance to cover liability 5.10 What is the applicable procedure for repossession in respect of, inter alia, third parties. of an aircraft under other forms of security interests?

This is not applicable. The only form of recognised secu- 7.2 Does the EU Emissions Trading System (EU ETS), or any similar scheme, apply to aircraft and aircraft rity interest over an aircraft registered in the Finnish Aircraft operators in your jurisdiction? Will charges levied Register is a Finnish law mortgage. according to the EU ETS, or its equivalent, give rise to any in rem rights in relevant aircraft which are part of the 62 Conventions fleet of the operator concerned and, if so, will such rights rank in priority ahead of any mortgage interests properly registered in the relevant aircraft and/or engine? 6.1 Has your jurisdiction ratified any of the following: (a) The Chicago Convention of 1944 on International Civil Aviation (the Chicago Convention); (b) The 1948 Yes, the EU Emissions Trading System applies at the moment to Convention on the International Recognition of Rights air traffic between airports located in the European Economic in Aircraft (the Geneva Convention); (c) The 1993 Area. The charges payable under the EU ETS do not give rise Convention for the Unification of Certain Rules Relating to any in rem rights. to the Precautionary Arrest of Aircraft (the 1993 Rome Convention); and (d) The Convention on International Interests in Mobile Equipment on Matters Specific to 7.3 What liabilities (actual or potential) could an owner, Aircraft Equipment (the Cape Town Convention) and the lessor or financier of an aircraft incur in your jurisdiction Protocol on the Convention on International Interests because of a failure to comply with local environmental in Mobile Equipment on Matters Specific to Aircraft law and/or regulations on the part of an operator of Equipment? aircraft leased or financed by it?

Finland is a party to the Chicago Convention and the Rome If the operator has caused environmental damage or risk thereof, Convention, but not the Geneva Convention or the Cape Town an owner, lessor or financier could be jointly and severally liable Convention. for prevention and restoration costs as well as damages provided

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that it can be considered comparable to the operator. In the payment of rent or other lease payments from the assessment of the comparability, consideration is given, inter alia, lessee, a guarantor or a shareholder; (c) giving notice to whether the owner, lessor or financier had actual control over of default under the lease; (d) obtaining a judgment or the operations. Additionally, the operator’s failure to comply arbitral award for unpaid lease payments; (e) giving notice to terminate the leasing of the aircraft and/or with local environmental law could have an adverse impact on engine; or (f) exercising rights to repossess the aircraft the owner’s reputation. and/or engine?

82 Insolvency and Searches (a) In bankruptcy, a secured creditor (such as a security deposit holder) may enforce its security notwithstanding 8.1 Are there any public registers in your jurisdiction the proceedings, but the liquidator must be notified in where a search can be carried out to determine whether advance and may temporarily prevent the enforcement to an order or resolution for any bankruptcy, bankruptcy protect the interests of the bankruptcy estate or to deter- protection or similar insolvency proceedings has been registered in relation to an operator or lessee? mine the secured creditor’s claim. In company adminis- tration, a general moratorium applies and no enforcement action (including the application of any security deposit) Yes. A public register search can be carried out online in respect may be taken. of bankruptcy or company administration proceedings of a (b) In insolvency proceedings, all payments by the insolvent Finnish operator or lessee. The register search shows whether debtor are blocked. A guarantee holder may nonethe- a petition to commence such insolvency proceedings has been less enforce third party guarantees or security notwith- filed and the status of such proceedings. standing the insolvency of the debtor, provided that such third parties are not subject to insolvency proceedings. 8.2 In the event that an operator or lessee were to (c) Giving notice of default is possible notwithstanding insol- become insolvent either on a balance sheet basis vency proceedings. However, in company administra- (assets less than liabilities) or is unable to pay debts as tion, a notice of default solely on the basis of the company fall due, would an operator or lessee be required to file administration proceedings or non-payment by the debtor for insolvency protection? is ineffective. (d) Notwithstanding insolvency proceedings, the creditor Yes. Where a Finnish lessee or operator is unable to pay its debts can obtain a judgment or arbitral award for unpaid lease as they fall due, other than on a temporary basis, the board of payments. However, the enforcement of such judgment directors of the lessee or operator is required to file for insol- may be limited by the insolvency proceedings. vency proceedings, unless other viable options are available. (e) See (c) above. The formal insolvency proceedings generally applicable to all (f) See (a) above. companies under Finnish law are bankruptcy (aimed at liqui- dating an insolvent debtor and distributing its assets among its 8.5 Can the commencement of insolvency proceedings creditors) and company administration (aimed at rehabilitating have retrospective effect in relation to any such actions an insolvent but ultimately viable debtor by rearranging its busi- taken before commencement? If so, for what period can ness operations and its debts). there be a look back?

8.3 Do the available forms of insolvency protection Yes. A transaction, series of transactions, arrangement or any in your jurisdiction involve the appointment of either other act relating to the assets of the debtor can be challenged, an officer of the court or a specifically court appointed if made during a critical period preceding insolvency or foreclo- official to take control of the operator or lessee (an sure proceedings, provided that certain conditions are met. The ‘Insolvency Official’) while in insolvency protection? critical period is calculated backwards from the filing for insol- vency proceedings or enforcement of a claim by foreclosure. In bankruptcy proceedings, the debtor no longer has the capacity Transactions may be revoked where the arrangement can be to represent itself and dispose of its assets. Instead, the court deemed as improper or inappropriate from the point of view of appoints a liquidator, who is essentially a representative of the the other creditors of the debtor, and the counterparty of the creditors and who takes over the assets of the debtor company. debtor knew, or ought to have known of the debtor being, or by Similarly, in company administration proceedings, the court virtue of the transaction becoming, unable to pay its debts when appoints an administrator to manage the debtor’s business due. The critical period is five years preceding the insolvency/ and prepare a restructuring plan. However, the debtor retains foreclosure filing. However, no time limit applies in dealings the right to represent itself and run its business in the ordi- between related parties. nary course. While the company administration proceedings In addition, specific grounds apply, for example, in respect of are ongoing, a general moratorium on payment of debts and revocation of payments, set-off and granting of security. The enforcement by creditors is in place until the restructuring plan critical periods for these are generally three months, or two is approved. Once approved, the debtor can only make payments years between related parties. on the restructuring debts in accordance with the plan.

8.6 Is there, either under law or as a matter of practice 8.4 Does the commencement of insolvency protection in your jurisdiction, a period of time within which the involving the appointment of an Insolvency Official Insolvency Official will either ‘adopt’ the lease and in your jurisdiction have the effect of prohibiting the pay rent and other lease payments as an expense owner from taking the following actions to enforce of the insolvency or ‘reject’ the lease and permit the the lease after commencement of such protection: (a) owner to enforce such rights as it may have under the applying any security deposit held by the owner against lease? (a) If the lease is ‘adopted’, will the Insolvency any unpaid amounts due under the lease; (b) accepting Official also pay any unpaid lease payments due as at

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commencement of the insolvency protection? (b) If not Under the Aviation Act, the aircraft owner, possessor and or if the lease is ‘rejected’, would the owner’s claim for operator are jointly liable for the costs of services obtained any outstanding sums rank equally with other ordinary from operators or service providers (e.g. airport or unsecured creditors of the lessee? air navigation fees). An aerodrome operator may, by refusing to provide services or by using equipment or constructions In both bankruptcy and company administration proceedings, intended to prevent aircraft departure, prevent an aircraft from the liquidator or administrator has the option to ‘adopt’ agree- departing until the charges due have been paid or a security for ments that relate to continued performance. Generally, the them has been given. ranking of accrued sums depends on whether the sums relate to the period prior to application for insolvency proceedings (in 92 Detention and Confiscation which case they rank pari passu with ordinary unsecured credi- tors) or after (in which case they rank ahead of ordinary unse- 9.1 Other than insolvency laws (see section 8), cured creditors whose claims arose before the application). are there any laws which may have the effect of defeating the owner’s right in the aircraft – for example, 8.7 Are there certain types of preferred creditors Government requisition? Do the laws of your jurisdiction whose claims will rank above claims of the owner? provide for any compensation in such circumstances?

Secured creditors and holders of right of retention rank above Under the Preparedness Act, the Finnish Defense Forces may unsecured creditors. The owner’s ranking depends, inter alia, on require that the aircraft is handed over to military troops in the whether the lease receivables are secured or unsecured. event of a state of war.

8.8 If the aircraft is in the possession of a person 9.2 Are there any rights in relation to third parties to other than the operator or lessee at the commencement detain or sell the aircraft pursuant to illegal activities, of Insolvency Protection of the operator or lessee, for tax or any other laws if the operator or lessee fails to pay example, an independent maintenance facility, will such when due? If so, can the aircraft be forfeited and sold person be entitled, under the laws of your jurisdiction, without the owner being made aware? to assert a lien arising under law or contract over the aircraft in respect of amounts then due and unpaid to An aircraft may under the Penal Code be detained by the State such person by the operator or lessee? of Finland if the aircraft is used for drug trafficking or for the purpose of another criminal offence (except where the equip- A service provider who has prepared or carried out any repara- ment belongs in full or in part to someone else than the offender tion, maintenance or similar work on the aircraft has the right and the owner of the equipment was in good faith). to hold the aircraft in its possession until the services have been paid in full. Similarly, the aircraft may be held by a for unpaid rent for space in which it has been stored.

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Maria Lehtimäki is a specialist partner whose practice focuses on advising financial institutions, investors and corporates on cross-border financing and capital markets transactions and related regulatory matters. She has experience in structured finance across a variety of asset classes, as well as special situation investments and distressed investments. Maria joined Waselius & Wist in 2012 after obtaining her Master of Laws from the University of Helsinki. Maria has also spent time with Cravath, Swaine & Moore LLP in London as a foreign associate working on equity and debt capital markets transactions. Maria is recom- mended as a rising star in Banking and Finance by Euromoney Legal Media Group and has won praise by clients as being “excellent, very responsive and engaged” (IFLR1000).

Waselius & Wist Tel: +358 9 668 95235 Eteläesplanadi 24 A Fax: +358 9 668 95222 00130 Helsinki Email: [email protected] Finland URL: www.ww.fi

Ann-Marie Eklund is a senior associate who regularly advises financial institutions and other operators in the aviation industry on aircraft financing and leasing, including ongoing assistance with registration matters. Ann-Marie joined Waselius & Wist in 2013 from Deloitte. Clients say about Ann-Marie: “Very strong attention to detail, great at progressing matters with other counsels. Also has a quick response time to emails and has a strong understanding of deal structure.” (IFLR 1000.)

Waselius & Wist Tel: +358 9 668 95249 Eteläesplanadi 24 A Fax: +358 9 668 95222 00130 Helsinki Email: [email protected] Finland URL: www.ww.fi

Waselius & Wist is a leading Finnish commercial law firm, committed to providing specialised legal services in complex business transactions. The firm is especially renowned for high-end advice within all fields of commer- cial law, with particular emphasis on capital markets, banking and finance, including financial restructurings, mergers and acquisitions, dispute resolu- tion, real estate, energy and natural resources, tax law, aviation law, employ- ment law, competition law as well as IPR. The firm takes pride in being able to deliver tailor-made services and solutions with efficiency, accuracy and flexibility, aimed at satisfying the needs of the most demanding clients. www.ww.fi

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Ravi Kini

MV Kini Khushboo Jain

12 General and Contractual ■ Payments cannot be fully expensed as would be permitted under an operating lease, but interest can be deducted.

1.1 What are the typical structures available for financing the purchase of an aircraft? 1.4 Are there any proposals for reform in the area of aviation finance? Generally, a lease can be classified as an operating lease (dry and wet lease with/without ACMI arrangements) or a finance/capital lease The RBI issued a revised ECB policy on 16 January 2019 with a (mortgage financing). Various structures for financing purchase view to rationalise the existing framework for external commer- of aircraft are: Lease Financing; Mortgage Financing; Placements; cial borrowings (ECB) and INR denominated bonds, which Back Leveraged Lease; ECA Financings; Bank Financings; EETCs; includes: AFIC; Non-Bank Financing; ECA Co-commercial financing; ■ simplification of structures; ECA Co-financing; Japanese structures (like JOL and JOLCO); ■ the new framework is instrument neutral and in relation to Owner Trust structures; Synthetic Lease; Orphan Trust Structures INR ECB, includes both private placement and listing of (like SPVs); and Asset Backed Securities (CDOs and CLOs). Rupee denominated bonds overseas; ■ ECB for working capital as a permissible end-use has been allowed for the civil aviation sector under the approval 1.2 What are the key advantages/disadvantages and main issues arising in relation to these financing route; and structures? ■ existing sector-wise limits have now been replaced, and all eligible borrowers may now raise ECBs of up to USD 750 million or its equivalent in any particular financial year The structure choice of Lease or Mortgage Financing is deter- mined by the operator in its ‘lease versus own’ analysis. The under the automatic route. following criteria will have a hand in the operator’s decision: operational flexibility; cost; residual risk; corporate policy; tech- 1.5 Is it possible according to the laws in your nological considerations; cheaper maintenance; better fuel burn; jurisdiction to enter into non-binding or partially access to capital; tax benefits, etc. binding pre-contractual agreements (e.g. ‘letters of intent’) which will NOT take effect as fully enforceable agreements? 1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential characteristics? It is a well settled legal position under Indian laws that to ‘enter into an agreement’ is neither enforceable, nor does it confer any In India, Operating and Capital Finance Lease are popular. rights upon the parties. A letter of intent is not intended to ultimately bind either party to enter into any contract. Such Characteristics of an Operating Lease: non-binding letter of intent can, however, also take a hybrid ■ The lessor will be the owner of the asset, so benefits of form where parties agree to be bound by certain identified depreciation may not be available such as capital lease. provisions. Much depends on the language of the LOI to create ■ The rent payments likely will be reduced to offset the tax a binding obligation. advantages retained by the lessor. ■ The full rental payment can be deducted as an expense 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction because it is a true lease and these payments will be lower which applies to all pre-contractual agreement, than with a purchase. financing and leasing transaction documents, and the ■ A transaction does not show up as a debt on the balance conduct of parties connected to them? sheet. ■ Flexibility to minimise obligations. The Indian Contract Act (‘the Act’) fails to incorporate even a semblance of a doctrine of good faith and fair dealing. The Capital Finance Lease: incorporation of this doctrine at the negotiation stage is clearly ■ Benefits of ownership while at the same time providing a lacking in the text of the Act. Judicial pronouncements on the way to finance all the costs of acquiring the asset, such as application of this doctrine under Indian law have also been equity build-up. sparse.

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22 Taxation and Related Matters permanent establishment could be triggered on several counts including the existence of a fixed place at the disposal of the foreign entity or deputation of the employees of foreign entity 2.1 Which government authority in your jurisdiction in India for a certain specified period (ranging between 9–12 has primary responsibility for the accounting for and months) on a specific project or the existence of a dependent regulation of revenue control and taxes? agent, etc. Therefore, the constitution of a PE depends upon the specific circumstances of each case. In India, there are two government authorities administering and regulating the revenue control and collection of taxes. The Central Board of Direct Taxes (CBDT) is responsible for the administra- 2.6 Is the authority at question 2.1 likely to establish a ‘look-through’ right or similar as regards a lender or a tion of direct taxes in India and the Central Board of Indirect Taxes lessor which is a special-purpose vehicle involved for and Customs (CBIC) is the nodal agency responsible for adminis- the purpose of tax treaty access? tering indirect taxes comprising of Goods and Services Tax and Customs. Both the authorities are part of Department of Revenue under the Ministry of Finance of the Government of India. The Income tax provisions in India encompass General Anti- avoidance Rules (GAAR) under which an income tax authority may ‘look through’ the transaction if it is the opinion that the 2.2 What are typically the taxes in your jurisdiction sole purpose of entering into such transaction is to evade the which may arise in relation to a sale, a lease or a payment of income tax that defeats the objects of the otherwise financing of an aircraft or an engine? applicable tax provisions.

The above transactions would typically give rise to the following 2.7 Will the import of an aircraft into your jurisdiction taxes in India: and/or the sale or leasing of the aircraft give rise to any (i) Lease rental payable by the resident lessee which could be VAT, sales or use taxes or any customs import or excise in the form of royalty or interest. duties? (ii) Interest element of loan repayments made by a resident to a non-resident. Importation of aircraft in India either by purchase or on lease (iii) The non-resident seller for aircraft registered and operated could be liable to GST/Customs duty in India. Currently, the in India shall be liable to capital gains tax in India. GOI has exempted the importation of aircraft on a lease basis, (iv) Goods and Services Tax (GST). however, outright purchase of aircraft is liable to IGST.

2.3 Is the provision of a current tax-residency 2.8 Are there any documentary taxes (for example, certificate by a payee sufficient for a lessee or a stamp duty payable on the execution of documents)? borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability? Yes, stamp duty is payable on any agreements of sale/purchase, lease or consortium financing agreements executed in India. In cases where the resident of any jurisdiction with which India The rate of stamp duty depends upon the nature of the agree- has signed a double tax avoidance treaty accrues to any benefit ment and it differs in every state where it is executed. under such treaty, then Tax Residency Certificate (TRC) is used to certify the residency of that entity and its eligibility of such 32 Registration and Deregistration benefit under the treaty. Based on such TRC, the jurisdictional tax authorities grants an appropriate exemption from the with- 3.1 Which government authority in your jurisdiction holding tax requirements. has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry or an operator registry? If the aircraft register is an 2.4 Has the advent of BEPS (the Base Erosion and operator register, is it possible to record the details of Profit Shifting initiative of the OECD) had any effect as an owner or lessor and any financier with an aircraft regards structures in aviation finance and leasing or mortgage? their interpretation?

The Director General of Civil Aviation (DGCA) is the primary BEPS could significantly impact the structures of aircraft government authority in India with the responsibility of regula- financing and leasing as the primary aim of measures under tion of aviation and the registration of aircraft. Aircraft Rules, BEPS to prevent non-taxation of global income of the MNE. 1937 provide for registration of the owner as well as the details Action Plan 4 under BEPS deals with interest deduction. Action of the lessor and lessee in the case of a leased aircraft. Plan 6 and 7 deal with prevention of treaty abuse and preventing As per DGCA Airworthiness Procedural Manual, in cases artificial avoidance of PE. These action plans by virtue of LOB where the aircraft has been mortgaged/hypothecated, such Clause or the principal purpose test may limit the ability of the mortgage/hypothecation shall be endorsed on the CoR. lessor/lessee to treaty shopping.

3.2 What is the effect of registration of the aircraft? 2.5 What are the typical thresholds in your jurisdiction Does registration on your national aircraft register for which a permanent establishment may be triggered confer proof of ownership of the aircraft and/or engine? under the terms of any relevant double-tax treaty or similar? It may be noted that the registration by the DGCA is for the Under most DTAA’s between India and other countries, purpose of controlling the safety of aviation in India and it in no

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way establishes the legal ownership of an aircraft. Disputes with IDERA Route ((Rule 30(7)) regard to the ownership and liabilities of the owners, if any, will First, an application shall be made to the DGCA, who shall have to be decided in a Court of Law. publish the fact on its website and email all airports that the application has been filed by the IDERA holder, at which point airports will calculate their dues preceding the applica- 3.3 Can foreign-owned aircraft be registered on your national aircraft register and are there limits or tion of the IDERA holder along with other government enti- restrictions on the age of aircraft that may be registered ties. Consequently, the IDERA holder shall make payment, for or operated? which a certificate shall be issued, which the holder shall submit to the DGCA. On receipt of this, the DGCA shall issue permis- sion to take the aircraft back. The Aircraft Rules, 1937 provide that an aircraft may be regis- tered in India in either of the following categories: (a) Category A where the aircraft is wholly owned either: 42 Security (i) by citizens of India; (ii) by a company or corpora- tion registered and having its principal place of business 4.1 Is it possible to create a mortgage over an aircraft within India; (iii) by the Central Government or any State or engine in your jurisdiction? If so, what are the types Government or any company or any corporation owned of aircraft mortgage and engine mortgage available and or controlled by either of the said Governments; or (iv) what formalities are required in order to perfect it? by a company or corporation registered elsewhere than in India, provided that such company or corporation has The concept of ‘security trustee’ is recognised in India. Normally, given the said aircraft on lease to any person mentioned in in financing transactions involving one or more lenders, the secu- sub-clause (i), sub-clause (ii) or sub-clause (iii). rity over aircraft and leases is structured through a security trustee (b) Category B where the aircraft is wholly owned either: (i) who holds and enforces the security interests on behalf of the by persons resident in or carrying on business in India, lenders. Indian law also facilitates arrangements whereby a secu- who are not citizens of India; or (ii) by a company or corpo- rity trustee may hold the security for a changing group of benefi- ration registered elsewhere than in India and carrying on ciaries. When the underlying loan is transferred or if the lenders business in India. change, it is advisable to intimate the DGCA about such changes. (c) No aircraft in respect of which the conditions required above are not satisfied, or which is already validly regis- tered in another country, shall be registered in India. 4.2 Can spare parts, including future parts, be subject (d) In a case where the usual station of an aircraft and its ordi- to the aircraft mortgage or engine mortgage (as the case nary area of operation are not situated in India, the Central may be)? If not, are there any other forms of security that Government may decline to accept an application for can be taken over spare parts? registration of the aircraft in India, or, as the case may be, to permit the aircraft to remain registered in India, if, in its There is no requirement in India for registration of a lease or mort- opinion, the aircraft could more suitably be registered in gage of an engine, separate from that of the aircraft. In relation some other country. to leased aircraft, typically the engines are not considered as sepa- rate items. In our experience, provisions in relation to title, secu- 3.4 Can aircraft leases be registered? If so, in what rity and obligations or restrictions in relation to spare parts are set circumstances? Must the lease be in a particular form out in the lease agreement, recording evidence of the owner’s title if it is to be valid and enforceable (for example, must it and beneficial interest in relation to the parts including spares. be in a particular language or be notarised, legalised or apostilled)? 4.3 Is there a register of mortgages or rights over aircraft and/or engine? In case an aircraft is taken on lease, a copy of the lease agreement must be submitted with the application for registration of the There is no separate register of aircraft mortgages in India. aircraft to DGCA. The lease must be in the English language However, the CAR requires the owner of an aircraft to file a or otherwise translated and must be duly stamped and notarised notarised and apostilled copy of the mortgage documents or apostilled. evidencing the creation of the charge with the DGCA, endorsing the name of the mortgagor on the certificate of registration. 3.5 How is deregistration affected and what steps can Also, if the mortgagor is an Indian company or one with a regis- a lessor take to de-register the aircraft on termination of tered place of business in India, the mortgagor must register any the lease? charge with the relevant RoC within 30 days of the creation.

As per the Aircraft Rules, 1937, deregistration can take place 4.4 What other forms of security can be taken over under Rule 30 (6) wherein registration of an aircraft may be an aircraft and/or engine and can these other forms be cancelled for, inter alia, termination of the lease and under (7) registered? where application is received from an IDERA holder. The registration of a security interest is certified by an acknowl- Non-IDERA Route (Rule 30(6)) edgment given by the ROC at the time such registration is done. The application for cancellation of registration shall be made by The RoC maintains a register of charges, which evidences the the registered owner or his authorised representatives to DGCA, existence of the charge over the aircraft and records the nature enclosing the original C of R and the Completed Checklist as per and details of the instrument creating the charge. Only charges Appendix-3 of CAR specifying the relevant clause of Aircraft created by Indian owners of the aircraft are required to be regis- Rules and paragraph of CAR under which cancellation is sought. tered with the ROC. An acknowledgment of the filing may be obtained from the DGCA at the time of the filing.

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4.5 What claims and rights would take priority in your of the parties deriving from such lease are not opposed to public jurisdiction over a registered mortgage? policy and are not in breach of Indian law.

Indian laws recognise the following liens in favour of third parties: 5.4 Will local courts recognise and enforce a foreign airline employees for unpaid wages; repairers for repairs of aircraft court judgment in favour of a mortgagee or lessor? Are in the repairers’ possession; and governmental or other unpaid any interim relief measures available? statutory dues. Also, the Central Government is able to empower any authority to detain an aircraft if such detention is necessary Only in certain cases can a foreign decree be executed in India to secure compliance with a domestic legislation, e.g.: the Central directly as if it had been passed by a court in India. Section 44A Government has the power to give directions to detain or requisi- CPC provides, inter alia, that where a foreign judgment has been tion any aircraft in the interest of public safety and security. rendered by a superior court in any country or territory outside India, which the Government has by a notification declared 4.6 What other forms of security can be granted over to be a reciprocating territory, it may be enforced in India by an aircraft and/or engine lease? proceedings in execution as if the judgment had been rendered by the relevant court of India. Typical forms of security granted in aviation finance trans- actions in India could include the taking over of security of 5.5 Are powers of attorney from a local airline in favour immovable property by way of mortgage or movable property/ of a lessor or mortgagee likely to be effective to allow bank accounts, etc. by way of deed of hypothecation. the lessor or mortgagee to deregister the aircraft? Can such powers be irrevocable, be governed by a foreign law and/or do they need to be in any particular form for 52 Enforcement and Repossession local recognition?

5.1 What are the circumstances in which a mortgagee or owner can take possession of the aircraft and/or sell A valid deregistration power of attorney (DPOA) executed by the aircraft? What requirements must the mortgagee or the lessee/operator in favour of the owner or lessor enables such owner comply with? owner or lessor to deregister the aircraft without the need for judicial intervention. Further, Indian law provides for both revocable and irrevocable powers of attorney, the distinction The owner or mortgagee can take possession of any aircraft on being that for a power of attorney to be irrevocable it must be lease typically on termination of lease following an EOD or coupled with an interest of the attorney being appointed in exer- on its expiry. To pursue the repossession, the owner has two cising the power under the power of attorney. It is advisable that options: either to approach the DGCA vide DPOA and IDERA; a duly stamped and notarised copy of a DPOA (executed by the or approach the court. operator in favour of the owner) be filed with the DGCA.

5.2 What is the procedure for repossession of the aircraft? 5.6 If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the An aircraft in India may be deregistered on the application aircraft? of the lessee/operator, owner, lessor or IDERA holder. The DGCA may also suo moto cancel the registration of an aircraft if This depends on a case-by-case basis. it no longer meets the civil aviation requirements of India. The lessee/operator or foreign lessor/owner may apply to the DGCA for deregistration of an aircraft in case the lease 5.7 Are there any restrictions on the ability of the regarding the aircraft has expired or has been terminated in lessor to export the aircraft from your jurisdiction on accordance with it. The applicant would have to approach the termination of the leasing? DGCA with a written application requesting deregistration. The consent of all the parties named on the certificate of regis- Permissions that are required for the export of an aircraft from tration should also be enclosed. India include: permission from the Directorate General of Civil An IDERA holder may also apply to the DGCA for deregis- Aviation under AIC 12 of 2018 (after the IDERA holder pays tration of the aircraft in light of the Cape Town Convention and government dues accrued against the aircraft for three months Aircraft Protocol. The IDERA holder would have to approach prior to the date of application for deregistration); or permission the DGCA with an application as prescribed under AIC 12 of from the Directorate General of Foreign Trade; and permission 2018 and annex the original or notarised copy of the IDERA. from the customs authorities. These permissions cannot be issued The IDERA holder must also provide evidence of the consent in advance and time required for the granting of each licence may of the entity named as the priority interest holder in the aircraft range from two to three weeks. Until 19 December 2019, approvals as per the International Registry. The DGCA is mandated to deregister the aircraft within five working days of receipt of from RBI were also required, which have now been exempted. application from the IDERA holder. 5.8 Are exchange controls prevailing in your jurisdiction as regards payments in foreign currency? 5.3 Will local courts recognise a choice of foreign law Will any consents be required for the remittance of the in an aircraft mortgage? Are there any mandatory local sale proceeds abroad? rules that apply, despite a choice of foreign law?

India is an exchange-controlled jurisdiction, and matters relating It is fairly common for a foreign law governed lease to be recog- nised in India. A court shall apply such law as long as the rights to remittance or repatriation of foreign exchange are governed

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by the provisions of the Foreign Exchange Management Act, tenets of the Convention and Protocol. There remain several 1999 and the rules and regulations made thereunder. conflicts between local municipal law and the Convention and Under law, Indian operators do not require any approval of Protocol. the Reserve Bank of India (RBI) for any remittance of oper- ating lease rentals, opening of letters of credit towards secu- 6.3 What is the legal position regarding rity deposit, etc. in respect of import of aircraft, aircraft engines non-consensual rights and interests under Article 39 of or helicopters on an operating lease basis. However, for other the Cape Town Convention? payments (e.g., rentals in financial lease transactions, indemnity payments and payments towards insurance premium), the prior India has made extensive declarations under the Convention, as approval of the RBI may be required. listed below. Specific declaration under Article 39(1)(a): 5.9 If the lease is governed by English law and a “The following categories of non-consensual right or interest have priority judgment is obtained by the lessor in the English courts, under its laws over an interest in an aircraft object equivalent to that of the can that judgment be automatically enforced in your holder of a registered international interest and shall have priority over a jurisdiction or will the case have to be re-examined on its registered international interest, whether in or outside insolvency proceed- merits? ings, namely:- (a) liens in favour of airline employees for unpaid wages arising since the In addition to question 5.4 above, in the absence of any recip- time of a declared default by that airline under a contract to finance or rocal arrangement or treaty, a suit will have to be filed for lease and aircraft object; enforcement of any such judgment or order obtained. The (b) liens or other rights of an authority of India relating to taxes or other United Kingdom and have been declared as unpaid charges arising from or related to the use of that aircraft object reciprocating tree territories for the purpose of Section 44A. In and owed by the owner or operator of that aircraft object, arising since a suit on a foreign judgment, the court cannot go into the merits the time of a default by that owner or operator under a contract to of the original claim or question its correctness or propriety. A finance or lease that aircraft object; and foreign judgment must be final and conclusive in the court in (c) liens in favour of repairers of an aircraft object in their possession to which it is passed for it to be considered a valid cause of action. the extent of service or services performed on and value added to that aircraft object.” General Declaration under Article 39(1)(b): 5.10 What is the applicable procedure for repossession “Nothing in the Convention shall affect its right or that of any entity of an aircraft under other forms of security interests? thereof, or any intergovernmental organisation in which India is a member, or other private provider of public services in India, to arrest The same procedure as provided at question 5.2 above. or detain an aircraft object under its laws for payment of amounts owed to the Government of India, any such entity, organisation or provider 62 Conventions directly relating to the service or services provided by it in respect of that object or another aircraft object.”

6.1 Has your jurisdiction ratified any of the following: (a) The Chicago Convention of 1944 on International 6.4 Has your jurisdiction adopted the remedies on Civil Aviation (the Chicago Convention); (b) The 1948 insolvency provided under Article XI of the Protocol to Convention on the International Recognition of Rights the Cape Town Convention? in Aircraft (the Geneva Convention); (c) The 1933 Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft (the 1933 Rome India will apply Article XI, Alternative A, of the Protocol in Convention); and (d) The Convention on International its entirety to all types of insolvency proceedings, and that Interests in Mobile Equipment on Matters Specific to the waiting period for the purposes of Article XI(3) of that Aircraft Equipment (the Cape Town Convention) and the Alternative shall be two calendar months. Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment? 6.5 What is the procedure to file an irrevocable deregistration and export request authorisation under the Cape Town Convention (IDERA)? India has ratified the Chicago Convention, but has opted not to ratify article 3 (Civil and State Aircraft) and article 83 (Transfer This has been elaborated in question 5.2 above. of Certain Functions and Duties) thereunder. India acceded to the Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Cape 72 Liability for Damage and Environmental Town Convention on International Interests in Mobile Equipment (Protocol) on 31 March 2008. 7.1 Can the owner be strictly liable – liable without India has not signed the Geneva or the Rome Convention. a requirement to prove fault or negligence – for any damage or loss caused by the aircraft assuming the owner is an innocent owner with no operational control 6.2 Has ratification of the Cape Town Convention of the aircraft? caused any conflicts or issues with local laws? The owner, lessor or financier would not be held strictly liable The Convention on International Interests in Mobile Equipment for any damage or loss caused to the third party by the aircraft, and the Aircraft Protocol are in force in India. However, there when they are not in operational control of the aircraft and such have been several implementation issues. Various amend- act was committed without their knowledge. ments have been made to Aircraft Rules, 1937, Civil CARs and Aeronautical Information Circulars (AICs) which imbibe the

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7.2 Does the EU Emissions Trading System (EU ETS), 8.3 Do the available forms of insolvency protection or any similar scheme, apply to aircraft and aircraft in your jurisdiction involve the appointment of either operators in your jurisdiction? Will charges levied an officer of the court or a specifically court appointed according to the EU ETS, or its equivalent, give rise to official to take control of the operator or lessee (an any in rem rights in relevant aircraft which are part of the ‘Insolvency Official’) while in insolvency protection? fleet of the operator concerned and, if so, will such rights rank in priority ahead of any mortgage interests properly The IB Code provides that a financial/operational creditor/ registered in the relevant aircraft and/or engine? corporate applicant may propose appointment of a insolvency professional as an Interim Resolution Professional (IRP) at For all International flights, CAR-Section – 10, SERIES ‘C’ the time of filing of application before NCLT for initiation PART I (CORSIA) has been applicable in India since 2019. The of Corporate Insolvency Resolution Process (CIRP) against a Ministry of Civil Aviation published a White Paper on Green corporate debtor. After evaluation of the insolvency profes- Aviation Policy in 2019 to address the issues pertaining to envi- sional in terms of eligibility provided under the IB Code and ronmental concerns. The White Paper also included general regulations made thereunder, the NCLT can order the appoint- statements of policy which may impose requirements for the ment of such insolvency professional an IRP. Such IRP is then operators/airlines to adopt the “Green House Gas Management approved by the Committee of Creditors (containing only finan- Framework” for their operations, including routes apart from cial creditors, to whom financial debt is owned) constituted the routes covered under CORSIA and the EU ETS scheme. under the Section 21 of the IB Code, to act as a Resolution Professional (RP). 7.3 What liabilities (actual or potential) could an owner, lessor or financier of an aircraft incur in your jurisdiction 8.4 Does the commencement of insolvency protection because of a failure to comply with local environmental involving the appointment of an Insolvency Official law and/or regulations on the part of an operator of in your jurisdiction have the effect of prohibiting the aircraft leased or financed by it? owner from taking the following actions to enforce the lease after commencement of such protection: (a) The obligation of compliance with environmental laws is applying any security deposit held by the owner against any unpaid amounts due under the lease; (b) accepting broadly covered under the Water Act 1974, Air Act 1981 and payment of rent or other lease payments from the Environmental Protection Act 1986 and penalties for contra- lessee, a guarantor or a shareholder; (c) giving notice vention lies thereunder. Additionally, the National Green of default under the lease; (d) obtaining a judgment or Tribunal can fix financial liabilities towards compensation for arbitral award for unpaid lease payments; (e) giving damage caused to the environment and restitution of the prop- notice to terminate the leasing of the aircraft and/or erty. The Supreme Court and the State High Courts may also engine; or (f) exercising rights to repossess the aircraft impose exemplary damages for damage to the environment. and/or engine?

82 Insolvency and Searches The intent of the IB Code is clear that during the period of Moratorium qua the corporate debtor, there shall be no institu- 8.1 Are there any public registers in your jurisdiction tion or continuation of any suits and no action whatsoever of where a search can be carried out to determine whether foreclosure, recovery or enforcement of any ‘security interest’ an order or resolution for any bankruptcy, bankruptcy which has been created by the corporate debtor vis-a-vis its prop- protection or similar insolvency proceedings has been erty or recovery of any property by the owner or lessor which is registered in relation to an operator or lessee? in possession of the corporate debtor. Further, there shall be no transfer, encumbrance, alienation or disposal of the assets In India, the matters pertaining to insolvency and liquidation or any legal right or beneficial interests by the corporate debtor of corporates are governed by the Insolvency and Bankruptcy during the moratorium. Hence, a) applying of security deposit Code, 2016 (IB Code) and regulations made thereunder. will need to be decided on a case-by-case basis, b) acceptance of Though there is no consolidated public registry on the orders rent from lessee or guarantor or shareholders may be allowed, in or resolutions pertaining to such matters but all the respective terms of the lease agreement but the same cannot be demanded orders passed by National Company Law Tribunal (NCLT), or enforced in terms of the lease deed, c) notice of default may being the Adjudicating Authority and National Company be sent, however, it cannot lead to enforcing of rights under the Appellate Tribunal (NCLAT), the Appellate Authority are lease, d) arbitration or any legal suit or claims cannot be insti- uploaded/recorded on the respective websites of NCLT and tuted or continued, e) termination of leasing of aircraft and/or NCLAT which allows public searches to be carried out for enti- engine cannot be done as it will lead to enforcement of secu- ties involved in the IBC proceedings. rity interest or any other rights under the lease, and f) if there a specific bar on the re-possession of an aircraft or engine.

8.2 In the event that an operator or lessee were to become insolvent either on a balance sheet basis 8.5 Can the commencement of insolvency proceedings (assets less than liabilities) or is unable to pay debts as have retrospective effect in relation to any such actions fall due, would an operator or lessee be required to file taken before commencement? If so, for what period can for insolvency protection? there be a look back?

Under Section 10 of the IB Code, the operator or lessee (being An interim resolution professional/resolution professional, as a corporate applicant) can file an application before NCLT on the case may be, is required to collect all financial and opera- occurrence of any default (non-payment of any financial or oper- tional payments data of the corporate debtor for a period over ational debt). the last two years. Further, he needs to opine on any transac- tions of the corporate debtor being a ‘Preferential Transaction’.

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The look-back period for the same is two years for the related The recovery of any property by an owner or lessor where party and one year for any party other than the related party. such property is occupied by or in the possession of the corpo- Also, for an extortionate credit transaction, a two-year period as rate debtor is prohibited once the moratorium under Section 14 a look-back period is provided preceding the date of commence- applies. ment of the CIRP. However, in liquidation proceedings, a lessor is permitted to repossess its property. Section 36(4) of the IBC specifically lays down that assets owned 8.6 Is there, either under law or as a matter of practice in your jurisdiction, a period of time within which the by a third party, which are in the possession of the corporate Insolvency Official will either ‘adopt’ the lease and debtor, shall be excluded from the liquidation estate and cannot be pay rent and other lease payments as an expense used in the process of liquidation of the corporate debtor. of the insolvency or ‘reject’ the lease and permit the owner to enforce such rights as it may have under the 92 Detention and Confiscation lease? (a) If the lease is ‘adopted’, will the Insolvency Official also pay any unpaid lease payments due as at commencement of the insolvency protection? (b) If not 9.1 Other than insolvency laws (see section 8), or if the lease is ‘rejected’, would the owner’s claim for are there any laws which may have the effect of any outstanding sums rank equally with other ordinary defeating the owner’s right in the aircraft – for example, unsecured creditors of the lessee? Government requisition? Do the laws of your jurisdiction provide for any compensation in such circumstances? The IB Code provides that on the commencement of CIRP, the creditors may file their respective claims to the interim resolu- In case of deregistration and export under India’s Cape Town tion professional/resolution professional for their outstanding Convention regulations, the IDERA holder must bear the cost dues which are to be paid in order of priority depending on of all charges accrued three months’ prior to the date of submis- the nature of the claim, i.e. secured; unsecured; financial; or sion of the IDERA, owed to the Central Government, or any operational. entity thereof, or any inter-governmental organisation in which Also see question 8.4 above and question 8.7 below. India is a member, or other private provider of public services in India. Third parties which are government entities have the right to arrest, detain, attach or sell an aircraft for payment of 8.7 Are there certain types of preferred creditors amounts owed. whose claims will rank above claims of the owner?

9.2 Are there any rights in relation to third parties to The IB Code provides for resolution of the corporate debtor detain or sell the aircraft pursuant to illegal activities, wherein an eligible resolution applicant is required to submit its tax or any other laws if the operator or lessee fails to pay resolution plan to the Resolution Professional within the time- when due? If so, can the aircraft be forfeited and sold lines prescribed under the IB Code. Section 30 of the IB Code without the owner being made aware? provides for the manner in which a resolution plan must be submitted and distribution is to be made to various creditors The following third-party rights would take priority over the (financial, operational and others) and which is to be approved lessor’s rights under aircraft lease: by the Committee of Creditors (with 66% voting shares). (i) Airports Authority of India can exercise a lien on aircraft Further, the Committee of Creditors may approve a reso- for any unpaid dues such as landing and parking charges lution plan, which may take into account the order of priority – this also includes private airport operators exercising amongst creditors as laid down in Section 53 of the IB Code, under the powers vested to the Airports Authority of including the priority and value of the security interest of a India; secured creditor. (ii) an unpaid bailee can exercise a mechanics lien; (iii) statutory dues such as taxes, workmen wages, etc.; and 8.8 If the aircraft is in the possession of a person (iv) the government or its agencies can confiscate, detain or other than the operator or lessee at the commencement requisition aircraft (whether foreign-owned or otherwise) of Insolvency Protection of the operator or lessee, for under circumstances such as declaration of emergency by example, an independent maintenance facility, will such Central Government or involvement of an aircraft in crim- person be entitled, under the laws of your jurisdiction, inal activity, etc. to assert a lien arising under law or contract over the aircraft in respect of amounts then due and unpaid to such person by the operator or lessee?

See question 8.4 above.

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Ravi Kini is renowned for his work in aviation and government affairs. His significant experience in the aviation sector has led him to advise on ground-handling issues across a number of airports. Ravi’s experience extends to advising bodies, such as the IATA on Competition Law issues. Ravi’s extensive experience includes advising India’s national carrier. He has negotiated and drafted the contracts for Air India’s purchase of 68 commercial aircrafts from Boeing in a US$7 billion deal. He also assisted in the formation of its low-cost subsidiary, Air India Express. He regularly drafts and vets aircraft leasing agreements. Ravi is ranked Band-2 leading lawyer for the aviation practice area of Chambers & Partners Asia-Pacific rankings, which recognises members of the legal community who have stood out from their peers by demonstrating professional achievement and excellence in their area of practice.

MV Kini Tel: +91 11 2437 1038 / 39 / 40 Kini House, 6/39, Jungpura B Fax: +91 11 2437 9484 New Delhi – 110 014 Email: [email protected] India URL: www.mvkini.com

Khushboo Jain has five years’ experience in asset finance and specialises in cross-border aircraft leasing and financing. She advises on structuring aircraft financing transactions and on an array of aviation commercial contracts. She possesses significant experience in nego- tiating aircraft and engine leases and has recently advised Air India on an ECB Loan of US$36 million from an Irish Financier for the purchase of three CFM Engines. Prior to her assumption of position as senior associate with MV Kini, she was associated with Clifford Chance LLP for three years as part of its Asset Finance team.

MV Kini Tel: +91 99 9917 0245 Kini House, 6/39, Jungpura B Fax: +91 11 2437 9484 New Delhi – 110 014 Email: [email protected] India URL: www.mvkini.com

MV Kini is a dynamic, long established Law Firm with a reputation for excel- The Firm’s lawyers have a deep understanding of key industry sectors and lence and results. It has a large network of offices across India and the as a result we hold leading positions in aviation, banking, environmental support of associates in Europe and the US. The Firm’s team comprises law, infrastructure, nuclear law, and shipping, besides sharp and accomplished legal practitioners dealing in diverse sectors. corporate and commercial. It offers a blend of youth and experience, expert knowledge and commercial www.mvkini.com acumen. Although the management team is the youngest among its peer groups, the Firm has served clients for more than 35 years. During that period, India’s economy has evolved from an era of state-run monopolies to become one of the most important and exciting emerging markets. It is home to thriving capital markets and attracts vast amounts of foreign investments. Many of MV Kini’s clients have been key players in the nation’s transfor- mation and the Firm has evolved to meet the needs of companies growing rapidly in India and internationally.

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Donna Ager James Kinsley

Robin Maples Group William Fogarty McDonnell

12 General and Contractual security following a default and in some other limited exception, fraud. Where debt is full recourse whether to the borrower itself or another entity of substance offering credit support, whilst 1.1 What are the typical structures available for the borrower loses the protection of no winding-up or enforce- financing the purchase of an aircraft? ment claims (beyond those limited exceptions listed above), they would expect to benefit from preferential financial terms. Financing structures involving Irish entities often employ the use of For lenders, if the transaction is structured as on-balance a special purpose vehicle (“SPV”) which is a company established sheet, where security it properly granted Irish insolvency would specifically to hold title to the aircraft subject to the financing and recognise the preferential interests of secured creditors over leasing of aircraft to the operators. Ireland is a popular jurisdiction other third party creditors of the group, but exercising the secu- for the establishment of SPVs due to the numerous double tax trea- rity may take longer in an insolvency situation due to the need to ties in place between Ireland and other countries, many of which engage in the examinership or winding up process. However, specifically refer to aviation in their text. Ireland is also attrac- on the positive side the enhanced credit would usually allow tive due to the confidence in the legal and court system (which is creditors to be made whole by another member of the group. broadly based on English common law) and the number of avia- tion experts and leasing companies based in Ireland. 1.3 What types of leasing are possible under the There are a number of options for financing both new and laws of your jurisdiction? What are their essential used aircraft in Ireland (many of which use SPVs) with the characteristics? financing being structured through either on- or off-balance sheets and limited or full recourse. Both on and off-balance sheet transactions can be full and limited recourse, although an Under Irish law there are no specific tax arrangements which off-balance sheet financing will be far more likely to be limited allow for tax-structured leasing arrangements, such as JOLCos recourse to the aircraft and the related income and any security in Japan or leverage-leases in France; however, both operating package. An on-balance sheet deal is a transaction where title to and financing leases are routinely entered in to by Irish compa- the aircraft being financed is held by an entity in a group struc- nies. The fundamental difference between an operating lease and ture and the income and liabilities associated with the aircraft a finance lease is that with an operating lease no title passes at the are included in that group’s financial statements, whereas end of the lease term, whereas with a finance lease there is provi- off-balance sheet financings sit outside a standard group struc- sion for title to the aircraft to pass to the lessee as the end of the ture with the aircraft held in a ring-fenced structure, which is lease term. The Irish revenue distinction between the two types of created via a trust arrangement. leases depends on who is actually taking risk on the aircraft asset.

1.4 Are there any proposals for reform in the area of 1.2 What are the key advantages/disadvantages aviation finance? and main issues arising in relation to these financing structures? The Irish government is currently reviewing legislation with The benefit of using an SPV in a financing structure is that the a view to reforming the law to limit a party’s ability to off-set transaction can be structured in a bankruptcy remote manner by profit by heavily leveraging financing structures as a means to limiting the activities of the SPV to the holding of title to specific strip out profit. Whilst this proposed legislative change is not aircraft being financed and leasing of those aircraft. The SPV specific to aviation it will inevitably impact a number of avia- will grant security over the aircraft and any key contracts and tion structures which involves SPVs whose taxes are assessed the shares in the SPV itself will ordinarily be charged in favour pursuant to S110 of the Taxes Consolidation Act (1997), which of the creditors. are frequently employed as an intermediary investment compa- On the borrower side, off-balance sheet financings results in nies in aircraft financing structures. the debts not being included in the borrower group’s financial In addition, the Irish government’s support of the OECD’s statements, which is viewed as beneficial where there is signif- base erosion and profit shifting (“BEPS”) initiative, will result in icant exposure under the financing and limited recourse trans- the need for SPVs established in Ireland to demonstrate reasons actions and which has the additional benefit of preventing cred- for being in Ireland, other than just access to preferential tax itors enforcing the borrower’s obligation, beyond accessing arrangements. In the aviation space, Ireland’s established reputa- revenue streams related to the aircraft being finance, enforcing tion as the global hub for aircraft leasing makes it simple enough

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to justify the use of Ireland in most circumstances, although tradi- ■ Irish withholding taxes on cross-border payments of tional lease-in, lease-out structures involving Irish SPV interme- interest and dividends; diary entities are increasingly difficult to justify where there is ■ Irish VAT on a lease or sale of an aircraft; and no other connection to Ireland. BEPS has also increased their ■ Irish capital gains tax or corporation tax on the disposal of focus on actual presence in Ireland and the need to demonstrate aircraft. that an entity has substance in Ireland. It is, however, of note Irish withholding tax at a rate of 20% is required to be with- that BEPS is a global initiative which has been signed up to by held from payments of Irish source “yearly” interest to non-res- over 130 countries and Ireland’s historic focus on management idents. However, there are a large number of exemptions avail- and control of entities being in Ireland puts it at a distinct advan- able, including for interest paid to a company which is resident in tage when compared to other jurisdictions which have tradition- an EU Member State or a country with which Ireland has signed ally been involved in the financing of aircraft. a double tax treaty where that territory imposes a tax that gener- ally applies to interest receivable in that territory by companies from outside that territory. 1.5 Is it possible according to the laws in your A similarly wide range of exemptions are available from the jurisdiction to enter into non-binding or partially requirement to withhold tax at a rate of 25% on the payment binding pre-contractual agreements (e.g. ‘letters of of dividends to non-resident persons. Such exemptions include intent’) which will NOT take effect as fully enforceable where payments are made to: agreements? ■ persons resident in an EU Member State (other than Ireland) or a country with which Ireland has concluded a Under Irish law, to have a binding contract there are three essen- double tax treaty (“EU/treaty state”); tial requirements: agreement between the parties; consideration; ■ companies ultimately controlled by persons who are resi- and intention to create legal relations. As such, if parties wish to dent in an EU/treaty state; and set out heads of terms or similar in a non-binding letter of intent ■ companies whose shares are substantially and regularly or termshseet, it is absolutely key to state in clean and unambig- traded on a recognised stock exchange in an EU/treaty uous language that the parties are not concluding a contract or state or where the recipient company is a 75% subsidiary of creating legal relation by virtue of the document. Often this is such a company or is wholly owned by two or more such achieved by stating that the terms of the document are condi- companies. tional upon certain further actions being taken, whether board The Irish stamp duty and VAT implications in as regards the approvals, aircraft inspections, payments or similar. If the docu- sale, lease or financing of an aircraft or an engine are discussed ment is unclear and the terms are sufficiently clear, the Irish further under questions 2.7 and 2.8 below. court may hold the document to be binding, especially where executed by the parties thereto. 2.3 Is the provision of a current tax-residency certificate by a payee sufficient for a lessee or a 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction borrower potentially subject to withholding taxes in your which applies to all pre-contractual agreement, jurisdiction on rental or interest payments to avail itself financing and leasing transaction documents, and the of treaty access and the mitigation of tax liability? conduct of parties connected to them? The provision of a current tax residency certificate by a payee It is a common misconception among parties to commercial who is potentially subject to withholding taxes in Ireland is agreements that Irish law imputes a mutual duty of good faith sufficient in order to obtain access to reduced withholding rates or fair dealing between them, whether or not this is expressly under Ireland’s tax treaty network. stated. However, whilst under Irish law there are certain types However, the necessity to provide a tax residency certificate of agreement where a duty of good faith applies, including part- to Irish Revenue rarely arises in practice. Ireland does not typi- nership agreements and insurance contracts, the Irish courts cally impose withholding tax on lease payments. Secondly, as have held that there is no general principle of good faith and fair outlined above, Ireland offers a range of domestic exemptions dealing in Irish contract law. with respect to outgoing interest payments by Irish borrowers. These do not require the provision of tax-residency certificates. 22 Taxation and Related Matters 2.4 Has the advent of BEPS (the Base Erosion and 2.1 Which government authority in your jurisdiction Profit Shifting initiative of the OECD) had any effect as has primary responsibility for the accounting for and regards structures in aviation finance and leasing or regulation of revenue control and taxes? their interpretation?

The Revenue Commissioners of Ireland (“Irish Revenue”) is the The introduction of the Multilateral Convention to Implement Irish government authority with primary responsibility for the Tax Treaty Measures to Prevent BEPS (“MLI”), which has accounting for and regulation of revenue control and taxes. the stated aim of counteracting treaty shopping, has become increasingly relevant to aircraft leasing structures. The MLI will introduce a new “principal purpose test” 2.2 What are typically the taxes in your jurisdiction (“PPT”) into Irish double tax treaties. It could deny a treaty which may arise in relation to a sale, a lease or a benefit (such as a reduced rate of withholding tax) if it is reason- financing of an aircraft or an engine? able to conclude, having regard to all facts and circumstances, that obtaining that benefit was one of the principal purposes of The sales, lease or financing of an aircraft or engine can attract any arrangement or transaction that resulted directly or indi- the following taxes in Ireland: rectly in that benefit. ■ Irish stamp duty and value-added tax (“VAT”) on the The MLI came into force in Ireland on 1 May 2019. As a acquisition of an aircraft or engine; general rule, it will have effect for Ireland’s tax treaties:

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■ with respect to taxes withheld at source, from 1 January VAT treatment of the sale of an aircraft will depend on the loca- 2020; and tion of the aircraft at the time of sale and the intended use. If ■ with respect to all other taxes levied by Ireland, for taxes the aircraft were supplied while within the territory of Ireland, levied with respect to taxable periods beginning on or after the standard Irish VAT rate (23%) would apply. However, the 1 November 2019. supply of aircraft can be zero-rated for VAT purposes where The impact of the MLI with respect to treaty access relief for either (i) the aircraft is used by an airline operating for reward lessors will be fact-dependant. However, Irish-based lessors are chiefly on international routes, or (ii) the aircraft is used and consciously increasing and evidencing the substance they main- enjoyed outside the EU. tain in Ireland. For those who have substantial trading operations Where an Irish-based lessor is leasing aircraft to an entity in Ireland, this is not a difficult issue. Others are increasing their outside Ireland, no Irish VAT should arise on the basis that personnel and resources in Ireland in order to ensure that they can the place of supply under a lease arrangement is the jurisdic- continue to avail of access to Ireland’s large treaty network. tion where the lessee is located. VAT may be chargeable in the jurisdiction of the lessee. Where the lessee is located in Ireland, 2.5 What are the typical thresholds in your jurisdiction the supply may be zero-rated for Irish VAT purposes where for which a permanent establishment may be triggered the lessee is operating chiefly on international routes. Where under the terms of any relevant double-tax treaty or the supply is zero-rated, the lessor should be entitled to credit similar? for any VAT incurred on the acquisition of the aircraft and any related costs. Subject to the terms of the relevant double-tax treaty, a non-resi- dent company will have a permanent establishment in Ireland if: 2.8 Are there any documentary taxes (for example, ■ it has a fixed place of business in Ireland through which stamp duty payable on the execution of documents)? the business of the company is wholly or partly carried on; or ■ an agent acting on behalf of the company has and habit- Irish stamp duty is generally chargeable on certain instruments ually exercises authority to do business on behalf of the that transfer property (including aircraft). However, Irish tax company in Ireland. law provides for a specific exemption from Irish stamp duty on A company is not, however, regarded as having an Irish the acquisition, lease or disposal of aircraft or part of an aircraft permanent establishment if the activities for which the fixed (e.g. an aircraft engine). place of business is maintained or which the agent carries on are Therefore, Irish lessors should not be subject to Irish stamp only of a preparatory or auxiliary nature. duty on the purchase of aircraft, disposal of aircraft or when In addition, the performance of services in Ireland should not, leases are entered into with lessees even where the documents in itself, create a permanent establishment. The longer the dura- relating to these transactions are executed in Ireland. tion of the service, however, the greater the likelihood that other criteria for creating a permanent establishment may be met, i.e., 32 Registration and Deregistration that the non-resident entity will either have a fixed place of busi- ness through which the company’s business is wholly or partly 3.1 Which government authority in your jurisdiction carried out or that the company’s business in Ireland will be has primary responsibility for the regulation of aviation carried out by a dependent agent who has the authority to do and the registration of aircraft? Is it an owner registry business on the company’s behalf. or an operator registry? If the aircraft register is an operator register, is it possible to record the details of 2.6 Is the authority at question 2.1 likely to establish an owner or lessor and any financier with an aircraft a ‘look-through’ right or similar as regards a lender or a mortgage? lessor which is a special-purpose vehicle involved for the purpose of tax treaty access? The Department of Transport, Tourism and Sport is the Government department responsible for aviation policy in Irish Revenue have indicated that they are prepared to take a Ireland. It has established the following entities to assist it in ‘look-through’ approach in respect of outbound payments by carrying out its functions: Irish lessor borrowers which may attract withholding taxes. ■ The Commission for Aviation Regulation. Generally, where debt is financed or equity is invested directly ■ The Irish Aviation Authority (“IAA”). via fund or partnership type structures, Irish Revenue may ■ The Air Accident Investigation Unit which is responsible ‘look-through’ tax transparent intermediate entities (such as for air accidents that take place in Ireland and air acci- partnerships) in order to identify the ultimate beneficiaries. dents that occur outside Ireland involving Irish registered For example, Irish Revenue may adopt such an approach in aircraft. respect of interest payments to US LLCs, which are treated as ■ The Environmental Protection Agency which is respon- transparent for US tax purposes, subject to the satisfaction of sible for the implementation of the EU emissions trading certain conditions. In such circumstances, Irish Revenue will scheme. look through the US LLC to its members in order to determine The IAA is in charge of registration of aircraft in Ireland. In whether the relevant withholding tax exemption applies. order to access the registry maintained by the IAA, the aircraft must have a connection to Ireland and, save in the rare case 2.7 Will the import of an aircraft into your jurisdiction where the IAA grants a specific exemption, the applicant must and/or the sale or leasing of the aircraft give rise to any demonstrate that the aircraft is either wholly owned by an Irish VAT, sales or use taxes or any customs import or excise citizen or EU citizen having a place of residence or business duties? in Ireland or owned by a company registered in and having its principal place of business in Ireland or the EU with no less As a general rule, Irish VAT applies to supplies of goods than two thirds of the directors also being Irish or EU citi- (including aircraft) made in Ireland by a taxable person. The zens. Notwithstanding the foregoing, an aircraft may also be

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registered in Ireland if it is “chartered by demise, leased or on a minimum maximum take-off weight and number of passen- hire to, or is in the course of being acquired under a lease-pur- gers, the aircraft must also satisfy minimum safety standards on chase or hire-purchase agreement by a citizen or company” an ongoing basis. where such charter, lease or hire is to an individual or corporate satisfying the requirements set out above with respect to Irish or 3.4 Can aircraft leases be registered? If so, in what EU citizenship. When relying on the operator as a connection circumstances? Must the lease be in a particular form to Ireland, the IAA may impose any conditions of such registra- if it is to be valid and enforceable (for example, must it tion as it deems fit. be in a particular language or be notarised, legalised or The IAA does not operate a register of aircraft mortgages apostilled)? or third-party rights or interests in aircraft or engines and will not agree to requests to note a mortgage or third-party interest Aircraft leases are not required to be registered and there are on the aircraft register or related file. Aircraft mortgages and no specific execution requirements for a lease to be recognised other “charges” (as defined in the Companies Act 2014 (the in Ireland. In Ireland, leases are commercial contracts and “CA2014”) over aircraft granted by Irish companies and Irish the terms can be freely negotiated between the parties and no registered branches of foreign companies) are registrable with specific form is required. the Companies Registration Office (the “CRO”) in Ireland within 21 days of the creation of the charge. The register main- tained by the CRO operates as a priority register with priority 3.5 How is deregistration affected and what steps can based on the time of filing, not the time of the interest being a lessor take to de-register the aircraft on termination of the lease? granted. Under the CA2014, priority interests can be filed up to 21 days prior to the date on which the charge is actually granted with a full filing being made upon the charge actually being Deregistration of aircraft will require the person or corporate granted. Parties may elect to make a single filing upon the who is listed on the register maintained by the IAA to submit charge actually being entered into. If the charge is not registered forms to the IAA for the de-registration of the aircraft. If there within 21 days of the date on which it is granted, the charge is an early termination and the operator, for example, refuses becomes void against a liquidator and any creditor of the party to allow the owner or financiers to de-register the aircraft then granting the charge. IAA will act upon an Irrevocable De-Registration and Export The Cape Town Convention (“CTC”) Act 2005 provides for Request Authorisation Register (“IDERA”) pursuant to its obli- the registration of certain interests in airframes and engines with gations under the Cape Town Convention and the IAA will the International Registry of Mobile Assets to ensure priority. acknowledge an IDERA at the time of registration if submitted Aircraft mortgages are amongst the interests which consti- to them. tute “International Interests” (as defined in the Cape Town Convention) to the extent the mortgage is granted by an owner 42 Security in a contracting State or the aircraft is registered in a contracting State. The International Registry is an online register but, due to 4.1 Is it possible to create a mortgage over an aircraft it being located in Dublin, disputes over registrations are heard or engine in your jurisdiction? If so, what are the types or enforced in the Irish High Court regardless of the country in of aircraft mortgage and engine mortgage available and which the claim originates. what formalities are required in order to perfect it?

3.2 What is the effect of registration of the aircraft? Yes. A legal mortgage or an equitable mortgage can be created Does registration on your national aircraft register over an aircraft or engine by corporate bodies and individuals/ confer proof of ownership of the aircraft and/or engine? groups of individuals. Legal mortgages can be created by oral agreement or in The Irish aircraft register operated and maintained by the IAA writing, however, in order to register the mortgage (and for is a registry of nationality and not of title. Registration of an contractual certainty), legal mortgages are usually created in aircraft in the name of a person does not establish that person’s writing. An equitable mortgage can be created by an agreement title to the aircraft and it cannot be regarded as giving notice to create a legal mortgage, a mortgage that fails to comply with (whether actual or constructive) of a person’s interest in an the formalities for a legal mortgage or a mortgage of an equi- aircraft. table interest. An equitable mortgage must be in writing. It is market practice for a mortgage to be registered as a charge with the CRO (if the mortgagor is a company). If the mortgagor 3.3 Can foreign-owned aircraft be registered on is an individual or a partnership, a mortgage can be registered your national aircraft register and are there limits or with the Central Office of the High Court. restrictions on the age of aircraft that may be registered or operated? 4.2 Can spare parts, including future parts, be subject Aircraft which are owned by foreign nationals may be registered to the aircraft mortgage or engine mortgage (as the case may be)? If not, are there any other forms of security that in Ireland if the aircraft is: (i) majority owned by an EU citizen can be taken over spare parts? or corporate; or (ii) subject to a lease or charter by demise to an Irish or EU citizen or company. In the case of a corporate, the entity must have a place of residence or business in Ireland or is Yes. Spare parts (including engines and future parts) are often owned by a company registered in and having its principal place included in an aircraft mortgage and can be registered as part of of business in Ireland or the EU with not less than two thirds of an aircraft. Please note, however, a mortgage over spare parts the directors also being Irish or EU citizens. cannot be registered separately unless the mortgagor is an indi- The IAA does not impose an age restriction on aircraft vidual or partnership (in which case the mortgage can be regis- which can be registered but commercial aircraft need to satisfy tered with the High Court).

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An alternative form of security would include a debenture, Engines: which is a security document that creates a variety of security All the types of security that can be taken over an aircraft can interests, including fixed charges over a company’s assets (e.g. also be created over engines. spare parts), assignments by way of security (e.g. over contracts) and floating charges. 4.5 What claims and rights would take priority in your Fixed charges and debentures are registrable against the jurisdiction over a registered mortgage? company with the CRO (as defined above). A registered mortgage will take priority over all other mortgages 4.3 Is there a register of mortgages or rights over and charges over the aircraft, except for mortgages registered aircraft and/or engine? before that mortgage. However, a registered aircraft mortgage will not take priority over a possessory lien in respect of work The IAA does not operate a register of aircraft mortgages or done on the aircraft or any statutory rights of detention affecting third-party rights or interests in aircraft or engines and will the aircraft (e.g. charges). not agree to requests to note a mortgage or third-party interest on the aircraft register or related file. The IAA acknowledges 4.6 What other forms of security can be granted over the IDERA pursuant to its obligations under the Cape Town an aircraft and/or engine lease? Convention as enacted by the International Interests in Mobile Equipment (Cape Town Convention) Act 2005 (the “CTC Act See question 4.4 above for the other forms of security that can 2005”), but this does not serve to notify third parties or perfect be granted over an aircraft and/or engine. any security interest in an aircraft. Security over a lease is usually taken by way of a security Aircraft mortgages and other “charges” (as defined in the assignment from the lessor, with written notice to the lessee. Companies Act 2014 (the “CA2014”) over aircraft granted by Irish companies and Irish registered branches of foreign compa- nies) are registrable with the CRO in Ireland within 21 days of 52 Enforcement and Repossession the creation of the charge. The register maintained by the CRO operates as a priority register with priority based on the time 5.1 What are the circumstances in which a mortgagee of filing, not the time of the interest being granted. Under the or owner can take possession of the aircraft and/or sell the aircraft? What requirements must the mortgagee or CA2014, priority interests can be filed up to 21 days prior to the owner comply with? date on which the charge is actually granted with a full filing being made upon the charge actually being granted. Parties may elect to make a single filing upon the charge actually being A mortgagee can take possession of the aircraft (or appoint a entered into. If the charge is not registered within 21 days of receiver to do so) and subsequently sell the aircraft, on occur- the date on which it is granted, the charge becomes void against rence of an event of default under the mortgage, provided this a liquidator and any creditor of the party granting the charge. has been specified in the mortgage document or otherwise The CTC Act 2005 provides for the registration of certain agreed in writing. This is a self-help remedy under Irish law interests in airframes and engines with the International Registry which can be obtained without judicial intervention. of Mobile Assets to ensure priority. Aircraft mortgages are In practice, however, a mortgagee will often seek a court amongst the interests which constitute “International Interests” order for delivery up and possession of the aircraft so as to give (as defined in the Cape Town Convention) to the extent the mort- certainty of title on the resale of the aircraft. An owner/lessor can seek repossession of an aircraft as a gage is granted by an owner in a contracting State or the aircraft matter of contract on termination of the lease without a court is registered in a contracting State. The International Registry is order. In those circumstances, the lessor must strictly comply an online register, but, due to it being located in Dublin, disputes with the procedure, as may be set out in the lease, in order to over registrations are heard or enforced in the Irish High Court validly take possession of the aircraft. regardless of the country in which the claim originates. If the lessee resists repossession, the lessor can apply to the A mortgage can also be registered against any aircraft that is court for an order of delivery up and possession of the aircraft. registered on the International Registry. In addition to the self-help remedies under Irish law, a mort- gagee or owner will have remedies available to it under the Cape 4.4 What other forms of security can be taken over Town Convention, including taking possession of the aircraft an aircraft and/or engine and can these other forms be without a court order and deregistering and exporting an aircraft registered? by exercising its rights under an IDERA.

Aircraft: 5.2 What is the procedure for repossession of the The principal security agreement over an aircraft will usually aircraft? take the form of a legal mortgage. However, other forms of security are also available, including a charge. A charge is similar Once there has been an event of default, the mortgagee will to an equitable mortgage, as the creditor obtains a proprietary notify the mortgagor (in accordance with the terms of the mort- equitable interest in the aircraft, but does not obtain either legal gage) that there has been an event of default under the loan and or beneficial title to it. that it intends to enforce its security. A security assignment transfers the aircraft title by way of If the mortgagor opposes repossession or there is a dispute security. A security assignment can either be a legal security about whether there has been an event of default under the assignment or an equitable security assignment. mortgage, a mortgagee can apply to the court for an order of A lien entitles a party to hold on to the aircraft in its posses- delivery up and possession of the aircraft. sion pending payment of a debt owed. It can be created by any Court proceedings for repossession of an aircraft by a mort- of equity, contractual (e.g. a contractual lien), operation of law gagee can be commenced by the issuing of a special summons in (e.g. a legal or common law lien) or statute (e.g. a statutory lien). the High Court (order 54, rule 3, Rules of the Superior Courts).

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At any stage of the claim, including prior to the commence- ■ the procedures and rules of the court giving the judgment ment of proceedings, the mortgagee can apply for interim relief have not been observed; (such as an injunction restraining the mortgagor from disposing ■ it is inconsistent with a judgment of the courts of Ireland of the aircraft or removing the aircraft from the jurisdiction) if in relation to the same matter; there is a real risk that the aircraft will be taken out of the juris- ■ it is contrary to public policy or natural or constitutional diction or that the mortgagor will deal with the aircraft in a way justice of Ireland; that will prejudice the mortgagee’s position. ■ the Irish courts have no jurisdiction over the matter; ■ the jurisdiction of the court giving such judgment has not been exercised in circumstances that an Irish court (as a 5.3 Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local matter of Irish law) will recognise as justifying enforce- rules that apply, despite a choice of foreign law? ment of the judgment; and ■ enforcement proceedings are not instituted in Ireland within six years of the date of the judgment. Generally, Irish courts will recognise and uphold express choice Interim relief by way of an injunction may be sought from of law clauses as valid in accordance with the relevant EU the courts in extreme emergency, for example, where there is Regulations (for disputes within the EU) or under common law immediate risk of the aircraft being taken outside the jurisdic- rules (for non-EU disputes). tion. This can be done on an ex parte basis, without notice to Provided there is no prejudice to the application of Irish law, the other party. Irish courts will uphold any governing law clause that specifies An interim injunction will be granted (usually in a matter of a foreign jurisdiction. days) pending an interlocutory hearing of the matter as soon as The Irish courts may, however, refuse to recognise choice of possible thereafter, with proceedings to be served on the other law clauses for public policy reasons, or where there are manda- party in the interim. tory Irish law considerations, such as consumer law matters. Before granting an injunction, the court must be satisfied that: ■ there is a bona fide/genuine question to be determined; 5.4 Will local courts recognise and enforce a foreign ■ damages are not an adequate remedy; and court judgment in favour of a mortgagee or lessor? Are ■ the balance of convenience lies in favour of granting the any interim relief measures available? injunction. In any application for injunctive relief, the mortgagee or Recognition and enforcement of a foreign judgment will depend lessor will be required to provide an undertaking and/or secu- on the country of its origin and the nature of the judgment. rity for damages to the court against a wrongful claim. The process of enforcing judgments of EU Member States is relatively straightforward and is governed by the following EU 5.5 Are powers of attorney from a local airline in favour Regulations and Convention: of a lessor or mortgagee likely to be effective to allow ■ Regulation (EU) 805/2004 creating a European Enforce- the lessor or mortgagee to deregister the aircraft? Can ment Order for uncontested claims. such powers be irrevocable, be governed by a foreign law ■ Regulation (EU) 1215/2012 (“Brussels Recast”) on juris- and/or do they need to be in any particular form for local diction and the recognition and enforcement of judgments recognition? in civil and commercial matters. ■ Lugano Convention (the “Lugano Convention”) on juris- The aircraft needs to be deregistered in order for it to be remar- diction and the recognition and enforcement of judgments keted and sold. To deregister, a request in writing from the regis- in civil and commercial matters. tered owner is required. The IAA may also approve an applica- To enforce a judgment from a country subject to Brussels tion for deregistration when accompanied by an irrevocable and Recast or the Lugano Convention, an application for recogni- export request authorising the financier to effect deregistration tion of the judgment must be made to the Master of the High on behalf of the borrower. Court. Once the foreign judgment has been declared enforce- An aircraft owner, mortgagee or lessor can apply for deregis- able, it will have the same force and effect as if it had been deliv- tration of the aircraft without the lessee’s or operator’s consent. ered by an Irish court, and the usual methods of enforcement The IAA will not record a deregistration power of attorney can be used by the mortgagee or lessor. (“DPOA”). The filing and recordation of an irrevocable dereg- To enforce foreign judgments from other countries, it is istration and export request authorisation (“IDERA”) has necessary for a mortgagee or lessor to rely on Irish common law largely replaced transaction-specific deregistration powers of rules of enforcement. The procedure for enforcing these judg- attorney where the aircraft is registered in Ireland. ments is by issuing fresh proceedings in Ireland. If the rele- A DPOA does not have to be governed by the laws of Ireland. vant foreign judgment is: for a debt of a definite sum; final and If the DPOA is expressed to be irrevocable and granted to conclusive; and given by a court of competent jurisdiction, the secure an obligation, the grantor should not be able to revoke it mortgagee or lessor may be able to obtain a summary judgment until those obligations have been discharged. (without the need for a full plenary hearing) on the grounds that A DPOA does not need to be translated, certified, notarised, the defendant has no defence to the claim. legalised or lodged in advance. Irish Courts do however have a discretion to refuse to recognise and enforce a foreign judgment in the following 5.6 If recovery of the aircraft is contested by the lessee circumstances: and a court judgment is obtained in favour of the lessor, ■ it is impeachable on the grounds of jurisdiction, fraud, how long is it likely to take to gain possession of the public policy or natural or constitutional justice, or the aircraft? judgment has been obtained or alleged to have been obtained by the commission of a fraud, trick or deliber- The lessor must first serve the judgment. ately misleading circumstances;

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Possession can be obtained within a few days from the issu- 5.9 If the lease is governed by English law and a ance of such a court order, depending on where the aircraft is judgment is obtained by the lessor in the English courts, located or when it is due to land in Ireland. can that judgment be automatically enforced in your The lessor may file an affidavit stating that the judgment or jurisdiction or will the case have to be re-examined on its order has not been obeyed and he/she may obtain an execution merits? order on foot of that affidavit. See response to question 5.4 above concerning the enforcement 5.7 Are there any restrictions on the ability of the of foreign judgments from Brussels Recast/Lugano Convention lessor to export the aircraft from your jurisdiction on countries and other countries. termination of the leasing? Generally, the UK will be treated as being an EU Member State until the end of this year, but it remains to be seen what will happen after this time. In order to export an aircraft, the registered owner must submit The UK’s withdrawal from the EU is governed by the terms a request for deregistration in writing to the Irish Aviation of the withdrawal agreement entered into between the EU and Authority (“IAA”). The request must include the complete the UK on 19 October 2019 (the “Withdrawal Agreement”), description of the aircraft, registration marks, make, model, and the terms of which provide for a transition period until the end serial number of the aircraft. The IAA can accept a request of 2020. Under Article 67 of the Withdrawal Agreement, the for deregistration of an aircraft only from the IAA’s Aircraft current rules on enforcement under Brussels Recast continue to Register. apply to proceedings commenced before the end of 2020 such The formal request in writing must comply with the following that UK judgments in respect of such proceedings will continue requirements: to be enforceable in EU Member States, and vice versa, in the 1. The letter must be signed: same way as between EU Member States. ■ by the relevant individual, if the registered owner is an The position after 31 December 2020 remains uncertain, but individual; in the absence of adherence to Brussels Recast or the Lugano ■ by all relevant individuals, if the registered owner is Convention, the common law rules for third countries would more than one individual; and apply. ■ by a current director of the company or the current company secretary (as shown in the current print-out of the CRO), if the registered owner is a company. 5.10 What is the applicable procedure for repossession 2. The request must provide evidence that: of an aircraft under other forms of security interests? ■ the aircraft’s nameplate/fireproof plate has been removed; The procedure for repossession of an aircraft under other ■ the Irish registration marks have been removed from forms of security can either take place by using the remedies the aircraft; provided for under the Cape Town Convention or through court ■ the aircraft’s Irish Mode S code has been negated (if proceedings. applicable); and It is worth noting that the IAA has the authority to detain ■ the aircraft’s Irish emergency locator transmitter code and sell an aircraft for unpaid navigational charges, including has been negated (if applicable). EUROCONTROL charges, on an Irish or non-Irish regis- 3. If the aircraft has an Irish air operator certificate (“AOC”), tered aircraft, and an aircraft may be detained in Ireland due to the AOC must be removed before deregistration. substantial unpaid charges relating to the aircraft or any other 4. All fees outstanding must be paid in full for the aircraft. aircraft in the relevant operator’s fleet. 5. If there is an IDERA lodged against the aircraft, the Furthermore, if a creditor wishes to exercise a remedy available IDERA must first be removed. to it under the Cape Town Convention (such as standard default In addition to the above, when an aircraft is being exported, the remedies under security agreements to take possession or control name of the foreign state to which the aircraft is being exported of the aircraft), it is not required to make an application to the is required and, where an export certificate of airworthiness is High Court for leave to exercise that remedy unless the provi- required, the applicant must submit Form AWSD.F.104A with sion expressly requires the creditor to make such an application. the prescribed fee to the IAA at least 20 working days in advance of the required export date. 62 Conventions

5.8 Are exchange controls prevailing in your 6.1 Has your jurisdiction ratified any of the following: jurisdiction as regards payments in foreign currency? (a) The Chicago Convention of 1944 on International Will any consents be required for the remittance of the Civil Aviation (the Chicago Convention); (b) The 1948 sale proceeds abroad? Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 Convention for the Unification of Certain Rules Relating Since 1 January 1993, there have been no foreign exchange to the Precautionary Arrest of Aircraft (the 1933 Rome controls in Ireland. However, the Financial Transfers Act 1992 Convention); and (d) The Convention on International gives the Minister for Finance reserve powers to introduce Interests in Mobile Equipment on Matters Specific to restrictions on financial transfers between the state and other Aircraft Equipment (the Cape Town Convention) and the countries in the form of regulations and orders. Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft A lessor under an aircraft lease can obtain a judgment in a Equipment? foreign currency.

Ireland is a signatory to the following conventions (as amended and updated) in relation to international airline operations:

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1. The 1929 for the Unification of In accordance with sub-article 2 of Article 54 of the Cape Certain Rules Relating to International Carriage by Air, as Town Convention, it is declared that a creditor who wishes to amended by the of 28 September 1955 – exercise a remedy that is available to the creditor under a provi- ratified 20 September 1935 and 12 October 1959. sion of the Cape Town Convention is not required to make an 2. The 1944 Chicago Convention on International Civil application to the High Court of Ireland for leave to exercise Aviation – ratified 31 October 1946. that remedy, unless the provision expressly requires the creditor 3. The 1956 Geneva Agreements on the Joint Financing of to make such an application. Certain Air Navigation Services in Greenland/Iceland – ratified 3 June 1960. 4. The 1962 Rome Protocol Relating to an Amendment to 6.4 Has your jurisdiction adopted the remedies on the Convention on International Civil Aviation – ratified insolvency provided under Article XI of the Protocol to the Cape Town Convention? 14 February 1963. 5. The 1971 New York Protocol Relating to an Amendment to the Convention on International Civil Aviation – rati- Yes. ‘Alternative A’ of the Cape Town Convention has the force fied 15 June 1971. of law in Ireland, following signing of an Order by the Irish 6. The 1971 Vienna Protocol relating to an amendment to the Government on 10 May 2017. Alternative A will apply to leases, Convention on International Civil Aviation – ratified 11 security agreements and conditional sale agreements registered July 1972. on the International Registry. 7. The 1963 on Offences and Certain Other Acts Committed on Board Aircraft – ratified 14 6.5 What is the procedure to file an irrevocable November 1975. deregistration and export request authorisation under 8. The 1970 Hague Convention for the Suppression of the Cape Town Convention (IDERA)? Unlawful Seizure of Aircraft – ratified 24 November 1975. 9. The 1999 for the Unification of Certain Rules for International Carriage by Air – ratified To file an IDERA against an eligible aircraft, the registered 29 April 2004. owner of the aircraft must complete the appropriate form on the 10. The 2001 Cape Town Convention on International website of the IAA (available at www.iaa.ie). Interests in Mobile Equipment – ratified 29 July 2005. The completed form must be signed and returned to the IAA 11. The 2001 Protocol to the Convention on International with the appropriate fee. Interests in Mobile Equipment on matters specific to Aircraft Equipment – ratified 23 August 2005. 72 Liability for Damage and Environmental Ireland has also signed, but has not yet ratified, the 1948 Geneva Convention on the International Recognition of Rights 7.1 Can the owner be strictly liable – liable without in Aircraft. a requirement to prove fault or negligence – for any damage or loss caused by the aircraft assuming the 6.2 Has ratification of the Cape Town Convention owner is an innocent owner with no operational control caused any conflicts or issues with local laws? of the aircraft?

The Cape Town Convention came into force on 1 March 2006. Section 21(1) of the Air Navigation Transport Act 1936 states Any potential conflicts or issues have successfully been resolved that aircraft owners are liable, without proof of negligence or in the High Court, however, due to a relative lack of judicial prece- intention or other cause of action, for any material damage dent, practice and procedure, the law in this respect is still evolving. caused to property or persons other than those in the aircraft; and where any passenger or article falls from an aircraft, whether in flight, landing or taking off. 6.3 What is the legal position regarding However, section 21(2) also provides that an owner will not be non-consensual rights and interests under Article 39 of liable where the aircraft is subject to a charter or lease arrange- the Cape Town Convention? ment for 14 days or more and the pilot and crew are not in the employment of the owner. In such cases, the person to whom In accordance with Article 39 of the Cape Town Convention, the aircraft is demised is strictly liable. Ireland has declared the following: ■ when, under a law of the State, a non-consensual right or 7.2 Does the EU Emissions Trading System (EU ETS), interest (other than a right or interest to which Article 40 or any similar scheme, apply to aircraft and aircraft of the Cape Town Convention applies) has priority over an operators in your jurisdiction? Will charges levied interest in an object equivalent to that of the holder of a according to the EU ETS, or its equivalent, give rise to registered international interest, that right or interest has any in rem rights in relevant aircraft which are part of the priority over a registered international interest, whether in fleet of the operator concerned and, if so, will such rights or outside insolvency proceedings; and rank in priority ahead of any mortgage interests properly ■ that if the State or any State entity, or any intergovern- registered in the relevant aircraft and/or engine? mental organisation of which the State or any such entity is a member, or any private provider has provided a public Yes. The EU ETS is implemented in Ireland under Statutory service, nothing in the Cape Town Convention affects Instrument No. 490 of 2012 and amendments, and Statutory the right of the State, entity, organisation or provider to Instrument No. 261 of 2010 and amendments. It is run on a arrest or detain, in accordance with the laws of the State, day-to-day basis in Ireland by the Environmental Protection an object for the payment of amounts owed to the State or Agency. The current phase (Phase III) of EU ETS runs from any such entity, organisation or provider for those services 2013 to 2020. This introduced greater use of auctioning of in respect of that object or another object. allowances and set up the market stability reserve to withdraw

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the surplus of allowances from the market and increase the the website of the Courts Service to determine whether a peti- price of allowances within the ETS. Phase IV will run from tion has been filed. A company can only be placed into compul- 2021 to 2030 and under this phase, sectors under the ETS must sory liquidation by an order of the Irish High Court. The fact reduce their emissions by 43% compared to 2005 levels. This of an order having been made will be visible on the Courts will involve a tighter cap on emissions and a removal of surplus Service website. Winding-up resolutions passed by members of allowances from the market. companies in respect of voluntary liquidations are filed in the Companies Registration Office.

7.3 What liabilities (actual or potential) could an owner, lessor or financier of an aircraft incur in your jurisdiction 8.2 In the event that an operator or lessee were to because of a failure to comply with local environmental become insolvent either on a balance sheet basis (assets law and/or regulations on the part of an operator of less than liabilities) or is unable to pay debts as fall aircraft leased or financed by it? due, would an operator or lessee be required to file for insolvency protection?

The European Communities (Greenhouse Gas Emissions Trading) (Aviation) Regulations 2010 (S.I. No. 261 of 2010), The test most often applied by the Irish courts, in assessing which transposes the Aviation Directive (Directive 2008/101/ whether a company is insolvent, is whether the company can pay EC of 19 November 2008 amending Directive 2003/87/ its debts as they fall due. EC) into national law, imposes obligations on operators of an There is no absolute obligation on a company to immedi- ately go into liquidation when it is insolvent. However, where a aircraft, which term is defined as being the person who operates company enters the “zone of insolvency” (i.e. where it is immi- an aircraft at the time it performs an aviation activity listed in nently likely to be unable to pay its debts), then the directors’ Schedule 1 thereto or, where that person is not known or is not duties shift to being owed to creditors and the directors must identified by the owner of the aircraft, the owner of the aircraft. carefully consider whether it is appropriate to commence a liqui- The key legislation in Ireland for environmental liability is dation process. the Environmental Liability Directive (Directive 2004/35/EC), The Irish High Court has power to appoint an examiner to transposed by the European Communities (Environmental a company if the company is or is likely to be unable to pay its Liability) Regulations 2008, which makes ‘operators’ (meaning debts as they fall due; or if the value of its assets is less than the a director, shareholder or other officer of a company if they amount of its liabilities, taking into account its contingent and exert sufficient control over the operational activities of a busi- prospective liabilities. A company and its directors are never ness) liable for environmental damage caused by an occupa- obliged to enter into examinership. tional activity or more generally to activities causing damage to protected species and habitats. However, transport and aviation do not come within the definition of occupational activity for 8.3 Do the available forms of insolvency protection in your jurisdiction involve the appointment of either the purposes of the Regulations. an officer of the court or a specifically court appointed Operators whose occupational activities fall outside the scope official to take control of the operator or lessee (an of the Regulations (i.e. air transport) can be liable for environ- ‘Insolvency Official’) while in insolvency protection? mental damage under the Environmental Protection Agency Acts 1992 to 2011, the Waste Management Acts 1996 to 2011, the Examinership involves the appointment of an insolvency prac- Local Government (Water Pollution) Act 1977 (as amended), the titioner by the High Court, including sometimes on an interim European Communities (Birds and Natural Habitats) Regulations basis pending the hearing of the petition. The examiner (or 2011 to 2015 and the Air Pollution Acts 1987 and 2011. interim examiner), once appointed by the court, remains in place Section 8(1) of the Environmental Protection Agency Act until the conclusion of the examinership. Examinership is a 1992 (the “EPA Act”) provides that a contravention of the debtor-in-possession process, so while the examiner can exer- EPA Act constitutes an offence. Section 8(2) of the EPA Act cise certain powers in relation to the affairs of the company, provides that, “where an offence under this Act is committed the directors remain in situ and they are not functus officio as they by a body corporate or by a person acting on behalf of a body would be in the case of an insolvent liquidation where the role of corporate and is proved to have been so committed with the directors comes to an end. consent, connivance or approval of, or to have been facilitated by any neglect on the part of any director, manager, secretary or any other officer of such body, such person shall also be guilty 8.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official of an offence”. Section 9 provides for a fine of up to €3,000 or in your jurisdiction have the effect of prohibiting the up 12 months’ imprisonment (or both) on summary conviction, owner from taking the following actions to enforce or a fine of up to €15,000,000 or up to 10 years’ imprisonment the lease after commencement of such protection: (a) (or both) on conviction on indictment. applying any security deposit held by the owner against any unpaid amounts due under the lease; (b) accepting payment of rent or other lease payments from the lessee, 82 Insolvency and Searches a guarantor or a shareholder; (c) giving notice of default under the lease; (d) obtaining a judgment or arbitral 8.1 Are there any public registers in your jurisdiction award for unpaid lease payments; (e) giving notice to where a search can be carried out to determine whether terminate the leasing of the aircraft and/or engine; or an order or resolution for any bankruptcy, bankruptcy (f) exercising rights to repossess the aircraft and/or protection or similar insolvency proceedings has been engine? registered in relation to an operator or lessee? If the lessee of an aircraft is in examinership, then a statutory If a company is to be placed into a compulsory liquidation or moratorium applies and is binding on the creditors of the lessee. into an examinership process, then a petition must be filed to No steps can be taken during the protection period to realise the Irish High Court. A search can readily be carried out on security affecting property of the company, without the consent

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of the examiner. Creditors may not enforce their claims, whether future obligations the performance of which might be detri- by issuing court proceedings or enforcing security. Proceedings mental to the company’s creditors. Similarly, in an examiner- may not be brought to wind up a protected company and appoint ship, the company may apply to the Irish High Court to repudiate a liquidator. In addition, an examiner may, with the leave of certain contracts under which some element of performance the High Court, dispose of assets which are subject to fixed or other than payment remains to be rendered. Such contracts may floating charges where it is likely to facilitate the survival of the also be affirmed in an examinership although that has rarely, if whole or any part of a protected company as a going concern. ever, occurred. However, it should be noted that the examinership regime If a liquidator causes a company to remain in occupation of a in Ireland has been modified since the coming into operation property, the rent will be an expense of the liquidation and will in 2017 of the Cape Town Convention and in particular the have priority status. Aircraft Protocol (Alternative A). The effect of Article A in If a liquidator simply decides (to draw an analogy with real Irish law in an examinership is that the examiner or the debtor property), to “hand back the keys” to the asset, then any arrears shall either: under the lease will be an unsecured claim. (a) give possession of the aircraft object to the creditor; or If a contract is disclaimed or repudiated, the other party to the (b) cure all defaults other than a default constituted by the contract will have a damages claim which can be dealt with in opening of insolvency proceedings and has agreed to the liquidation or examinership as the case may be. perform all future obligations under the agreement, Examinership is not in a terminal insolvency process. The no later than the earlier of the end of a 60-day waiting period company remains liable under its contracts, subject to the stat- or the date on which the creditor would be entitled to possession utory moratorium. of the aircraft object if Article A did not apply.

8.7 Are there certain types of preferred creditors whose 8.5 Can the commencement of insolvency proceedings claims will rank above claims of the owner? have retrospective effect in relation to any such actions taken before commencement? If so, for what period can there be a look back? In a liquidation, certain types of creditors have preferential status, principally certain debts due to the Irish tax authority, which have preference over unsecured claims and over the The commencement of insolvency proceedings can result in claims of the holders of floating charges. antecedent transactions being challenged by the insolvency If an asset is subject to a fixed charge, the holder of the charge office holder or a creditor under a number of different statutory is entitled to enforce its security and realise the asset outside the provisions, including the following: scope of the liquidation. If a lessee goes into liquidation, the (i) Unfair preference: The creation of security and the making owner of the aircraft will typically assert its contractual rights, of any payments prior to being placed in an insolvent liqui- which may include a right to terminate the contract and re-take dation can be set aside, where the debtor company carried possession of the asset in the event that certain specified insol- out the transaction with the intention of benefiting one vency events occur. creditor over the other creditors. The preference can be If the owner is a creditor in respect of money due and owing set aside if it occurred within six months preceding the under the lease, then in the absence of security or a trust arising liquidation (or two years if the beneficiary of the transac- in respect of the asset, the owner’s status in respect of the debt tion is a “connected person”, as defined). will be an unsecured claim. (ii) Improper transfer: If the company’s assets have been improperly transferred (i.e. with the effect of perpetrating a fraud), the High Court can order assets to be returned if 8.8 If the aircraft is in the possession of a person it considers it just and equitable to do so. other than the operator or lessee at the commencement (iii) A floating charge created within 12 months before the of Insolvency Protection of the operator or lessee, for commencement of its winding up may be invalid (except to example, an independent maintenance facility, will such the extent of monies advanced or paid or the actual price person be entitled, under the laws of your jurisdiction, to assert a lien arising under law or contract over the or value of the goods or services sold or supplied to the aircraft in respect of amounts then due and unpaid to company), unless it is proved that the company, immedi- such person by the operator or lessee? ately after the creation of the charge, was solvent. Where the floating charge is created in favour of a “connected person”, the period of 12 months is extended to two years. Irish law recognises certain liens and rights of detention for unpaid debts or charges. The rights may arise in law, equity, under contract or statute. 8.6 Is there, either under law or as a matter of practice At common law, the third-party liens available are similar to in your jurisdiction, a period of time within which the other common law jurisdictions. An unpaid seller may seek to Insolvency Official will either ‘adopt’ the lease and pay rent and other lease payments as an expense exercise a seller’s lien, although typical aircraft finance struc- of the insolvency or ‘reject’ the lease and permit the tures mean that aircraft manufacturers are not in a position to owner to enforce such rights as it may have under the exercise such rights. A possessory lien may be exercised, for lease? (a) If the lease is ‘adopted’, will the Insolvency example, where aircraft are subject to a claim for unpaid repairs. Official also pay any unpaid lease payments due as at In order to exercise such a lien, the relevant aircraft must commencement of the insolvency protection? (b) If not remain in the possession of the party who carried out the repairs. or if the lease is ‘rejected’, would the owner’s claim for The aircraft must have been improved through the labour of any outstanding sums rank equally with other ordinary that party exercising the lien, with the knowledge and authorisa- unsecured creditors of the lessee? tion of the owner, resulting in an unpaid debt. Such a lien would only extend to the cost of unpaid repairs to the specific aircraft The liquidator of an Irish company may apply to the Irish High in question, and would not allow for a right of sale without court Court within 12 months of the commencement of the winding intervention. Contractual liens can also be created in certain up to disclaim an onerous contract where the contract imposes circumstances.

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Certain airports operated by specified airport authorities have or statute. For example, a possessory lien may be exercised the right to detain and, if necessary, to sell aircraft in respect of where aircraft are subject to a claim for unpaid repairs. In such certain unpaid airport charges. This power to detain extends cases, the aircraft must remain in possession of the party who beyond the particular aircraft in respect of which the charges carried out the repairs and the aircraft must have been improved were incurred to any other aircraft of the operator or registered through the labour of that party with the knowledge and author- owner. isation of the owner. This lien of course would only extend to Parties in possession of judgments may also be entitled to the cost of the unpaid repairs and there must be court interven- exercise certain rights and procedures in order to execute a judg- tion for any sale. ment against (for example) an aircraft or shares in an aircraft Contractual liens may also exist if provided for in the agree- holding company. ment, pursuant to which aircraft may be detained and sold. Section 40 of the Air Navigation and Transport (Amendment) 92 Detention and Confiscation Act 1998 provides airport authorities in Ireland with the power to detain and sell aircraft in respect of which airport charges remain unpaid. Such authorities may also detain and sell other 9.1 Other than insolvency laws (see section 8), aircraft operated by the same defaulting operator in satisfac- are there any laws which may have the effect of tion of such outstanding charges. Section 40(5) provides that defeating the owner’s right in the aircraft – for example, if the authorities propose to apply for leave to sell an aircraft, it Government requisition? Do the laws of your jurisdiction shall take steps to bring the application to the notice of persons provide for any compensation in such circumstances? whose interests are likely to be affected. The IAA has the power under the Air Navigation In an emergency, the IAA can give directions as to the use or (Eurocontrol) Act 1963 to detain and sell aircraft for unpaid possession of an aircraft registered in Ireland. Eurocontrol charges in Irish airspace. Such powers given to the Revenue can seize and sell an aircraft for unpaid taxes owed IAA relate only to charges incurred by the operator or registered by the owner. owner in the airspace controlled by the IAA. The Criminal Assets Bureau has the power to confiscate any Parties in possession of judgments may also be entitled to property suspected of deriving from criminal conduct under s5 exercise certain rights against an aircraft, if appropriate judg- of the Criminal Assets Bureau Act 1996. ment enforcement procedures have been followed. Irish courts The Irish High Court can make a disposal order under s4 of will have regard to prior and superior interests before granting the Proceeds of Crime Act 1996 in respect of property consti- any such relief. tuting proceeds of crime. Acknowledgments 9.2 Are there any rights in relation to third parties to The authors are grateful to Kevin Harnett, Karole Cuddihy detain or sell the aircraft pursuant to illegal activities, and Niamh Mulherin for their invaluable contribution to this tax or any other laws if the operator or lessee fails to pay when due? If so, can the aircraft be forfeited and sold chapter. without the owner being made aware?

Irish law recognises certain liens and rights of detention for unpaid charges or debts, arising in law, equity or under contract

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Donna Ager is head of Maples and Calder’s European Aviation team, advising on tax-efficient leasing and financing structures, in addition to platform establishments and transportation business acquisitions and disposals, all from an Irish law perspective. Having worked on the acquisition, finance, leasing and disposal of transportation assets for more than 15 years, Donna has extensive industry and structuring knowl- edge, notably in the aviation sector where she specialises.

Maples Group Tel: +44 20 7466 1712 11th Floor, 200 Aldersgate Street Email: [email protected] London URL: www.maples.com EC1A 4HD United Kingdom

James Kinsley is a partner of Maples and Calder’s Finance team in the Maples Group’s Singapore office. He has extensive experience of inter- national capital markets and finance transactions in Asia, Europe and the Middle East. He advises on all aspects of structured finance, aircraft finance (including on- and off- balance sheet structures and aircraft portfolio securitisations), general banking, fund finance, Islamic finance and corporate transactions, including private equity co-investment platforms. James is also a specialist in derivatives transactions, equity derivatives transactions and advises leading financial institutions on complex netting and collateral structures for both conventional and Islamic derivatives.

Maples Group Tel: +65 6922 8410 1 Raffles Place, #36-01 Email: [email protected] One Raffles Place URL: www.maples.com 048616 Singapore

William Fogarty is a tax lawyer at Maples and Calder, the Maples Group’s law firm. He advises international financial institutions on Irish investment, financing and property transactions. He is very active in relation to Irish real estate and debt structuring. William also advises private equity firms on executive remuneration, carried interest structuring and VAT planning. William is also qualified as an Associate of the Irish Taxation Institute.

Maples Group Tel: +353 1 619 2730 75 St. Stephen’s Green, Dublin 2 Email: [email protected] D02 PR50 URL: www.maples.com Ireland

Robin McDonnell is head of the Dublin Dispute Resolution & Insolvency team at Maples and Calder, the Maples Group’s law firm. He special- ises in insolvency and corporate recovery/restructuring, and has acted in a wide range of compulsory and voluntary liquidations, examin- erships, receiverships, schemes of arrangement and bankruptcies. Robin acts for insolvency and restructuring practitioners and advises distressed companies, company directors, shareholders and creditors of distressed companies. He has extensive experience in acting for NAMA, both domestic and international financial institutions and private equity funds in banking litigation and enforcement matters.

Maples Group Tel: +353 1 619 2726 75 St. Stephen’s Green, Dublin 2 Email: [email protected] D02 PR50 URL: www.maples.com Ireland

Maples Group, through its leading international law firm, Maples and Calder, advises global financial, institutional, business and private clients on the laws of the British Virgin Islands, the Cayman Islands, Ireland, Jersey and Luxembourg. With offices in key jurisdictions around the world, the Maples Group has specific strengths in the areas of corporate commercial, finance, investment funds, litigation and trusts. Maintaining relationships with leading legal counsel, the Group leverages this local expertise to deliver an integrated service offering for global business initiatives. www.maples.com/dublin

Aviation Finance & Leasing 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 72 Chapter 10 Japan Japan

Taro Omoto

Mori Hamada & Matsumoto Makoto Sakai

12 General and Contractual lease agreements are usually governed by foreign laws, typi- cally English or N.Y. laws. Under the Civil Code of Japan, an aircraft lease is usually classified as a “lease”. Article 601 of the 1.1 What are the typical structures available for Civil Code of Japan sets forth that “a lease shall become effec- financing the purchase of an aircraft? tive when one of the parties promises to make a certain thing available for use for a fee in the form of rent, and the other The most typical structure is an SPC owning the aircraft. Such party promises to pay rent for the same”. Primarily for tax and SPC is typically owned by a leasing company or other business accounting purposes, there is a distinction between a finance entity, and procures funding for the purchase of the aircraft lease and an operating lease. While there is a difference between through a combination of debt financing on a limited recourse tax laws and accounting rules, generally speaking, the following basis and equity-like cash contributions from investors in the criteria is used to distinguish a lease: (a) whether the agreement form of a tokumei kumiai. (A nini-kumiai scheme, where the SPC cannot be terminated during the lease term; and (b) full paid-out and other inventors enter into a partnership agreement, and standard. Furthermore, under insolvency proceedings, a lease the unincorporated partnership purchases the aircraft, which agreement might be re-characterised as a secured financing will then be jointly owned by partners, is also used but less transaction, and as such the rent would be subject to reduction. frequently.) The SPC then leases the aircraft to lessee airlines. In some cases, investors borrow or use their own funds, 1.4 Are there any proposals for reform in the area of directly purchase the aircraft, and lease it to lessee airlines aviation finance? (direct ownership structure).

There are no particular proposals in relation to aviation finance, 1.2 What are the key advantages/disadvantages but major amendments will be made to the provisions of the and main issues arising in relation to these financing Civil Code of Japan governing, among others, contracts, statute structures? of limitation, and others. The amendment will take effect on April 1, 2020. Since SPCs are usually owned by corporate entities that are actively engaged in other businesses, SPCs are not perfectly bankruptcy-remote structures. However, financial institutions 1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially usually regard loans to SPCs as a kind of asset-based finance; binding pre-contractual agreements (e.g. ‘letters of thus, the credit of the investors is virtually irrelevant (i.e., finan- intent’) which will NOT take effect as fully enforceable cial institutions mainly look at the credit of lessee airlines and agreements? value of the aircraft. Having said that, financial institutions do usually require SPC investors that are actively engaged in busi- Yes, it is possible to enter into non-binding or partially binding ness to issue a keep-well letter). pre-contractual agreements which will not take effect as fully Investors can enjoy tax benefits since they can recognise enforceable agreements. depreciation costs and reduce taxable income to a certain extent. However, for SPC investors, recognition is significantly restricted by tax laws, compared to investors who directly own 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction the aircraft. The nini-kumiai structure is used particularly for which applies to all pre-contractual agreement, leases to, for example, US airlines because of the US-Japan tax financing and leasing transaction documents, and the treaty. conduct of parties connected to them?

Yes. Article 1, Paragraph 2 of the Civil Code sets forth that the 1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential exercise of rights and performance of duties must be done in characteristics? good faith, and Paragraph 3 sets forth that no abuse of rights is permitted. This applies to all agreements, and in some cases where this doctrine was invoked, the court recognised that The Act on General Rules for Application of Laws (Japanese certain obligations have arisen prior to the execution of the conflicts of law) permits parties to choose the governing law contract by the parties. of the agreement as a matter of general principle. Cross-border

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22 Taxation and Related Matters 2.7 Will the import of an aircraft into your jurisdiction and/or the sale or leasing of the aircraft give rise to any VAT, sales or use taxes or any customs import or excise 2.1 Which government authority in your jurisdiction duties? has primary responsibility for the accounting for and regulation of revenue control and taxes? Japan is a party to the Agreement on Trade in Civil Aircraft. Therefore, importation of aircraft into Japan from another The National Tax Agency has primary responsibility. party-country is not subject to customs duty. Sale and lease of aircraft in Japan is subject to consumption tax if the aircraft is 2.2 What are typically the taxes in your jurisdiction registered in Japan. which may arise in relation to a sale, a lease or a financing of an aircraft or an engine? 2.8 Are there any documentary taxes (for example, stamp duty payable on the execution of documents)? Corporate tax, consumption tax and registration tax may be incurred in relation to a sale of an aircraft. Also, withholding Stamp duty is payable on the execution of aircraft purchase and tax may be imposed on the rent if a Japanese lessee pays rent to sale agreements. a foreign lessor. 32 Registration and Deregistration 2.3 Is the provision of a current tax-residency certificate by a payee sufficient for a lessee or a 3.1 Which government authority in your jurisdiction borrower potentially subject to withholding taxes in your has primary responsibility for the regulation of aviation jurisdiction on rental or interest payments to avail itself and the registration of aircraft? Is it an owner registry of treaty access and the mitigation of tax liability? or an operator registry? If the aircraft register is an operator register, is it possible to record the details of an owner or lessor and any financier with an aircraft It will depend on the applicable tax treaty. Some treaties entered mortgage? into by the Japanese government include a limitation of benefit clause. In that case, the payee would need to submit via the payor an application for income tax treaty relief, together with The Ministry of Land, Infrastructure, Transport and Tourism certain attachments. has primary responsibility for the regulation of aviation and registration of aircraft. It is an owner registry but there is also a system for registering mortgages. 2.4 Has the advent of BEPS (the Base Erosion and Profit Shifting initiative of the OECD) had any effect as regards structures in aviation finance and leasing or 3.2 What is the effect of registration of the aircraft? their interpretation? Does registration on your national aircraft register confer proof of ownership of the aircraft and/or engine?

Japan is a party to the Multilateral Convention to Implement Tax Treaty Related Matters to Prevent BEPS, which has been Registration can be made only for aircraft; there is no regis- tration system for engines. As a general principle, in order to in effect from January 1, 2019. Therefore, depending on the operate an aircraft, it must be registered in Japan (with excep- country of residence of the payee, if the principal purpose of tions for foreign-registered aircraft). The registration also func- an arrangement is to obtain the treaty benefit, it would have an tions as a means to perfect ownership and mortgage interests. effect as regards structures in aviation finance and leasing.

3.3 Can foreign-owned aircraft be registered on 2.5 What are the typical thresholds in your jurisdiction your national aircraft register and are there limits or for which a permanent establishment may be triggered restrictions on the age of aircraft that may be registered under the terms of any relevant double-tax treaty or or operated? similar?

Foreign-owned aircraft cannot be registered. The Civil Aeronautics A permanent establishment may be triggered if there is a fixed Act stipulates that registration cannot be made with respect to place of business through which the business of an enterprise is any aircraft owned by (i) a person who does not have Japanese wholly or partly carried on. nationality, (ii) any foreign state or public entity or its equivalent in any foreign state, (iii) any juridical person or body established 2.6 Is the authority at question 2.1 likely to establish in accordance with the laws and ordinances of any foreign state, or a ‘look-through’ right or similar as regards a lender or a (iv) any juridical person whose representative is any one of those lessor which is a special-purpose vehicle involved for the listed in the preceding three items or one-third or more of whose purpose of tax treaty access? officers are, or one-third or more of whose voting rights are held, by such persons. There are no limits on the age of aircraft. There is no specific authority granted to the National Tax Agency to look through a lender or lessor, although some tax 3.4 Can aircraft leases be registered? If so, in what treaties have a limitation of benefit clause. circumstances? Must the lease be in a particular form if it is to be valid and enforceable (for example, must it be in a particular language or be notarised, legalised or apostilled)?

No, they cannot.

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3.5 How is deregistration affected and what steps can a lessor take to de-register the aircraft on termination of 52 Enforcement and Repossession the lease? 5.1 What are the circumstances in which a mortgagee or owner can take possession of the aircraft and/or sell Deregistration may be made by the person who registered the the aircraft? What requirements must the mortgagee or aircraft or his attorney-in-fact. The application for deregistra- owner comply with? tion shall be submitted together with the certificates of owner- ship and aircraft registration. For mortgages created pursuant to the Aircraft Mortgage Act, 42 Security the mortgagee should be able to exercise the security interest if an event of default has occurred.

4.1 Is it possible to create a mortgage over an aircraft or engine in your jurisdiction? If so, what are the types 5.2 What is the procedure for repossession of the of aircraft mortgage and engine mortgage available and aircraft? what formalities are required in order to perfect it? Repossession based on ownership or lease interest is conducted The Aircraft Mortgage Act allows mortgages to be created in accordance with the Civil Execution Act. Under Article 169 over aircraft. There is no equivalent legislation for engines. of the Act, compulsory execution for movables, such as aircraft, Regarding choice of law, while there is no express provision in shall be carried out by confiscation of the movables from the the Act on General Rules for Application of Laws, the law of obligor, and delivery of such movables to the obligee, by a court registration is usually considered as the governing law of the execution officer. Compulsory execution shall be carried out mortgage interest over the aircraft. based on “certficate of obligation (saimu meigi)” (this is the technical term used in the act), which includes, among others, a final and 4.2 Can spare parts, including future parts, be subject binding judgment, or a judgment of a foreign court or arbitral to the aircraft mortgage or engine mortgage (as the case award for which an order for execution has become final and may be)? If not, are there any other forms of security that binding. can be taken over spare parts? To obtain an order for execution, the foreign judgment must satisfy the requirements in Article 118 of the Code of Civil No. Potentially, security assignments can be used for this Procedure. Under Article 118, a final and binding judgment purpose. rendered by a foreign court is valid only if it meets all of the following requirements: (i) the jurisdiction of the foreign court is recognised pursuant 4.3 Is there a register of mortgages or rights over to laws and regulations, conventions, or treaties; aircraft and/or engine? (ii) the defendant has been served (excluding service by publi- cation or any other service similar thereto) with the requi- There is a registration system for aircraft mortgages (but none site summons or order for the commencement of litiga- for engines) under the Aircraft Mortgage Act. tion, or has appeared without being so served; (iii) the contents of the judgment and litigation proceedings 4.4 What other forms of security can be taken over are not contrary to public policy in Japan; and an aircraft and/or engine and can these other forms be (iv) there is guarantee of reciprocity in the country of the registered? foreign court. The requirements to obtain an order for execution are set A pledge can be created but is usually regarded as imprac- forth in the Arbitration Act. tical because the pledgor must deliver possession of the thing Regarding the enforcement of mortgage interests over pledged to the pledgee; thus, the pledgor cannot continue to use aircraft, if the mortgage interest is registered in Japan, the proce- the aircraft. Security assignment is also possible but very rarely dure is similar to enforcement for real estate. For enforcement used, while security assignment is widely used for the interests of mortgage interests registered in Japan, the aircraft registra- over the lease. tion certificate should be delivered to a court execution officer.

4.5 What claims and rights would take priority in your 5.3 Will local courts recognise a choice of foreign law jurisdiction over a registered mortgage? in an aircraft mortgage? Are there any mandatory local rules that apply, despite a choice of foreign law? Article 11 of the Aircraft Mortgage Acts states that an aircraft mortgagee has the same priority as a first-rank lien. However, See our answer to question 4.1. Article 330 of the Civil Code stipulates that, for liens arising for the preservation of the aircraft, a first-rank lien holder cannot 5.4 Will local courts recognise and enforce a foreign exercise priority over junior lien holders if the first-rank lien court judgment in favour of a mortgagee or lessor? Are holder is aware of such junior liens at the time the first-rank lien any interim relief measures available? holder acquired secured interests. See our answer to question 5.2. Interim relief measures are 4.6 What other forms of security can be granted over provided under the Civil Provisional Remedies Act. an aircraft and/or engine lease?

See our answer to question 4.2.

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5.5 Are powers of attorney from a local airline in favour 5.9 If the lease is governed by English law and a of a lessor or mortgagee likely to be effective to allow judgment is obtained by the lessor in the English courts, the lessor or mortgagee to deregister the aircraft? Can can that judgment be automatically enforced in your such powers be irrevocable, be governed by a foreign jurisdiction or will the case have to be re-examined on its law and/or do they need to be in any particular form for merits? local recognition? See our answer to question 5.2. Foreign judgments are not auto- There is no clear answer for this issue. The Ministry of Land, matically enforced; rather, an order for execution is required, but Infrastructure, Transport and Tourism has prepared a power of the case will not be re-examined on its merits. attorney form to be used for the purpose of deregistration of the aircraft. The Ministry requires the power of attorney to be 5.10 What is the applicable procedure for repossession sealed with the registered seal, and submitted to the Ministry of an aircraft under other forms of security interests? with a certificate of corporate seal issued within the last three months. Obtaining an updated certificate of corporate seal would be a practical issue. See our answer to question 5.2. 62 Conventions 5.6 If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the 6.1 Has your jurisdiction ratified any of the following: aircraft? (a) The Chicago Convention of 1944 on International Civil Aviation (the Chicago Convention); (b) The 1948 Convention on the International Recognition of Rights To our knowledge there is no such precedent; thus, it is diffi- in Aircraft (the Geneva Convention); (c) The 1993 cult to estimate how long it is likely to take to gain possession Convention for the Unification of Certain Rules Relating of the aircraft. to the Precautionary Arrest of Aircraft (the 1993 Rome Convention); and (d) The Convention on International Interests in Mobile Equipment on Matters Specific to 5.7 Are there any restrictions on the ability of the Aircraft Equipment (the Cape Town Convention) and the lessor to export the aircraft from your jurisdiction on Protocol on the Convention on International Interests termination of the leasing? in Mobile Equipment on Matters Specific to Aircraft Equipment? The Foreign Exchange and Foreign Trade Act regulates the export of goods, including the engines and navigation systems. Japan has ratified (a) the Chicago Convention of 1944 on With respect to ordinary civil aircraft, an export licence is usually International Civil Aviation (the Chicago Convention). Japan required only where (i) the exporter is aware that the aircraft will has not ratified (b) the 1948 Convention on the International be used for military purposes, (ii) the importer is included in Recognition of Rights in Aircraft (the Geneva Convention), the concerned user list of the Ministry of Economy, Trade and (c) the 1933 Convention for the Unification of Certain Rules Industry (METI), or (iii) the METI notifies the exporter of the Relating to the Precautionary Arrest of Aircraft (the 1933 concern over the importer (a catch-all rule). With respect to Rome Convention), or (d) the Convention on International the engines, assuming that the exported civil aviation engine Interests in Mobile Equipment on Matters Specific to Aircraft is (i) certified by a civil aviation authority of Japan or another Equipment (the Cape Town Convention) and the Protocol on Wassenaar Arrangement participating country, (ii) intended to the Convention on International Interests in Mobile Equipment power non-military manned aircraft for which any civil aviation on Matters Specific to Aircraft Equipment. authority of Japan or another Wassenaar Arrangement partici- pating country issues certification as a civil aircraft, and (iii) not designed to cruise at Mach 1 or higher for more than 30 minutes, 6.2 Has ratification of the Cape Town Convention caused any conflicts or issues with local laws? an export licence is required only where (i) the exporter is aware that the engine is used for a military purpose, (ii) the importer is included in the concerned user list of Ministry of Economy, This is not applicable. Trade and Industry (METI), or (iii) the METI notifies the exporter of the concern over the importer (an catch-all rule). 6.3 What is the legal position regarding non-consensual rights and interests under Article 39 of the Cape Town Convention? 5.8 Are exchange controls prevailing in your jurisdiction as regards payments in foreign currency? Will any consents be required for the remittance of the This is not applicable. sale proceeds abroad?

6.4 Has your jurisdiction adopted the remedies on Exchange controls can be imposed on payments/remittances insolvency provided under Article XI of the Protocol to under certain exceptional cases (e.g., payment to a person the Cape Town Convention? residing in an area subject to international sanctions) but, as a general rule, these are only subject to a post facto reporting This is not applicable. requirement.

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6.5 What is the procedure to file an irrevocable 8.3 Do the available forms of insolvency protection deregistration and export request authorisation under in your jurisdiction involve the appointment of either the Cape Town Convention (IDERA)? an officer of the court or a specifically court appointed official to take control of the operator or lessee (an ‘Insolvency Official’) while in insolvency protection? This is not applicable.

72 Liability for Damage and Environmental It depends on the type of insolvency protection. In Japan, we have three types of insolvency regimes, i.e. the Bankruptcy Act, the Civil Rehabilitation Act, and the Corporate Reorganization 7.1 Can the owner be strictly liable – liable without Act. The Corporate Reorganization Act is applicable to Japanese a requirement to prove fault or negligence – for any damage or loss caused by the aircraft assuming the stock companies (kabushiki kaisha) only. The Companies Act owner is an innocent owner with no operational control also provides for a special liquidation process. of the aircraft? 8.4 Does the commencement of insolvency protection There is no express provision to recognise such strict liability on involving the appointment of an Insolvency Official the owner of the aircraft, although some academicians believe in your jurisdiction have the effect of prohibiting the that such liability should be recognised. owner from taking the following actions to enforce the lease after commencement of such protection: (a) applying any security deposit held by the owner against 7.2 Does the EU Emissions Trading System (EU ETS), any unpaid amounts due under the lease; (b) accepting or any similar scheme, apply to aircraft and aircraft payment of rent or other lease payments from the operators in your jurisdiction? Will charges levied lessee, a guarantor or a shareholder; (c) giving notice according to the EU ETS, or its equivalent, give rise to of default under the lease; (d) obtaining a judgment or any in rem rights in relevant aircraft which are part of the arbitral award for unpaid lease payments; (e) giving fleet of the operator concerned and, if so, will such rights notice to terminate the leasing of the aircraft and/or rank in priority ahead of any mortgage interests properly engine; or (f) exercising rights to repossess the aircraft registered in the relevant aircraft and/or engine? and/or engine?

The Act on Promotion of Global Warming Countermeasures (a) is generally permitted. (b) is generally not permitted. As provides for a “quota account inventory” system in accordance to (c), (e) and (f), according to court precedents, the effect of with international decisions regarding the calculation of quotas the termination of the lease is unlikely to be recognised. (d) is pursuant to Article 7, No. 4 of the Kyoto Protocol applies to generally not permitted apart from insolvency proceedings. aircraft and aircraft operators in Japan. 8.5 Can the commencement of insolvency proceedings 7.3 What liabilities (actual or potential) could an owner, have retrospective effect in relation to any such actions lessor or financier of an aircraft incur in your jurisdiction taken before commencement? If so, for what period can because of a failure to comply with local environmental there be a look back? law and/or regulations on the part of an operator of aircraft leased or financed by it? Insolvency proceedings take effect when a commencement order is issued by the court. As a general principle, owners, lessors, or financiers of aircraft are not made liable for the failure of the operators of the aircraft 8.6 Is there, either under law or as a matter of practice to comply with local environmental laws and/or regulations; in your jurisdiction, a period of time within which the however, you may need to check each law and/or regulation on Insolvency Official will either ‘adopt’ the lease and this point. pay rent and other lease payments as an expense of the insolvency or ‘reject’ the lease and permit the 82 Insolvency and Searches owner to enforce such rights as it may have under the lease? (a) If the lease is ‘adopted’, will the Insolvency Official also pay any unpaid lease payments due as at 8.1 Are there any public registers in your jurisdiction commencement of the insolvency protection? (b) If not where a search can be carried out to determine whether or if the lease is ‘rejected’, would the owner’s claim for an order or resolution for any bankruptcy, bankruptcy any outstanding sums rank equally with other ordinary protection or similar insolvency proceedings has been unsecured creditors of the lessee? registered in relation to an operator or lessee? Yes. The Japanese insolvency legislation generally permits the If the operator or lessee is a corporation, the registration of Insolvency Official to adopt or terminate the lease. If the lease insolvency proceedings will be made in the corporate registry. is adopted, lease payments after the commencement of the insol- vency proceedings will not be subject to restrictions under the 8.2 In the event that an operator or lessee were to insolvency proceedings, while in many cases the Insolvency become insolvent either on a balance sheet basis Official seeks voluntary reduction of the rent as a condition to (assets less than liabilities) or is unable to pay debts as adopt the lease. Irrespective of whether the Insolvency Official fall due, would an operator or lessee be required to file adopts or terminates the lease, all outstanding claims as at the for insolvency protection? commencement of the insolvency proceedings rank equally with claims or other ordinary unsecured creditors of the lessee. The operator or lessee would not be required to file for insol- vency protection.

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8.7 Are there certain types of preferred creditors 9.2 Are there any rights in relation to third parties to whose claims will rank above claims of the owner? detain or sell the aircraft pursuant to illegal activities, tax or any other laws if the operator or lessee fails to pay when due? If so, can the aircraft be forfeited and sold Yes, there are. without the owner being made aware?

8.8 If the aircraft is in the possession of a person The aircraft and engine used to traffic illegal drugs may be other than the operator or lessee at the commencement confiscated by the law enforcement authority pursuant to of Insolvency Protection of the operator or lessee, for Article 69-3, Paragraph 2 of the Narcotics and Psychotropics example, an independent maintenance facility, will such person be entitled, under the laws of your jurisdiction, Control Act, Article 24-5, Paragraph 2 of the Cannabis Control to assert a lien arising under law or contract over the Act, and Article 41-8, Paragraph 2 of the Stimulants Control aircraft in respect of amounts then due and unpaid to Act. While these acts do not explicitly eliminate the possibility such person by the operator or lessee? of aircraft owned by a third party being confiscated, the confis- cation would be allowed only where the owner of the aircraft Generally no. Liens are permitted on the properties of the was aware of the relevant offence because the Supreme Court obligor (in this case the operator or lessee). has taken the position (in a case involving another confiscation law in 1957) that such awareness is required to confiscate prop- 92 Detention and Confiscation erty owned by a third party. The ability to confiscate depends on the awareness of the owner, not of the airline, because the ground for the restriction on confiscation is based on the consti- 9.1 Other than insolvency laws (see section 8), tutional protection of property rights, which are held by the are there any laws which may have the effect of owner. Airports and air navigation authorities are not granted defeating the owner’s right in the aircraft – for example, Government requisition? Do the laws of your jurisdiction any special rights to detain or sell aircraft or engines in relation provide for any compensation in such circumstances? to any payment obligations, except for possible statutory liens.

Article 29, Paragraph 3 of the Japanese Constitute stipulates that private property may be taken for public use subject to payment of just compensation. There is no special legislation for aircraft.

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Taro Omoto’s practice focuses mainly in the field of capital markets and structured instruments, particularly on aircraft/ship financing and financial regulation. Taro regularly advises leasing companies, investors, banks and airlines on the formation of new JOL/JOLCO transactions, as well as its restructuring. Taro joined Mori Hamada & Matsumoto in 2000, and was promoted to a partner in 2009. He is a qualified lawyer in Japan and New York and a graduate of Harvard Law School (LL.M.) 2005 and Keio University (LL.B., magna cum laude) 1999. He has received awards from many groups, including Chambers Global, Chambers Asia-Pacific and Best Lawyers.

Mori Hamada & Matsumoto Tel: +81 3 6212 8307 16th Floor, Marunouchi Park Building Email: [email protected] 2-6-1 Marunouchi URL: www.mhmjapan.com Chiyoda-ku Tokyo 100-8222 Japan

Makoto Sakai joined Mori Hamada & Matsumoto in 2004. He obtained his LL.B. from the University of Tokyo in 2003, and his LL.M. from Cornell Law School in 2009. He has worked previously with Gibson, Dunn & Crutcher in Los Angeles from 2009 to 2010, and was seconded to the Tokyo Regional Taxation Bureau from 2011 to 2013, working in the department that handles audits of large businesses. Mr. Sakai works primarily in the practice areas of tax, M&A and private wealth matters. He also handles tax investigations and appeals filed against tax authorities and tax disputes. Making the most of his experience as a former Review Officer (International Examination) at the Large Enterprise Examination Department of the Tokyo Regional Taxation Bureau, he takes a pragmatic approach towards a wide variety of matters that involve tax issues. He has received awards from many groups, including Chambers Asia-Pacific, The Legal 500 and Best Lawyers.

Mori Hamada & Matsumoto Tel: +81 3 6212 8357 16th Floor, Marunouchi Park Building Fax: +81 3 6212 8257 2-6-1 Marunouchi Email: [email protected] Chiyoda-ku Tokyo 100-8222 URL: www.mhmjapan.com Japan

We are a leading global full-service corporate law firm headquartered in Tokyo, Japan. We have offices in other cities in Japan, as well in China, Singapore, Thailand, Myanmar and Vietnam. Our aviation practice advise a wide range of clients, including leasing companies, trading companies, financial institutions, investors, airlines, and shipping companies. We offer legal services for a variety of transactions and legal issues, including advising on acquisitions, Japanese operating leases (JOLs), pure operating leases and finance leases, compliance with investor protection laws and financial regulations, the handling of tax and other matters for investors, dispute resolution, and bankruptcy. www.mhmjapan.com

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Malta Malta

Steven Decesare

Camilleri Preziosi Krista Ellul

12 General and Contractual According to such rules, a finance lease constitutes ‘the lease of an asset…involving the payment by the lessee to the lessor over a number of years of the full, or nearly the full cost of the asset 1.1 What are the typical structures available for together with a return on the finance provided by the lessor and financing the purchase of an aircraft? such other remuneration as may be reasonable in the circum- stances of the case’. Traditionally, the most preferred model was commercial lending, secured by a mortgage over the aircraft. Other forms 1.4 Are there any proposals for reform in the area of of financing include leasing structures, capital markets, securiti- aviation finance? sations and export credit agency financing. In Malta, the most common forms of aircraft financing are leasing structures and commercial lending. Transport in Malta (“TM”) is currently working on amend- ments to the legal framework regulating aviation with the aim of making Malta an attractive jurisdiction for aircraft leasing. 1.2 What are the key advantages/disadvantages The proposal includes the introduction of cell companies for the and main issues arising in relation to these financing aviation sector and facilitation measures relating to the impor- structures? tation of aircraft.

In a structure, ownership is vested in the borrower (airline or aircraft leasing company). Accordingly, risks and 1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially rewards incidental to ownership are vested in the borrower. binding pre-contractual agreements (e.g. ‘letters of Furthermore, the loan would normally cover a part (not all) intent’) which will NOT take effect as fully enforceable of the purchase price for the aircraft and therefore the airline agreements? would need to finance part of the acquisition price from its own funds (or through other means). It is possible to enter into letters of intent, memoranda of under- In a finance leasing, the ownership of the aircraft remains standing or similar pre-contractual agreements. vested in the lessor; however, all risks and rewards incidental to ownership are transferred to the lessee. The entire purchase price is typically financed by the finance lessor, in which the price 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction is recovered (all or substantially all) through rental payments. which applies to all pre-contractual agreement, The lessee would have the option or obligation to acquire the financing and leasing transaction documents, and the aircraft at the end of the term. The lessor would retain legal title conduct of parties connected to them? and typically register an international interest in relation to the lease in the International Registry (the “IR”) established by the All contracts must be carried out in good faith. Cape Town Convention (the “CTC”). 22 Taxation and Related Matters 1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential 2.1 Which government authority in your jurisdiction characteristics? has primary responsibility for the accounting for and regulation of revenue control and taxes? The lease of an aircraft is regulated by the Civil Code, Chapter 16 of the laws of Malta (the “Civil Code”) which gives priority The Office of the Commissioner for Revenue (“OCR”). to the terms of the lease agreement. Accordingly, aircraft leases will primarily be regulated by the relevant lease agreement, in 2.2 What are typically the taxes in your jurisdiction conjunction with international usages of trade, where applicable. which may arise in relation to a sale, a lease or a The Civil Code fails to distinguish between a finance lease and financing of an aircraft or an engine? an operating lease albeit finance leases are distinguished from operating leasing arrangements in the Finance Leasing Rules, No withholding tax is payable on lease payments when the lessor Subsidiary Legislation 123.88 (the “Finance Leasing Rules”). is not tax-resident in Malta. The tax legislation is very favourable

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to aircraft operators who are not tax-resident in Malta. Income 2.8 Are there any documentary taxes (for example, derived by them from the ownership, leasing or operation of stamp duty payable on the execution of documents)? aircraft used in international aviation business is not taxed in Malta if such income is not received in Malta. This is the case No stamp duty applies on the transfer of aircrafts, airframes, even if the aircraft is registered in, or operated from, Malta. engines and other aircraft-related assets. No other documen- tary taxes apply. 2.3 Is the provision of a current tax-residency certificate by a payee sufficient for a lessee or a 32 Registration and Deregistration borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself 3.1 Which government authority in your jurisdiction of treaty access and the mitigation of tax liability? has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry Yes, a tax-residency certificate issued by the appropriate foreign or an operator registry? If the aircraft register is an governmental authority would typically suffice for this purpose. operator register, is it possible to record the details of an owner or lessor and any financier with an aircraft mortgage? 2.4 Has the advent of BEPS (the Base Erosion and Profit Shifting initiative of the OECD) had any effect as regards structures in aviation finance and leasing or The Civil Aviation Directorate within the TM (“CAD”) is their interpretation? responsible for the regulation of aviation and registration of aircraft in the National Aircraft Register (the “NR”), kept by the Director General (the “DG”). The main effect which the advent of BEPS has had on avia- The NR is an operator registry. It is possible to record owner- tion finance and leasing structures is the added emphasis on ship rights, lessor and lessee rights, and details of any mortgages substance. and international interests registered in the IR and the debtor thereof. 2.5 What are the typical thresholds in your jurisdiction for which a permanent establishment may be triggered 3.2 What is the effect of registration of the aircraft? under the terms of any relevant double-tax treaty or Does registration on your national aircraft register similar? confer proof of ownership of the aircraft and/or engine?

Although Maltese tax legislation contains references to the term Registration of aircraft: (a) renders information public; (b) ‘permanent establishment’, the term is not defined by Maltese renders the acts effective against third parties; (c) creates legislation. Indeed, in terms of Maltese domestic tax law, a priority; (d) where expressly conditional on registration, creates non-resident is, in principle, subject to Maltese tax on income legal effects between the parties to certain transactions; and (e) arising in Malta, irrespective of the existence or otherwise of has all other effects under the ARA. a permanent establishment in Malta (subject to any double tax The certificate of registration signed by the DG is prima facie treaty provisions that would apply if in conflict with Maltese evidence of its contents and issuance. tax law). If the Maltese Inland Revenue is required to interpret such a term, reference would typically be made to the definition 3.3 Can foreign-owned aircraft be registered on contained in the OECD Model Convention. your national aircraft register and are there limits or restrictions on the age of aircraft that may be registered or operated? 2.6 Is the authority at question 2.1 likely to establish a ‘look-through’ right or similar as regards a lender or a lessor which is a special-purpose vehicle involved for Foreign-owned aircraft may be registered in the NR. There are the purpose of tax treaty access? no restrictions or limitations as to the age of aircraft that may be registered in the NR. This is not likely to be established by the OCR. 3.4 Can aircraft leases be registered? If so, in what circumstances? Must the lease be in a particular form 2.7 Will the import of an aircraft into your jurisdiction if it is to be valid and enforceable (for example, must it and/or the sale or leasing of the aircraft give rise to any be in a particular language or be notarised, legalised or VAT, sales or use taxes or any customs import or excise apostilled)? duties?

The operator of an aircraft under a lease or other tempo- Leasing of an aircraft is chargeable to VAT, but only on the rary title may register the aircraft. It is not necessary for this deemed use of the aircraft within the European airspace. For to be notarised, legalised or apostilled for it to be valid and this purpose, the VAT Department has issued a formula that enforceable. establishes the percentage of such use taking into account the features of the particular aircraft. Through this scheme, the lessor may claim back the original VAT incurred upon acquisi- 3.5 How is deregistration affected and what steps can tion of the aircraft. No VAT is charged in respect of the supply a lessor take to de-register the aircraft on termination of of aircraft destined to be used by airline operators for reward the lease? chiefly for international transport of passengers or goods. The deregistration process is typically initiated by the registrant, through the submission of a written application to the DG.

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It is possible to register an irrevocable de-registration and export 4.5 What claims and rights would take priority in your request authorisation (“IDERA”) and/or irrevocable de-registra- jurisdiction over a registered mortgage? tion power of attorney (“DPOA”). If an IDERA is registered, it is only the authorised party under the IDERA, or its certified Mortgages registered in the NR rank after international inter- designee, who is entitled to deregister the relevant aircraft. ests registered in the IR, unless such mortgages were registered If a request for de-registration is made by an authorised person in the NR prior to the ‘effective date’ (as defined in the ARA) or his delegate, pursuant to an IDERA or DPOA which has of the CTC. been registered in the NR or in the IR, CAD must act upon such Certain creditors, including aircraft manufacturers and request unless the holder of the IDERA or DPOA, as appli- repairers, which are placed with the authority and care of an cable, ranks in priority after any mortgage or any international aircraft for a particular purpose (such as the execution of works), interest registered in the NR or IR, in which case consents to benefit from a possessory lien. This lien entitles the creditor to cancellation would be required. retain possession of the aircraft until the creditor is paid. The ARA also caters for the creation of special privileges, 42 Security both by operation of law and following registration, in rela- tion to certain debts. The special privileges arising by opera- 4.1 Is it possible to create a mortgage over an aircraft tion of law are (a) judicial costs incurred in respect of the sale of or engine in your jurisdiction? If so, what are the types an aircraft pursuant to the enforcement of a mortgage or other of aircraft mortgage and engine mortgage available and executive title, (b) fees due to the DG, (c) wages due to crew, what formalities are required in order to perfect it? (d) debts due to the holder of a possessory lien, or expenses incurred, in each case for the repair, preservation of the aircraft It is possible to register a mortgage over an aircraft (or a share to the extent of the service performed on and value added to, the therein) in the NR. aircraft, and (e) wages and expenses for salvage in respect of the In terms of Maltese law, for the purposes of the registration aircraft (“Non-Registrable Privileges”). of the mortgage, an aircraft is deemed to include not simply the The ARA also provides for the possibility of registering airframe but also the engines, any equipment, appurtenances certain claims in relation to (a) taxes, duties and, or, levies due to and machinery as well as data and manuals insofar as they the Government of Malta, and (b) wages and expenses for assis- belong to the same owner. Hence it is not possible to register a tance or recovery, in each case in respect of the aircraft, in the Maltese mortgage over the engines alone. IR (“Registrable Privileges”). A mortgage has no effect regarding the aircraft or share, or Any debt secured by a mortgage registered in the NR or a against any person, other than the mortgagor, unless it has been charge in the IR (or secured by a foreign mortgage recognised registered. under the ARA) ranks after debts secured by possessory liens and Non-Registrable Privileges, and in preference to other hypoth- ecary and privileged claims. Registrable Privileges, once regis- 4.2 Can spare parts, including future parts, be subject tered, rank after Non-Registrable Privileges and after all debts to the aircraft mortgage or engine mortgage (as the case secured by mortgages and charges in the IR registered prior to may be)? If not, are there any other forms of security that can be taken over spare parts? the date of the registration of the relevant Registrable Privileges, and thereafter shall rank in accordance with article 44(3) of the ARA, in each case subject to article 44(5) of the ARA. Any spare parts and/or engines attached to an aircraft which do not pertain to the owner of the airframe will not be subject to any mortgage registered in the NR. However, an interna- 4.6 What other forms of security can be granted over tional interest in an aircraft object (the airframe or engine) may an aircraft and/or engine lease? be registered in the IR. Other forms of security of general application, such as general Security may be granted over an aircraft and, or, engine lease by hypothecs, pledges or security by title transfers, are also avail- means of the registration of an international interest in the IR. able. However, given the nature of such security interests, these may not be suitable or feasible for spare parts. 52 Enforcement and Repossession

4.3 Is there a register of mortgages or rights over 5.1 What are the circumstances in which a mortgagee aircraft and/or engine? or owner can take possession of the aircraft and/or sell the aircraft? What requirements must the mortgagee or owner comply with? Mortgages registered over an aircraft are recorded in the NR.

The mortgagee and mortgagor may at any time agree in writing 4.4 What other forms of security can be taken over as to what constitutes a default and thus gives rise to certain an aircraft and/or engine and can these other forms be registered? remedies in terms of the enforcement of a registered mort- gage. However, in the absence of an express agreement, the ARA provides its own interpretation as to the qualification of International interests over an aircraft object may be registered a default. in the IR, which shall be recognised and enforceable under the Reference is made to question 3.5 above, in relation to the laws of Malta irrespective of whether it is recorded in the NR or de-registration and repossession of an aircraft. not. Various interests which can be registered in the IR include: In each case, a mortgagee has the power to terminate the rele- (i) an interest granted by the chargor under a security agreement; vant agreement and take possession or control of the aircraft, or (ii) an interest vested in a conditional seller under a title reser- to apply to the court to authorise or direct either of these acts. vation agreement; and (iii) an interest vested in a lessor under a A mortgagee may also apply for the issuance of a warrant of leasing agreement. arrest by the court.

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5.2 What is the procedure for repossession of the and enforce such judgments, subject to the applicable law aircraft? of Malta imposing judgment registration or confirmation in Malta, unless: (i) the judgment sought to be enforced Reference is made to questions 3.5 and 5.1 above. In addition, may be set aside on any of the grounds for re-trial as a creditor may demand and obtain the issuance of a warrant of contemplated in Maltese law on organisation and civil arrest by means of an application in the form prescribed by law. procedure; (ii) in the case of a judgment by default, the The right to request issuance of an arrest warrant is, however, parties were not contumacious according to foreign law; subject to certain limitations as to the value of the claim and the or (iii) the judgment contains any disposition contrary to nature of the services provided by the said aircraft, unless the public policy or to the internal public law of Malta. claim is made by the holder of a mortgage or an international As explained above, it is possible to request the issuance of a interest which has been registered in accordance with the appli- warrant of arrest. In addition, in terms of the First Schedule of cable provisions of the ARA. the ARA (which implements the provisions of the Convention), where a creditor can adduce evidence of default by the debtor, the creditor may obtain ‘speedy relief’ from the court by virtue 5.3 Will local courts recognise a choice of foreign law of a court order. This relief may take various forms including in an aircraft mortgage? Are there any mandatory local the preservation of the aircraft object and its value, the posses- rules that apply, despite a choice of foreign law? sion, control or custody of the aircraft and the sale and applica- tion of proceeds therefrom. A mortgage registered in the NR must be submitted on a statu- tory form, which is regulated by Maltese law. The mortgage can secure a foreign law finance or security document. Furthermore, 5.5 Are powers of attorney from a local airline in favour of a lessor or mortgagee likely to be effective to allow where the security interest has been registered as an interna- the lessor or mortgagee to deregister the aircraft? Can tional interest in the IR, it will be recognised and enforceable such powers be irrevocable, be governed by a foreign in Malta. The choice of law is not restricted, subject to compli- law and/or do they need to be in any particular form for ance with EC Regulation No. 593/2008/EC of the European local recognition? Parliament and of the Council on the law applicable to contrac- tual obligations (Rome I) of 17 June 2008. The ARA expressly contemplates the registration of irrevocable de-registration powers of attorney and IDERAs. The IDERA 5.4 Will local courts recognise and enforce a foreign must be submitted to the CAD in the statutory form, whilst the court judgment in favour of a mortgagee or lessor? Are irrevocable de-registration power of attorney need not be in a any interim relief measures available? specific form or governed by Maltese law, however it should state that it is irrevocable and granted by way of security. A judgment awarded by a competent court outside Malta would Requests made by an authorised person or his certified be recognised as a valid judgment and enforceable in the Courts designee in writing, pursuant to an irrevocable de-registration of Malta, subject to the provisions of the following: authorisation or power of attorney which has been registered, (a) in the case of judgments falling within the scope of the must be acted upon in all cases by CAD, unless the holder of the Brussels I (Recast) Regulation (EU) No. 1215/2012 (the irrevocable deregistration authorisation which has been regis- “European Judgments Regulation”), the recogni- tered ranks in priority after any mortgage or any international tion and enforcement would be subject to the provisions interest registered in the NR or in the IR, respectively, in which contained in the European Judgments Regulation; case the consent of all holders of registered mortgages or inter- (b) in the case of judgments falling within the scope of the national interests is required. Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial 5.6 If recovery of the aircraft is contested by the lessee Matters signed in Lugano on 30 October 2007 between and a court judgment is obtained in favour of the lessor, the European Community, the Kingdom of Denmark, how long is it likely to take to gain possession of the the Republic of Iceland, the Kingdom of Norway and the aircraft? Swiss Federation (“Lugano Convention”), the recogni- tion and enforcement of judgments delivered in Member As explained above, the lessor is not required to obtain a judg- States of the Lugano Convention, other than judgments ment to take possession or control of the aircraft, notwith- which fall within the European Judgments Regulation, standing the opposition of the lessee. If the lessee does not would be subject to the provisions contained in the Lugano comply with the provisions of the lease agreement and the Convention; lessor’s instructions, the lessor may apply to court to authorise (c) in the case of judgments falling within the scope of the or order such acts. In such case, the court is required to render Convention on Choice of Court Agreements, concluded on its full support to the lessor as expeditiously as possible. 30 June 2005 under the auspices of the Hague Conference on Private International Law (the “Hague Convention”), the recognition and enforcement in a contracting state of 5.7 Are there any restrictions on the ability of the judgments delivered by a court of another contracting state lessor to export the aircraft from your jurisdiction on termination of the leasing? designated in an exclusive choice of court agreement which is regulated by the Hague Convention would be subject to the provisions contained in the said Hague Convention; In terms of article 15 of the First Schedule to the ARA, the and lessor may – to the extent that the lessee has at any time so (d) in the case of judgments not falling within the scope of the agreed and in accordance with the terms agreed and provided European Judgments Regulation, the Lugano Convention that it has obtained the prior consent in writing of the holder or the Hague Convention, Maltese Courts would recognise of any registered interest ranking in priority to that of the lessor

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– (i) procure the de-registration of the aircraft, and (ii) procure aircraft registration and security related to aircraft was published. the export and physical transfer of the aircraft object from the Its ratification has accordingly not caused any conflicts or issues territory in which it is situated. with local laws. Certain amendments were also made to the Civil The CAD must honour such request, unless it is not able to Code in order to reflect the principles underpinning the CTC. do so due to any applicable safety laws and regulations, provided that: (i) the request is properly submitted by the authorised party under a recorded IDERA; and (ii) the authorised party certi- 6.3 What is the legal position regarding non-consensual rights and interests under Article 39 of fies, if required, that all registered interests ranking in priority to the Cape Town Convention? that of the creditor, in whose favour the authorisation has been issued, have been discharged or that the holders of such interests have consented to the de-registration and export. The ARA differentiates between non-consensual rights and interests and priority non-consensual rights or interests. The Non-Registrable Privileges in question 4.5 qualify as priority 5.8 Are exchange controls prevailing in your non-consensual rights or interests. A priority non-consensual jurisdiction as regards payments in foreign currency? Will any consents be required for the remittance of the right or interest, to the extent that it has priority over an aircraft sale proceeds abroad? object equivalent to that of the holder of a registered interna- tional interest, prior to the ‘effective date’ (as defined in question 4.5 above), retains priority and this is irrespective of whether Exchange control limitations have been abolished in Malta and there are insolvency proceedings or not. Maltese persons may enter into foreign currency transactions without limitation. The only requirement in this regard is that The Registrable Privileges in question 4.5 qualify as regis- statistical data relating to certain foreign currency transactions trable non-consensual rights or interests. These must be regis- is submitted by Maltese credit institutions on the appropriate tered as if the right or interest were an international interest and forms to the Central Bank of Malta in terms of the External only thereafter will it be regulated in an equivalent manner. Transactions Act, Chapter 233 of the laws of Malta. Failure to so notify will not impinge on the ability of the non-Maltese 6.4 Has your jurisdiction adopted the remedies on counterparty to claim payment and will have no impact on the insolvency provided under Article XI of the Protocol to validity of the underlying transaction. the Cape Town Convention?

5.9 If the lease is governed by English law and a Malta has adopted Alternative A. judgment is obtained by the lessor in the English courts, can that judgment be automatically enforced in your jurisdiction or will the case have to be re-examined on its 6.5 What is the procedure to file an irrevocable merits? deregistration and export request authorisation under the Cape Town Convention (IDERA)? Reference is made to question 5.4. An IDERA must be filed by the operator or owner in the stat- utory form and recorded by CAD. The IDERA is to be signed 5.10 What is the applicable procedure for repossession and two originals must be submitted. of an aircraft under other forms of security interests? 72 Liability for Damage and Environmental There are no more aircraft-specific security interests.

7.1 Can the owner be strictly liable – liable without 62 Conventions a requirement to prove fault or negligence – for any damage or loss caused by the aircraft assuming the 6.1 Has your jurisdiction ratified any of the following: owner is an innocent owner with no operational control (a) The Chicago Convention of 1944 on International of the aircraft? Civil Aviation (the Chicago Convention); (b) The 1948 Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 Strict liability for environmental damage is established under Convention for the Unification of Certain Rules Relating the Prevention and Remedying of Environmental Damage to the Precautionary Arrest of Aircraft (the 1933 Rome Regulations, Subsidiary Legislation 549.97 (“SL 549.97”), Convention); and (d) The Convention on International however, its application is restricted to environmental damage Interests in Mobile Equipment on Matters Specific to (excluding air damage) arising from those activities set out in Aircraft Equipment (the Cape Town Convention) and the Schedule III thereto, and these activities do not include the Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft operation of an aircraft. Equipment? 7.2 Does the EU Emissions Trading System (EU ETS), The Chicago Convention and the Cape Town Convention, or any similar scheme, apply to aircraft and aircraft together with the Protocol, have both been ratified, whilst the operators in your jurisdiction? Will charges levied Geneva Convention and the 1933 Rome Convention have not according to the EU ETS, or its equivalent, give rise to any in rem rights in relevant aircraft which are part of the been ratified at present date. fleet of the operator concerned and, if so, will such rights rank in priority ahead of any mortgage interests properly 6.2 Has ratification of the Cape Town Convention registered in the relevant aircraft and/or engine? caused any conflicts or issues with local laws? Yes, in terms of the European Union Greenhouse Gas Simultaneously with ratification of CTC, a new act regulating Emissions Trading System for Aviation Regulations, Subsidiary

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Legislation 423.51 (the “SL 423.51”), the EU ETS applies to The Companies Act does allow for the appointment of a aircraft operators performing certain aviation activities (set out in provisional administrator at any time after the presentation Schedule 1 to the regulations) which result in emissions of green- of a winding up application. The provisional administrator is house gases specified in respect of those activities, and who have responsible for the administration of the estate of the company a valid operating licence; or for whom Malta, being the Member subject to the winding up order. State with the greatest estimated attributed aviation emissions Furthermore, a specific insolvency regime is contemplated in from aviation activities as listed in Schedule 1 performed in the article 27A of the ARA for a company whose centre of main base year by those aircraft operators, has been designated as interests is in Malta or is registered in Malta and the sole asset of the administering Member State either in Regulation (EC) No. which is an aircraft or aircraft engines and other related assets 748/2009, or by means of any measure taken by the European (“Aircraft Companies”). In particular, the memorandum and Commission pursuant to Directive 2003/87/EC or by the articles of association of Aircraft Companies can provide that ‘competent authority’ in terms of SL 423.51. the right to request any insolvency proceedings in relation to No, charges levied according to the EU ETS will not give rise the said company is to be exercised only by holders of a mort- to any in rem rights in the relevant aircraft. gage, an international interest or a security interest, or trustees or agents for such persons, over such assets, singly or collec- 7.3 What liabilities (actual or potential) could an owner, tively, including as a class or classes of creditors, to the exclusion lessor or financier of an aircraft incur in your jurisdiction of any other persons for as long as the interest of the persons so because of a failure to comply with local environmental indicated remains in force. law and/or regulations on the part of an operator of aircraft leased or financed by it? 8.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official Under SL 549.97, it is the operator who is responsible for failure to in your jurisdiction have the effect of prohibiting the comply with local environmental law. However, the term ‘oper- owner from taking the following actions to enforce ator’ is broadly defined encompassing all persons, whether natural the lease after commencement of such protection: (a) or legal, private or public, who operate or control the occupational applying any security deposit held by the owner against activity or, to whom decisive economic power over the technical any unpaid amounts due under the lease; (b) accepting functioning of the occupational activity has been delegated. payment of rent or other lease payments from the lessee, a guarantor or a shareholder; (c) giving notice of default under the lease; (d) obtaining a judgment or 82 Insolvency and Searches arbitral award for unpaid lease payments; (e) giving notice to terminate the leasing of the aircraft and/or 8.1 Are there any public registers in your jurisdiction engine; or (f) exercising rights to repossess the aircraft where a search can be carried out to determine whether and/or engine? an order or resolution for any bankruptcy, bankruptcy protection or similar insolvency proceedings has been Reference is made to question 8.3 above. registered in relation to an operator or lessee? Malta has adopted Alternative A of the Aircraft Protocol. Accordingly, where Malta is the primary insolvency jurisdic- In relation to corporate entities registered with the Malta Business tion, the debtor or insolvency administrator must give posses- Registry (the “MBR”), an insolvency register is maintained. sion of the aircraft object no later than: (a) expiry of a period of 30 calendar days commencing on the date of the insolvency-re- 8.2 In the event that an operator or lessee were to lated event (‘waiting period’); or (b) the date on which the cred- become insolvent either on a balance sheet basis itor would be entitled to possession of the aircraft object if the (assets less than liabilities) or is unable to pay debts as relevant provision of the ARA did not apply. Unless and until fall due, would an operator or lessee be required to file the creditor is given the opportunity to take possession: (i) the for insolvency protection? insolvency administrator or debtor, as applicable, must preserve the aircraft object and maintain it and its value in accordance Maltese insolvency law does not cater for the possibility of filing with the agreement; and (ii) the creditor is entitled to apply for for insolvency protection, albeit certain protections are afforded any other forms of interim relief available in terms of applicable to a Maltese company filing for insolvency, such as the company law. recovery procedure. The insolvency administrator or debtor, as applicable, may Article 329B of the Companies Act, Chapter 386 of the laws retain possession of aircraft object where, during the waiting of Malta (“Companies Act”) regulates how a company can period, it has cured all defaults (other than a default constituted apply and be placed under company recovery. This procedure by the opening of insolvency proceedings) and has agreed to allows an insolvent company to benefit from a restructuring perform all future obligations under the agreement. option instead of being wound up and dissolved. However, in terms of the ARA, the provisions of article 329B do not apply 8.5 Can the commencement of insolvency proceedings to a company whose main object or function is to own, hold, have retrospective effect in relation to any such actions operate, charter, manage or lease any aircraft or aircraft engine. taken before commencement? If so, for what period can there be a look back?

8.3 Do the available forms of insolvency protection in your jurisdiction involve the appointment of either Article 303 of Companies Act provides that any obligation an officer of the court or a specifically court appointed incurred by a company within six months before dissolution of official to take control of the operator or lessee (an same company is deemed to be a fraudulent preference against ‘Insolvency Official’) while in insolvency protection? its creditors, whether it is of gratuitous or onerous nature, if it constitutes a transaction at an undervalue or if a preference is Please refer to question 8.2. given, unless the person in whose favour it is made, done or

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incurred, proves that it did not know and did not have reason 8.8 If the aircraft is in the possession of a person to believe that the company was likely to be dissolved by reason other than the operator or lessee at the commencement of insolvency. of Insolvency Protection of the operator or lessee, for example, an independent maintenance facility, will such person be entitled, under the laws of your jurisdiction, 8.6 Is there, either under law or as a matter of practice to assert a lien arising under law or contract over the in your jurisdiction, a period of time within which the aircraft in respect of amounts then due and unpaid to Insolvency Official will either ‘adopt’ the lease and such person by the operator or lessee? pay rent and other lease payments as an expense of the insolvency or ‘reject’ the lease and permit the owner to enforce such rights as it may have under the Reference is made to questions 4.5 and 8.2 above. lease? (a) If the lease is ‘adopted’, will the Insolvency Official also pay any unpaid lease payments due as at 92 Detention and Confiscation commencement of the insolvency protection? (b) If not or if the lease is ‘rejected’, would the owner’s claim for 9.1 Other than insolvency laws (see section 8), are any outstanding sums rank equally with other ordinary there any laws which may have the effect of defeating unsecured creditors of the lessee? the owner’s right in the aircraft – for example, Government requisition? Do the laws of your jurisdiction Reference is made to question 8.4 above. provide for any compensation in such circumstances?

8.7 Are there certain types of preferred creditors Maltese law does not specifically cater for Government requisi- whose claims will rank above claims of the owner? tion of an aircraft or any similar means of defeating an owner’s right in the aircraft. Reference is made to question 4.5 above regarding special priv- ileges. Registrable Privileges only constitute a privilege and 9.2 Are there any rights in relation to third parties to enjoy the preference and status of such right in relation to the detain or sell the aircraft pursuant to illegal activities, aircraft if the claim is created by the owner of the aircraft or a tax or any other laws if the operator or lessee fails to pay person authorised by him. when due? If so, can the aircraft be forfeited and sold The person enjoying a possessory lien also has a preferred without the owner being made aware? claim on the aircraft and has no obligation to release aircraft until sums due to him are unconditionally discharged or other- Laws of general application cater for several instances where wise secured to his satisfaction and in any such case shall rank assets may be detained in the context of illegal activities (such first on such security as may be granted. as the carriage of weapons). Moreover, aircraft may be detained Debts secured by a mortgage registered in the NR or a charge where deemed unfit to fly or where lacking required insurance in the IR or secured by a foreign mortgage recognised under the cover. ARA rank in the manner set out in article 44 of the ARA. The Airports and Civil Aviation (Security) Act, Chapter 405 Finally, certain creditors are granted rights in rem against of the laws of Malta also lists the various instances when an aircraft in terms of the Code of Organisation and Civil aircraft can be detained, generally in the context of offences Procedure, Chapter 12 of the laws of Malta. against the safety of aircraft and, or, the protection and policing of airports.

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Steven Decesare is a Partner within the firm responsible for Intellectual Property, Telecommunications, Media & Technology, Competition, Public Procurement, Infrastructure, Energy & Resources and Transport law. He read law at the University of Malta, graduating with an LL.D. in 2008, and subsequently obtained an LL.M. in Commercial Law in 2009 from the University of Edinburgh, where he studied Banking and Finance, Debt and Insolvency Law, Company Law and EC Competition Law. Steve joined the firm as a trainee in 2007 and was admitted to partnership in 2018.

Camilleri Preziosi Tel: +356 2567 8122 Level 3, Valletta Buildings Email: [email protected] South Street URL: www.camilleripreziosi.com Valletta, VLT 1103 Malta

Krista Ellul joined Camilleri Preziosi as a trainee in 2017. She forms part of the firm’s Regulatory, EU and Litigation practice group with her main practice areas being maritime and aviation law, competition and EU law and public procurement. Krista graduated with an LL.B. (Hons) from the University of Malta in 2016 and 2017 she graduated from the Master of Advocacy degree at the same university. Krista was admitted to the Bar in 2018. In 2019, Krista successfully completed a Master of Law in Economics at Utrecht University after submitting her thesis entitled ‘If you can do it alone, then why partner up? A study on the limitations of competition law to secure the most successful outcome in competitive public tendering’. By virtue of this thesis, she was able to illustrate the conflicts that may arise when competition law and public procurement law overlap.

Camilleri Preziosi Tel: +356 2123 8989 Level 3, Valletta Buildings Email: [email protected] South Street URL: www.camilleripreziosi.com Valletta, VLT 1103 Malta

Camilleri Preziosi is a leading Maltese law firm established in the 1960s having a large international legal practice, advising across all areas of corporate and commercial law. The firm’s approach is to understand clients’ key business drivers in order to provide an integrated, solution-driven and business-oriented service. Internationally, Camilleri Preziosi commands an outstanding reputation as a leading corporate law firm and is regularly ranked as a top-tier firm in the Chambers Global, Chambers Europe, IFLR1000 and European Legal 500 directories. Camilleri Preziosi is strongly positioned in the transport industry, including in particular aviation and shipping. With particular reference to the avia- tion sector (both business and commercial), the firm’s clients include local and international banks and financiers, aircraft owners, operators, charter companies, aircraft lessees and lessors, as well as the Malta . More specifically, the firm advises on aircraft registration, security interests, enforcement and regulatory matters. www.camilleripreziosi.com

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Switzerland Switzerland

Blum&Grob Attorneys at Law Ltd Michael Eitle

12 General and Contractual 1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially binding pre-contractual agreements (e.g. ‘letters of 1.1 What are the typical structures available for intent’) which will NOT take effect as fully enforceable financing the purchase of an aircraft? agreements?

The typical structures for financing of the purchase of an Yes, letters of intent are common and usually agreed as aircraft are senior loans secured by a mortgage over the aircraft, non-binding. However, often certain provisions are agreed aircraft finance leases, aircraft operating leases and sale-and- as binding (such as confidentiality obligations, exclusivity and leaseback structures. dispute resolution).

1.2 What are the key advantages/disadvantages 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction and main issues arising in relation to these financing which applies to all pre-contractual agreement, structures? financing and leasing transaction documents, and the conduct of parties connected to them? In a secured loan structure, the borrower becomes the owner of the aircraft and, thus, the lender’s rights relating to the aircraft Swiss law provides for a general duty of good faith in article 2 are limited to the foreclosure of the mortgage as self-help reme- para 1 of the Swiss Civil Code, pursuant to which each party must dies are limited (see question 5.1). The loan is a borrower’s exercise its rights and perform its obligations under a contract balance sheet transaction, provides for a full recourse to the in good faith. Thus, this general duty applies to all Swiss law borrower and the loan agreement may contain certain negative governed agreements, including pre-contractual arrangements covenants and positive undertakings of the borrower. and all other transaction documents. In a finance or operating lease structure, the lessor becomes the owner of the aircraft and may sell the aircraft in case of 22 Taxation and Related Matters payment default by the lessee. The same applies to sale-and- leaseback structures in which the financier purchases the 2.1 Which government authority in your jurisdiction aircraft and leases it back to the lessee. has primary responsibility for the accounting for and regulation of revenue control and taxes? 1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential In Switzerland, due to its federal structure, the 26 Cantons characteristics? have their own tax laws and tax income, wealth, inheritances, capital and property gains, and tax objects quite differently. Even though as such not explicitly mentioned in the Swiss Code Furthermore, the communes may either levy communal taxes of Obligations, finance and operating leases over aircraft are at their own discretion or decide on supplements relative to the recognised by Swiss law and are widely common. The lessee cantonal basic tax scale or the cantonal tax payable. Moreover, typically is granted the use, possession and quiet enjoyment of there is Swiss confederation taxes income as well, although its tax the aircraft as long as no event of default occurred under the receipts largely come from other sources, primarily from Value lease, whilst the lessee has the obligation to maintain the aircraft Added Tax (VAT), the Swiss Withholding Tax, stamp duties, in an airworthy condition and to pay the lessor the agreed rental customs duties and special consumption taxes. As a result, due instalments. to Switzerland’s federal structure, there is no “primary” respon- sibility of one government authority. 1.4 Are there any proposals for reform in the area of aviation finance? 2.2 What are typically the taxes in your jurisdiction which may arise in relation to a sale, a lease or a Currently there are none. financing of an aircraft or an engine?

There is no sales or excise tax levied in Switzerland, however, a sale or leasing of an aircraft delivered in Switzerland or

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positioned from Swiss to the place of delivery however, a service branch has not yet been introduced into the outside of Switzerland may be subject to VAT unless a legal tax laws in Switzerland. exemption applies. In particular, sales proceeds, leasing fees or rent are not subject to the Swiss Withholding Tax. 2.6 Is the authority at question 2.1 likely to establish a ‘look-through’ right or similar as regards a lender or a 2.3 Is the provision of a current tax-residency lessor which is a special-purpose vehicle involved for the certificate by a payee sufficient for a lessee or a purpose of tax treaty access? borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself Swiss tax law provides for various correction mechanisms, of treaty access and the mitigation of tax liability? which in spite of the principle of separate taxation of corpo- ration and owners, fiscal look-through mechanisms may be In general, lease or rental interest payments to a foreign payee applied by the respective tax authorities (see question 2.1) irre- are not subject to withholding taxes, however, an individual spectively of whether Switzerland is the state of residence or assessment on a case-by-case-basis is required, in particular in the source state. If tax avoidance (i.e. unusual, improper or the event of thin financing of borrowings guaranteed by related outlandish legal structures chosen by the parties) or abuse of parties; this could trigger Swiss Withholding Tax on interest tax law is possibly committed, the respective authorities reserve to be retained by the borrower; further, in the event the lessor such a ‘look-through’ right that is in general always applied if a or lender is syndicating its claim with the effect that the lessee special purpose vehicle is used to gain tax treaty access; however, or borrower faces multiple lessors or lenders and, therefore, a a variety of exemptions may apply, but onus of proof is that the collective financing can be deemed. The Swiss Withholding structuring is not a treaty shopping exercise with the vehicle. Tax constitutes a final tax in principle to recipients domiciled abroad. If, however, rental or interest payments are subject 2.7 Will the import of an aircraft into your jurisdiction to the Swiss Withholding Tax, persons resident in a country and/or the sale or leasing of the aircraft give rise to any which has entered into a double taxation agreement (DTA) VAT, sales or use taxes or any customs import or excise with Switzerland are entitled to a full or partial withholding duties? tax refund, depending on the regulations in the relevant DTA, provided the conditions set out therein are met. The import of an aircraft into Switzerland is subject to VAT Usually, the demonstration of tax-residency only will not be (currently at a rate of 7.7%) and custom duties. However, custom sufficient to avail oneself of treaty access and the mitigation duties in Switzerland may be avoided under an end use relief of tax liability, if any. Besides the current tax-residency certif- system provided that such application is filed by the importer icate, the tax subject must as well provide proof of beneficial in time. VAT and custom duties apply if a Swiss residential has ownership, payment documentation, etc. and thus demonstrate factual control of an aircraft (irrespective of the nationality of that there is no abuse of law because the Swiss Federal Tax the aircraft). However, the Federal Act on Value Added Tax Administration may deny any refund deemed abusive. grants an exemption if the Swiss recipient is engaged in commer- cial air transport business and the aircraft is used solely for 2.4 Has the advent of BEPS (the Base Erosion and such business, provided, however, the holder of the air oper- Profit Shifting initiative of the OECD) had any effect as ator certificate operates the aircraft commercially and has got a regards structures in aviation finance and leasing or genuine right to charter the aircraft to its customers. their interpretation?

2.8 Are there any documentary taxes (for example, BEPS has been embraced by Switzerland and has led to adjust- stamp duty payable on the execution of documents)? ments in the practice of the tax authorities with respect to a) substance requirements of the lender and lessor, and b) the extended application of the general anti-abuse theory on struc- There are no documentary taxes, such as stamp duty, payable on tures that would, from a Swiss viewpoint, result in unjustified the execution documents for aircraft transactions. tax savings or refund of taxes, and c) the exchange of finan- cial information among tax authorities. However, Switzerland 32 Registration and Deregistration does not apply the Principal Purpose Test (PPT) provided for in BEPS, because Switzerland deems its adjusted anti abuse prac- 3.1 Which government authority in your jurisdiction tice as equivalent to the PPT. has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry or an operator registry? If the aircraft register is an 2.5 What are the typical thresholds in your jurisdiction operator register, is it possible to record the details of for which a permanent establishment may be triggered an owner or lessor and any financier with an aircraft under the terms of any relevant double-tax treaty or mortgage? similar?

The government authority mainly responsible for the regulation A permanent establishment (PE) in the sense of Swiss tax law of aviation and the registration of aircraft is the Federal Office of is a fixed place of business through which the business activity Civil Aviation (FOCA), which is part of the Federal Department of an enterprise is wholly or partly carried on. Particularly, PEs of Environment, Transport, Energy and Communications. are branches, factories, workshops, sales agencies, permanent There are two aircraft registers in Switzerland, both of which representations, mines and other places of extraction of natural are maintained by the FOCA: resources, as well as building or construction sites that are main- ■ The Aircraft Register (Luftfahrzeugregister), which is the tained for at least 12 months. This definition is generally in line Swiss aeronautical register in which all Swiss aircraft are with the OECD Model Tax Convention on Income and Capital; mandatorily recorded; an entry therein establishes the

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Swiss nationality of an aircraft. Whilst being an owner registered in the Aircraft Register in addition to the owner if register, it also mentions the operator of the aircraft (if it operates the aircraft. Moreover, if the aircraft is recorded in different to the registered owner). Such mention of owner- the Aircraft Record, an aircraft lease (with a term of at least six ship, however, does not provide any legal proof of title. months) may be recorded in the Aircraft Record. Such recor- The Aircraft Register is not public but the FOCA main- dation, however, only notes the lessee’s right to operate the tains an electronic database where online searches can respective aircraft. For the recordation in the Aircraft Record, be performed. The Aircraft Register is governed by the a simple copy of the lease agreement is to be provided to the Federal Law on Civil Aviation (Aviation Act). FOCA together with the respective application for recordation. ■ The Aircraft Record (Luftfahrzeugbuch), in which a Swiss registered aircraft (i.e. already recorded, or simultaneously to be recorded, with the Aircraft Register) may be recorded 3.5 How is deregistration affected and what steps can upon the aircraft owner’s request. The registration of a Swiss a lessor take to de-register the aircraft on termination of aircraft in the Aircraft Record is optional unless the aircraft the lease? shall be encumbered with an aircraft mortgage. Upon regis- tration of an aircraft in the Swiss Aircraft Record, owner- The deregistration request to be provided to the FOCA must ship (and the respective owner’s details) as well as mort- be executed by the owner (irrespective of whether the aircraft is gages (and the respective financier’s details) and certain recorded in the Aircraft Register only or also with the Aircraft other rights in rem may be recorded. The Aircraft Record is a Record). In the case that the aircraft is recorded in the Aircraft public register and a transcript relating to an aircraft may be Record, the entry relating to the aircraft must be cancelled ordered from the FOCA. The Aircraft Record is governed therein prior to deregistration from the Aircraft Register. Such by the Federal Law on the Aircraft Record (Record Act). cancellation requires the prior written consent of a mortgagee (if any). The FOCA must be in possession of the originals of 3.2 What is the effect of registration of the aircraft? both the aircraft’s certificate of registration and certificate of Does registration on your national aircraft register airworthiness. confer proof of ownership of the aircraft and/or engine? If a lease interest has been recorded in the Aircraft Record, the owner, assumingly being the lessor, may request dereg- The registration of an aircraft in the Aircraft Register provides istration of the aircraft without involvement of the lessee and for the aircraft’s Swiss nationality as per the flag principle but the current practice of the FOCA does not allow the lessee to not any legally binding proof of title. The recordation of the oppose the deregistration. Nevertheless, the FOCA will inform aircraft’s ownership in the Aircraft Record, however, is subject to the lessee of the pending deregistration. a presumption of knowledge and third parties acting in good faith are protected in their actions based on information contained in the 42 Security Aircraft Record. Moreover, the recordation in the Aircraft Record results in the applicability of the Record Act which governs, inter 4.1 Is it possible to create a mortgage over an aircraft alia, the transfer of title and the creation of a mortgage. or engine in your jurisdiction? If so, what are the types There is no specific register for aircraft engines in Switzerland, of aircraft mortgage and engine mortgage available and but installed engines are generally considered as being part of what formalities are required in order to perfect it? the aircraft. However, engines may be expressly designated and recorded jointly with the aircraft in the Aircraft Record. In such case of specific registration of the engines, such engines form part The Record Act provides only for one type of contractual of the aircraft, regardless of whether they are installed or not. mortgage over aircraft. The aircraft mortgage (Luftfahrzeugver- schreibung) as security for the repayment of debt is possible and common in aircraft financing transactions. The attached 3.3 Can foreign-owned aircraft be registered on engines of an aircraft are considered accessory thereof and form your national aircraft register and are there limits or restrictions on the age of aircraft that may be registered an integral part of the aircraft. Thus, the engines are subject to or operated? the same mortgage as the aircraft itself. The mortgage agreement must be made in writing and contain information about the aircraft (and its engines), details Pursuant to the Aviation Act, an aircraft owned by a foreign of the parties, a maximum secured amount including principal person (individual or company) can only be registered in Switzerland subject to certain exceptions. For example, a and interest in Swiss francs as well as the rank of the mortgage. foreign-owned aircraft can be recorded in the Aircraft Register To perfect the mortgage, it is to be recorded in the Aircraft if it is to be supplied and used commercially by a Swiss aircraft Record for which the original agreement must be filed with the operator for a certain minimum period of time. The operator FOCA. Consequently, it is a prerequisite that the aircraft is must submit a specific application to the FOCA for approval. recorded in the Aircraft Register. There are no limits or restrictions on the age of aircraft, provided the airworthiness requirements pursuant to the 4.2 Can spare parts, including future parts, be subject Aviation Act and relating Federal Ordinances as well as require- to the aircraft mortgage or engine mortgage (as the case ments relating to the environmental protection are met. may be)? If not, are there any other forms of security that can be taken over spare parts? 3.4 Can aircraft leases be registered? If so, in what circumstances? Must the lease be in a particular form Parts are considered accessory to the aircraft if connected to if it is to be valid and enforceable (for example, must it the aircraft and, thus, automatically subject to the aircraft mort- be in a particular language or be notarised, legalised or gage. The aircraft mortgage may also cover parts not connected apostilled)? to the aircraft, such as spare parts, if an inventory is delivered to the FOCA and the following prerequisites are met: (i) the spare Provided that the lessee meets the prerequisites, it may be parts must be stored in a designated location (in Switzerland or

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abroad); (ii) in the location of storage, they must be maintained the self-help remedies of a lessor to repossess the aircraft are separate from other spare parts which are not covered by the somewhat limited in Switzerland, as general principles of law aircraft mortgage; and (iii) the spare parts must bear a visible such as the lessee’s right to deny third parties access to its prem- label stating that the respective parts are subject to an aircraft ises, may hinder the lawful exercise of any contractual repos- mortgage recorded in the Aircraft Record, as well as the name session right by the lessor if so provided by the lease agree- and the address of the mortgagee. ment. Nevertheless, if the lessee does not return the aircraft The same applies to spare engines which cannot be subject when contractually obliged to do so, the lessor as owner of the to an independent mortgage but can nevertheless expressly aircraft may seek an injunction to have the competent court be recorded in the Aircraft Record with a specific mortgaged order the lessee under the threat of a criminal penalty to return aircraft by which such spare engines become an integral part of the aircraft to the lessor. the aircraft. A mortgagee cannot unilaterally engage in taking possession However, if a spare engine is not expressly recorded with and private sale of a mortgaged aircraft in Switzerland. In the the mortgaged aircraft and also not used and installed on the event of a default by or the indebtedness of the mortgagor, the aircraft, it is not considered an accessory of the aircraft and, mortgagee may proceed with the foreclosure of the mortgage thus, different security such as a pledge can be taken over such and the sale of the aircraft to secure repayment of its debt out spare engine. of the proceeds. The enforcement of an aircraft mortgage must occur by way of forced execution procedure in accordance with the relevant provisions of the Federal Debt Enforcement and 4.3 Is there a register of mortgages or rights over aircraft and/or engine? Bankruptcy Act and under the control of the respective debt enforcement office. A forced sale of a mortgaged aircraft may take effect either as a public sale by auction or, if all interested Mortgages as well as ownership and certain other rights in rem parties request it, a private sale. over aircraft (including its engines) may be recorded in the Aircraft Record. 5.2 What is the procedure for repossession of the aircraft? 4.4 What other forms of security can be taken over an aircraft and/or engine and can these other forms be registered? See above under question 5.1.

There is no other form of security possible than the aforemen- 5.3 Will local courts recognise a choice of foreign law tioned aircraft mortgage over aircraft recorded in the Aircraft in an aircraft mortgage? Are there any mandatory local Record. If not registered in the Aircraft Record, aircraft are rules that apply, despite a choice of foreign law? considered as movable assets and there is no concept on non-pos- sessory pledges over such movable assets in Switzerland. Whether an aircraft mortgage may be validly governed by foreign law, a distinction is to be made between aircraft registered (i) in Switzerland, (ii) in a signatory to the Geneva Convention (as 4.5 What claims and rights would take priority in your jurisdiction over a registered mortgage? defined below), or (iii) in a country which is not a party to the Geneva Convention. Where the aircraft is recorded in Switzerland both in the The statutory mortgages (gesetzliche Pfandrechte) take priority over Aircraft Register and the Aircraft Record, the aircraft mortgage contractual mortgages recorded in the Aircraft Record. Such will be governed by the Record Act. Due to the reservation in statutory mortgages are limited to secure claims resulting from the Federal Act on Private International Law (PILA) in favour aircraft salvage, assistance or extraordinary expenses for the of provisions set forth in other Federal laws such as the Record preservation of the relevant aircraft or for claiming against third Act conclusively determining the law applicable to rights in rem parties having a liability for the confiscation, damage, destruc- in aircraft, no choice of law is possible as mandatorily Swiss law tion or loss of the aircraft. applies. Where an aircraft is registered in a signatory to the Geneva 4.6 What other forms of security can be granted over Convention, provided that the relevant aircraft mortgage is an aircraft and/or engine lease? valid under the laws of such country and it is duly registered in a public register, Swiss courts will recognise the validity of such a mortgage over an aircraft. It is common for a lessee to pay to the lessor a deposit as secu- Where the aircraft is registered in a country which is not a rity for the obligations of the lessee under the lease. Moreover, signatory to the Geneva Convention, Swiss courts would recog- it is often agreed that maintenance reserve payments are to be nise that the validity and effect of the mortgage will be deter- paid to segregated accounts of the lessee which are subject to a mined by the law of the country of the relevant aircraft register, bank account pledge. in accordance with the terms of the Record Act, such as the reservation that under certain circumstances, the acquisition by 52 Enforcement and Repossession a person in good faith of title to, or right in, an aircraft while situated in Switzerland, would be protected in accordance with 5.1 What are the circumstances in which a mortgagee Swiss law. or owner can take possession of the aircraft and/or sell the aircraft? What requirements must the mortgagee or owner comply with? 5.4 Will local courts recognise and enforce a foreign court judgment in favour of a mortgagee or lessor? Are any interim relief measures available? In the event of a default by the lessee under the lease agree- ment, the lessor as owner of the aircraft may retake possession of the latter as per the terms of the lease agreement. However, The recognition and enforcement of a foreign judgment

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depends upon the existence of a treaty between Switzerland 5.8 Are exchange controls prevailing in your and the country which issued the judgment. Switzerland has jurisdiction as regards payments in foreign currency? ratified the Convention on Jurisdiction and the Enforcement Will any consents be required for the remittance of the of Judgments in Civil and Commercial Matters of 30 October sale proceeds abroad? 2007 (Lugano Convention). In the absence of applicability of the Lugano Convention or any other treaty, the PILA applies. No, there are currently neither restraints in Switzerland upon The PILA provides that a foreign judgment will be recognised payments in a foreign currency nor upon the transfer of sale in Switzerland if (i) the foreign authority rendering the judg- proceeds abroad. ment had authority to do so, (ii) no appeal or other legal remedy remains against the judgment in the legal system of the country from which it originated, and (iii) good reasons for denying 5.9 If the lease is governed by English law and a judgment is obtained by the lessor in the English courts, recognition do not exist. can that judgment be automatically enforced in your Subject to the 1933 Rome Convention, interim measures, such jurisdiction or will the case have to be re-examined on its as freezing orders or attachments, are available in the enforce- merits? ment proceedings for the party seeking recognition and enforce- ment to protect its legitimate interest. Following BREXIT, the Lugano Convention applies on final judgments obtained in English courts until the end of the tran- 5.5 Are powers of attorney from a local airline in favour sition period only. If the UK does not re-join the Lugano of a lessor or mortgagee likely to be effective to allow Convention after the end of the transition period, the Lugano the lessor or mortgagee to deregister the aircraft? Can Convention will no longer apply to the UK and, subject to any such powers be irrevocable, be governed by a foreign law bilateral treaty being entered into between Switzerland and the and/or do they need to be in any particular form for local recognition? UK, the PILA will apply to the enforcement and recognition of final judgements obtained in English courts in Switzerland (see hereto question 5.4). In any case, Swiss courts will not review The deregistration of an aircraft, irrespective of whether it is the respective case on its merits in order to determine whether recorded in the Aircraft Register only or also with the Aircraft the judgment should be enforced. Record, may only be effected by its owner. Hence, a deregistra- tion power of attorney by the lessee in favour of the lessor is not required. Even if the lease has been recorded in the Aircraft 5.10 What is the applicable procedure for repossession Record, it is the FOCA’s current practice that the lessee may of an aircraft under other forms of security interests? not oppose to the deregistration. The lessee, however, will be informed of such requested deregistration in advance. This is not applicable. On the other hand, a power of attorney in favour of a mort- gagee to deregister the aircraft is of limited interest, as self-help 62 Conventions remedies of a mortgagee are limited and no circumvention of the mandatory legal provisions can be effected by granting a power 6.1 Has your jurisdiction ratified any of the following: of attorney to the mortgagee (or any third party) in advance. (a) The Chicago Convention of 1944 on International A Swiss law governed power of attorney is revocable at any Civil Aviation (the Chicago Convention); (b) The 1948 time pursuant to mandatory law. The granting of a power of Convention on the International Recognition of Rights attorney governed by any law other than Swiss law is possible, in Aircraft (the Geneva Convention); (c) The 1933 however, the aforementioned limitations when granted to a Convention for the Unification of Certain Rules Relating mortgagee remain. to the Precautionary Arrest of Aircraft (the 1933 Rome Convention); and (d) The Convention on International Interests in Mobile Equipment on Matters Specific to 5.6 If recovery of the aircraft is contested by the lessee Aircraft Equipment (the Cape Town Convention) and the and a court judgment is obtained in favour of the lessor, Protocol on the Convention on International Interests how long is it likely to take to gain possession of the in Mobile Equipment on Matters Specific to Aircraft aircraft? Equipment?

Provided that the judgment is obtained in Swiss courts and Switzerland is a party to the Chicago Convention, the Geneva final, a court may oblige the lessee, under the threat of a crim- Convention, and the 1933 Rome Convention. However, the inal penalty for non-compliance, to transfer the possession of Cape Town Convention and the Protocol have not (yet) been the aircraft to the lessor within a certain (short) time period. ratified by Switzerland.

5.7 Are there any restrictions on the ability of the 6.2 Has ratification of the Cape Town Convention lessor to export the aircraft from your jurisdiction on caused any conflicts or issues with local laws? termination of the leasing? This is not applicable. The lessor, as owner of the aircraft, may apply for deregistra- tion and export of an aircraft. For the export of an aircraft from 6.3 What is the legal position regarding Switzerland, an export airworthiness inspection and the issu- non-consensual rights and interests under Article 39 of ance of an airworthiness certificate for export may be required. the Cape Town Convention? Further, the regulations of the country of destination are to be complied with. This is not applicable.

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6.4 Has your jurisdiction adopted the remedies on 82 Insolvency and Searches insolvency provided under Article XI of the Protocol to the Cape Town Convention? 8.1 Are there any public registers in your jurisdiction where a search can be carried out to determine whether This is not applicable. an order or resolution for any bankruptcy, bankruptcy protection or similar insolvency proceedings has been registered in relation to an operator or lessee? 6.5 What is the procedure to file an irrevocable deregistration and export request authorisation under the Cape Town Convention (IDERA)? There is no official public register of pending bankruptcy proceedings in Switzerland. However, the liquidation of a This is not applicable. company due to bankruptcy is registered in the respective Cantonal commercial register at the seat of the company which 72 Liability for Damage and Environmental can be accessed online (www.zefix.ch). Moreover, information relating to bankruptcy proceedings, including the opening of bankruptcy proceedings, revocation of bankruptcy, suspension 7.1 Can the owner be strictly liable – liable without of bankruptcy proceedings and closure of bankruptcy proceed- a requirement to prove fault or negligence – for any ings, is published in the Swiss Official Gazette of Commerce damage or loss caused by the aircraft assuming the owner is an innocent owner with no operational control which can be accessed online (www.shab.ch). of the aircraft? 8.2 In the event that an operator or lessee were to No. Pursuant to the Aviation Act, it is the aircraft operator, become insolvent either on a balance sheet basis (assets and not the owner, that is strictly liable without limitation for all less than liabilities) or is unable to pay debts as fall due, would an operator or lessee be required to file for surface damage caused by the aircraft. However, if the aircraft insolvency protection? was used by a third party without the permission of the operator, such third party will be liable. As regards insurance coverage, Regulation (EC) No. If an interim balance sheet of the operator or lessee shows that 785/2004 (as amended by Regulation (EU) No. 285/2010) estab- the claims of the respective company’s creditors are not covered, lishes minimum insurance requirements for aircraft operators. its board of directors must notify the court unless certain of the company’s creditors subordinate their claims to those of all other creditors of the company to the extent of the capital 7.2 Does the EU Emissions Trading System (EU ETS), deficit. If the board of directors fails to notify the court of this, or any similar scheme, apply to aircraft and aircraft then the statutory auditor must notify the court. Bankruptcy operators in your jurisdiction? Will charges levied according to the EU ETS, or its equivalent, give rise to proceedings are ordered by the court upon such notification. any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights 8.3 Do the available forms of insolvency protection rank in priority ahead of any mortgage interests properly in your jurisdiction involve the appointment of either registered in the relevant aircraft and/or engine? an officer of the court or a specifically court appointed official to take control of the operator or lessee (an Switzerland’s emission trading scheme (ETS) applies to ‘Insolvency Official’) while in insolvency protection? aircraft operators. The Swiss ETS and the EU ETS are linked as of January 1, 2020. The linking of the Swiss and EU ETSs A company may request a deferral of bankruptcy proceedings means that Swiss and European emission allowances are mutu- (Konkursaufschub) in case there is a good chance of a restruc- ally recognised. Anyone obliged to participate in the Swiss turing. The court may appoint one or several natural or legal or EU ETS can use emission allowances from both schemes persons as administrative receiver (Sachwalter) and either deprive to cover their emissions. Aircraft operators that carry out the board of directors of its power of disposal or make its resolu- domestic flights in Switzerland or flights from Switzerland to tions conditional on the consent of the administrative receiver. the European Economic Area (EEA) are obliged to participate. Flights from the EEA to Switzerland are covered by the EU 8.4 Does the commencement of insolvency protection ETS. Charges levied according to the Swiss ETS do not give involving the appointment of an Insolvency Official rise to the registration of a statutory mortgage pursuant to the in your jurisdiction have the effect of prohibiting the Record Act. owner from taking the following actions to enforce the lease after commencement of such protection: (a) applying any security deposit held by the owner against 7.3 What liabilities (actual or potential) could an owner, any unpaid amounts due under the lease; (b) accepting lessor or financier of an aircraft incur in your jurisdiction payment of rent or other lease payments from the lessee, because of a failure to comply with local environmental a guarantor or a shareholder; (c) giving notice of default law and/or regulations on the part of an operator of under the lease; (d) obtaining a judgment or arbitral aircraft leased or financed by it? award for unpaid lease payments; (e) giving notice to terminate the leasing of the aircraft and/or engine; or According to Swiss law, the operator is obliged to comply with (f) exercising rights to repossess the aircraft and/or the Federal Act on the Protection of the Environment and engine? related Ordinances. Failure to comply results in a liability of the operator only, provided that the owner, lessor and/or financier a) The owner must refrain from doing so if the security do not qualify as operator or carrier of the aircraft. deposit held by the owner is part of the lessee’s bankruptcy estate and not part of the estate of the owner.

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b) Upon opening of bankruptcy proceedings, the debtor may creditors enjoy priority over unsecured creditors and are directly not freely dispose of its assets anymore which belong to satisfied out of the proceeds from the realisation of the collat- the bankrupt estate. Thus, such payment may be reclaimed eral. Among the unsecured creditors, Swiss law sets up three from the owner by the bankruptcy administration. different classes for the distribution out of the proceeds of the However, the owner is neither prohibited from accepting entire remainder of the bankrupt estate: payments from a guarantor nor from a shareholder. ■ the includes, inter alia, certain claims of employees c) A default notice may be given. and outstanding pension plan contributions to be paid by d) Upon the opening of bankruptcy proceedings, no new the employer; court proceedings against the lessee and bankruptcy ■ the second class includes, inter alia, unpaid contributions estate, respectively, may be initiated in Switzerland and due under certain Federal laws; and pending court proceedings are stayed. The owner’s claims ■ the third class includes all other claims. for unpaid lease payments must be filed with the bank- Unless the owner’s claim is secured, it would rank in the third ruptcy office. class. e) Only if a termination right is agreed in the lease agree- ment in case of insolvency of a party. Otherwise the claims for outstanding lease payments are to be filed with 8.8 If the aircraft is in the possession of a person the bankruptcy office until the latter terminates the lease other than the operator or lessee at the commencement of Insolvency Protection of the operator or lessee, for agreement. example, an independent maintenance facility, will such f) Whilst the owner may exercise its (limited) rights to person be entitled, under the laws of your jurisdiction, repossess the aircraft despite the opening of bankruptcy to assert a lien arising under law or contract over the proceedings, judicial actions cannot be taken against the aircraft in respect of amounts then due and unpaid to lessee itself, but are to be filed with the bankruptcy office such person by the operator or lessee? against the bankruptcy estate (Aussonderungsklage). In general, upon commencement of the bankruptcy proceedings 8.5 Can the commencement of insolvency proceedings against the operator/lessee, all assets which presumably belong have retrospective effect in relation to any such actions to the latter form part of the bankruptcy estate and the bank- taken before commencement? If so, for what period can ruptcy administration may initiate proceedings to return the there be a look back? relevant assets not in possession of the bankruptcy estate. Swiss law, however, further provides for a creditor’s statutory The commencement of bankruptcy proceedings does not right of retention over a movable asset which has come into his per se have a retrospective effect on such actions. However, possession with the debtor’s consent to secure a claim against the certain transactions by the lessee which occurred prior to the debtor which is intrinsically connected with the retained asset. commencement of the proceedings may be challenged by the Such retained asset may be enforced by the creditor in the same bankruptcy administration. Defendants in this case are persons way as a pledged asset. However, if the debtor (i.e. the operator with whom the lessee concluded such transactions (e.g. the or the lessee) is not the actual owner of the aircraft, such right of owner). Such transactions include, inter alia, (i) gifts and unpaid retention arises only if the owner explicitly or implicitly agreed to disposals made or the granting of collaterals by the lessee in the the creation of the retention situation. In the event the owner did year prior to the commencement of bankruptcy proceedings if not agree, the creditor may only assert a retention right if it was in the lessee was at the time already overindebted, and (ii) all trans- good faith at the time of the transfer of possession in relation to actions carried out by the lessee within five years prior to the the debtor having been entitled by the owner to transfer posses- commencement of bankruptcy proceedings with the intent to sion over the aircraft to the creditor. However, a retention right is favour certain creditors over others. excluded if the relevant aircraft is recorded in the Aircraft Record.

8.6 Is there, either under law or as a matter of practice 92 Detention and Confiscation in your jurisdiction, a period of time within which the Insolvency Official will either ‘adopt’ the lease and pay rent and other lease payments as an expense 9.1 Other than insolvency laws (see section 8), of the insolvency or ‘reject’ the lease and permit the are there any laws which may have the effect of owner to enforce such rights as it may have under the defeating the owner’s right in the aircraft – for example, lease? (a) If the lease is ‘adopted’, will the Insolvency Government requisition? Do the laws of your jurisdiction Official also pay any unpaid lease payments due as at provide for any compensation in such circumstances? commencement of the insolvency protection? (b) If not or if the lease is ‘rejected’, would the owner’s claim for Circumstances of interference by the Federal or Cantonal any outstanding sums rank equally with other ordinary unsecured creditors of the lessee? authorities are rare. The Swiss Constitution guarantees indi- vidual property rights which may, however, exceptionally be expropriated by the Federal government, provided that it is No, there is no period of time within which the bankruptcy in the public interest, proportionate, has a legal basis, and is administration is required to “adopt” or “reject” the lease. compensated. Unpaid lease payments due as at the commencement of the In case of a serious incident involving an aircraft, the latter proceedings are to be filed with the bankruptcy administration may be seized by the investigating authority for the investiga- and, provided there is no security, rank equally with other unse- tion of the case. cured creditors. If material statutory regulations have been breached, the FOCA may seize the respective aircraft provided that its further 8.7 Are there certain types of preferred creditors whose use would endanger the public safety or there is a risk that such claims will rank above claims of the owner? use would be abusive. In criminal proceedings, the seizure of assets may under In bankruptcy proceedings in Switzerland, claims of secured certain circumstances be ordered provided they are considered

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to be used as evidence, or objects that have been used or were measures against the aircraft if the debtor does not pay the tax intended to be used for the commission of an offence (such as debt, if the debtor of the tax debt is the owner of the aircraft. drug trafficking), in the event that the respective objects consti- If the operator or the lessee are the debtors of such tax debt but tute a threat to public safety, morals or public order. not the owner of the aircraft, such enforcement against the latter is not possible. Moreover, the right of retention entitles the creditor to 9.2 Are there any rights in relation to third parties to detain or sell the aircraft pursuant to illegal activities, enforce a retained asset the same way as a pledged asset (see tax or any other laws if the operator or lessee fails to pay question 8.8). when due? If so, can the aircraft be forfeited and sold However, the 1933 Rome Convention may in certain cases without the owner being made aware? prevent precautionary detention or retention of aircraft, whereby exceptions apply with regard to operating private (non-commer- The Swiss Federal Tax Administration may, pursuant to the cial) and certain non-scheduled flights. Federal Act on Direct Federal Taxation, initiate enforcement

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Michael Eitle is a senior associate with Blum&Grob’s Aviation & Transport, M&A/Corporate and Capital Markets practice. His practice mainly focuses on aircraft finance and other aviation-related matters, M&A, financing and capital markets transactions. He advises corporations of all sizes in various industries with a strong focus on the transport sector. Michael has broad experience in complex project and asset finance matters and regularly advises national and international financiers, as well as lessors, corporate jet and ship owners, airlines and operators. Michael graduated from the University of Zurich in 2011 (MLaw) and has been admitted to the Zurich Bar in 2014. In 2017 he obtained a Master’s degree in International Financial Law (LL.M.) from King’s College London. He is a member of the Swiss Bar Association, the Zurich Bar Association and the International Association of Young Lawyers (AIJA). Furthermore, Michael is an authorised issuer’s representative (Listing Agent) at the SIX Swiss Exchange.

Blum&Grob Attorneys at Law Ltd Tel: +41 58 320 00 00 Neumuehlequai 6 Email: [email protected] P.O. Box URL: www.blumgrob.ch CH-8021 Zurich Switzerland

Blum&Grob Attorneys at Law is a Swiss law firm with about 60 employees located in the heart of Zurich. Its Swiss and foreign clients include SMEs, listed companies, large organisations, startups, entrepreneurs and private individuals. Advising in all areas of commercial law, on complex transac- tions and efficiently pursuing claims in disputes, Blum&Grob has a long- standing experience as well as in-depth industry and technical knowledge in the field of aviation. The firm’s activity is built on professional exper- tise, experience, teamwork and a trusting relationship between client and attorney. To that end, Blum&Grob fosters a personal and open approach with its clients. At the same time, its lawyers think and act entrepreneur- ially, offer pragmatic solutions, and are distinctively cost-conscious in carrying out a mandate. www.blumgrob.ch

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Kartal Law Firm Ali Kartal

1.5 Is it possible according to the laws in your 12 General and Contractual jurisdiction to enter into non-binding or partially binding pre-contractual agreements (e.g. ‘letters of 1.1 What are the typical structures available for intent’) which will NOT take effect as fully enforceable financing the purchase of an aircraft? agreements?

There are three main structures available for financing the Non-binding or partially binding pre-contractual agreements purchase of an aircraft. These are asset-backed loans, asset- are recognised under Turkish Law. backed securities and financial leases. In an asset-backed loan, the loan is secured with a mortgage on the aircraft. In an asset- 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction backed security, the debt is likewise secured by a mortgage. Asset- which applies to all pre-contractual agreement, backed securities have probably never been issued for an aircraft financing and leasing transaction documents, and the in Turkey. Therefore, it will not be taken up in further detail. In conduct of parties connected to them? a financial lease, the aircraft remains the property of the lessor/ financier for the term of the lease and can be purchased by the The Turkish Civil Code stipulates that every person must observe lessee for a nominal price at the end of the lease term. rules of honesty in exercising their rights and performing their obligations. Good faith is presumed unless lack of it is proven. 1.2 What are the key advantages/disadvantages On the other hand, any person who relies on good faith of and main issues arising in relation to these financing another is required to exercise a reasonable degree of care and structures? due diligence.

In asset-backed financing, repossession of the aircraft in case 22 Taxation and Related Matters of default used to be somewhat cumbersome and required a lengthy process. In financial leasing, repossession is much 2.1 Which government authority in your jurisdiction easier. However, this difference between the two types of has primary responsibility for the accounting for and financing is now obsolete since Turkey has ratified the Cape regulation of revenue control and taxes? Town Convention, and repossession of the aircraft is much easier and similar in both types of financing under the aforementioned The Directorate of Revenue Administration is the government Convention. In legal terms, there are no distinct advantages or authority responsible for taxes. disadvantages of one type of financing over the other.

2.2 What are typically the taxes in your jurisdiction 1.3 What types of leasing are possible under the which may arise in relation to a sale, a lease or a laws of your jurisdiction? What are their essential financing of an aircraft or an engine? characteristics?

Sale, purchase and delivery of aircraft to commercial enti- Wet leasing, dry leasing and financial leasing are possible and ties whose primary business is operation of these aircraft, are provided for in Turkish Law. Wet and dry leasing between aircraft exempt from Value Added Tax. Financial lease payments are operating entities are subject to permission of the Directorate subject to 1% VAT and 1% withholding income tax. There are General of Civil Aviation, and governed by civil aviation regu- no taxes for financing of aircraft or engines with loans. lations. Financial leasing is not subject to permission and is governed by the Law on Financial Leasing, Factoring and Finance Companies. Operational leases are treated as financial leases. 2.3 Is the provision of a current tax-residency certificate by a payee sufficient for a lessee or a borrower potentially subject to withholding taxes in your 1.4 Are there any proposals for reform in the area of jurisdiction on rental or interest payments to avail itself aviation finance? of treaty access and the mitigation of tax liability?

At present there are no proposals which may have an impact on Provision of a current tax-residency certificate is sufficient for a aviation finance transactions. payee to avail itself of treaty access and mitigation of tax liability.

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2.4 Has the advent of BEPS (the Base Erosion and 3.2 What is the effect of registration of the aircraft? Profit Shifting initiative of the OECD) had any effect as Does registration on your national aircraft register regards structures in aviation finance and leasing or confer proof of ownership of the aircraft and/or engine? their interpretation? Registration of ownership is proof of title against third parties. The advent of BEPS has not had any effect on structures in avia- The bona fide acquisition of title or other interest by relying on tion finance and leasing or their interpretation. the contents of the registry is protected, even if the owner has no title or the title is defective. Claims that the registration is 2.5 What are the typical thresholds in your jurisdiction not correct can be recorded in the registry through a precau- for which a permanent establishment may be triggered tionary court order. Engines cannot be registered on the aircraft under the terms of any relevant double-tax treaty or registry, and there is no separate registry for engines. similar? 3.3 Can foreign-owned aircraft be registered on There is no threshold for which a permanent establishment may your national aircraft register and are there limits or be triggered. A permanent establishment will be deemed to restrictions on the age of aircraft that may be registered exist only if (i) the entity concerned maintains a place of busi- or operated? ness or a permanent representative in Turkey, and at the same time (ii) obtains revenue from its commercial transactions Foreign-owned aircraft can be temporarily registered in the within Turkey. Turkish aircraft registry but only if it is dry leased for a period of at least six months, or under a financial lease, to a Turkish 2.6 Is the authority at question 2.1 likely to establish person or entity. Turkish entity in this context means a Turkish a ‘look-through’ right or similar as regards a lender or a registered company in which the majority of the voting shares lessor which is a special-purpose vehicle involved for and the board of directors are Turkish citizens or legal persons. the purpose of tax treaty access? The registration is terminated upon expiry or termination of the lease. There is no restriction on the age of the aircraft, but prior The Directorate of Revenue Administration is unlikely to estab- to importation, a technical compliance letter must be obtained lish a ‘look-through’ right or similar in a special purpose vehicle. from the DGCA. It is within the power of the DGCA to deny a technical compliance letter on the basis of age or other tech- nical reasons. 2.7 Will the import of an aircraft into your jurisdiction and/or the sale or leasing of the aircraft give rise to any VAT, sales or use taxes or any customs import or excise 3.4 Can aircraft leases be registered? If so, in what duties? circumstances? Must the lease be in a particular form if it is to be valid and enforceable (for example, must it be in a particular language or be notarised, legalised or Import or sale of aircraft to entities whose primary business is to apostilled)? operate these aircraft commercially is exempt from VAT. Lease payments are subject to 1% VAT. There are no other sales or use The following information is specific to financial leases. Other taxes, customs import or excise duties for such aircraft. types of lease can also be registered, but commercial and busi- ness aircraft leased to Turkish entities are almost invariably 2.8 Are there any documentary taxes (for example, leased under a financial lease, even though the terms of the lease stamp duty payable on the execution of documents)? may not conform to the definition of a financial lease exactly. Registration of a lease interest is a two-step process. The first Stamp duty is payable on most documents. A notable excep- step is registration of the lease agreement with the Association tion is financial leasing agreements, which are exempted from of Financial Institutions. This is a quasi-governmental agency, stamp duty. which records all financial leasing transactions. Financial leasing agreements must be notarised and translated into Turkish if they 32 Registration and Deregistration are in a foreign language. These are exempt from stamp duty. Depending on the length and language of the agreement, notari- sation will cost between $2,000 and $5,000. 3.1 Which government authority in your jurisdiction has primary responsibility for the regulation of aviation Step two is registration of the lease in the aircraft registry. and the registration of aircraft? Is it an owner registry The following documents must be submitted to the aircraft or an operator registry? If the aircraft register is an registry: operator register, is it possible to record the details of ■ the lease agreement, as recorded and certified by the an owner or lessor and any financier with an aircraft Association of Financial Institutions; mortgage? ■ the registration application form; ■ the application letter signed by the owner or their attorney; The Directorate General of Civil Aviation (DGCA) is the ■ a letter of deregistration from the previous registry; government agency responsible for regulation of aviation and ■ a copy of the aircraft flight manual page that shows the registration of aircraft. It is a department of the Ministry of maximum takeoff weight; and Transportation and Infrastructure. The registry is an owner’s ■ proof of payment of the aircraft registry service fee. registry. Operators who have use of an aircraft through a dry Registration is completed within five to 10 business days upon lease of at least six months or a financial lease are also registered application. The aircraft registry service fee is approximately alongside the owner/lessor. Mortgagees are also recorded, as $500. mortgage agreements are subject to registration.

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3.5 How is deregistration affected and what steps can it becomes extinct. The government has priority only for the a lessor take to de-register the aircraft on termination of motor vehicle tax that is payable for the aircraft. This is usually the lease? negligible, as the amount will not exceed a few thousand US dollars. No other liens or rights will have priority over regis- If the lease is terminated upon expiry of its term, the Association tered consensual mortgages. of Financial Institutions shall confirm termination to the DGCA, and the DGCA will deregister the aircraft. If the lease 4.6 What other forms of security can be granted over is terminated before expiry for any reason, the consent of the an aircraft and/or engine lease? lessee is required. If the termination is due to default by the lessee and the lessee does not give consent to deregistration, a Aircraft and engine leases can be transferred to a security court order will be required for deregistration. However, if there trustee. Also, lease payments can be assigned by way of security. is a registered IDERA, the aircraft can be deregistered directly by the DGCA by exercising the IDERA, without the need for consent from the lessee or confirmation by the Association of 52 Enforcement and Repossession Financial Institutions. 5.1 What are the circumstances in which a mortgagee or owner can take possession of the aircraft and/or sell 42 Security the aircraft? What requirements must the mortgagee or owner comply with? 4.1 Is it possible to create a mortgage over an aircraft or engine in your jurisdiction? If so, what are the types The mortgagee or owner can take possession of the aircraft if of aircraft mortgage and engine mortgage available and what formalities are required in order to perfect it? the mortgagor or lessee are in default. The meaning of default is defined in Article 11 of the Cape Town Convention as “a default which substantially deprives the creditor of what it is entitled to It is possible to create a mortgage on an aircraft but not on an expect under the agreement”. A mortgagee can sell the aircraft engine. An engine cannot be mortgaged separately from an and its proceeds must be first used to satisfy the outstanding aircraft, and an aircraft mortgage covers the engines by default, amounts owed to them, any surplus must be distributed among unless they are expressly excluded. A mortgage is created by subsequent ranking secured creditors, and any balance must be executing a mortgage agreement before a notary public and returned to the owner. The owner is not bound by any require- registering it in the aircraft registry. ment in disposing of the aircraft.

4.2 Can spare parts, including future parts, be subject 5.2 What is the procedure for repossession of the to the aircraft mortgage or engine mortgage (as the case aircraft? may be)? If not, are there any other forms of security that can be taken over spare parts? Turkey recognises the right of the mortgagee or owner/lessor to use self-help for repossession on default, as provided for in the Spare parts, including future spare parts are within the scope of Cape Town Convention. Use of self-help is not recommended the mortgage. where the owner/lessee tries to prevent or legally challenges the repossession. For this reason, it is advisable to seek a court 4.3 Is there a register of mortgages or rights over order for repossession. Turkish courts have been known to aircraft and/or engine? issue preliminary injunctions under Article 13 of the Cape Town Convention giving possession of the aircraft to the creditor. In the case of a mortgage, it is also possible to start a mortgage There is no specific mortgage registry which is separate from the enforcement action, which will lead to the sale of the aircraft by aircraft registry itself. Mortgages on aircraft are recorded in the public auction. The debtor has a right to raise objections to this registry entry of the aircraft. action. Depending on the mortgage agreement and documenta- tion of the default, the objection may be set aside by a summary 4.4 What other forms of security can be taken over judgment. an aircraft and/or engine and can these other forms be registered? 5.3 Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local There is no other form of security that can be taken over an rules that apply, despite a choice of foreign law? aircraft. There is no security that can be taken over an engine. However, priority rights registered in the International Registry Mortgage agreements are subject to the law of the place of over engines are recognised in Turkish Law by virtue of the registration of the aircraft. This is mandatory and cannot be Cape Town Convention and Protocol. changed by agreement. A mortgage on an aircraft registered in Turkey will be subject to Turkish Law. Choice of law will not 4.5 What claims and rights would take priority in your be recognised. jurisdiction over a registered mortgage? 5.4 Will local courts recognise and enforce a foreign Aircraft manufacturers and repairers have the right to demand court judgment in favour of a mortgagee or lessor? Are the registration of a statutory mortgage on the aircraft for their any interim relief measures available? receivables. This mortgage will take priority over all other consensual mortgages. The demand must be made within three The enforcement of foreign court judgments requires a recogni- months of completion of the construction or repairs, otherwise tion and enforcement decision by a Turkish court. The purpose

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of a recognition and enforcement action is not to retry the merits to be recognised and declared as enforceable by a Turkish court. of the case, but only to determine whether the foreign court The case will not be re-examined on its merits, it will only be decision fulfils the requirements for enforcement in Turkey. tested to see if it complies with the conditions for enforcement One of the important requirements for recognition and of foreign judgments, as explained in question 5.4 above. enforcement is the existence of a de facto or contractual reciprocity between Turkey and the country that issued the decision with 5.10 What is the applicable procedure for repossession regard to recognising and enforcing each other’s court decisions. of an aircraft under other forms of security interests? Another important requirement for the recognition and enforcement of a foreign court decision is that the claim has There is only one form of security interest on aircraft and that been duly and properly served on the defendant, and the is a mortgage. defendant has been given adequate opportunity to defend itself against the claim. It is not necessary to prove that defendants have defended themselves. The decision may be given in absentia 62 Conventions if they have been duly invited. Interim relief can be sought based on a foreign judgment. 6.1 Has your jurisdiction ratified any of the following: (a) The Chicago Convention of 1944 on International Civil Aviation (the Chicago Convention); (b) The 1948 5.5 Are powers of attorney from a local airline in favour Convention on the International Recognition of Rights of a lessor or mortgagee likely to be effective to allow in Aircraft (the Geneva Convention); (c) The 1933 the lessor or mortgagee to deregister the aircraft? Can Convention for the Unification of Certain Rules Relating such powers be irrevocable, be governed by a foreign law to the Precautionary Arrest of Aircraft (the 1933 Rome and/or do they need to be in any particular form for local Convention); and (d) The Convention on International recognition? Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Cape Town Convention) and the Protocol on the Convention on International Interests A deregistration and export power of attorney can be used to in Mobile Equipment on Matters Specific to Aircraft deregister and export an aircraft. However, under Turkish law, Equipment? a power of attorney cannot be issued irrevocably. The principal has the unrestricted and absolute right to revoke the power of Turkey has ratified the Chicago Convention and the Cape Town attorney at any time, even if the power of attorney states that Convention and Protocol. The Geneva and Rome conventions it is irrevocable. They can be made subject to foreign laws. A have not been signed or ratified by Turkey. Power of Attorney has to be notarised, and if issued in a foreign country, it must be apostilled. A power of attorney will become invalid if the principal is declared bankrupt. 6.2 Has ratification of the Cape Town Convention caused any conflicts or issues with local laws?

5.6 If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, Turkish law regarding insolvency and bankruptcy does not how long is it likely to take to gain possession of the allow a mortgagee to take possession of the mortgaged prop- aircraft? erty. Likewise, a lessor is not allowed to take possession of the leased property in the absence of a court decision. The Cape Town Convention, on the other hand, allows for direct repos- Enforcement of a court decision ordering repossession of the session. This is a conflict between the Cape Town Convention aircraft would normally take about two weeks. and local law. However, this conflict is resolved by the Turkish Constitution which states that all international treaties ratified 5.7 Are there any restrictions on the ability of the by Turkey have the power of law, and if there is any conflict lessor to export the aircraft from your jurisdiction on between national law and the treaty, the treaty shall prevail. termination of the leasing? Turkish courts have been known in most cases to apply the Cape Town Convention. There are no restrictions on the lessor to export the aircraft upon termination of the leasing. 6.3 What is the legal position regarding non-consensual rights and interests under Article 39 of the Cape Town Convention? 5.8 Are exchange controls prevailing in your jurisdiction as regards payments in foreign currency? Will any consents be required for the remittance of the Turkey declared under Article 39 of the Cape Town Convention sale proceeds abroad? that non-consensual rights and interest arising under Turkish law shall have priority over registered international interests. There are no restrictive exchange control mechanisms. No Likewise, Turkey has reserved the right to arrest or detain the consent is required for remittance of sales proceeds outside the aircraft for services in respect of the aircraft, whether provided country. by the state, intergovernmental organisations, private or public service providers.

5.9 If the lease is governed by English law and a judgment is obtained by the lessor in the English courts, 6.4 Has your jurisdiction adopted the remedies on can that judgment be automatically enforced in your insolvency provided under Article XI of the Protocol to jurisdiction or will the case have to be re-examined on its the Cape Town Convention? merits? Turkey has declared that it will apply alternative (A) under Article The English court decision cannot be enforced directly. It needs XI of the Cape Town Protocol for insolvency procedures.

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6.5 What is the procedure to file an irrevocable a balance sheet basis. They may simultaneously apply for bank- deregistration and export request authorisation under ruptcy protection. They are not required to file for bankruptcy the Cape Town Convention (IDERA)? solely on the basis of not being able to pay debts as they fall due.

The procedure for registration, revocation and exercise of 8.3 Do the available forms of insolvency protection IDERAs are well defined with a Civil Aviation Regulation on in your jurisdiction involve the appointment of either this subject matter. The authorised representative of the author- an officer of the court or a specifically court appointed ised party under the IDERA shall fill out the IDERA exer- official to take control of the operator or lessee (an cise request form and will submit it, together with proof of his ‘Insolvency Official’) while in insolvency protection? authority, to the DGCA. An insolvency officer or board of officers are appointed by the 72 Liability for Damage and Environmental court to take control of the operator or lessee while the bank- ruptcy is postponed. 7.1 Can the owner be strictly liable – liable without a requirement to prove fault or negligence – for any damage or loss caused by the aircraft assuming the 8.4 Does the commencement of insolvency protection owner is an innocent owner with no operational control involving the appointment of an Insolvency Official of the aircraft? in your jurisdiction have the effect of prohibiting the owner from taking the following actions to enforce the lease after commencement of such protection: (a) An owner cannot be held liable for the operation of the aircraft applying any security deposit held by the owner against or activities of the operator. The owner may be held liable only any unpaid amounts due under the lease; (b) accepting if the operator cannot be identified and the owner cannot prove payment of rent or other lease payments from the that it is not the operator. lessee, a guarantor or a shareholder; (c) giving notice of default under the lease; (d) obtaining a judgment or arbitral award for unpaid lease payments; (e) giving 7.2 Does the EU Emissions Trading System (EU ETS), notice to terminate the leasing of the aircraft and/or or any similar scheme, apply to aircraft and aircraft engine; or (f) exercising rights to repossess the aircraft operators in your jurisdiction? Will charges levied and/or engine? according to the EU ETS, or its equivalent, give rise to any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights Commencement of insolvency protection has the following rank in priority ahead of any mortgage interests properly effects on the lease agreement and the owner’s rights: registered in the relevant aircraft and/or engine? (a) The owner can apply any security deposit held against unpaid and due amounts under the lease. The EU Emission Trading System does not apply in Turkey. (b) The owner cannot accept payment from the lessee unless There is no similar scheme in effect. the payment is sanctioned under the terms of the restruc- turing plan approved by the court as a condition of 7.3 What liabilities (actual or potential) could an owner, bankruptcy protection. However, the owner can accept lessor or financier of an aircraft incur in your jurisdiction payments from guarantors or shareholders without any because of a failure to comply with local environmental restriction. law and/or regulations on the part of an operator of (c) The effect of bankruptcy protection on leases shall be aircraft leased or financed by it? determined by the restructuring plan approved by the court. On this basis, it may not be possible for the owner to An owner, lessor or financier cannot be held liable for the failure give a notice of default under the lease for lease payments of the operator to comply with local environmental law and which have fallen due before the bankruptcy protection regulations. decision. It is, however, possible to give notice of default for lease payments which should have been made under 82 Insolvency and Searches the restructuring plan. (d) There is no need to obtain a judgment or arbitral award for 8.1 Are there any public registers in your jurisdiction overdue lease payments, unless the default is contested by the where a search can be carried out to determine whether lessee. If the lessee contests the payment, a court judgment an order or resolution for any bankruptcy, bankruptcy or arbitral award can be obtained but it cannot be enforced. protection or similar insolvency proceedings has been (e) Unless it is sanctioned by the restructuring plan, the lease registered in relation to an operator or lessee? cannot be terminated. Any provision in the leasing agree- ment to the effect that the lease can be terminated, shall Bankruptcy, bankruptcy protection and composition proce- not be valid and applicable. dures are notified to the Commercial Registry. It is possible to (f) The aircraft or engine cannot be repossessed unless the learn if there are any such proceedings in respect of an operator lessee is in default of the restructuring plan. or lessee by checking the Commercial Registry. 8.5 Can the commencement of insolvency proceedings 8.2 In the event that an operator or lessee were to have retrospective effect in relation to any such actions become insolvent either on a balance sheet basis taken before commencement? If so, for what period can (assets less than liabilities) or is unable to pay debts as there be a look back? fall due, would an operator or lessee be required to file for insolvency protection? Any enforcement action started before declaration of bank- ruptcy shall be stopped. An operator or lessee would be required to file for bankruptcy on

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8.6 Is there, either under law or as a matter of practice 8.8 If the aircraft is in the possession of a person in your jurisdiction, a period of time within which the other than the operator or lessee at the commencement Insolvency Official will either ‘adopt’ the lease and of Insolvency Protection of the operator or lessee, for pay rent and other lease payments as an expense example, an independent maintenance facility, will such of the insolvency or ‘reject’ the lease and permit the person be entitled, under the laws of your jurisdiction, owner to enforce such rights as it may have under the to assert a lien arising under law or contract over the lease? (a) If the lease is ‘adopted’, will the Insolvency aircraft in respect of amounts then due and unpaid to Official also pay any unpaid lease payments due as at such person by the operator or lessee? commencement of the insolvency protection? (b) If not or if the lease is ‘rejected’, would the owner’s claim for If the lessee is under bankruptcy protection, any third person in any outstanding sums rank equally with other ordinary possession of the aircraft is not entitled to exercise a lien. unsecured creditors of the lessee? 92 Detention and Confiscation Declaration of bankruptcy automatically terminates the lease. The bankruptcy officer is not authorised to adopt the lease. 9.1 Other than insolvency laws (see section 8), The bankruptcy officer is required to separate the leased prop- are there any laws which may have the effect of erty from other assets of the lessee and return it to the owner. defeating the owner’s right in the aircraft – for example, However, the lessee and other creditors are entitled to raise an Government requisition? Do the laws of your jurisdiction objection to this separation within seven days of learning the provide for any compensation in such circumstances? decision of the bankruptcy officer. Any claim of the owner for overdue lease payments rank equally with all other unsecured Aircraft can be requisitioned only for general mobilisation in a creditors. state of war, against compensation.

8.7 Are there certain types of preferred creditors 9.2 Are there any rights in relation to third parties to whose claims will rank above claims of the owner? detain or sell the aircraft pursuant to illegal activities, tax or any other laws if the operator or lessee fails to pay when due? If so, can the aircraft be forfeited and sold Creditors secured with a mortgage, employees, and the tax without the owner being made aware? office for motor vehicle taxes, rank above claims of the owner.

The aircraft can be confiscated upon the decision of a prosecutor if it is found to be used in the smuggling of illegal goods and substances. It can be sold upon a decision of the criminal court.

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Ali Kartal completed his law degree at the Ankara University Law School. He completed his apprenticeship at the AYBAY & AYBAY law firm and obtained his licence for practising law in 1987 in Istanbul. He then started working for the PEKIN & PEKIN law firm, gaining experience in the financial services and banking sector. In 1989 he joined IBM Turkey as inhouse counsel. In the meantime, his love of aviation and aircraft urged him to learn how to fly, and he got his commercial pilot licence in the USA in 1994. Later in 1994 he joined AYBAY & AYBAY again, a firm well known at the time for shipping and insurance. His experience in aviation did not go unnoticed, and the firm soon started receiving assignments from the aviation sector. Ali was the managing partner of the firm between 2002 and 2016. Upon dissolution of AYBAY & AYBAY in 2016, he started his own firm. Kartal Law Firm Tel: +90 212 293 23 23 / +90 532 265 24 70 Tekfen Tower Level 8 Email: [email protected] 209 Buyukdere Street URL: www.kartallawfirm.com Levent 34394 Istanbul Turkey

Kartal Law Firm is a boutique law practice in Istanbul, Turkey, offering legal services exclusively in the aviation industry. The firm has a passion for aviation and an understanding of aviation operations which set it apart from other full-service law firms that provide the same legal services indis- criminately for any other business. The firm is a full-service law firm, but serves aviators only. When speaking to the firm, clients will not waste their time explaining aviation. The firm’s clients include insurers, lenders, lessors, airlines, manufacturers, general aviation operators, ground-han- dling companies and other players in the aviation industry. The firm has advised and represented insurers and airlines in air crash litigation, lenders and lessors in aircraft finance and leasing transactions, as well as in dispute resolution and aircraft repossession, and a host of other aviation businesses in both contentious and non-contentious matters. If a client’s opportunity or issue involves an aircraft, the firm can save them a lot of time, money and trouble. www.kartallawfirm.com

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Ukraine Ukraine

Jurvneshservice Dr. Anna Tsirat

12 General and Contractual (i) Subject. The leased object will be an asset(s) which is more specifically defined. Only the owner (or a person author- ised by the owner as lessor) may lease the object. The 1.1 What are the typical structures available for leased object may be transferred together with a crew (wet financing the purchase of an aircraft? lease). Whilst, the Civil Code indicates that a separate law to wet leasing may be adopted, it has not been developed Typically, financing of the purchase of the aircraft may be done yet. through financial lease or lease and purchase agreement. These (ii) Rent. If the parties fail to agree on the rent payable (which types of structures suggest installment of payments or bank is unlikely) it will be calculated, based on the model of the credit. aircraft and other essential circumstances. The fee will be paid on a monthly basis unless it is stipulated otherwise 1.2 What are the key advantages/disadvantages in the lease agreement. The lessee is not obliged to make and main issues arising in relation to these financing the lease payments if it has lost the possibility to use the structures? leased object as a result of circumstances for which it is not responsible. (iii) Lease Term. If parties failed to agree on a specific term The key advantage of a lease and purchase agreement and finan- for the lease (which is unlikely), the lease agreement will be cial lease is the possibility for an airline to utilise the aircraft treated as concluded for an indefinite period. In this case, from the moment of its acceptance. The main disadvantage is each party to the lease may refuse to continue after having that the price is higher than the market one due to the applica- notified the other party in writing at least three months tion of a certain percentage by the lessor. before such refusal. The lease agreement may fix another term for notification. If the lessee continues to operate a 1.3 What types of leasing are possible under the subject of lease within one month after expiration of the laws of your jurisdiction? What are their essential lease agreement, it is considered as prolonged for a term characteristics? which has been set up initially. (iv) The lessee has a right to the proceeds arising from the The Ukrainian law (the Civil Code and the Law on the Financial object of the lease. Lease) defines a finance lease only as an agreement between one (v) The lessee is obliged to maintain the aircraft, including the party (the lessor) and another (the lessee), whereby the lessor payment of all taxes and fees which are connected to such undertakes to purchase certain property from the seller and lease maintenance. this property to the lessee for, at least, one year. Irrespective of (vi) The aircraft must be insured. The lessee must insure its the absence of a definition to operative lease, it is used in rela- liability in respect of damage to third parties and with tion to aircraft. In the case where the asset has been purchased respect to loss or damage of the aircraft. by the lessor without the prior agreement of the lessee, the lease may be termed an operating lease (also called a direct lease). Wet 1.4 Are there any proposals for reform in the area of lease is allowed as well. aviation finance? The lease must be in writing. If any party to the lease is a natural person, the lease must be notarised. The essential terms of the lease under the Law are as follows: The area of aviation finance is not specially regulated in Ukraine (i) description of the subject matter of the lease; but there are proposals for reform. (ii) term of the lease; (iii) amount of the lease payments; and 1.5 Is it possible according to the laws in your (iv) other terms on which any contracting party insists on. jurisdiction to enter into non-binding or partially The lessor may rescind the lease and claim the return of the binding pre-contractual agreements (e.g. ‘letters of aircraft pursuant to the notary’s endorsement if the lessee fails intent’) which will NOT take effect as fully enforceable to pay any lease instalment (whether in full or in part) and the agreements? lessee does not cure this default within 30 days thereafter. The Civil Code lays down the following as being the essential Under the Ukrainian law, Article 635 of the Civil Code, any pre-requisites for a lease: pre-contractual arrangements of the parties, including letters of

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intent, are binding if the parties clearly state there that it is a to expenses in accordance with national accounting standards pre-contractual agreement. Pre-contractual agreement without (standards) or international financial reporting standards. The this clear provision does not take effect as a fully enforceable financial result before tax is reduced on the amount of deprecia- contract. tion, residual value of an individual asset in case of its liquidation or sale and the cost of the acquisition of the asset. 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction which applies to all pre-contractual agreement, 2.3 Is the provision of a current tax-residency financing and leasing transaction documents, and the certificate by a payee sufficient for a lessee or a conduct of parties connected to them? borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability? The doctrine of “good faith” is implemented in the Civil Code where in Article 3 it states that general grounds of the civil law are justice, good faith and reason. Thus, these principles are The provision of a current tax-residency certificate is a prerequi- applied to all precontractual agreements, financing and leasing site term to apply the provisions of the bilateral treaty on avoid- transaction documents and the conduct of the parties to them. ance of double taxation. The application of zero or a decreased tax rate is possible only if the payee is beneficiary (factual) 22 Taxation and Related Matters receiver (owner) of payment to be transferred. The beneficiary (actual) recipient (owner) of the income is a person entitled to receive it. An agent or a nominal holder (nominal owner) is 2.1 Which government authority in your jurisdiction treated as intermediary but not the beneficial owner (actual) has primary responsibility for the accounting for and recipient (owner) of the income. regulation of revenue control and taxes? As stated above, provisions may be corrected nearer to the time. Appropriate law has been approved by the parliament and The State Fiscal Service of Ukraine is responsible for realisa- is waiting for the president’s signature. The definition of benefi- tion of state policy in the sphere of customs affairs, applica- ciary (actual) recipient (owner) of the income will be added with tion of tax and customs laws, control for payment of taxes and reference to its right to dispose the income. If the payee does not duties as well as for fight against offences in the sphere of taxa- have sufficient authority (or in the case proven facts and circum- tion, public policy in the field of control over the timely settle- stances are not entitled) to use and dispose of the income, and/ ment in foreign currency, compliance with the procedure of or the payee transfers the proceeds or their substantial portion cash payments for goods (services), as well as the availability of to the benefit of another person regardless of the manner in special licences and trade patents. which such a transfer is made, and the payee does not perform significant functions, does not use significant assets and does not carry significant risks in the operation of such transfer, and/ 2.2 What are typically the taxes in your jurisdiction or the payee has no appropriate resources (skilled personnel, which may arise in relation to a sale, a lease or a property, sufficient equity, etc.) that are needed to actually financing of an aircraft or an engine? perform the functions, to use the assets and to manage the risks associated with the receipt of the appropriate type of income the Any sale of goods, including engine or aircraft, and services in payee is not treated as beneficiary owner. Furthermore, a clear Ukraine, is subject to a value added tax (VAT) at a rate of 20%. provision forbidding the application of an international treaty The date of arising of the tax liability for the supply of goods or of Ukraine is introduced if the principal or overriding purpose services shall be the date attributable to the tax period during of conducting a transaction with the payee is to obtain, directly which any of the events that occurred earlier: the date of transfer or indirectly, the benefits conferred by the international treaty of funds from the buyer/customer to the bank account of the in the form of a tax exemption or the application of a reduced taxpayer as payment for the goods/services to be supplied; the rate of tax (principal purpose test). Introduction of such provi- date of shipment of goods, and in case of export of goods; the sions put in question the application of head-sublease structures date of registration of customs declaration, certifying the fact in Ukraine. Besides, SPV used as lessors in ABS transactions of crossing the customs border of Ukraine, and for services; may be treated as nominal but not beneficiary owners of rent or the date of registration of a document certifying the fact of payments transferred to them by a Ukrainian lessee. providing services by the taxpayer. In cases where the taxpayer is engaged in the supply of used engines and aircraft purchased 2.4 Has the advent of BEPS (the Base Erosion and from persons not registered as VAT taxpayers, the tax base is a Profit Shifting initiative of the OECD) had any effect as positive difference between the sale and the purchase price of regards structures in aviation finance and leasing or such engines and aircraft. The aircraft is treated as used if it their interpretation? is registered not for the first time in Ukraine and it has already been registered in other states, and its flying time exceeds 40 hours. A flight time is considered to be calculated from the The Multilateral Convention to Implement Tax Treaty Related flight block take-off time to the landing block time. The Tax Measures to Prevent BEPC took effect for Ukraine on 1 January code does not provide definition of used engine. Rent payments 2019. It has not had any effect as regards structures in aviation under the lease are exempted from VAT. Rent payments under finance and leasing and their interpretation. finance lease are subject to VAT. Any income in Ukraine is subject to income tax at the rate 2.5 What are the typical thresholds in your jurisdiction of 18%. Financial result before tax is increased: to the amount for which a permanent establishment may be triggered of accrued depreciation, the impairment loss from decrease of under the terms of any relevant double-tax treaty or usefulness of the main assets; and residual value of an item of similar? property or intangible assets, the cost of repair, reconstruc- tion, modernisation or other improvement of non-productive The term “permanent establishment” can be defined as a fixed fixed assets or non-productive intangible assets attributable

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place of business through which the business of an enterprise 32 Registration and Deregistration is wholly or partly carried on. The term “permanent estab- lishment” includes in particular: place of management; affil- iate; office; factory; workshop; natural resource exploration 3.1 Which government authority in your jurisdiction facility or facility; a mine, an oil or gas well, a quarry or any has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry other place of extraction of natural resources; and a warehouse or an operator registry? If the aircraft register is an or other structure used as a point of sale. The term “perma- operator register, is it possible to record the details of nent establishment” does not include: the use of facilities an owner or lessor and any financier with an aircraft solely for the purpose of storage, display or delivery of goods mortgage? or merchandise belonging to the enterprise; the stocking of goods or merchandise belonging to the enterprise solely for the The State Aviation Service of Ukraine has primary responsibility purpose of storage, display or delivery or processing by another for the regulation of aviation and the registration of aircraft. enterprise; maintaining a fixed place of business solely for the The Civil Aircraft Register is an owner register in Ukraine. It purpose of purchasing goods or merchandise or of gathering contains data as to the operator, owner, model of the aircraft and information for the enterprise or carrying on any other activity its certificate of registration number. of a preparatory or auxiliary character; and the maintenance of a fixed place of business solely for the purpose of pursuing any combination of listed activities, provided that the aggregate 3.2 What is the effect of registration of the aircraft? activity is preparatory or ancillary. A foreign company shall not Does registration on your national aircraft register confer proof of ownership of the aircraft and/or engine? be regarded as having a permanent establishment in Ukraine if it pursues an entrepreneurial activity through a broker, commis- sioner or any other agent with independent status, provided that On the registration of the aircraft in the Aircraft Register, such persons act in the ordinary course of business. The fact it will be treated as a Ukrainian aircraft. The registration of that a foreign company controls or is controlled by a Ukrainian aircraft in the Aircraft Register will be confirmed by the issue company does not in itself transform one of these companies of a Certificate of Registration which will indicate the aircraft’s into a permanent establishment of the other. nationality. From the time of the registration of the aircraft in the Aircraft Register, any recording made in a foreign aircraft register in respect of the same aircraft will not be recognised 2.6 Is the authority at question 2.1 likely to establish by Ukraine and, if the aircraft is not subsequently de-registered a ‘look-through’ right or similar as regards a lender or a from the Ukrainian Aircraft Register, Ukraine will not recog- lessor which is a special-purpose vehicle involved for nise its subsequent inclusion in any other aircraft register. The the purpose of tax treaty access? registration of the aircraft in the Aircraft Register does not, in itself, constitute evidence of title to the aircraft. Special purpose vehicles involved for the purpose of tax treaty access is treated as intermediary and has no rights to use the 3.3 Can foreign-owned aircraft be registered on advantages (usually there is zero withholding tax rate for an your national aircraft register and are there limits or aircraft leased to continue to be used for international transpor- restrictions on the age of aircraft that may be registered tation of passengers) of the treaty. or operated?

2.7 Will the import of an aircraft into your jurisdiction Foreign-owned aircraft may be registered in Ukraine. There is and/or the sale or leasing of the aircraft give rise to any no limit or restriction on the age of the aircraft to be registered VAT, sales or use taxes or any customs import or excise or operated in Ukraine. duties?

3.4 Can aircraft leases be registered? If so, in what The Ukrainian laws impose no import or excise duty applicable circumstances? Must the lease be in a particular form to aircraft imported into Ukraine. The aircraft is exempt from if it is to be valid and enforceable (for example, must it the value-added tax (VAT) of 20% pursuant to Article 206.7.1 be in a particular language or be notarised, legalised or of the Tax Code and Article 105 of the Customs Code, provided apostilled)? that the aircraft is imported by a local airline under a temporary regime for a period of not more than three years and is exported A foreign-owned aircraft is registered in Ukraine under lease, in before the expiry of such period. To benefit from this exemp- which information is submitted to the Aviation Authority. The tion, the lessee needs to re-import the aircraft after the expira- lease must be made in writing. As usually leases are in a foreign tion of the first such three-year period or request the customs language, there is a requirement for their translation by a certi- authorities to extend such temporary regime for another three- fied translator, i.e. an interpreter whose signature is notarised. year period. Such re-importation can be satisfied by flying the aircraft on an international route any time within such period. 3.5 How is deregistration affected and what steps can a lessor take to de-register the aircraft on termination of 2.8 Are there any documentary taxes (for example, the lease? stamp duty payable on the execution of documents)?

The owner of the aircraft – or any person acting under its written There is no registration, stamp or other taxes or duties of any authority (i.e. by way of power of attorney) or holder of regis- kind payable in Ukraine in connection with the signature, tered IDERA, if any – may apply for the deregistration of the performance, filing or enforcement through legal proceedings aircraft. The following documents are required to be submitted of any of the lease transaction documents or in connection with to the Aircraft Register for the deregistration of the aircraft by payments made pursuant to the lease transaction documents. the owner or its authorised person:

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(a) written agreement of the next Civil Aircraft registry be mortgaged. Such kind of mortgage is called pledge of goods to register the aircraft. It may be done by electronic in circulation. The pledge contract for goods in circulation must confirmation; individualise the subject of the pledge by indicating the posses- (b) an application for the deregistration of the aircraft, in the sion of the goods in the mortgagor’s possession or their loca- prescribed form; tion in a particular shop, warehouse, other premises, or by other (c) originals of the Certificate of Registration of the aircraft means sufficient to identify the aggregate of movable items as and notification on issuance of state and registration mark collateral. The mortgagor reserves the right to own, use and of the aircraft; dispose of the collateral. In case of alienation of the pledged (d) a Re-delivery Certificate; and goods, the mortgagor is obliged to replace them with other (e) a document confirming payment of the relevant deregis- goods of the same or greater value. Reduction in the value of tration fees that is 200% of the registration fee. replaced goods is only allowed when it is agreed by the parties The holder of IDERA registered with SAS submits the to repay the original debt. The goods sold by the mortgagor IDERA. cease to be the subject of the pledge from the moment of their The applicant pays expenses which are connected with the delivery to the purchaser or transport organisation while goods inspection of the aircraft by the Aviation Authority inspector purchased by the mortgagor became the subject of the pledge who will check that the Ukrainian nationality and registra- contract as a result of the ownership on them. tion marks have been deleted. If the aircraft is located outside of Ukraine, such expenses will include the inspector’s per diem 4.3 Is there a register of mortgages or rights over travel and accommodation expenses to undertake this. aircraft and/or engine? The deregistration certificate is issued 10 days after made inspection, if not earlier. There is no special register of mortgages or rights over aircraft 42 Security and/or engine. To find out any information as to aircraft or engine mortgage or spare parts pledge, one needs to check the Mortgage Register. 4.1 Is it possible to create a mortgage over an aircraft or engine in your jurisdiction? If so, what are the types of aircraft mortgage and engine mortgage available and 4.4 What other forms of security can be taken over what formalities are required in order to perfect it? an aircraft and/or engine and can these other forms be registered? It is possible to create a mortgage for the aircraft or engine. Although the mortgage, as a form of security, is used quite widely Sale of goods on credit with deferred or installed payments or in Ukraine, Ukrainian law does not stipulate any particular lease is treated as security. To receive due priority over claims of types of aircraft mortgage. An aircraft mortgage will automat- competing creditors, appropriate contracts shall be recorded at ically cover all accessories and spare parts unless it is expressly the Mortgage Register. stipulated otherwise in the mortgage. The mortgage is made in simple written form to be valid between its parties. To be 4.5 What claims and rights would take priority in your valid for the third parties, the mortgage shall be recorded at the jurisdiction over a registered mortgage? State Registry of Movable Assets Encumbering (the “Mortgage Register”). Recordation is made through a prescribed form of an application to be submitted to the Mortgage Register. There is Only already registered claims may have a higher priority over a no requirement as to the consent of any official body (including registered mortgage. the National Bank) in respect of the registration of any mortgage in the Mortgage Register. 4.6 What other forms of security can be granted over The application must be submitted to the Mortgage Register an aircraft and/or engine lease? by the mortgagee. Alternatively, it can be submitted by his representative, who must identify himself and the authority by which he acts (usually, this is a power of attorney). The appli- Ukrainian law does not provide for other forms of security over cation will be registered if it is signed by the person submit- an engine or aircraft. ting it. If the application is not signed or if the person submit- ting it fails to identify himself and/or to prove the due authority 52 Enforcement and Repossession under which he acts, then the registration of the mortgage in the Mortgage Register will not be made. 5.1 What are the circumstances in which a mortgagee Registration will be made that same day. Registration of or owner can take possession of the aircraft and/or sell the aircraft mortgage is treated as effective from the date, and the aircraft? What requirements must the mortgagee or time, at which the corresponding entry is noted in the Mortgage owner comply with? Register. The effectiveness of this registration will continue up to the time of the satisfaction of the mortgage. Once the mort- If the mortgagor failed to perform the main obligations and the gage debt has been satisfied, the mortgagee is obliged to notify mortgagee plans to take possession over a mortgaged engine or the Mortgage Register within five days. aircraft in an out of court procedure, it is liable to notify the debtor and other registered creditors on default and its plans 4.2 Can spare parts, including future parts, be subject to take possession (the Law on security of creditors’ claims to the aircraft mortgage or engine mortgage (as the case and registration of encumbering equals taking possession with may be)? If not, are there any other forms of security that title transfer over engine or aircraft) or sale of the engine or can be taken over spare parts? aircraft. The notification shall be simultaneously registered at the Mortgage Register. Spare parts, including future parts, of the engine or aircraft may

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The notification must contain the following information: 5.2 What is the procedure for repossession of the (1) the content of the infringement committed by the debtor; aircraft? (2) the total amount of claim that is encumbered with the registered mortgage; The Ukrainian law has no special procedure for repossession of (3) description of the subject of securing encumbrance; the aircraft. (4) a reference to the right of another mortgagee in favour of which another registered mortgage is established, to fulfil the debtor’s breached obligation until the moment of 5.3 Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local aircraft or engine sale; rules that apply, despite a choice of foreign law? (5) description of the way of possession that will be used by the mortgagee or place and time of auction to be held; and (6) the requirement for the debtor to cure the breached obli- The International Private Law establishes the parties’ freedom gation or to transfer the object of the security encum- to choose a law to govern their relationship if otherwise imper- brance to the mortgagee within 30 days from the moment atively prescribed by it. The imperative rule of the International of registration of the notification at the Mortgage Register. Private Law is that ownership and other rights in rem data of which If within 30 days from the date of registration of the notifi- shall be recorded at state registries shall be defined by the place of cation, an event of default is not cured, the debtor is obliged to the property registration. Therefore, if the aircraft is registered in transfer the engine or aircraft into mortgagee possession. If the Ukraine, under the imperative rule mortgage agreement, it shall be governed by Ukrainian law (as stated above). If the aircraft is not debtor does not perform the obligation to transfer the engine or registered in the State Registry of Aircrafts (the Aircraft Registry), aircraft into possession of the mortgagee, the latter must apply irrespective of its location on the territory or outside of Ukraine, to a court. the mortgage agreement over it may be governed by foreign law. The debtor and competing creditors may object for the mort- gagee to take into possession the engine or aircraft. Such objec- tion shall be notified (in writing) to all interested parties. In 5.4 Will local courts recognise and enforce a foreign such case, the mortgagee may either sell the engine or aircraft or court judgment in favour of a mortgagee or lessor? Are cover the debt of the objecting creditor and take possession over any interim relief measures available? the engine or aircraft after that. In case of possession over the engine or aircraft, all encumbrances with higher priority shall Any foreign court judgment is recognised or accepted for execu- remain valid and the encumbrances with lower priority will be tion by the courts of Ukraine without retrial or examination of terminated. the merits of the case, under the principle of reciprocity. The The mortgagee has the right to satisfy his claim by selling the Civil Procedure Code provides for seizure of the aircraft and engine or aircraft if he duly notified the debtor and other regis- prohibition to take actions as to it as interim relief measures. A tered creditors of his intent, the date and the place of the auction foreign mortgagee or lessor may request for interim relief meas- or about his intention to sell it to a third party. ures only if it pays a deposit in the amount defined by the court The competing creditor has the pre-emptive right to purchase that may not be less than potential amount of losses that may be the engine or aircraft, provided that he has notified in writing incurred to lessee by such interim relief meaures. about his intention to purchase within a 30-day period (as stated above). If the notice of intention to buy has been received by 5.5 Are powers of attorney from a local airline in favour the mortgagee from several competing creditors, the right to of a lessor or mortgagee likely to be effective to allow purchase is vested with the highest priority competing creditor. the lessor or mortgagee to deregister the aircraft? Can The purchase price shall not be lower than the price offered by such powers be irrevocable, be governed by a foreign any third party during the sale procedure. law and/or do they need to be in any particular form for If the competing creditor who has expressed the intention local recognition? to purchase does not enter into a purchase contract within five days from the sale procedure, the right to purchase is transferred Usually local airlines issue an irrevocable deregistration power to the next competing creditor in accordance with the estab- of attorney in favour of the lessor (the DPOA). The DPOA may lished priority. This creditor also has a five-day period for the not be governed by foreign law but only by Ukrainian law. This conclusion of the purchase contract. DPOA is useless in Ukraine as the Aircraft Registry is held in If the competing creditors do not exercise the right to the name of the owner and only the owner may register or dereg- purchase the engine or aircraft, the mortgagee will sell the ister the aircraft. The DPOA may be used abroad if access to engine or aircraft to the highest bidder. the aircraft is necessary in a foreign airport. There is no require- The purchase contract is made by the mortgagee on behalf ment as to notarisation or apostillation of the DPOA. It is of the debtor and is the legal basis for the purchaser to acquire usually done in writing, on a lessee head letter. The imperative ownership of the engine or aircraft. The buyer of the engine requirement is the date of DPOA issuance. or aircraft acquires the title without any security and public encumbrances. 5.6 If recovery of the aircraft is contested by the lessee Within 10 days from the date of sale, the mortgagee is obliged and a court judgment is obtained in favour of the lessor, to provide the debtor and all competing creditors a written how long is it likely to take to gain possession of the report on the results of the sale. aircraft? Receivables from the sale shall be shared in the following: (1) coverage of sale charges; If the court judgment is from a foreign court, it must be recog- (2) satisfaction of secured obligations with higher priority, if nised and enforced through a local court at the place of the lessee’s any; location. The process of recognition and enforcement may take (3) satisfaction of secured obligations of the mortgagee; from three months to several years depending on the lessee’s posi- (4) satisfaction of secured obligations with lower priority; and tion and circumstances of notification on the court process. (5) the return of the rest to the debtor.

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5.7 Are there any restrictions on the ability of the lessor to export the aircraft from your jurisdiction on 62 Conventions termination of the leasing? 6.1 Has your jurisdiction ratified any of the following: (a) The Chicago Convention of 1944 on International There are no restrictions on the ability of the lessor to export the Civil Aviation (the Chicago Convention); (b) The 1948 aircraft from Ukraine on termination of the lease. Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 Convention for the Unification of Certain Rules Relating 5.8 Are exchange controls prevailing in your to the Precautionary Arrest of Aircraft (the 1933 Rome jurisdiction as regards payments in foreign currency? Convention); and (d) The Convention on International Will any consents be required for the remittance of the Interests in Mobile Equipment on Matters Specific to sale proceeds abroad? Aircraft Equipment (the Cape Town Convention) and the Protocol on the Convention on International Interests Any payment in foreign currency is made under the Law “On in Mobile Equipment on Matters Specific to Aircraft Currency and Currency Transactions” and Regulations No. 5 Equipment? and 8, both as of 2 January 2019, and No. 13 as of 13 January 2019 of the National Bank of Ukraine. To make remittance in Ukraine is a party to the Chicago Convention of 1944 on favour of the Lessor, the Lessee submits the letter of the lessor International Civil Aviation (the Chicago Convention) and the stating that it is the beneficiary owner of the payments, the lease Convention on International Interests in Mobile Equipment and a monthly to its bank. In case of lease novation on Matters Specific to Aircraft Equipment (the Cape Town due to aircraft financing, the new lessor must submit not only Convention) and the Protocol to it Specific to Aircraft a letter that it is the beneficiary owner but disclose its benefi- Equipment. Ukraine is not a party to the Geneva Convention ciary owners and the economic reason to make the novation as and the 1933 Rome Convention. Regulation No. 8 as of 2 January 2019 of the National Bank of Ukraine treats novation as a kind of agreement concluded at money laundering. 6.2 Has ratification of the Cape Town Convention caused any conflicts or issues with local laws?

5.9 If the lease is governed by English law and a Ukrainian law has no specific legislation as to aircraft financing judgment is obtained by the lessor in the English courts, can that judgment be automatically enforced in your or leases, thus the ratification of the Cape Town Convention did jurisdiction or will the case have to be re-examined on its not cause any conflicts or issues with local law. merits? 6.3 What is the legal position regarding The judgment obtained in an English court out of a lease non-consensual rights and interests under Article 39 of governed by English law will be recognised and enforced in the Cape Town Convention? Ukraine without re-examination of the case on its merits. Irrespective, the procedure of recognition and enforcement may Ukraine did not state any declaration under Article 39 of take significant time if the lessee pretends that it was not duly the Cape Town Convention. Correspondingly, there are no notified about the process of an English court. The Ukrainian non-consensual rights and interests that are of priority to regis- law provides that due notification means notification made tered interests under the Cape Town Convention. under the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, 1965 6.4 Has your jurisdiction adopted the remedies on through the Ministry of Justice of Ukraine. Declarations made insolvency provided under Article XI of the Protocol to under the Convention by Ukraine does not provide the possi- the Cape Town Convention? bility of notification through a Process Agent. Thus, a contested lessee may pretend that it was not duly served with the process and may not present its position. These are the grounds to In its declaration, Ukraine has chosen Option A under Article XI refuse recognition and enforcement. of the Protocol to the Cape Town Convention but that was not reflected in the local legislation. The new Code on Bankruptcy procedures has been enacted on 18 October 2018, but it has no 5.10 What is the applicable procedure for repossession peculiarities for airline bankruptcy procedures including those of an aircraft under other forms of security interests? provided by the Cape Town Convention.

Ukraine is a party to the Cape Town Convention and in the 6.5 What is the procedure to file an irrevocable Article 13 provides for lessor remedy to repossess the aircraft. deregistration and export request authorisation under Though Ukraine declared under Paragraph 2 of Article 54 of the Cape Town Convention (IDERA)? the Convention that any remedy available to the creditor under any provision of this Convention which is not there expressed Irrevocable Deregistration and Export Request Authorization to require application to court may be exercised without leave (IDERA) and Confirmation Letter of Appointment of an of court, there is no practice of application of the procedure for Authorized Person PR AID REG.A – 008 dated 27 June 2019 repossession of the aircraft under security interests. (the “Procedure”) contains the procedure for IDERA recorda-

tion. The Procedure provides for the submission of two orig- inals of IDERA accompanied with the letter of Appointment of the Authorized person and the officer’s certificate. The Procedure does not refer to the time schedule of IDERA recor- dation that is done for two to three weeks in practice.

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72 Liability for Damage and Environmental rehabilitation plan; and the scope of authority of the redevelop- ment manager (if appointed). The sanation plan may provide for: division of creditors participating in the rehabilitation into 7.1 Can the owner be strictly liable – liable without categories depending on the type of requirements and the avail- a requirement to prove fault or negligence – for any ability (absence) of security of such creditors; different condi- damage or loss caused by the aircraft assuming the owner is an innocent owner with no operational control tions of satisfaction of claims for creditors of different cate- of the aircraft? gories; borrowing or loan arrangements; and the measures to restore the solvency. If the operator is unable to pay the debts as they fall due, it may open a bankruptcy case. Local courts treat The owner may not be strictly liable as the Civil Code of Ukraine debtors’ applications negatively to open bankruptcy procedures. clearly states that liability is on the operator of the vehicle only.

8.3 Do the available forms of insolvency protection 7.2 Does the EU Emissions Trading System (EU ETS), in your jurisdiction involve the appointment of either or any similar scheme, apply to aircraft and aircraft an officer of the court or a specifically court appointed operators in your jurisdiction? Will charges levied official to take control of the operator or lessee (an according to the EU ETS, or its equivalent, give rise to ‘Insolvency Official’) while in insolvency protection? any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights rank in priority ahead of any mortgage interests properly Yes, an arbitration manager that is an independent professional registered in the relevant aircraft and/or engine? is appointed for each stage of bankruptcy procedures, including the sanation stage. Ukraine plans to establish a national ETS in line with its obli- gations under the Ukraine-EU Association Agreement, which 8.4 Does the commencement of insolvency protection entered into force on 1 September 2017. Climate change related involving the appointment of an Insolvency Official issues are addressed in Article 365 © Title V and Annex XXX in your jurisdiction have the effect of prohibiting the to the agreement. Ukraine is developing the main elements of owner from taking the following actions to enforce the national MRV system which mainly will correspond to the the lease after commencement of such protection: (a) EU ETS. applying any security deposit held by the owner against any unpaid amounts due under the lease; (b) accepting payment of rent or other lease payments from the 7.3 What liabilities (actual or potential) could an owner, lessee, a guarantor or a shareholder; (c) giving notice lessor or financier of an aircraft incur in your jurisdiction of default under the lease; (d) obtaining a judgment or because of a failure to comply with local environmental arbitral award for unpaid lease payments; (e) giving law and/or regulations on the part of an operator of notice to terminate the leasing of the aircraft and/or aircraft leased or financed by it? engine; or (f) exercising rights to repossess the aircraft and/or engine? Currently, Ukrainian law doe not provide any actual or potential liabilities of the owner, lessor or financier of the aircraft because The appointment of an Insolvency Official does not have the of the lessee’s failure to comply with local environmental laws effect of prohibiting the owner from taking the following and regulations. actions to enforce the lease after commencement of such protection: (a) applying any security deposit held by the owner 82 Insolvency and Searches against any unpaid amounts due under the lease; (b) accepting payment of rent or other lease payments from the lessee, a guar- antor or a shareholder; (c) giving notice of default under the 8.1 Are there any public registers in your jurisdiction lease; (d) obtaining a judgment or arbitral award for unpaid where a search can be carried out to determine whether lease payments; (e) giving notice to terminate the leasing of the an order or resolution for any bankruptcy, bankruptcy protection or similar insolvency proceedings has been aircraft and/or engine; or (f) exercising rights to repossess the registered in relation to an operator or lessee? aircraft and/or engine.

There is a public register of legal entities, entrepreneurs and 8.5 Can the commencement of insolvency proceedings non-profitable organisations that contains information on the have retrospective effect in relation to any such actions initiation of the bankruptcy procedure as to an exact entity. taken before commencement? If so, for what period can there be a look back?

8.2 In the event that an operator or lessee were to The Code of Bankruptcy Procedures provides that any contract become insolvent either on a balance sheet basis (assets less than liabilities) or is unable to pay debts as made by the debtor after the opening of bankruptcy proceed- fall due, would an operator or lessee be required to file ings or during the three years preceding the opening of bank- for insolvency protection? ruptcy proceedings may be declared invalid by the commercial court in the course of bankruptcy proceedings at the request of the Insolvency Official or any creditor if the contract caused The Code of Bankruptcy Procedures provides that in the case losses to the debtor or the creditors if the debtor became insol- of bankruptcy, the operator’s director shall notify the operator’s vent due to fulfilment of its monetary obligations under that shareholders that it has the right but not the liability to bind the contract, or the debtor acquired the asset at prices higher than operator to initiate a sanation (rehabilitation) procedure before the market prices, or the debtor paid a creditor on the day the bankruptcy case. The sanation plan defines: the size, proce- when the amount of other creditors’ claims against the debtor dure and terms of repayment of claims of creditors participating exceeded the value of its assets. These general requirements are in the rehabilitation; measures to implement and oversee the

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so flexible that they may be applied to any lease agreement as (c) the third priority: taxes and duties (compulsory payment) usually local airlines assets are cheaper than the total amount of claims; payments to be made under lease agreements for the whole term. (d) the fourth priority: unsecured creditors’ claims (which include obligations of lessee under the lease); (e) the fifth priority: claims to return staff members’ contribu- 8.6 Is there, either under law or as a matter of practice in your jurisdiction, a period of time within which the tions to the statutory capital of the debtor; and Insolvency Official will either ‘adopt’ the lease and (f) the sixth priority: any other claims. pay rent and other lease payments as an expense of the insolvency or ‘reject’ the lease and permit the 8.8 If the aircraft is in the possession of a person owner to enforce such rights as it may have under the other than the operator or lessee at the commencement lease? (a) If the lease is ‘adopted’, will the Insolvency of Insolvency Protection of the operator or lessee, for Official also pay any unpaid lease payments due as at example, an independent maintenance facility, will such commencement of the insolvency protection? (b) If not person be entitled, under the laws of your jurisdiction, or if the lease is ‘rejected’, would the owner’s claim for to assert a lien arising under law or contract over the any outstanding sums rank equally with other ordinary aircraft in respect of amounts then due and unpaid to unsecured creditors of the lessee? such person by the operator or lessee?

As stated above, the Code of Bankruptcy Procedures has no pecu- Regarding any creditor that lawfully possesses the aircraft in a liar provisions as to insolvency of airlines. In Ukrainian history maintenance facility, an airport or other air navigation servicer only one airline, AeroSvit, has declared itself as a bankrupt having may detain the aircraft in respect of the amount due and unpaid recorded appropriate application to the commercial court. The by the operator or lessee at the commencement of Insolvency commercial court did not accept AeroSvit’s declaration and in Protection. The Law allows such creditor to even sell the such indirect way confirmed that it was solvent and might pay the aircraft if the outstanding amount is not paid. Usually in such creditors. The Insolvency Official was not appointed. Taking cases the lessor covers the lessee’s indebtedness to release the into account current laws and attitude of Ukrainian banks towards aircraft or any item connected with it. currency payments, it can be assumed that the Insolvency Official Ukraine is a party to the Eurocontrol Convention and will rather reject the lease while the owner has to claim appro- Protocols amending and consolidating the Eurocontrol priate outstanding amounts that will rank equally with other ordi- International Convention relating to Co-operation for the Safety nary unsecured creditors of the lessee. of Air Navigation of 13 December 1960 which stipulates under Annex IV Provisions relating to the Common Route Charges 8.7 Are there certain types of preferred creditors System that unpaid route charges may be attached as a lien to whose claims will rank above claims of the owner? the aircraft which incurred the charge, irrespective of in whose hands it may be. The Eurocontrol Convention provides that the lessee and the owner of the aircraft are jointly and severally liable Pursuant to the Code On Bankruptcy Procedures, Article 64, to pay the charge. Where the amount due has not been paid, the following priorities are established: measures may be taken to enforce recovery, including detention (a) the first priority: and sale of aircraft, if the Law of the Contracting Party where (i) claims regarding the payment of wage arrears to the aircraft has landed so permits. The Civil Code of Ukraine currently employed and dismissed employees, pecu- provides a creditor’s right to detain and to sell a debtor’s asset in niary compensation for unused vacation days and the case that the debtor fails to pay its liability in time. additional vacation to employees with children, other funds payable to employees in connection with the 92 Detention and Confiscation paid vacation, and dismissal compensation payable to employees in connection with termination of labour relations including the reimbursement of loans 9.1 Other than insolvency laws (see section 8), are received for these purposes; there any laws which may have the effect of defeating the owner’s right in the aircraft – for example, (ii) creditors’ claims under insurance agreements; and Government requisition? Do the laws of your jurisdiction (iii) expenses relating to bankruptcy proceedings in provide for any compensation in such circumstances? the court and work of the liquidating commission including: (1) court duties; Ukrainian law (specifically, the Constitution of Ukraine, Article (2) expenses relating to official notifications; (41)) guarantees the protection of property from expropriation (3) expenses and remuneration of the asset manager, without fair compensation. The laws of Ukraine stipulate cases reorganisation manager, liquidator related to main- in which the Aircraft may be seized from the Lessee by a govern- tenance and keeping the bankrupt’s assets; and ment entity subject to payment of fair compensation: (4) expenses of creditors relating to audit if such was (a) The Civil Code of Ukraine (Article 353) provides for the held upon a court order at their expense. possibility of requisition of the property from its owner in (b) the second priority: claims arising as a consequence of emergency circumstances and public needs. Such emer- causing harm to life and health of individuals through gency circumstances may be natural disasters, accidents capitalisation of respective payments, including those or catastrophes, epidemics or epizootic that endangers made to the Occupational Accidents and Professional human life or health. Requisition may be carried out by Diseases Social Insurance Fund of Ukraine for individuals state authorities with full compensation in cases of natural insured with this Fund, premium payment obligations for or man-made disasters, epidemics or epizootics. obligatory state social insurance, and the claims of indi- (b) Confiscation is possible by decision of a court or another vidual grantors (depositors) of trust institutions or any competent body as punishment for an unlawful act of the other economic entities that attracted property (funds) of owner (Article 354 of the Civil Code of Ukraine). grantors (depositors);

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9.2 Are there any rights in relation to third parties to be confiscated by the Customs authorities in Ukraine under a detain or sell the aircraft pursuant to illegal activities, Ukrainian court judgment in case of violation of customs rules tax or any other laws if the operator or lessee fails to pay (e.g., drug trafficking). The Customs Code has no clear provi- when due? If so, can the aircraft be forfeited and sold sion as to owner notification but as soon as the decision on without the owner being made aware? confiscation is taken by a court, it will serve the owner with summons to the hearing. In accordance with the Customs Code of 11 July 2002 (with If the operator or less fails to pay any tax when due aircraft corresponding amendments and additions), the aircraft may may not be detained or liened by tax authorities.

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Dr. Anna Tsirat is a partner at Jurvneshservice. She is an acknowledged expert in the field of aircraft financing and the author of articles on Ukraine in various books and publications, including: Aircraft Liens and Detention Rights; The Official Guide to Aircraft Registration and Tax 2018; PWSP World Aircraft Repossession Index 2018; Aircraft Financing; Getting the Deal Through – Air Transport 2017; Getting the Deal Through – Aviation Finance & Leasing 2018; and the Aviation Law Review. In 2018 she issued a monograph entitled Unification of International Private Air Law. Her areas of specialisation include: aircraft financing (purchase, sale, lease and mortgage of aircraft and engines); international trade; litigation; and dispute resolution. As the firm’s leading aviation attorney, Anna has successfully completed nearly 100 aircraft acquisition, financing, leasing and restructuring transactions over the past 15 years; within the last decade she has repossessed at least 10 aircraft including those from Aerosvit, Donbassaero, and AirOnix that were insolvent; all these aircraft repossessions have been made without Cape Town instruments.

Jurvneshservice Tel: +38 044 239 239 0 46/11 Turgenevska Street, suite 2 Email: [email protected] Kiev 01054 URL: www.jvs.com.ua Ukraine

Jurvneshservice Law Firm (Kyiv – HQ) was established in 1987. Its main office is located in Kyiv. The firm’s main practices are aircraft and project finance, bankruptcy, cross-border litigation and debt recovery, enforcement of foreign arbitral awards and judgments, and international arbitration. Jurvneshservice’s aviation law clients include Ukrainian airlines, foreign equity investors, aircraft leasing companies and financial institutions, borrowers, financial advisors, and other participants in the global aviation industry. The firm regularly assists aviation clients and financiers with all forms of debt financing and securitisations, including KYC compliance procedures at Ukrainian banks. Jurvneshservice drafts and performs appropriate mortgage and other agreements, assists in receipt of AEP codes at the Ukrainian State Aviation Service to register bills of sales, secu- rity agreements and leases at the Cape Town International Registry. www.jvs.com.ua

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United Kingdom United Kingdom

K&L Gates LLP Philip Perrotta

12 General and Contractual however, for various reasons this support has become uncertain and may become supplemented by insurance-based AFIC struc- tures for Boeing equipment and Balthazhar for Airbus aircraft 1.1 What are the typical structures available for where insurance markets substitute the agencies to maintain financing the purchase of an aircraft? pricing levels and risk allocations.

The primary demand for aviation finance remains at all times the v) (Operating) Leasing world’s airlines. At present, somewhere in the region of US$ 185 This is essentially the hire or bailment of an aircraft by an airline billions worth of new aircraft combined at Airbus and Boeing from its owner for the agreed period, either as part of a sale/ alone are contractually committed to delivery in 2021. This leaseback financing to release airline equity or as a straightfor- results in the establishment of a variety of different financing, ward lease to enhance flexible fleet development while (subject structures and returns, some themselves hybrid mixtures of to IFRS16 – see below) maintaining balance sheet integrity. others. They are perhaps generically best summarised below (in A whole industry has of course evolved around aircraft leasing no particular order of importance). and the flexibility it brings, although for organisations, reporting to International Financial Reporting Standards (“IFRS”) the i) Original Equipment Manufacturer (“OEM”) Finance introduction of IFRS16 in January 2019 means that both oper- The manufacturer stimulates the purchase of its products ating and finance leases must be now treated as on-balance sheet through a variety of financial support instruments, ranging from items. a “backstop” loan, providing guarantees to third party finan- Derivatives of the operating lease product have over time ciers as regards the ongoing value of the aircraft or aero-engine, included various aggressive tax-driven structures such as the or in more extreme circumstances agreeing to re-purchase at a German and Japanese Leveraged Lease and latterly the Japanese specified fixed price subject to certain conditions. Operating Lease (including with Call Option) with the effect of further reducing the cost of the financing by utilising deprecia- ii) Commercial Bank Debt tion benefits in various jurisdictions involved. However, while The specialist lender supplies credit on either a secured or (less the JOLCO market continues to boom, relatively speaking, most commonly) unsecured basis, and is applied by the airline (or an have had loopholes closed by relevant revenue authorities and operating lessor) to pay its purchase price obligations on delivery the advent of the BEPs initiative makes similar further product of the aircraft and/or its milestone payments prior to the delivery development problematic. of the aircraft during its production programme. On a secured basis, recourse is to the underlying equipment usually by way of 1.2 What are the key advantages/disadvantages a mortgage or other form of “in rem” right. and main issues arising in relation to these financing structures? iii) Securities/Capital Markets Often subject to additional scrutiny due to exchange and other The detailed analysis required here is largely beyond the scope of compliance regulations (particularly asset backed security (ABS) this answer. However, a number of themes may be inferred, the transactions), this type of financing is heavily structured, costly most important of which is that the allocation of risk between and generally the domain of the larger airlines and leasing compa- the parties to a transaction structure will determine the cost of nies. Loan notes (which can be traded) are issued to investors funds and pricing structure for an airline in the capital market. representing a repayment right collateralised against a revenue OEM finance provides a transfer of substantial risk for an stream such as that of a substantial aircraft lease portfolio, and airline as regards the product but is typically very expensive. their capital contribution finances the aircraft acquisition. Commercial bank debt is generally competitively-priced and well-established, but it tends to be quite inflexible for the airline. iv) Export Credit Finance ABS and other capital market transactions are very expensive Quasi-governmental agencies set up to promote home product to conclude but give effect to complete risk transfers for port- trade support aircraft sales by, in particular, Boeing (in the case folios of aircraft and aero-engines of a certain scale. Export of the US Eximbank) and Airbus (in the case of the European Credit Finance is increasingly uncertain but is available on a Export Credit Agencies in France, Germany and the United limited basis anyway as its pricing is generally the most competi- Kingdom). Support has typically taken the form of guarantees tive, although it tends to be a requirement that the relevant juris- of portions of commercial loans provided by third party lenders, diction has adopted the Cape Town Convention into its local

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laws. Operating leasing is possibly the most flexible form of 1.6 Is there a doctrine of ‘good faith’ in your jurisdiction financing although the transaction terms themselves are typi- which applies to all pre-contractual agreement, cally heavily-weighted against the airline and in favour of the financing and leasing transaction documents, and the aircraft owner. conduct of parties connected to them?

1.3 What types of leasing are possible under the English law traditionally does not recognise a universal implied laws of your jurisdiction? What are their essential duty on contracting parties to perform their obligations in “good characteristics? faith”, whether at the pre-contractual or contractual stage of a transaction. This is in part due to apprehensions that it would create too much uncertainty, and it goes contrary to freedom (A) Operating Leasing of contract. English law has developed particular solutions to ■ The lessor will lease the aircraft to the lessee for rent for a the issue of acting in good faith, one being that in commercial period of time. contracts, such as financing and leasing documents, parties can ■ The lessee will arrange and bear the cost of matters such as expressly ask parties to perform particular obligations in “good repairs, maintenance and insurance. faith”. Such express terms will be interpreted carefully, in the ■ Risk of ownership lies with the lessor and benefit of the context of the entire contract and commercial relationship of residual value of the asset lies with the lessor at the end of the parties. the lease period. 22 Taxation and Related Matters (B) Finance Leasing ■ The lessor will lease the aircraft to the lessee and receive sufficient rent during the lease term to amortise its capital 2.1 Which government authority in your jurisdiction has primary responsibility for the accounting for and outlay on the purchase of the asset, to cover its financing regulation of revenue control and taxes? charges incurred on the capital outlay and provide some profit. ■ The lessee will arrange and bear the cost of matters such as Her Majesty’s Revenue and Customs (“HMRC”), which is a non-ministerial department of the United Kingdom responsible repairs, maintenance and insurance. for the collection of taxes, payment of forms of state support ■ Risk of ownership lies with the lessee and benefit of the and the administration of other regulatory regimes including the residual value of the asset lies with the lessee at the end of national minimum wage. the lease period.

2.2 What are typically the taxes in your jurisdiction 1.4 Are there any proposals for reform in the area of which may arise in relation to a sale, a lease or a aviation finance? financing of an aircraft or an engine?

There is probably nothing exclusively related to aviation finance Potential taxes (as distinct from duties – see question 2.7) in rela- in prospect as regards reform, however, aviation finance will be tion to a sale, a lease or a financing of an aircraft or an engine considerably affected by a number of broader-based develop- can essentially be divided into broadly two distinct categories, ments in terms of the frameworks within which it operates. namely direct and indirect taxation. These developments, some of which are already incepting, a) Direct taxation include the exit of the United Kingdom from the European A common applicable direct tax is capital gains tax applied Union, the increasingly legislative approach in the United to the profit on a disposal by way of sale of the aircraft. Kingdom to the environmental impact of aviation and those who The current tax rate is typically 20%, although a lower tax facilitate it, and the consequences of the COVID-19 pandemic rate of 10% applies if the relevant entity is either a sole such as reform to insolvency laws in the United Kingdom. trader or partnership whose gains qualify for HMRC’s Entrepreneur’s Relief. Lease rentals and instalment payments under condi- 1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially tional sale-type agreements (including in relation to avia- binding pre-contractual agreements (e.g. ‘letters of tion finance) do not attract withholding tax in the United intent’) which will NOT take effect as fully enforceable Kingdom and it will not apply to a relevant ‘finance charge’ agreements? component of payments either. However, a risk remains that payments under hire-purchase agreements could potentially be characterised by HMRC as annual payments Yes. However, under English law, an assessment of whether for tax purposes. In all of these cases, the tax risk is gener- or not a letter of intent is legally binding will require careful ally borne by the recipient of the financing or of the leased drafting of the document as a whole, as well as the language asset (as applicable). used in the letter of intent. b) Indirect taxation By way of a recent example, in the case of Novus Aviation Value-added tax (“VAT”) applies to the sale of an aircraft Limited v Alubaf Arab International Bank BSC(c) [2016], the parties or an aero-engine which is not the subject of an appli- entered into a “Commitment Letter” under which the bank cable exemption if the sale takes place when located in the agreed to provide equity to Novus Aviation for an aircraft United Kingdom. The United Kingdom remains bound purchase. Although Novus Aviation had not countersigned the at present (and prior to full implementation of Brexit) Commitment Letter and it stated that the lender’s commitment by applicable European Union Directives in this regard, to the transaction “shall be conditional upon satisfactory review where the most common exemption relates to aircraft and completion of documentation”, the court held that due to which are operated for reward chiefly (60% or more as a the other provisions it contained, the Commitment Letter was rough guide, but this is a complex fact-based analysis) in binding on the parties. international operations.

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VAT is also applicable potentially to lease rental amounts completed the ratification and deposit process, including the payable pursuant to the terms of a lease as a supply of UK) HMRC has demonstrated its readiness to “look through” aircraft, when it is typically paid to the relevant lessor in structured transactions to establish whether excessive tax-ef- addition to the relevant lease rental payments. ficiency practices are behind certain ownership and financing Under current applicable laws and the regulations, there are structures as regards aircraft and aero-engines. no documentary taxes. 2.7 Will the import of an aircraft into your jurisdiction 2.3 Is the provision of a current tax-residency and/or the sale or leasing of the aircraft give rise to any certificate by a payee sufficient for a lessee or a VAT, sales or use taxes or any customs import or excise borrower potentially subject to withholding taxes in your duties? jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability? In advance of expected changes arising from Brexit, the United Kingdom remains bound as before to the relevant European Generally yes, but subject always to the overriding right of Union Directives and part of the customs union. HMRC to require more information. Consequently, unless the aircraft has previously been imported into “free circulation” in the European Union it will be necessary to pay the relevant importation VAT currently set 2.4 Has the advent of BEPS (the Base Erosion and Profit Shifting initiative of the OECD) had any effect as at 20% of the value of the aircraft or aero-engine concerned, in regards structures in aviation finance and leasing or order to import the same into the United Kingdom. their interpretation? As above in question 2.2, corporation tax, VAT and with- holding tax may arise in relation to the subsequent or independent sale or leasing of aircraft, depending on the circumstances and The advent of BEPS has not as yet had any direct effect on the tax residency of the transaction parties concerned. current structures in aviation finance and leasing or their interpretations. Expectations are that HMRC will become even more vigilant 2.8 Are there any documentary taxes (for example, to examine structures, particularly those incorporating entities stamp duty payable on the execution of documents)? who are tax resident in traditional tax-haven jurisdictions. This is a common feature of many aviation finance structures No documentary taxes are applicable to any relevant aircraft or where bankruptcy remote single-purpose vehicles are estab- aero-engine transaction (including, but not limited to, stamp duty). lished for the purposes of owning aircraft in jurisdictions such as Ireland, Cayman Islands, Bermuda, Jersey, Luxembourg, Isle of 32 Registration and Deregistration Man and Mauritius. This tends to be more to do with ensuring the recourse of lenders involved in the structure is preserved as regards their principle security, the aircraft itself. 3.1 Which government authority in your jurisdiction has primary responsibility for the regulation of aviation and the registration of aircraft? Is it an owner registry 2.5 What are the typical thresholds in your jurisdiction or an operator registry? If the aircraft register is an for which a permanent establishment may be triggered operator register, is it possible to record the details of under the terms of any relevant double-tax treaty or an owner or lessor and any financier with an aircraft similar? mortgage?

HMRC as a policy approach considers each case in this regard The Civil Aviation Authority (the “CAA”) is an independent and looks at the substance of an operation or entity in general body primarily responsible for the regulation of aviation and the to ascertain whether the relevant test of a permanent establish- registration of aircraft within the United Kingdom. The United ment is satisfied. Kingdom Register of Civil Aircraft, maintained by the CAA, is an Under s.1141 Corporation Tax Act 2010, the definition of operator register and not a register of legal ownership. To register domestic law permanent establishment means that a non-resi- aircraft on the United Kingdom Register of Civil Aircraft, a Form dent company has a domestic law permanent establishment in CA I (see www.caa.co.uk) is submitted either by the owner or by the United Kingdom if: the so-called “charterer by demise” (by virtue of a relevant loan, (i) it has a fixed place of business in the United Kingdom lease, hire or hire purchase) eligible to register in accordance with through which the business of the company is wholly or the Air Navigation Order 2009. The name and address of every partly carried on; or person entitled as owner to a legal interest in the aircraft or a share (ii) an agent acting on behalf of the company has and habitu- therein such as a lessor or owner may be noted with the CAA. ally exercises in the United Kingdom authority to do busi- The CAA also maintains the United Kingdom aircraft mort- ness on behalf of the company (for as long as that agent is gage register (pursuant to the Mortgaging of Aircraft Order l 972) not of independent status acting in the ordinary course of (the “Aircraft Mortgage Register”). There are no restrictions as to his business). who can be registered as a mortgagee, and any mortgage charging a UK-registered aircraft by way of security may be registered.

2.6 Is the authority at question 2.1 likely to establish a ‘look-through’ right or similar as regards a lender or a 3.2 What is the effect of registration of the aircraft? lessor which is a special-purpose vehicle involved for the Does registration on your national aircraft register purpose of tax treaty access? confer proof of ownership of the aircraft and/or engine?

In line with the spirit as well as the guidelines established by The United Kingdom Register of Civil Aircraft, maintained by BEPS and included within the Multilateral Instrument (“MLI”) the CAA, is not a register of legal ownership, and therefore regis- (87 territories are signatories to the MLI and 21 countries have tration of ownership does not constitute proof of ownership of

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a particular aircraft. However, it often provides non-conclusive 3.5 How is deregistration affected and what steps can prima facie evidence. a lessor take to de-register the aircraft on termination of the lease?

3.3 Can foreign-owned aircraft be registered on your national aircraft register and are there limits or The CAA is the primary body responsible for the de-registra- restrictions on the age of aircraft that may be registered tion of aircraft in the United Kingdom. A lessor can upon termi- or operated? nation of the lease request the CAA to de-register the aircraft. Deregistration will normally be effected within three working An aircraft can be entered on the UK Register of Civil Aircraft days (at no cost), although the process may be expedited (for either under the name of the aircraft owner or the charterer by an additional fee) if the CAA’s same-day service is requested. demise pursuant to the Air Navigation Order 2016. However, in order to deregister an aircraft, the lessor must ensure: To be eligible to be entered on the UK Register of Civil ■ aircraft is clear of registered mortgages or the mort- Aircraft, the aircraft must be owned or chartered by: gage lenders must give their consent to the aircraft being ■ British citizens; de-registered; ■ nationals of any European Economic Area state; ■ if the aircraft is the subject of an Irrevocable De-Registration ■ undertakings formed in accordance with the law of an and Export Request Authorisation (“IDERA”) this must EEA State which have their registered office, central be revoked before the aircraft can be de-registered; or administration or principal place of business within the ■ if an Export Certificate of Airworthiness is required, it EEA, including companies or undertakings incorporated must obtain this before de-registering the aircraft. in the UK; Where the aircraft is the subject of a registered international ■ firms carrying out business in Scotland; interest within the meaning of the Cape Town Convention ■ the Crown in right of Her Majesty’s Government in the (which is not a pre-existing interest) and in respect of which an UK, and the Crown in right of the Scottish Administration; IDERA under the Cape Town Convention is in force (a “Cape and/or Town Aircraft”), the person in whose favour the IDERA has ■ British protected persons. been issued (known as the authorised party) can request the There are some limited exceptions to the regulations above, deregistration of the aircraft by completing and submitting to for example, it is possible for an aircraft to be entered on the UK the CAA form CA54. The CAA must cancel the registration Register when the aircraft is based and maintained in the United of a Cape Town Aircraft as soon as reasonably practicable if it Kingdom or the aircraft is in storage provided the aircraft is not is satisfied that the authorised party is entitled to procure its used for commercial air transport whilst registered in the UK, deregistration and further, the CAA may only cancel the regis- and if it could not be more suitably registered in another ICAO tration of a Cape Town Aircraft pursuant to a request by the contracting state. authorised party under an IDERA recorded with the CAA There are no specific limits or restrictions on the age of (unless such IDERA has been revoked). The CAA is obliged aircraft exclusively that may be registered or operated. The to exercise its functions under the Civil Aviation Act 1982 and guiding requirements are related to the continuing airworthiness other enactments in order to co-operate expeditiously with and of an aircraft generally within the meaning of EU Commission assist the authorised party in the exercise of this treaty remedy, Regulation (EC) No. 2042/2003. as implemented by the Cape Town Convention. Deregistration of a Cape Town Aircraft pursuant to the request of the author- 3.4 Can aircraft leases be registered? If so, in what ised party under an IDERA does not require the consent of any circumstances? Must the lease be in a particular form mortgagee registered on the Aircraft Mortgage Register or the if it is to be valid and enforceable (for example, must it consent of the registered owner or other party noted on the UK be in a particular language or be notarised, legalised or Register of Civil Aircraft. The consent of the mortgagee is only apostilled)? required (or the mortgage must be discharged) where, at the time of the IDERA deregistration request, a registered mort- No legal provision is made for the registration of leases in the gage is currently entered on the Aircraft Mortgage Register that UK Register of Civil Aircraft and the CAA will not permit it was created prior to 1 November 2015. in practice. An international interest constituted under the Convention on International Interests in Mobile Equipment 42 Security and Protocol thereto on Matters specific to Aircraft Equipment (the “Cape Town Convention”) includes an interest vested in a person who is the lessor under a leasing agreement. 4.1 Is it possible to create a mortgage over an aircraft Consequently, both an operating lease and a finance lease may or engine in your jurisdiction? If so, what are the types of aircraft mortgage and engine mortgage available and be registered as international interests on the International what formalities are required in order to perfect it? Registry, provided that they comply with the definition of “leasing agreement” under the Convention and the other conditions for constitution of an international interest are met. Yes. It is possible to create a mortgage over an aircraft or engine There is no particular form which must be followed for leases in the UK. Mortgages of aircraft may be either legal or equi- to be valid and enforceable other than the lease, like contracts in table mortgages. general under English law, should have at least, two contracting parties, an offer and acceptance, together with consideration, an Legal Mortgage intention to create legal relations and certainty of terms. Leases A legal mortgage takes effect as the transfer of the mortgagor’s can be created by oral agreement although will invariably be in ownership in the aircraft to the mortgagee. The transfer is a writing. conditional one since the mortgagor retains the right to redeem the aircraft (i.e. recover its ownership) on payment (or discharge) of the mortgage debt. This right is called the “equity (or right) of redemption”. This right cannot be excluded – even by express

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provision. Providing the mortgagor can transfer (or can direct Mortgage Register (pursuant to the Mortgaging of Aircraft a third party to transfer) its ownership to the mortgagee and Order l 972). There are no restrictions as to who can be regis- provided that the mortgage constitutes a transfer of ownership tered as a mortgagee, and any mortgage charging a UK-registered (and not merely an agreement to transfer), no further formality aircraft by way of security may be registered. Leases and other is necessary. The mortgage can be created by an oral agreement charges not constituting in rem rights in a ‘G’-registered aircraft between the parties though, in the case of aircraft, it will invari- (such as mortgages) cannot be registered, and there is no sepa- ably be in writing since it will not otherwise be registrable in the rate register maintained by the CAA for the registration of Aircraft Mortgage Register. There would also be difficulty in ownership rights in engines or parts. determining its existence and terms.

Equitable mortgage 4.4 What other forms of security can be taken over An equitable mortgage is a specifically enforceable contract to an aircraft and/or engine and can these other forms be registered? create a legal mortgage. Equitable mortgages of aircraft consti- tute executory agreements to transfer ownership only. Thus, there is no actual transfer of ownership, though the mortgagee A typical type of security (other than a mortgage) which will be will have a right to call for such a transfer which will be enforce- taken over an aircraft and engines are share charges whereby able by the English courts in the exercise of their equitable juris- shares are charged to the creditor by way of security but with diction. As in the case of legal mortgages, the mortgagor has ownership of the asset remaining with the company owning an inalienable right to redeem the aircraft on payment of the the shares. In the context of an aviation financing, the SPV mortgage debt. Equitable mortgages will arise where an agree- which holds title to the aircraft and engines, delivers to the cred- ment has been made to create a legal mortgage, but where that itor a signed and undated stock transfer form along with other mortgage has failed to comply with the formalities for a legal documents which enable the creditor to take effective control mortgage or where an equitable interest is mortgaged. Equitable of the SPV and the title to the aircraft and engines in a default mortgages must be in writing signed by (or on behalf of) the situation. mortgagor. The security agreement containing the relevant share charge Whenever possible, mortgagees of aircraft will require a legal can be registered against the company at Companies House, mortgage. Mortgages, whether legal or equitable, are registrable which such registration constitutes constructive notice to all in the Aircraft Mortgage Register. The priority of such mort- third parties of the existence of such charge. gages is dealt with in question 4.5 below.

Mortgage Registration 4.5 What claims and rights would take priority in your Applicants for registration of a mortgage must complete and jurisdiction over a registered mortgage? provide to the CAA a Form CA 577 (see www.caa.co.uk), together with a complete copy of the related aircraft mortgage An aircraft mortgage registered on the UK Aircraft Mortgage deed (provided it has been certified as a true copy by the appli- Register will take priority over all other non-registered or subse- cant). The CAA will then confirm, in writing, to the applicant quently registered mortgages. It constitutes notice of the rele- once an aircraft mortgage registration application is successful. vant mortgage being given to all relevant third parties, and all The registration fees for an aircraft mortgage by the CAA persons are thereby deemed to have express notice of all of the vary according to the maximum take-off weight (“MTOW”) details appearing in the United Kingdom Aircraft Mortgage of the subject aircraft. They are currently as follows (and are Register. If the relevant mortgagor is a company registered in subject to revision annually): England and Wales, in order to obtain all the protections conven- tionally afforded to a mortgagee, it will be necessary to also Maximum Take-off Weight CAA Charge register the relevant mortgage at Companies House pursuant 5,700 kg and under £175 to the provisions of the Companies Act 2006 as it will become void against an appointed insolvency agent of the mortgagor 5,701 kg to 15,000 kg £347 (whether an administrator, a liquidator or a secured creditor). 15,001 kg to 50,000 kg £578 It should be noted, however, that this priority position of Over 50,000 kg £1,040 an aircraft mortgage is nevertheless subject to certain other in rem rights (“liens”) of third parties to retain or detain the rele- For aircraft mortgages which attach to a number of aircraft, vant aircraft until a claim for payment (e.g. in respect of main- the CAA registration fee is levied on the heaviest aircraft by tenance or repair of the aircraft or in respect of an unpaid MTOW, plus £175 for each additional aircraft attached. purchase price for the aircraft) has been satisfied. These liens are created both by statute and under common law, and they are also capable of creation by contract between parties. In addi- 4.2 Can spare parts, including future parts, be subject tion, certain specific rights are created by statute for relevant to the aircraft mortgage or engine mortgage (as the case may be)? If not, are there any other forms of security that regulatory authorities to detain the aircraft (e.g. the CAA for can be taken over spare parts? unpaid airport and air navigation charges, the UK Environment Agency for unpaid penalties under the European Emissions Trading Scheme, and HM Revenue & Customs in respect of Yes, they can if that is the intention of the parties and the unpaid taxes). In certain circumstances, these rights of deten- drafting of the security document incorporates that effectively. tion will also include a power of sale of the relevant aircraft, or attach to the rest of the operating fleet of which the aircraft is a 4.3 Is there a register of mortgages or rights over part despite different ownership. aircraft and/or engine? The limited case law in English law which applies as prec- edent to the matter of the priority of aircraft liens and statu- Yes. The CAA maintains the United Kingdom Aircraft tory detention rights, suggests strongly that an aircraft lien or

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statutory detention right will take priority over a registered freezing injunction restraining the mortgagor from disposing aircraft mortgage. of the aircraft. The mortgagee applicant is usually obliged to provide a “cross undertaking” and/or security for damages to the court against 4.6 What other forms of security can be granted over an aircraft and/or engine lease? a wrongful claim. The mortgagee might consider applying for the appointment of a receiver over the aircraft and the mortgagor’s assets. The only “in rem” right is an aircraft or engine mortgage, however in the alternative security by way of indirect control is a possibility by utilising a charge over the shares in the aircraft 5.3 Will local courts recognise a choice of foreign law or engine-owning company (see question 4.4), although this may in an aircraft mortgage? Are there any mandatory local be more risky if the company concerned conduct other business rules that apply, despite a choice of foreign law? or operations and thereby incurs obligations over and above ownership of the asset concerned. During the Brexit transition period, which is currently set to expire at the end of 2020, the rules on governing law, including 52 Enforcement and Repossession the Rome I Regulation, continue to apply. The English courts generally uphold a choice of governing 5.1 What are the circumstances in which a mortgagee law by the parties to the mortgage. or owner can take possession of the aircraft and/or sell There are certain exceptions under the Rome I Regulation, the aircraft? What requirements must the mortgagee or including: owner comply with? (a) where all the other elements of the contract are located in a country other than the country whose law has been chosen The remedies will depend on the express terms of the mortgage. and that country’s laws cannot be derogated from, then Typically, on the occurrence of an event of default under a mort- those laws must be applied (Article 3(3)); gage, the mortgagee can take possession of the aircraft without (b) where all the other elements of the contract are located in the involvement of the courts and sell the aircraft. The mort- one or more EU Member States but the parties’ chosen law gagee will usually notify the mortgagor that there has been an is not the law of any Member State, EU law must be applied event of default and that it intends to enforce its security. (Article 3(4)); The mortgagee may decide to seek the approval of the courts (c) overriding mandatory provisions (crucial for safeguarding in circumstances where there is uncertainty about whether an the public interests of a country) of the law of the country event of default has occurred or if the mortgagor opposes repos- where the contractual obligations are to be performed session. Further, damages may be very high in the event of must be applied where the overriding provisions render wrongful possession by the mortgagee and the mortgagee may the contract unlawful (Article 9); and wish to obtain the title in the event of a sale. (d) where the application of the parties’ chosen law is incom- In addition, remedies available under Article 8 of the Cape patible with the public policy of England (Article 21). Town Convention include: taking possession of an aircraft without obtaining a court order; selling or granting a lease of an aircraft; and collecting or receiving any income or profits in 5.4 Will local courts recognise and enforce a foreign connection with the management or use of that aircraft. court judgment in favour of a mortgagee or lessor? Are On an event of default by a lessee under a lease, the lessor will any interim relief measures available? generally re-take possession of the aircraft in accordance with the express terms of the lease. Where the lessee is not willing to During the Brexit transition period, which is currently set to hand over the aircraft, the lessor will usually seek a mandatory expire at the end of 2020, the rules on recognition and enforce- injunction in which the English court will order the aircraft to ment of judgments, including the Brussels Regulation (Recast), be returned to its owner. continue to apply between the UK and EU Member States. The Hague Convention on Choice of Court Agreements (Hague 5.2 What is the procedure for repossession of the Convention) may become significant after the transition period. aircraft? The UK is bound by the Hague Convention by virtue of its EU membership (and this status will continue to apply during the The procedure for the taking of possession of the aircraft and transition period), and it has indicated its commitment to contin- the enforcement of a mortgage is similar to claims in respect of uing to participate in the Hague Convention as a contracting chattels. There is no general right of pre-trial “in rem” attach- state in its own right post-Brexit. If the UK accedes to the Hague ment unlike certain other jurisdictions. Convention on its own behalf, the Hague Convention might be The mortgagee would issue a claim form, which would important with respect to jurisdiction and the enforcement of normally include: details of the mortgage debt, interest thereon judgments as between the UK and the EU Member States. and costs; other charges as provided in the mortgage; delivery There are various statutory regimes in place that govern recip- up of possession of the mortgaged aircraft; an injunction when rocal arrangements for the recognition and enforcement of judg- necessary; and further or other relief. ments as between the UK and other jurisdictions. The applica- An interim injunction will usually be sought when it is bility of each depends on the origin of the foreign judgment. possible that the aircraft will be removed from the jurisdiction With regard to EU Member States, the process is governed or otherwise be dealt with by the mortgagor in a manner preju- by the Recast Brussels Regulation, the 2001 Brussels Regulation dicial to the mortgagee’s claim. Interim relief can be applied for and the 2007 Lugano Convention. In addition, there is an and granted at any stage of the claim, including before proceed- instrument which creates a European Enforcement Order for ings have commenced. If a pre-action injunction is granted, the uncontested claims (Regulation EC 805/2004). mortgagee usually undertakes to issue proceedings as soon as Judgments of current or former Commonwealth countries possible. Interim relief can include an order for detention of are governed by the Administration of Justice Act 1920 and the the aircraft, preventing it from leaving the jurisdiction and a Foreign Judgments (Reciprocal Enforcement) Act 1933. Under

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those statutes, foreign judgments that satisfy specific require- 5.10 What is the applicable procedure for repossession ments can be registered in the English High Court. of an aircraft under other forms of security interests? Once the foreign judgment is recognised, it is considered by the English court as if it had been delivered by a court in The principal type of security obtained by lenders is a legal mort- England and Wales, and the mortgagee can then use the usual gage. Other common types of security that arise under aircraft methods of enforcement. For foreign judgments that fall outside the above rules, a financing arrangements are charges or pledges over the shares mortgagee must issue fresh proceedings in England and Wales of the special-purpose vehicle owner, and liens, which can arise to enforce the judgment, under common law rules. by operation of law, equity, contract and statute. The procedure for repossession of an aircraft under forms of security other than mortgages can either take place: 5.5 Are powers of attorney from a local airline in favour ■ Without the court’s intervention, by using the reme- of a lessor or mortgagee likely to be effective to allow dies provided under the Cape Town Convention (see the the lessor or mortgagee to deregister the aircraft? Can such powers be irrevocable, be governed by a foreign law answer to question 5.1). and/or do they need to be in any particular form for local ■ Through court proceedings (see the answer to question recognition? 5.2).

As an operator-based registry, where an aircraft is registered on 62 Conventions the UK Register of Civil Aircraft, it is common practice for the lessor to request that the lessee grant it a “deregistration power 6.1 Has your jurisdiction ratified any of the following: of attorney” which expressly permits the lessor to deregister (a) The Chicago Convention of 1944 on International the aircraft upon a default by the lessee, and the CAA may not Civil Aviation (the Chicago Convention); (b) The 1948 deregister the aircraft without its consent or without a court Convention on the International Recognition of Rights order. Such powers may be governed by a foreign law. in Aircraft (the Geneva Convention); (c) The 1933 Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft (the 1933 Rome 5.6 If recovery of the aircraft is contested by the lessee Convention); and (d) The Convention on International and a court judgment is obtained in favour of the lessor, Interests in Mobile Equipment on Matters Specific to how long is it likely to take to gain possession of the Aircraft Equipment (the Cape Town Convention) and the aircraft? Protocol on the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment? Possession can in theory be obtained shortly after the issuance of a warrant of control by the court, depending on where the aircraft is located. Any delays are therefore likely due to the UK is a signatory to and has ratified: practicalities of planning. ■ the Chicago Convention; ■ the Cape Town Convention; and ■ the Geneva Convention. 5.7 Are there any restrictions on the ability of the lessor to export the aircraft from your jurisdiction on The UK is not a signatory to the 1933 Rome Convention. termination of the leasing? In relation to the Cape Town Convention, the UK has made declarations under the Convention regarding the priority of non-consensual rights or interests and statutory detention rights Export licences are not generally required for the purpose of without registration, determination of courts and exercise of the export of civil aircraft. The export of certain aircraft and aircraft parts may be prohibited or restricted, for example, treaty remedies without leave of court; and declarations under with regard to countries subject to UN, EU or UK sanctions. the Aircraft Protocol regarding choice of law, insolvency assis- Evidence of deregistration of the aircraft from the UK Register tance, deregistration and export, interim relief and remedies on of Civil Aircraft is also required. insolvency.

5.8 Are exchange controls prevailing in your 6.2 Has ratification of the Cape Town Convention jurisdiction as regards payments in foreign currency? caused any conflicts or issues with local laws? Will any consents be required for the remittance of the sale proceeds abroad? To date no conflicts or issues with local laws regarding the inter- pretation or the application of either the Convention or the local Currently, there are no such restrictions on the transfer of funds. laws have emerged substantively. There are no foreign exchange controls in operation in the UK and no Bank of England or other official consents required for 6.3 What is the legal position regarding the transfer of aircraft sale proceeds. non-consensual rights and interests under Article 39 of the Cape Town Convention? 5.9 If the lease is governed by English law and a judgment is obtained by the lessor in the English courts, The United Kingdom made declarations under Article 39 of can that judgment be automatically enforced in your jurisdiction or will the case have to be re-examined on its the Cape Town Convention to the effect that all categories of merits? non-consensual rights or interests will continue to have priority over a registered international interest. The two relevant rights and interests set out in the Cape Town Convention are: Yes, it can be automatically enforced. (a) possessory liens for maintenance or repair work carried out on the aircraft object; and

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(b) any arrest and detention rights in effect under domestic 72 Liability for Damage and Environmental UK law including for the non-payment of amounts due in respect of public services relating to that aircraft object (such as the Eurocontrol fleet lien). 7.1 Can the owner be strictly liable – liable without a requirement to prove fault or negligence – for any These non-consensual rights and interests will not need to damage or loss caused by the aircraft assuming the be registered with the International Registry in order for their owner is an innocent owner with no operational control priority status to be protected. It is also irrelevant whether these of the aircraft? rights and interests arose before or after ratification of the Cape Town Convention and/or creation of the relevant international A prominent feature of statutory environmental offences interests. (enforced by the United Kingdom Environmental Agency) is that the vast majority requires no proof of intent, recklessness, 6.4 Has your jurisdiction adopted the remedies on dishonesty or any other mental element in any part of the actus insolvency provided under Article XI of the Protocol to reus. These are known as “strict liability” offences. In order to the Cape Town Convention? establish an offence, the only thing which needs to be proved is the act or omission which forms part of the offence and there The UK has adopted Alternative A with a specified waiting is no need to prove any negligence or fault on the part of the period of 60 days. Alternative A requires that, upon the occur- defendant. rence of an insolvency-related event, the insolvency practitioner It follows that an innocent owner of an aircraft with no oper- or debtor either: ational control of it is unlikely to be participating in the rele- (a) gives up possession of the asset to the creditor; or vant act or omission and therefore equally unlikely to incur strict (b) cures all defaults and agrees to perform all future obliga- liability in this respect. tions under the relevant transaction documents, in each case, by the earlier of the end of the specified waiting 7.2 Does the EU Emissions Trading System (EU ETS), period or the date on which the creditor would otherwise be or any similar scheme, apply to aircraft and aircraft entitled to possession of the aircraft object if the Cape Town operators in your jurisdiction? Will charges levied Convention did not apply. according to the EU ETS, or its equivalent, give rise to In the meantime, the insolvency practitioner or debtor is any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights required to preserve the aircraft object and maintain its value rank in priority ahead of any mortgage interests properly in accordance with the transaction documents until possession registered in the relevant aircraft and/or engine? is given to the creditor. Once possession has been obtained, the creditor has the right to deregister and export the aircraft. The EU ETS will continue for the 2019 and 2020 compliance The CAA must make these remedies available to the creditor years during the Brexit transition period from 1st February 2020 within five working days of notification from the creditor that to 1st January 2021. During this period, the United Kingdom they have a right to those remedies. remains a full participant in the EU ETS and compliance obli- gations apply for 2019 and 2020 emissions. United Kingdom 6.5 What is the procedure to file an irrevocable operators will continue to be able to access their accounts in deregistration and export request authorisation under the Union Registry and any allowances they contain for the the Cape Town Convention (IDERA)? purposes of 2020 compliance on 30 April 2021, which is the surrender deadline for 2020 emissions. The person in whose favour the IDERA has been issued (known The EU ETS gives the United Kingdom Environment as the authorised party) can request the deregistration of the Agency (and not the Civil Aviation Authority) the power to aircraft by completing and submitting form CA54 to the CAA. detain an aircraft in two circumstances, namely: The CAA will cancel the registration of a Cape Town Aircraft as i) as regards aircraft administered by the United Kingdom soon as reasonably practicable if it is satisfied that the authorised which have failed to pay any civil penalty (generally party is entitled to procure its deregistration and further, the resulting from failure to comply with EU regulations) CAA may only cancel the registration of a Cape Town Aircraft within six months of the due date; and pursuant to a request by the authorised party under an IDERA ii) as regards EU operators who are subject to an operating recorded with the CAA (unless such IDERA has been revoked). ban under Article 16(10) of the EU ETS Directive. The CAA is obliged to exercise its functions under the Civil The detention rights operate on a fleet-wide basis, similar to Aviation Act 1982 and other enactments in order to co-operate the fleet lien imposed by the Eurocontrol fee payment, as it is expeditiously with and assist the authorised party in the exercise the operator which is non-compliant with the EU-ETS rather of this treaty remedy. than a specific aircraft. In each case, such detention rights combines with an ultimate Deregistration of a Cape Town Aircraft pursuant to the request right of sale which would subordinate any mortgagee rights, of the authorised party under an IDERA does not require the thereby creating additional risk exposure to any secured party, consent of any mortgagee registered on the Aircraft Mortgage typically the aircraft financier. Register or the consent of the registered owner or other party noted on the UK Register of Civil Aircraft. The consent of the mortgagee is only required (or the mortgage must be discharged) 7.3 What liabilities (actual or potential) could an owner, where, at the time of the IDERA deregistration request, a regis- lessor or financier of an aircraft incur in your jurisdiction tered mortgage is currently entered on the Aircraft Mortgage because of a failure to comply with local environmental law and/or regulations on the part of an operator of Register that was created prior to 1 November 2015. aircraft leased or financed by it?

Private persons can bring civil law claims for harm caused by environmental matters, usually under the common law of

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nuisance or negligence claims are usually for damages but the agreement). Note that in a court-based application, even if the courts can also grant an injunction. To sustain such a claim, it relevant criteria are satisfied, it is still within the court’s discre- would be necessary to establish the relevant act or omission of tion to decline to grant an administration order. Nevertheless, the aircraft owner; however, it is to be expected that an aircraft in all cases the insolvency practitioner must provide an opinion owner could be added to civil proceedings against an aircraft stating that the statutory purpose of administration, which is set operator as a tactical matter and amid the perception of “deep out as a hierarchy of objectives in the Insolvency Act 1986, is pockets”. reasonably likely to be achieved.

82 Insolvency and Searches 8.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official 8.1 Are there any public registers in your jurisdiction in your jurisdiction have the effect of prohibiting the where a search can be carried out to determine whether owner from taking the following actions to enforce an order or resolution for any bankruptcy, bankruptcy the lease after commencement of such protection: (a) protection or similar insolvency proceedings has been applying any security deposit held by the owner against registered in relation to an operator or lessee? any unpaid amounts due under the lease; (b) accepting payment of rent or other lease payments from the lessee, a guarantor or a shareholder; (c) giving notice of default It is possible to conduct a search at Companies House in England under the lease; (d) obtaining a judgment or arbitral and Wales, including online, to ascertain whether a company is award for unpaid lease payments; (e) giving notice to being wound up (liquidated) or is in so-called provisional liqui- terminate the leasing of the aircraft and/or engine; or (f) dation (meaning the court has frozen the assets of a company in exercising rights to repossess the aircraft and/or engine. advance of a hearing to decide if it should be liquidated or not). There is also the facility to conduct a winding-up search by (a) It depends on the terms of the deposit and which insol- telephone at the Bankruptcy Court (High Court) England and vency protection is involved. In administration, a mora- Wales which will identify any petitions in relation to any regis- torium enforcement of security rights applies which might tered company which have been made by any relevant creditor. be relevant. Properly drafted, it could be governed by the Financial Collateral Regulations however which permits 8.2 In the event that an operator or lessee were to application regardless of the moratorium. become insolvent either on a balance sheet basis (assets (b) From the lessee – lease payments can be accepted from less than liabilities) or is unable to pay debts as fall the lessee acting by its administrators/liquidators which due, would an operator or lessee be required to file for become an expense of the insolvency process and rank insolvency protection? ahead of the insolvency officials own remuneration; from a guarantor – there is no limitation on accepting payments No, there is no mandatory requirement to file for insolvency under a guarantee and, properly drafted, these can be kept proceedings. However, subject to events connected with the “in suspense” to preserve maximum recovery in the insol- COVID-19 pandemic which included the announcement by vency of the lessee; from a shareholder – there is no limita- the Government of the United Kingdom that certain amend- tion on accepting payments from the shareholder. ments to insolvency laws were being amended, once a director (c) Notice of default may be given. of a company concludes (or should have concluded) that there (d) Commencement of proceedings is prohibited after an is no reasonable prospect of the company avoiding an insolvent insolvent administration has started except with the liquidation or insolvent administration, he or she has a duty to consent or leave of court, and it is similar in the case of a take every step which a reasonably diligent person would take to court compulsory liquidation. The liquidator in a liquida- minimise potential loss to the company’s creditors, which would tion commenced by meeting will normally apply for (and normally require an application for either insolvent administra- obtain) a stay on proceedings if required. tion or insolvent liquidation (as appropriate). (e) Notice to terminate may be given, but the consent of the administrators or leave of court is required in an adminis- tration to take further steps as regards the aircraft and/or 8.3 Do the available forms of insolvency protection engine. No such limitation arises in a liquidation except as in your jurisdiction involve the appointment of either an officer of the court or a specifically court appointed set out in (d) as regards proceedings generally. official to take control of the operator or lessee (an (f) Consent of the administrators or leave of court is required ‘Insolvency Official’) while in insolvency protection? in an administration, while liquidation is as set out in (e). Notwithstanding, the relevant insolvency official must give up possession of the aircraft to any holder of Generally, yes. The most common procedures are adminis- an international interest (in the context of the Cape Town tration (a rescue process, which creates a statutory morato- Convention) within 60 days, subject in turn to any prior rium) and liquidation (a terminal process). Both administra- lien or detention rights. tors and liquidators are officers of the court, but they are not always appointed by the court. For an example, an out-of-court application may be made by the company or its directors or by 8.5 Can the commencement of insolvency proceedings a secured creditor who is the holder of a “qualifying floating have retrospective effect in relation to any such actions charge” which necessarily must relate to the whole, or substan- taken before commencement? If so, for what period can tially the whole, of the company’s property. there be a look back? Typically, it will be necessary to show that the company is or is likely to become unable to pay it debts, whereas the holder of Transactions at an undervalue which have been entered into a qualifying floating charge is able to appoint an administrator during the period of two years ending with the onset of insol- when an event has occurred that would allow him to enforce vency (broadly, of the commencement of the winding-up or his charge (usually where there has been a default under a loan administration) at a time when the company was insolvent on a

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cash flow or balance sheet basis or it became insolvent as a result 92 Detention and Confiscation of it are vulnerable to challenge. Transactions defrauding cred- itors are similarly vulnerable, although there is no defined time period, as are preferences. Preference transactions will be set 9.1 Other than insolvency laws (see section 8), are there any laws which may have the effect of defeating aside if it was entered into in the six-month period before the the owner’s right in the aircraft – for example, commencement of the winding-up of the company or its entry Government requisition? Do the laws of your jurisdiction into administration. This period extends to two years in the provide for any compensation in such circumstances? case of a connected person. There are certain statutory rights which could, in certain circum- 8.6 Is there, either under law or as a matter of practice stances, defeat an owner’s right to its aircraft. These are: in your jurisdiction, a period of time within which the ■ Certain airport operators and the CAA may detain aircraft Insolvency Official will either ‘adopt’ the lease and for unpaid airport charges. pay rent and other lease payments as an expense ■ The CAA may detain aircraft for unpaid navigation of the insolvency or ‘reject’ the lease and permit the charges. owner to enforce such rights as it may have under the ■ The UK Environment Agency has the right to detain lease? (a) If the lease is ‘adopted’, will the Insolvency aircraft within a fleet operated by a UK administered Official also pay any unpaid lease payments due as at commencement of the insolvency protection? (b) If not airline which has failed to pay a civil penalty or by a EU or if the lease is ‘rejected’, would the owner’s claim for operator subject to an operating ban under Article 16(10) any outstanding sums rank equally with other ordinary of the EU ETS Directive. unsecured creditors of the lessee? ■ HMRC may seize goods (which can include an aircraft) for unpaid taxes. ■ UK customs officers have various powers to detain an No set period but the holder of an International Interest under aircraft – generally where they transport undeclared items the Cape Town Convention with priority is entitled to posses- for customs purposes. sion of the aircraft on or before expiry of a 60-day period so in ■ An aircraft may be detained in relation to various crimes effect the Insolvency Official must either cure all defaults and including actual or suspected acts of terrorism. perform or give back the aircraft in that period. (a) yes, (b) yes, ■ The CAD has rights to detain an aircraft if it has no certif- it would be an unsecured claim in insolvency unless the owner icate of airworthiness or other licensing requirements. has security over other assets. ■ Certain liens can arise as a matter of contract or law, e.g. a repairers lien for unpaid amounts used to improve an 8.7 Are there certain types of preferred creditors whose aircraft. claims will rank above claims of the owner? ■ The United Kingdom government has certain statutory rights of requisitions but only in the event of an emergency and then only on satisfaction of certain conditions set out Yes, although the regimes in administration and liquidation in the Civil Contingencies Act 2004. The statute provides are different. In administration, fixed charge claims, admin- for requisition with or without compensation although istration expenses, the costs of the administration, preferential historically compensation has generally been paid. claims (including salary, national insurance contributions, and ■ The Secretary of State within the Department of Transport certain pension schemes) and claims under a floating charge has rights to detain aircraft, for example if it fails to have rank above claims of the owner. In liquidation, in addition to the necessary certification, including for airworthiness, the above in some circumstances, liquidation expenses rank noise or emissions. behind claims under a floating charge.

9.2 Are there any rights in relation to third parties to 8.8 If the aircraft is in the possession of a person detain or sell the aircraft pursuant to illegal activities, other than the operator or lessee at the commencement tax or any other laws if the operator or lessee fails to pay of Insolvency Protection of the operator or lessee, for when due? If so, can the aircraft be forfeited and sold example, an independent maintenance facility, will such without the owner being made aware? person be entitled, under the laws of your jurisdiction, to assert a lien arising under law or contract over the aircraft in respect of amounts then due and unpaid to The Secretary of State for the Department for Transport and such person by the operator or lessee? the CAA may detain aircraft in certain circumstances including: ■ where aircraft are involved in drug trafficking, breaches of UN, EU or UK sanctions, or terrorism; No, except with the consent of an administrator or with the leave ■ breaches of licensing and certification requirements (failure of court. Any such assertion of lien rights would be contrary to to possess the relevant Certificate of Airworthiness) and the moratorium principle. In practice, a court might regulate of air navigation requirements; and matters to ensure the release of the aircraft to the administrators ■ where the aircraft is not in a fit condition to fly. in exchange for adequate protection (such as cash collateral). Under s.88 Civil Aviation Act 1982, local authorities which own or manage UK airports have a right to detain and sell aircraft to satisfy unpaid airport charges. The UK tax authorities may seize, and sell, aircraft for unpaid taxes owed by the owner. Customs officers may detain an aircraft in respect of imported cargo until certain expenses have been paid.

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Philip Perrotta is a senior partner in the Firm’s London office, where he is responsible for the Aviation Finance team and is a member of its Banking & Asset Finance group. The nature of his practice is truly international and he frequently works globally with clients across Europe and South Asia, including out of Milan and Singapore as part of the service to clients in this practice area. He is an aviation and aviation finance specialist and recognised as a “leading expert”, regularly receiving both commendations for his ability, focus and commerciality as well as accolades in the legal directories, for example for being “very strong” and “dealing with all the big points without ever over-lawyering them”. He is noted as “experienced and skilled” and for providing “an excellent and accessible service” to clients (The Legal 500). Philip acts for a broad range of significant aviation businesses across the world and he has an impressive track record of successful transac- tions, some being landmark deals in the industry. He has successfully concluded literally hundreds of transactions involving commercial and business aircraft, aero-engines and other aviation assets in jurisdictions in every continent. Philip is a regular contributor at industry events, and is often sought after to comment on developments in a variety of segments of the aviation sector and the aviation finance market, where his insight as a commentator is highly valued.

K&L Gates LLP Tel: +44 20 7360 8205 One New Change Email: [email protected] London EC4M 9AF URL: www.klgates.com United Kingdom

K&L Gates LLP is a fully integrated global law firm with lawyers located across five continents. Our broad global platform allows us to guide clients through the legal challenges inherent in the ever-changing international landscape. The deep latticework of relationships across our offices and practices enables our clients to respond to diverse legal issues and risks, through the services of one law firm with a single point of communication. K&L Gates LLP represents leading global corporations in every major industry, capital market participants, and ambitious middle-market and emerging growth companies. Our lawyers also serve public sector entities, educational institutions, philanthropic organisations and individuals. We are leaders in legal issues related to industries critical to the economies of both the developed and developing worlds – technology, manufacturing, financial services, healthcare and energy, among many others. www.klgates.com

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Michael J. Adam R. Beringer Edelman

Melissa W. Matthew P. Vedder Price P.C. Kopit Larvick

Note financing structures described above are largely commercial in nature. Some of the primary considerations in selecting a Our responses to this questionnaire are tailored to practical financing structure are pricing (e.g., absolute financing costs guidance for aviation industry professionals with respect to and prepayment penalties, make-wholes or other requirements), finance and leasing legal matters arising from U.S. registered interest exposure (i.e., fixed rate financings vs. floating rate aircraft. Although U.S. federal laws and regulations pre-empt financings), the recourse nature of the financing (e.g., recourse much of state law with respect to aviation, there are still many to a corporate credit vs. recourse only to the aircraft), restrictive areas in which individual state laws govern rights and remedies financial covenants (e.g., debt service coverage rations, loan- of involved parties. Given the purpose of this questionnaire, to-value tests, minimum equity tests and borrowing base tests) we are not able to discuss and distinguish the individual laws of and restrictive operational covenants (e.g., limitations on asset all 50 states and unless otherwise noted, we refer to federal and dispositions, restrictions on leasing, etc.). New York state law in our responses.

1.3 What types of leasing are possible under the 12 General and Contractual laws of your jurisdiction? What are their essential characteristics? 1.1 What are the typical structures available for financing the purchase of an aircraft? Aircraft leasing structures in the United States generally fall into two categories: (1) operating leases; and (2) finance leases. The availability of financing structures in the United States for In an operating lease, the lessor owns the aircraft and retains parties that desire to purchase aircraft is partially dependent on the benefits and risks of ownership. While operating leases are whether the party seeking financing is an operator or, instead, typically triple-net with the lessee being responsible for main- is an operating lessor that intends to lease the aircraft to an tenance, insurance and taxes with respect to the aircraft during operator. Some of the most common basic financing struc- the lease term, the lessor otherwise bears residual value risk with tures utilised by operators include (i) term loan facilities in the respect to the aircraft (subject to an obligation of the lessee to commercial lending markets secured by mortgages on one or return the aircraft in an agreed condition). Operators some- more identified aircraft, (ii) in the case of major airline operators, times enter into wet leases, where in addition to providing an enhanced equipment trust certificate (EETC) offerings in the aircraft, the operator lessor also provides some or all of a crew, capital markets to finance an identified group of aircraft, and (iii) maintenance services and insurance coverage. in the case of operators with investment grade credit, unsecured bond offerings in the capital markets. Some of the most common In a finance lease, while the lessor retains legal title to the financing structures utilised by operating lessors include (i) aircraft during the lease term, the lessee typically has an option term loan facilities in the commercial lending markets secured or the obligation to purchase the aircraft from the lessor at the by mortgages on one or more identified aircraft and collateral expiration of the lease term for an agreed price (typically less than assignments of the related leases, (ii) warehouse facilities in the fair market value if it is only an option). As a result, many of the commercial lending markets providing committed financing benefits and risks of ownership are transferred to the lessee at from a lender or lending syndicate to acquire leased aircraft over lease commencement. For example, (i) the lessee may be required a period of time satisfying agreed characteristics (e.g., aircraft to report the aircraft as an asset for accounting or tax purposes, types, lessees, geographic concentrations, etc.), which may be and (ii) the lessee may assume the residual risk by virtue of the recourse or non-recourse facilities, (iii) asset backed securitisa- lease-end purchase right or obligation. In a proceeding under tions in the capital markets, which provide non-recourse long- title 11 of the U.S. Code (the “Bankruptcy Code”), a finance term financing on a portfolio of identified leased aircraft, and lease will typically be recharacterised as a secured loan, with the (iv) in the case of operating lessors with investment grade credit, lessee being treated as the owner of the aircraft and the lessor unsecured bond offerings in the capital markets. being treated merely as a holder of a security interest.

1.2 What are the key advantages/disadvantages 1.4 Are there any proposals for reform in the area of and main issues arising in relation to these financing aviation finance? structures? The FAA Modernization and Reform Act of 2012 (the The advantages, disadvantages and issues arising from the “Modernization Act”) set an October 2021 deadline for the

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Federal Aviation Administration (the “FAA”) to complete 2.2 What are typically the taxes in your jurisdiction modernisation of its Civil Aviation Registry (the “FAA which may arise in relation to a sale, a lease or a Registry”). As part of the mandate of the Modernization financing of an aircraft or an engine? Act, on March 25, 2020 the U.S. Government Accountability Office (the “GAO”) issued a report detailing the results of a U.S. federal income taxes are generally imposed on the world- study conducted to examine registry fraud and abuse. In the wide income of “United States persons” and, with respect to report, the GAO made 15 recommendations to the FAA gener- non-U.S. persons, on their income that is considered to be effec- ally intended to facilitate the FAA being more effectively able tively connected with a U.S. trade or business (“ECI”). With to (among other things) (i) curtail fraud in aircraft registration, respect to amounts that are not ECI, a 30% withholding tax (ii) gather and record information regarding aircraft ownership, applies to payments of U.S.-source fixed and determinable particularly as it relates to indirect ownership through corpo- income, including rents and interest, to a non-U.S. person. The rate entities, (iii) verify eligibility of registration applicants, withholding tax may be reduced if a tax treaty applies or, in the and (iv) monitor sanctions data on direct and indirect aircraft case of interest payments, if the interest qualifies as “portfolio owners. It is unclear at this point how the FAA efforts under interest”. Moreover, FATCA withholding could apply unless the Modernization Act will affect aircraft owners and financiers. the payee establishes FATCA compliance or an exemption. In addition, the sale and purchase of an aircraft can give rise to state sales and use taxes, depending on the location of the sale. 1.5 Is it possible according to the laws in your jurisdiction to enter into non-binding or partially binding pre-contractual agreements (e.g. ‘letters of 2.3 Is the provision of a current tax-residency intent’) which will NOT take effect as fully enforceable certificate by a payee sufficient for a lessee or a agreements? borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself of treaty access and the mitigation of tax liability? As a matter of course under New York law, counterparties are permitted to, and regularly do, enter into non-binding or partially binding letters of intent (an “LOI”). Parties that desire The provision of a tax-residency certificate by a payee is not, of an LOI or other pre-contractual agreement to be non-binding itself, sufficient to establish a treaty exemption from U.S. with- should expressly state that within such LOI or agreement, with holding taxes on rental or interest payments. A payee that qual- any exceptions as to terms that are intended to be binding (e.g., ifies for a treaty exemption generally is required to provide an expenses, indemnities, etc.). Absent express provisions to applicable Internal Revenue Service Form W-8 to establish the the contrary, an LOI or other pre-contractual agreement that basis for the exemption. contains all of the material terms of the parties’ agreement may create a binding agreement even if the document contemplates 2.4 Has the advent of BEPS (the Base Erosion and the parties subsequently entering into comprehensive contrac- Profit Shifting initiative of the OECD) had any effect as tual arrangements to finalise the transaction. regards structures in aviation finance and leasing or their interpretation?

1.6 Is there a doctrine of ‘good faith’ in your jurisdiction Certain aspects of the BEPS project have influenced recent tax which applies to all pre-contractual agreement, financing and leasing transaction documents, and the legislation in the United States. One such provision is section conduct of parties connected to them? 163(j) of the Internal Revenue Code, enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Under this provision, a taxpayer’s deduction for business interest is limited to 30% of its Under New York law, parties to every contract, including defin- “adjusted taxable income” (defined generally as EBITDA through itive financing and leasing transaction documents, are bound by 2021, and EBIT thereafter). TCJA also enacted rules aimed at an implied covenant of good faith and fair dealing. In addition, neutralising the effects of hybrid mismatch arrangements. any binding provisions of a pre-contractual arrangement are also subject to the implied covenant of good faith and fair dealing. If parties desire to impose an obligation to negotiate definitive 2.5 What are the typical thresholds in your jurisdiction for which a permanent establishment may be triggered documents in good faith in an otherwise non-binding pre-con- under the terms of any relevant double-tax treaty or tractual agreement, they should include a provision to that effect similar? that is expressed to be legally binding in such pre-contractual agreement. A “permanent establishment” under a double-tax treaty typically includes a place of management, a branch, office, factory, or 22 Taxation and Related Matters other fixed place of business. Additionally, a permanent estab- lishment may be attributed from certain functions and activities 2.1 Which government authority in your jurisdiction of a “dependent agent”. It should be noted that, if a double-tax has primary responsibility for the accounting for and treaty does not apply, a non-U.S. person may be subject to U.S. regulation of revenue control and taxes? federal income tax if it is considered to be “engaged in a U.S. trade or business”, even absent a permanent establishment. The U.S. Internal Revenue Service is responsible for the admin- istration and enforcement of federal income taxes. In addi- 2.6 Is the authority at question 2.1 likely to establish tion, the revenue authorities of each state are responsible for the a ‘look-through’ right or similar as regards a lender or a administration and enforcement of any applicable income, sales lessor which is a special-purpose vehicle involved for the and use taxes imposed by that state. purpose of tax treaty access?

A lender or lessor which is a special-purpose vehicle and that

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desires to qualify for access to a U.S. tax treaty should be aware 3.3 Can foreign-owned aircraft be registered on of certain look-through (i.e., “anti-treaty shopping”) rules that your national aircraft register and are there limits or could apply. First, most U.S. tax treaties contain a “limitation restrictions on the age of aircraft that may be registered on benefits” article that must be satisfied by a non-U.S. payee or operated? seeking treaty access. Moreover, special “anti-conduit” rules could apply to a lender or lessor that is considered to be part of The FAA will register an aircraft at the FAA Registry in accord- a conduit financing arrangement. The application of these rules ance with section 44102(a)(1) of the Transportation Code if will depend on the facts of a particular transaction. it is owned by “(A) a citizen of the United States; (B) an indi- vidual citizen of a foreign country lawfully admitted for perma- 2.7 Will the import of an aircraft into your jurisdiction nent residence in the United States; or (C) a corporation not a and/or the sale or leasing of the aircraft give rise to any citizen of the United States when the corporation is organized VAT, sales or use taxes or any customs import or excise and doing business under the laws of the Unites States or a State, duties? and the aircraft is based and primarily used in the United States”. An owner of an aircraft is a “citizen of the United States” (as The United States does not impose VAT at the federal level. The defined in section 40102(a)(15) of the Transportation Code) if sale and purchase of an aircraft could be subject to state-level sales such owner is “(A) an individual who is a citizen of the United and use taxes, depending on the location of the sale. However, States; (B) a partnership each of whose partners is an individual some states do not impose a sales tax, and other states may provide who is a citizen of the United States; or (C) a corporation or exemptions that could be applicable to a particular transaction. association organized under the laws of the United States or a Thus, the location of a sale within the United States should be care- State, the District of Columbia or a territory or possession of the fully considered in light of the specific facts of each transaction. United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens 2.8 Are there any documentary taxes (for example, of the United States, which is under the actual control of citi- stamp duty payable on the execution of documents)? zens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citi- zens of the United States”. The United States does not impose a documentary or stamp An aircraft is “based and primarily used in the United States” duty tax on the execution of documents, but some states may for if at least 60% of the total flight hours flown by the aircraft certain types of documents. are accumulated within the United States. In order to register an aircraft on this basis, the non-U.S. citizen corporation must 32 Registration and Deregistration submit semi-annual reports to the FAA. In addition, there are two other means by which non-U.S. citi- 3.1 Which government authority in your jurisdiction zens may register aircraft at the FAA Registry. First, an aircraft has primary responsibility for the regulation of aviation may be registered at the FAA Registry if it is held in a U.S. and the registration of aircraft? Is it an owner registry grantor trust where the trustee is a U.S. citizen or resident alien, or an operator registry? If the aircraft register is an operator register, is it possible to record the details of even if the beneficiaries of that trust are non-U.S. citizens. If an owner or lessor and any financier with an aircraft the beneficiaries of the trust are non-U.S. citizens (such trust, a mortgage? “Non-Citizen Trust”), those beneficiaries must not have more than 25% of the aggregate power to direct or remove the trustee. The U.S. Department of Transportation (“DOT”) is an exec- However, non-U.S. citizens may hold more than 25% beneficial utive branch department within the U.S. federal government interest in a Non-Citizen Trust so long as their power to direct and has regulatory authority with respect to all transporta- or remove the trustee is expressly limited by the trust instru- tion matters within the United States. The FAA, an operating ment itself. Non-Citizen Trusts have come under close scrutiny administration of the DOT, has primary responsibility for the in recent years and the FAA has a process in place to review and regulation of aviation and maintains the FAA Registry. The approve trust agreements for Non-Citizen Trusts. FAA Registry is an “owner registry” in that the FAA registers Second, a domestic corporation that does not otherwise aircraft and issues certificates of registration to aircraft owners. satisfy the U.S. citizen requirements may register an aircraft at See questions 3.4 and 4.1 regarding mortgage recordation. the FAA Registry if it is held in a voting trust. Similar to the Non-Citizen Trust, the effect of the voting trust is to remove voting control over the ownership and operation of the aircraft 3.2 What is the effect of registration of the aircraft? from the non-citizen corporation and vest it in a trustee. Like Does registration on your national aircraft register confer proof of ownership of the aircraft and/or engine? Non-Citizen Trusts, the FAA has a process in place to review and approve these trust arrangements. There are no limits on the age of aircraft that may be regis- The FAA registers aircraft based on FAA-established owner- tered or operated in the United States, however, there are addi- ship tests, which are broadly intended to identify the apparent tional inspections for aircraft of a certain vintage. owner and require complex analysis. Determination of an owner for FAA purposes may conflict with a determination for other purposes, including local law, tax or accounting. The 3.4 Can aircraft leases be registered? If so, in what sole purpose of registration with the FAA Registry is to estab- circumstances? Must the lease be in a particular form lish nationality of an aircraft for international purposes, and it is if it is to be valid and enforceable (for example, must it be in a particular language or be notarised, legalised or not conclusive evidence of ownership in a proceeding under the apostilled)? laws of the United States. In fact, section 44103(c)(2) of title 49 of the U.S. Code (the “Transportation Code”) expressly states that a certificate of registration is not evidence of ownership of In addition to the FAA Registry, the FAA maintains a central an aircraft. recording system where conveyances affecting FAA Equipment,

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including leases and mortgages, may be recorded. “FAA precautionary measure, and in part due to the fact that a typical Equipment” includes: (a) U.S. registered civil aircraft; (b) mortgage granting clause is often broad enough to cover other aircraft engines having at least 550 rated take-off horsepower collateral that may not be FAA Equipment (e.g., aircraft docu- (or its equivalent); (c) aircraft propellers capable of absorbing at mentation, insurance contracts, etc.) and thereby not subject to least 750 rated take-off horsepower (or its equivalent); and (d) federal pre-emption. Other than as set out in question 3.4, no engines, propellers and spare parts being maintained or used by particular formalities are required to record a security instru- a U.S. certificated air carrier. ment at the FAA, and no other formalities are required for UCC While such documents do not need to be notarised, legalised filings. or apostilled and there are no requirements as to a particular Finally, the United States is a contracting state under the CTC. form, they do need to be an original or a certified true copy of Accordingly, to the extent the granting party under an aircraft an original, in addition to meeting other requirements for a form mortgage or engine mortgage is domiciled in the United States, acceptable to the FAA. As a matter of industry practice, parties or in the case of an airframe, the airframe is registered at the transacting on FAA registered aircraft typically engage special FAA Registry, the international interests created in airframes or FAA counsel to review aircraft leases and security instruments engines should be registered with the International Registry (the in order to ensure compliance with FAA rules and regulations “IR”) created under the CTC. prior to filing. 4.2 Can spare parts, including future parts, be subject 3.5 How is deregistration affected and what steps can to the aircraft mortgage or engine mortgage (as the case a lessor take to de-register the aircraft on termination of may be)? If not, are there any other forms of security that the lease? can be taken over spare parts?

If evidence of the lease termination has been recorded at the Spare parts or future parts that are attached to an aircraft or FAA or a lease term has expired, and the owner can provide engine that is collateral under a previously executed mortgage evidence that “each holder of a recorded right has been satisfied will, subject to limited exceptions, become subject to the secu- or has consented to the transfer”, an owner may submit a request rity interest created by that mortgage upon attachment. In addi- to cancel the registration of an aircraft for export to another tion, a mortgage may be created over spare parts that are not yet country. attached to any aircraft or engine. If the party seeking deregistration is a secured party (i.e., not the registered owner), an irrevocable deregistration and export 4.3 Is there a register of mortgages or rights over request authorisation (an “IDERA”) submitted to the FAA in aircraft and/or engine? compliance with the Cape Town Convention (the “CTC”), or if the aircraft is not subject to the CTC, a deregistration power As described in question 4.1, the FAA has established a recording of attorney, may be utilised in lieu of the owner’s request. In system for security instruments in FAA Equipment. this circumstance, the authorised party seeking to deregister and export an aircraft under an IDERA or deregistration power of attorney must submit to the FAA a written certification in 4.4 What other forms of security can be taken over accordance with section 47.47 of title 14 of the U.S. Code of an aircraft and/or engine and can these other forms be Federal Regulations (the “Federal Aviation Regulations”), registered? “that all registered interests ranking in priority to that of the requestor have been discharged or that the holders of such inter- A variety of non-consensual security interests may attach to ests have consented to the cancellation for export purposes”. aircraft equipment, including liens arising from failure to pay taxes, court judgments, use of a hangar and provision of main- 42 Security tenance services or materials. As with the consensual secu- rity interests described in question 4.1, subject to certain excep- 4.1 Is it possible to create a mortgage over an aircraft tions and federal pre-emption, Article 9 of the UCC governs or engine in your jurisdiction? If so, what are the types the validity, priority and enforcement of these security interests. of aircraft mortgage and engine mortgage available and In the case of tax liens, judgment liens and mechanic’s, mate- what formalities are required in order to perfect it? rialman’s and hangar keeper’s liens, depending on their nature, these security interests may be recorded at the FAA, in accord- The creation of consensual security interests in personal prop- ance with the UCC and/or at the IR created pursuant to the erty, including aircraft mortgages and engine mortgages, are CTC. It is also important to note, that in certain circumstances broadly governed by Article 9 of the Uniform Commercial Code mechanic’s, materialman’s and hangar keeper’s liens may only (the “UCC”). The perfection of security interests in personal be perfected by possession of the underlying aircraft equipment. property created under Article 9 of the UCC is generally accom- plished by filing a UCC-1 financing statement with the appro- 4.5 What claims and rights would take priority in your priate filing office. However, section 9-109(c) of the UCC jurisdiction over a registered mortgage? provides that Article 9 does not apply to the extent a federal statute or regulation or U.S. treaty pre-empts it. The Federal Generally, the United States has a first in time, first in right Aviation Act mandated the establishment of a recording system system, with the first party to perfect a security interest in collat- for security interests in FAA Equipment. eral being given priority over later perfected security interests. In order to perfect a mortgage in FAA Equipment, the under- This applies both to the recordation of security instruments at lying security instrument (e.g., aircraft mortgage or engine mort- the FAA and the filing of UCC financing statements as well as gage) must be recorded at the FAA. As a matter of practice, even the registration of international interests with the IR. However, where a mortgage covers FAA Equipment, transaction parties under the UCC, possessory mechanic’s, materialman’s or hangar nonetheless also file a UCC-1 financing statement, in part as a

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keeper’s liens would generally have priority over other perfected a private foreclosure sale, where the secured party has identi- security interests. Additionally, pursuant to the U.S. declara- fied a third party purchaser of the collateral; (b) a public fore- tions filed under the CTC, non-consensual rights or interests closure sale, pursuant to which the secured party makes the which under U.S. law have priority over registered international collateral available for sale by public auction; and (c) a strict fore- interests (or an equivalent interest), will take priority over previ- closure, whereby the secured party retains the collateral in full ously registered interests. Finally, in the case of a bankruptcy, or partial satisfaction of the secured debt (but partial satisfac- certain obligations such as administrative expenses for admin- tion requires the express written agreement of a debtor, which istrating the bankruptcy case and certain tax claims are given is rarely obtained). Private foreclosure sales and public foreclo- priority under sections 503 and 507 of the Bankruptcy Code. sure sales are governed by UCC section 9-612, which requires 10 days’ notice to interested parties (the CTC has a similar 10 work- ing-day notice requirement and aircraft subject to the Geneva 4.6 What other forms of security can be granted over Convention, 30 days’ notice may be required). an aircraft and/or engine lease? In addition to these notice requirements for the mortgagor and other interested parties (i.e., other lienholders), the number A lessor can assign its rights under an aircraft or engine lease of days for the notice of a public sale to prospective bidders and pursuant to a lease assignment or security agreement. Both the manner in which such notice is given, will be determined the lease itself and the lease assignment or security agreement after considering what is likely to be deemed a commercially should be recorded at the FAA. Because the United States is a reasonable public sale. For public foreclosure sales of certain contracting state under the CTC, the secured party should ensure aircraft, such notice period to potential bidders is generally 30 that the security interest is properly registered with the IR which days or more if that much time is deemed needed to adequately means the related lease interest must first be registered before the market the aircraft. related assignment may be registered. All such collateral assign- For strict foreclosures, UCC section 9-620 provides that a ment or security documents must meet the requirements of the secured party can accept the aircraft collateral in full or partial CTC in order to be properly registered and enforced. If there is satisfaction of the secured debt. Generally, strict foreclosures a lease which does not qualify recordation at the FAA or registra- can be effected with 20 days’ notice, unless additional time tion with the IR, the lease may be considered chattel paper under is required under the terms of the related security agreement the UCC. Such a lease assignment can be perfected by possession between the mortgagor and the secured party. Strict foreclo- of the original chattel paper lease and/or filing a UCC financing sures, which are often used where the mortgagor is willing to statement. permit foreclosure without objection and the secured party has not otherwise identified a buyer for the collateral, provide the 52 Enforcement and Repossession most streamlined procedure in these circumstances, and the required notice period can be shortened with the mortgagor’s 5.1 What are the circumstances in which a mortgagee consent (at the time of the strict foreclosure). or owner can take possession of the aircraft and/or sell A secured party could also pursue a judicial foreclosure under the aircraft? What requirements must the mortgagee or the laws of the applicable jurisdiction; however, given the higher owner comply with? costs and longer time periods required, most secured parties prefer to pursue non-judicial remedies. In the United States, a secured party or lessor, as applicable, can exercise remedies for initiating the possession/repossession of, 5.2 What is the procedure for repossession of the and for disposing, property either through judicial or non-ju- aircraft? dicial processes. The following focuses on the non-judicial remedies – although similar relief can be obtained through the courts where self-help remedies are not available or advisable. As discussed in question 5.1, owners and secured parties are In general, remedies are divided between (a) obtaining posses- permitted to exercise self-help to repossess an aircraft that is sion of an aircraft, and (b) disposing or selling such aircraft. subject to a defaulted lease or security agreement. If the aircraft Unless the parties expressly contract to bar self-help reme- is located in a secure facility, the personnel used to effect the dies, self-help is a statutorily permitted remedy for both secured self-help will need to have, or obtain, security clearance for financings (see UCC section 9-609) and leases (see UCC section such facility. Often in such cases, a lessor or secured party may 2A-525(2)) in almost every jurisdiction in the United States, need to obtain a court order of attachment, which empowers a provided that such remedy can be effected “without breaching marshal to seize and possess property belonging to the judg- the peace”. Although the statutes do not specifically delineate ment debtor until the conclusion of the litigation or as other- what constitutes a “breach of the peace”, using physical force to wise provided by court order, and marshal services are sought to wrest control of the property away from the mortgagor/lessee assist in repossessing the aircraft. is not permitted. There are no formal statutory requirements for initiating self-help possession/repossession of the property, 5.3 Will local courts recognise a choice of foreign law other than the requirement that the subject secured financing or in an aircraft mortgage? Are there any mandatory local lease be in default. rules that apply, despite a choice of foreign law? While a lessor that repossesses an aircraft after a lease default is not subject to any restrictions on its ability to dispose of that Most state and federal courts will recognise and enforce foreign aircraft, the UCC requires a secured party that repossesses an laws, and the rights and liabilities based thereon, provided that aircraft to comply with certain notice periods (in addition to such laws do not violate public policy. In addition, for inter- any requirements of the underlying agreements). Furthermore, ests governed by the CTC, the CTC expressly provides that the all aspects of the disposition should be made in a “commer- parties may agree to the law that governs their contractual rights cially reasonable manner” as required by both the UCC and and obligations. the CTC. There are three types of non-judicial foreclosures of security interests of aircraft and other equipment collateral: (a)

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5.4 Will local courts recognise and enforce a foreign 5.8 Are exchange controls prevailing in your court judgment in favour of a mortgagee or lessor? Are jurisdiction as regards payments in foreign currency? any interim relief measures available? Will any consents be required for the remittance of the sale proceeds abroad? Most states, including New York, have adopted some form of the Uniform Foreign Money Judgments Recognition Act (the Subject to the disclosure requirements and OFAC restrictions “UFMJRA”), which requires a local court to give effect to the referred to in question 5.7, parties are generally free to desig- “final, conclusive and enforceable judgments” of other countries nate a foreign currency for payment and no exchange controls provided certain requirements are satisfied (i.e., interim deci- or consents are required. sions are not given effect). Although reciprocity is not formally listed as a consideration under UFMJRA, some courts have held 5.9 If the lease is governed by English law and a that the existence of reciprocity by the foreign jurisdiction of judgment is obtained by the lessor in the English courts, similar judgments “is always a permissible consideration” for can that judgment be automatically enforced in your determining whether to recognise the foreign judgment. jurisdiction or will the case have to be re-examined on its In addition to the “self-help” remedies described above, U.S. merits? courts can order grounding, repossession and other injunctive relief on an interim basis. Depending upon the type of relief See question 5.4. being sought, a court may require that a bond, other under- taking or other form of security be posted by the requesting lessor or secured party. 5.10 What is the applicable procedure for repossession of an aircraft under other forms of security interests?

5.5 Are powers of attorney from a local airline in favour of a lessor or mortgagee likely to be effective to allow See questions 5.1 and 5.2. the lessor or mortgagee to deregister the aircraft? Can such powers be irrevocable, be governed by a foreign law and/or do they need to be in any particular form for local 62 Conventions recognition? 6.1 Has your jurisdiction ratified any of the following: (a) The Chicago Convention of 1944 on International While a secured party would typically obtain an IDERA from Civil Aviation (the Chicago Convention); (b) The 1948 an aircraft owner as set forth in question 3.5, powers of attorney Convention on the International Recognition of Rights from an aircraft owner in favour of a secured party should be in Aircraft (the Geneva Convention); (c) The 1933 effective to allow the secured party to deregister an aircraft Convention for the Unification of Certain Rules Relating from the FAA Registry. There is no prohibition upon the use to the Precautionary Arrest of Aircraft (the 1933 Rome of foreign law governed powers of attorney, although the use of Convention); and (d) The Convention on International foreign law may delay the FAA’s review. Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Cape Town Convention) and the Protocol on the Convention on International Interests 5.6 If recovery of the aircraft is contested by the lessee in Mobile Equipment on Matters Specific to Aircraft and a court judgment is obtained in favour of the lessor, Equipment? how long is it likely to take to gain possession of the aircraft? The Chicago Convention has been ratified by the United States. The Geneva Convention has been ratified by the United States. If the judgment is rendered by a U.S. court in the location where The 1933 Rome Convention has not been ratified by the United the aircraft is located, the timing of the enforcement will be States. The CTC has been ratified by the United States, and dependent upon the terms of the order and any applicable stat- the United States has made declarations to apply Article VIII utory stay, such as, for example, the 30-day stay of enforcement of the Cape Town Protocol (Choice of Law), Article XII of the provided under Rule 62 of the Federal Rules of Civil Procedure (which applies for federal judgments unless a court orders other- Cape Town Protocol (Insolvency Assistance) and Article XIII of wise). For orders from other jurisdictions, the exact length of time the Cape Town Protocol (De-Registration and Export Request will be highly dependent upon the terms and circumstances of the Authorization). judgment and the jurisdiction in which enforcement is sought. 6.2 Has ratification of the Cape Town Convention caused any conflicts or issues with local laws? 5.7 Are there any restrictions on the ability of the lessor to export the aircraft from your jurisdiction on termination of the leasing? No, ratification of the CTC has not caused any conflict or issues within local laws. The FAA does establish certain requirements for the export of an aircraft. The FAA handles deregistration and export requests 6.3 What is the legal position regarding on a priority basis (usually within a few days, and sometimes less). non-consensual rights and interests under Article 39 of An export airworthiness certificate is needed under subpart L of the Cape Town Convention? the Federal Aviation Regulations. Of course, disclosure require- ments under the USA Patriot Act and the Currency and Foreign Transactions Reporting Act must be complied with (designed to The United States has adopted Article 39 in its Declaration prevent transfers to suspected terrorist and other criminal organ- that was lodged under the CTC at the time of the deposit of its isations). Also, the Office of Foreign Asset Controls (“OFAC”) Instrument of Ratification. enforces restrictions upon transactions involving certain coun- tries or regions that are the subject of U.S. sanctions.

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6.4 Has your jurisdiction adopted the remedies on 7.3 What liabilities (actual or potential) could an owner, insolvency provided under Article XI of the Protocol to lessor or financier of an aircraft incur in your jurisdiction the Cape Town Convention? because of a failure to comply with local environmental law and/or regulations on the part of an operator of aircraft leased or financed by it? Although the United States has not adopted either Alternative A or Alternative B, section 1110 of the Bankruptcy Code (“Section 1110”) was considered the model for Alternative A and provides There are a number of environmental regulations in the creditors with similar protections. See question 8.4. United States related to environmental issues such as noise and fuel storage but not relating to greenhouse gasses or climate change, generally. The United States is party to the Montreal 6.5 What is the procedure to file an irrevocable Protocol and the Chicago Convention, which established the deregistration and export request authorisation under International Civil Aviation Organization (“ ”), and both the Cape Town Convention (IDERA)? ICAO parties to the Montreal Protocol and ICAO have issued amend- ments and resolutions to support environmental protections. The IDERA should be substantially in the form annexed to the Recent programmes that were established included extending Cape Town Convention Protocol and submitted for recorda- federal tax incentives and federal local guarantee authority for tion to the FAA meeting the standard submission requirements clean energy projects and contributing to the Green Climate noted in question 3.4. Fund created by the United Nations Framework Convention on Climate Change. However, the current administration has indi- 72 Liability for Damage and Environmental cated it may reconsider continuing these programmes. Overall, the U.S. Supreme Court case of City of Burbank v. Lockheed Air 7.1 Can the owner be strictly liable – liable without Terminal, established federal pre-emption over aviation regula- a requirement to prove fault or negligence – for any tion, so the FAA and the Environmental Protection Agency damage or loss caused by the aircraft assuming the would have jurisdiction over such matters. As of now, there are owner is an innocent owner with no operational control no broad reaching federal environmental regulations that would of the aircraft? affect an owner, lessor or financier of an aircraft.

While product liability is historically a matter of state law (and 82 Insolvency and Searches many states have strict liability regimes with regards to the ownership and operation of equipment), the U.S. Congress has 8.1 Are there any public registers in your jurisdiction codified a safe harbor intended to pre-empt state law and protect where a search can be carried out to determine whether innocent lessors, owners and secured parties from liability for an order or resolution for any bankruptcy, bankruptcy aircraft incidents. Under section 44112 of the Transportation protection or similar insolvency proceedings has been Code, lessors, owners and secured parties are shielded from registered in relation to an operator or lessee? liability for personal injury, death or property loss or damage caused by aircraft, engines or propellers provided that the Each bankruptcy court and most state courts in which bank- lessor, owner or secured party is not in actual possession or ruptcy or similar insolvency proceedings could be pending main- operational control of the relevant aircraft equipment when the tain electronic databases that allow for expeditious searches to related incident occurs. While this statute has been interpreted determine whether an operator or lessee is subject to bankruptcy in conflicting manners by a variety of state courts, with multiple proceedings. state courts upholding federal pre-emption and the safe harbour generally, the statute was amended in 2018 in response to a state court decision that did not respect federal pre-emption further 8.2 In the event that an operator or lessee were to become insolvent either on a balance sheet basis (assets evidencing Congressional intent to protect innocent lessors, less than liabilities) or is unable to pay debts as fall owners and secured parties. due, would an operator or lessee be required to file for insolvency protection? 7.2 Does the EU Emissions Trading System (EU ETS), or any similar scheme, apply to aircraft and aircraft While there is no general requirement for a U.S. operator or operators in your jurisdiction? Will charges levied lessee to voluntarily start a bankruptcy proceeding when it according to the EU ETS, or its equivalent, give rise to becomes insolvent, there are strong incentives to voluntarily any in rem rights in relevant aircraft which are part of the fleet of the operator concerned and, if so, will such rights do so in order to reorganise and stay in business. Additionally, rank in priority ahead of any mortgage interests properly subject to satisfaction of numerosity and claim size require- registered in the relevant aircraft and/or engine? ments (which are not significant), creditors can initiate an invol- untary bankruptcy case against an operator or lessee. EU ETS does not apply in the United States and charges levied by EU ETS would not give any in rem rights in such aircraft when 8.3 Do the available forms of insolvency protection it is located in the United States. Generally, there is no federal in your jurisdiction involve the appointment of either detention statute that would permit detention of an aircraft for an officer of the court or a specifically court appointed such purposes, but on a state level, there are some airport lien official to take control of the operator or lessee (an ‘Insolvency Official’) while in insolvency protection? statutes which could give rise to detention of an aircraft where there are unpaid airport fees and charges. If an operator or lessee commences a reorganisation case under Chapter 11 of the Bankruptcy Code (“Chapter 11”), their board of directors and officers stay in control of such debtors. In

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such Chapter 11 cases, the debtors (as debtors-in-possession) or more individuals or 6,000 pounds or more of cargo; (2) cred- stay in control of their companies, but must operate under the itor type: for aircraft equipment first placed in service after requirements of the Bankruptcy Code, with the oversight of the October 22, 1994, all lessors and secured creditors of covered bankruptcy court and, in most large Chapter 11 cases, a cred- aircraft equipment are granted protection under Section 1110; itors committee. In cases of fraud or mismanagement, credi- (3) the types of remedies to recover the aircraft equipment must tors and/or the bankruptcy court can either (a) seek to have a be provided under the agreement with the air carrier; (4) the Chapter 11 trustee appointed to control such debtor, or (b) have debtor must be a U.S. certificated air carrier; and (5) the debtor the case converted to a liquidation case under chapter 7 of the must be in a Chapter 11 case (i.e., Section 1110 does not apply Bankruptcy Code (“Chapter 7”). to Chapter 7). In a Chapter 7 liquidation case, a trustee is appointed to control and administer the liquidation of the debtor’s businesses 8.5 Can the commencement of insolvency proceedings and assets. have retrospective effect in relation to any such actions taken before commencement? If so, for what period can 8.4 Does the commencement of insolvency protection there be a look back? involving the appointment of an Insolvency Official in your jurisdiction have the effect of prohibiting the Except as set forth below, no – the filing of a bankruptcy peti- owner from taking the following actions to enforce tion creates a bankruptcy estate and the rights of the prepeti- the lease after commencement of such protection: (a) tion debtors and the post-petition bankruptcy estate are distin- applying any security deposit held by the owner against any unpaid amounts due under the lease; (b) accepting guished as of such petition date. payment of rent or other lease payments from the lessee, Individual transactions, however, are subject to various types a guarantor or a shareholder; (c) giving notice of default of avoidance, with the main actions for avoidance, dependent under the lease; (d) obtaining a judgment or arbitral upon the applicable facts and circumstances, being preference award for unpaid lease payments; (e) giving notice to and fraudulent conveyance actions. terminate the leasing of the aircraft and/or engine; or One of the primary goals of the Bankruptcy Code is to effect (f) exercising rights to repossess the aircraft and/or a ratable distribution of the debtor’s estate to similarly situated engine? creditors. To accomplish this, section 547 of the Bankruptcy Code empowers a bankruptcy trustee or debtor-in-possession to The commencement of a bankruptcy case effects a stay of all set aside or “avoid” certain transfers of the debtor’s assets made such creditor enforcement action. When a Chapter 11 petition is prior to the bankruptcy filing to the extent that the transfer filed, creditors are automatically prohibited from taking action causes the creditor to receive more than it otherwise would have against the debtor or its property to collect debts arising before if the transfer was not made or if the debtor had been liquidated. the filing of the Chapter 11 petition. The automatic stay has Such a preferential transfer is a transfer made during the “prefer- the effect of a court-ordered injunction. Actions which violate ence period” by an insolvent debtor on account of an antecedent the automatic stay include: (a) commencing lawsuits against debt, and which is to or for the benefit of a creditor. The length the debtor with respect to debts arising before the filing of the of the preference period depends upon the relationship of the Chapter 11 petition; (b) taking action to seize or attach the debt- transferee to the debtor, but is generally the 90-day period prior or’s property by legal process or private action; (c) taking action to the filing of the bankruptcy petition. However, where the to foreclose or otherwise enforce liens or mortgages on the debt- creditor was an insider of the debtor at the time that the transfer or’s property; and (d) taking action to enforce remedies under took place, the preference period is the one-year period prior unexpired leases. to the date of the bankruptcy petition. The Bankruptcy Code However, Section 1110 affords aircraft lenders and lessors provides several exceptions to preference actions, the primary special protections in a Chapter 11 case involving a U.S. certifi- ones being defences for (a) contemporaneous exchange for “new cated air carrier. Under Section 1110, qualifying aircraft lessors, value”, (b) a secured creditor holding collateral supporting the lenders and conditional vendors have the right to repossess distribution, and (c) payments made in the ordinary course of Section 1110 qualifying aircraft equipment under the terms of business. their prebankruptcy agreements unless, within 60 days after With respect to fraudulent conveyance avoidance actions, entry of the order for relief, the air carrier-debtor (i) cures all such actions seek to avoid a conveyance or transfer of prop- defaults, and (ii) agrees to perform future obligations under erty, or the incurrence of an obligation, the object of which is to such agreements by making a so-called 1110(a) agreement. If defraud, hinder or delay another creditor, or to put such prop- the debtor fails to do this, then the automatic stay does not apply erty beyond the creditor’s reach. Fraudulent conveyances can for the affected Section 1110 creditors and they may demand be made with actual intent to hinder, delay or defraud creditors repossession, commence foreclosure proceedings or effect other or can be “constructive” fraudulent transfers if certain statuto- remedies against their aircraft equipment under the transaction rily prescribed factors are met. In a bankruptcy case, fraudulent documents. In addition, in the event a debtor air-carrier does conveyance claims can be raised under the Bankruptcy Code as not cure or agree to perform, Section 1110(c) requires that such well as applicable non-bankruptcy law. The applicable statute debtor “immediately surrender and return” such equipment to of limitations for bringing such an action is usually dependent the aircraft lender or lessor if the aircraft lender or lessor is enti- upon the applicable statute of limitations for fraudulent convey- tled to possession under its transaction documents and makes ances under applicable local law, with four years being the most written demand for such possession. comment limitations period. There are five key factors for determining whether an aircraft With respect to any type of avoidance powers under the lessor or financier’s transactions are entitled to protection under Bankruptcy Code, an additional restriction upon such avoidance Section 1110: (1) equipment type: only leases, security agree- is that the avoidance action must be commenced by the debtor ments or conditional sale contracts involving an “aircraft”, in its bankruptcy case within two years of the bankruptcy peti- “aircraft engine”, “propeller”, “appliance” or “spare part” are tion date (or, if a trustee is appointed in any bankruptcy case to protected, and only applies for aircraft capable of carrying 10 replace the debtor-in-possession within such two-year period,

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the later of such two-year period or one year from the appoint- 8.8 If the aircraft is in the possession of a person ment of the trustee). See Bankruptcy Code section 546(a)(1). other than the operator or lessee at the commencement of Insolvency Protection of the operator or lessee, for example, an independent maintenance facility, will such 8.6 Is there, either under law or as a matter of practice person be entitled, under the laws of your jurisdiction, in your jurisdiction, a period of time within which the to assert a lien arising under law or contract over the Insolvency Official will either ‘adopt’ the lease and aircraft in respect of amounts then due and unpaid to pay rent and other lease payments as an expense such person by the operator or lessee? of the insolvency or ‘reject’ the lease and permit the owner to enforce such rights as it may have under the lease? (a) If the lease is ‘adopted’, will the Insolvency Maintenance, repair and storage facilities generally can assert Official also pay any unpaid lease payments due as at liens over the aircraft in their possession. The exact scope and commencement of the insolvency protection? (b) If not rights accorded to such mechanic’s, materialman’s and hangar or if the lease is ‘rejected’, would the owner’s claim for keeper’s lien holders is highly dependent upon the laws of the any outstanding sums rank equally with other ordinary specific jurisdiction in which the aircraft is located and/or that unsecured creditors of the lessee? governs the contracts between the parties.

Absent a court order, such leases/contracts may be assumed or 92 Detention and Confiscation rejected at any point during the course of the debtor-air-carrier’s bankruptcy case – i.e., at any time prior to plan confirmation. All obligations under an assumed lease, as well as, in the case 9.1 Other than insolvency laws (see section 8), are there any laws which may have the effect of defeating of rejected leases/contracts, compensation to the creditor for the owner’s right in the aircraft – for example, the use of the equipment following the commencement of the Government requisition? Do the laws of your jurisdiction bankruptcy proceedings, are accorded administrative priority provide for any compensation in such circumstances? and will rank in priority over all prepetition claims against such debtor. Additionally, when assuming a lease, a debtor-air carrier According to section 2644 of title 10 of the U.S. Code, in a is required to have all defaults (including any missed prepeti- “time of war”, the federal government “may take possession tion payment obligations) cured as part of any assumption of its and assume control of all or part of any system of transporta- lease, and such a lessor is entitled to receive full payment. If, on tion to transport troops, war material, and equipment, or for the other hand, a debtor rejects a lease, the rejection and other other purposes related to the emergency”. However, the Fifth prepetition damage claims under such rejected lease are treated Amendment of the U.S. Constitution would require the federal as prepetition general unsecured claims of the debtor and are government to provide “just compensation” if it were to requi- treated on the same priority as other prepetition general unse- sition an aircraft (i.e. if it were to take such “private property… cured claims. for public use”). Many U.S. airlines also participate in the Civil As discussed in question 8.4, Section 1110 debtors have 60 Reserve Air Fleet (“CRAF”), which is a voluntary programme days following commencement of a Chapter 11 case to make a among the DOT, the Department of Defense (“DOD”) and so-called Section 1110(a) agreement or enter in so-called Section airlines. The airlines enter into a contractual arrangement with 1110(b) stipulations with the operator/lessor/secured party the federal government whereby the airline volunteers certain of regarding terms for using the aircraft. These Section 1110(a) their aircraft to the CRAF programme when DOD needs more agreements or Section 1110(b) stipulations, however, are not aircraft in emergencies, including humanitarian assistance/ an assumption of a lease or reinstatement of a financing, but disaster relief, major theatre war, and periods of national mobi- a vehicle for temporary use of aircraft by an airline-debtor. A lisation, in return for preference in carrying commercial peace- debtor can later decide to assume or reject a lease in which it time cargo and passenger traffic for DOD. previously made a Section 1110(a) agreement or a Section 1110(b) stipulation – and the foregoing discussion would apply to such a lease. 9.2 Are there any rights in relation to third parties to detain or sell the aircraft pursuant to illegal activities, tax or any other laws if the operator or lessee fails to pay 8.7 Are there certain types of preferred creditors whose when due? If so, can the aircraft be forfeited and sold claims will rank above claims of the owner? without the owner being made aware?

In general, the rights of a secured party and/or lessor are estab- In the case of certain criminal activity, the U.S. government lished under applicable state law and will be recognised and can seek forfeiture of property if that property was either the respected under the Bankruptcy Code. With respect to claims “fruit” of the crime or used to commit the crime in accord- against a debtor’s estate, the bankruptcy court keeps a detailed ance with sections 853 and 881 of title 21 of the U.S. Code. An ranking of priority and the Bankruptcy Code sets forth a detailed example would be if an aircraft was used to traffic illegal drugs. list of priority, generally according post-petition lenders and Additionally, each state also has its own laws regarding type, parties entitled to adequate protection with the potential to have priority and validity of liens after repossession. For example, the top-priority ranks, followed by post-petition administration depending on the state, repair facilities, airport authorities, fuel claims, various categories of priority claims (which are gener- and other suppliers may be able to assert claims for materials ally fairly limited in amount) and then general unsecured claims. or labour provided with respect to an aircraft but states have different laws regarding whether such possessory liens may be filed with the FAA. However, these types of liens would not generally permit the lien holder to sell the aircraft without the owner being made aware.

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Adam R. Beringer is a Shareholder and member of the Global Transportation Finance team at Vedder Price P.C. His focus is on commercial aircraft finance, and he has significant experience representing operating lessors, commercial banks, finance companies, manufacturers, private equity funds, hedge funds and other aircraft investors in all manners of aircraft finance transactions, including portfolio securitisa- tions and warehouse financings involving substantial commercial aircraft portfolios, Rule 144A capital markets transactions, M&A transac- tions, cross-border operating lease transactions, distressed-debt transactions involving debt secured by commercial aircraft portfolios, and numerous aircraft portfolio acquisition and disposition transactions.

Vedder Price P.C. Tel: +1 312 609 7625 222 North LaSalle Street Email: [email protected] Chicago, IL 60601 URL: www.vedderprice.com USA

Michael J. Edelman practises both the corporate and litigation sides of the bankruptcy and restructuring fields, and he also has extensive experience in aircraft financings and aircraft asset dispositions. His practice involves all aspects of bankruptcy litigation, proceedings, nego- tiation and restructuring. Michael has experience in many of the significant Chapter 11 reorganisations and out of court restructurings of the past two decades as counsel to creditors, debtors and financial institutions. Michael also has been engaged in numerous representations involving international airline restructurings and enforcement actions, such as Varig, Air Comet and Mexicana.

Vedder Price P.C. Tel: +1 212 407 6970 1633 Broadway, 31st Floor Email: [email protected] New York, NY 10019 URL: www.vedderprice.com USA

Melissa W. Kopit is an Associate in the firm’s Global Transportation Finance team at Vedder Price P.C. Melissa concentrates her practice in corporate and financial transactions, with a focus on secured lending, asset finance and leasing involving commercial and business aircraft, helicopters and general equipment assets. Melissa also counsels and represents lenders, borrowers, lessors, lessees, equity participants and other financiers in a wide range of cross-border and domestic transactions.

Vedder Price P.C. Tel: +1 202 312 3037 1401 I Street NW, Suite 1100 Email: [email protected] Washington, District of Columbia 20005 URL: www.vedderprice.com USA

Matthew P. Larvick is a Shareholder in the Corporate practice area, specifically corporate taxation. Matthew focuses on federal income taxation, including structuring, implementing and advising on partnership and limited liability company transactions and vehicles, including private equity and hedge funds (and associated investment structures), corporate joint ventures, operating businesses, equity compensation arrangements, family office and investment funds, and real estate investment vehicles. Matthew also advises on mergers and acquisitions, whether taxable, tax-deferred or partially tax-deferred, including representation of buyers, sellers and management.

Vedder Price P.C. Tel: +1 312 609 7970 222 North LaSalle Street Email: [email protected] Chicago, IL 60601 URL: www.vedderprice.com USA

With 300 lawyers and growing, Vedder Price P.C. serves sophisticated clients of all sizes and in virtually all industries from offices in Chicago, New York, Washington, D.C., London, San Francisco, Los Angeles and Singapore. Vedder Price’s Global Transportation Finance team, and in particular our finance practice, is widely recognised as an industry leader, including by Chambers Global which recognised Vedder Price P.C. as “one of the top law firms for Asset Finance in the world”. Vedder Price’s commercial aviation finance lawyers have achieved global recognition and prominence representing a wide variety of clients world- wide, including airlines, operating lessors, commercial banks, investment banks, private equity funds, manufacturers and governmental agencies in a broad variety of commercial aviation transactions. www.vedderprice.com

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Dr. Michael Loc Pham

LIFT Consulting Group Julien Tran

12 General and Contractual ■ The lessee has great flexibility in 1.1 What are the typical structures available for managing its fleet financing the purchase of an aircraft? because it can ■ Cost of a financing lease contract for in- can be higher than other creased capacity forms of financing. As per our experience, typical structures used in Vietnam to Financing only if necessary. finance the purchase of an aircraft are similar to those of inter- Lease ■ The airline or the lessee national practice. In our daily operations, most of the financing ■ At the end of shall bear the risks and re- structures we have encountered are: the term, the wards incident to the own- ■ a secured loan: a borrower incurs a loan from a bank or lessee has either ership of the aircraft. other financial institution, secured by a mortgage over the a right or an ob- aircraft; and ligation to pur- ■ a financing lease of the aircraft: as an operating lease, the chase the aircraft. lessee shall pay rent to the lessor. However, at the end of the term, the lessee is expected to purchase the aircraft for a low price. 1.3 What types of leasing are possible under the laws of your jurisdiction? What are their essential characteristics? 1.2 What are the key advantages/disadvantages and main issues arising in relation to these financing structures? According to the Vietnam Civil Aviation Law No. 66/2006/ QH11, leases of an aircraft can be: ■ With a crew (or wet-lease). The lessor agrees to provide Advantages Disadvantages an aircraft, crew, maintenance and insurance (ACMI) to the lessee. The aircraft shall be operated according to the ■ Typical events of default lessor’s aircraft operator certificate. The lessor shall ensure or other provisions nor- safety standards of aircraft maintenance and operation. mally included in loan doc- ■ Without a crew (or dry-lease). The lessor only provides the uments and secured trans- aircraft. The aircraft shall be operated according to the action may limit the airline lessee’s aircraft operator certificate. The lessee shall ensure ■ The airline or or the leasing company to safety standards of aircraft maintenance and operation. leasing company operate its business. owns the aircraft. ■ The airline or the leasing 1.4 Are there any proposals for reform in the area of aviation finance? ■ The airline or company may be restricted Secured leasing company on its capability to incur ad- Loan has the choice ditional loan, as loan agree- For now, there is no reform scheduled in the area of aviation to operate the ments might include finan- finance. aircraft itself or cial covenants or provisions limiting the amount of debt lease it to another 1.5 Is it possible according to the laws in your party. a company can incur. jurisdiction to enter into non-binding or partially binding pre-contractual agreements (e.g. ‘letters of ■ The interest of the loan intent’) which will NOT take effect as fully enforceable could be high since the air- agreements? line or the leasing company or airline may not be invest- In Vietnam, this is based on agreement between parties prior to ment grade. signing a fully enforceable agreement.

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1.6 Is there a doctrine of ‘good faith’ in your jurisdiction ■ photocopies of business contracts, service contracts, agent which applies to all pre-contractual agreement, contracts, entrustment contracts, technology transfer financing and leasing transaction documents, and the contracts, or documents proving the shipping business (if conduct of parties connected to them? the taxpayer is an international transport company), that are certified by the taxpayer; According to Article 3.3 of the Civil Code, “good faith” is a ■ tax receipts certified by a State Treasury, commercial bank, basic principle of the Civil Code, in which any legal entity must credit institution, or tax authority, or photocopies of tax establish, exercise, terminate its rights and obligations in good receipts certified by the taxpayer; faith and honesty. However, no doctrine of “good faith” is clar- ■ certification of the operation period and performance ified under Vietnamese laws. according to the contract by the Vietnamese party; and/or ■ a letter of attorney if the taxpayer authorises a legal repre- 22 Taxation and Related Matters sentative to follow the procedure.

2.1 Which government authority in your jurisdiction 2.4 Has the advent of BEPS (the Base Erosion and has primary responsibility for the accounting for and Profit Shifting initiative of the OECD) had any effect as regulation of revenue control and taxes? regards structures in aviation finance and leasing or their interpretation? The General Department of Taxation at the central level, which is directly under the management of the Ministry of Finance, Since 24 February 2017, Decree No. 20/2017 has implemented has prime responsibility for the accounting and regulation of OECD’s BEPS in Vietnam. Transfer pricing regulations revenue control and taxes. are therefore fully enforceable in Vietnam. To avoid transfer pricing tax reassessment, concerned structures must carefully prepare all required forms (in particular, Master File, Local File 2.2 What are typically the taxes in your jurisdiction and Country by Country). which may arise in relation to a sale, a lease or a financing of an aircraft or an engine? 2.5 What are the typical thresholds in your jurisdiction for which a permanent establishment may be triggered 1. Sale: under the terms of any relevant double-tax treaty or According to Article 11 of the Circular No. 78/2014/TT-BTC, similar? enterprises (generally companies) are subject to the Corporate Income Tax (CIT) at rates imposed by the law. According to Article 1. 2.2. of Circular No. 205/2013/TT-BTC guiding the implementation of the agreements on double taxa- 2. Lease: tion avoidance, the permanent establishment needs to be ■ Foreign Company: Foreign Contract Tax (FCT) an organisation established and operating under the laws of is applied to foreign organisations and individuals Vietnam. undertaking business or earning income sourced from Furthermore, according to Article 1. 3.2. of the mentioned Vietnam on the basis of agreements with Vietnamese circular, it also depends on specific provisions in each double-tax parties (including foreign-owned companies). FCT is treaty to determine a non-individual entity as a resident of not a separate tax, and normally comprises a combina- Vietnam. Double-tax treaties usually prescribe the following tion of Value Added Tax (VAT) and CIT (Articles 12 criteria: and 13 of the Circular No. 103/2014/TT-BTC). a) if the permanent establishment is established or registered ■ Domestic Company: according to Article 11 of the for operation in Vietnam, it shall be deemed to be resident Circular No. 78/2014/TT-BTC, enterprises are subject of Vietnam; to the Corporate Income Tax (CIT) at rates imposed b) if such entity has a main office in Vietnam, it shall be by the law. deemed to be resident of Vietnam; or c) if such entity has place of effective management in Vietnam, 3. Purchase: it shall be deemed to be resident of Vietnam. In the case of purchase, enterprises shall be subject to an import tax with 0% rate, as provided in Appendix II of Decree No. 125/2017/ND-CP. 2.6 Is the authority at question 2.1 likely to establish a ‘look-through’ right or similar as regards a lender or a lessor which is a special-purpose vehicle involved for 2.3 Is the provision of a current tax-residency the purpose of tax treaty access? certificate by a payee sufficient for a lessee or a borrower potentially subject to withholding taxes in your jurisdiction on rental or interest payments to avail itself 1) Lender or lessor is a special-purpose vehicle established in of treaty access and the mitigation of tax liability? Vietnam and owned by a foreign entity Pursuant to Circular No. 156/2013/TT-BTC and Decree No. Pursuant to Article 54, 2. of the Circular No. 156/2013/TT-BTC, 83/2013/ND-CP, the tax authority has rights to proceed on tax it is required for a tax refund according to double taxation agree- audits towards organisations, households, and individuals that pay ments and also to submit an application to the Department of taxes, fees, or other amounts to government budgets as prescribed Taxation consisting of: by law. If the lender or lessor is a special-purpose vehicle estab- ■ a written request for a tax refund; lished in Vietnam and owned by a foreign entity, it would be ■ the original copy (or certified true copy) of the consularly considered by the Vietnamese authority as an organisation as legalised Certificate of Residence issued by a tax authority defined in the mentioned circular. Therefore, the tax authority of the home country, specifying the tax year; would have rights to proceed on tax audits towards such entity.

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2) Lender or the lessor is a special-purpose vehicle estab- 3.2 What is the effect of registration of the aircraft? lished in a foreign country and owned by a Vietnamese Does registration on your national aircraft register entity. confer proof of ownership of the aircraft and/or engine? Pursuant to Article 1 of the Circular No. 96/2015/TT-BTC, in certain circumstances CIT shall have to be paid. In that case, Pursuant to Article 1.1a of Decree No. 07/2019/ND-CP, the tax authority shall have some “look-through” rights, such as Registration of aircraft nationality allows the aircraft to be oper- requesting for declaration of overseas income tax. ated in Vietnam. Registration does confer proof of ownership of the aircraft 2.7 Will the import of an aircraft into your jurisdiction and/or engine. Based on form No. 4 of Appendix as provided and/or the sale or leasing of the aircraft give rise to any under Decree No. 68/2015/ND-CP, information about the VAT, sales or use taxes or any customs import or excise aircraft owner shall be recorded in the Registration Certificate duties? of Aircraft Bearing Vietnamese Nationality.

1. Regarding VAT: 3.3 Can foreign-owned aircraft be registered on According to Article 4. 17. c) of Circular No. 219/2013/ your national aircraft register and are there limits or TT-BTC, airplanes (including engines) that cannot be manufac- restrictions on the age of aircraft that may be registered tured in Vietnam and are imported as fixed assets or leased from or operated? a foreign party to serve manufacturing, trading, or to sublease shall not be subject to VAT. According to Article 13.5 of the Law on Vietnam Civil Aviation, foreign-owned aircraft can be registered in the Vietnam national 2. Custom import: aircraft register. According to Appendix II of Decree No. 125/2017/ND-CP, the The laws of Vietnam set out below identify several limits on import tax rate with respect to aircraft is 0%. the age of aircraft that can be registered/operated:

3. Regarding Excise Duties: According to Article 3. 3. of Decree No. 108/2015/ND-CP, No. Type of aircraft Age of aircraft aircraft used for the transport of cargo, passengers, tourists, and Used passenger ≤ 10 years as from the date aircraft serving national defence and security purposes are not carriage aircraft of manufacture to the date of subject to excise tax. Other aircraft shall be subject to excise importation in Vietnam under tax according to the Law on excise duty and instructions of the the purchase/financing lease Ministry of Finance. agreement. 1 ≤ 20 years as from the date of manufacture to the due date of 2.8 Are there any documentary taxes (for example, lease agreement. stamp duty payable on the execution of documents)? Used helicopter ≤ 25 years as from the date of manufacture to the due date of Decree No. 23/2015/ND-CP describes procedures and fees lease agreement. for the issuance of copies from master registers, certification of true copies from originals, and authentication of signatures and Used cargo car- ≤ 15 years as from the date contracts. Beyond that, Vietnamese laws do not provide any riage aircraft of manufacture to the date of documentary taxes such as stamp duty payable on the execution importation in Vietnam under the purchase/financing lease of documents. 2 agreement. 32 Registration and Deregistration ≤ 25 years as from the date of manufacture to the due date of lease agreement. 3.1 Which government authority in your jurisdiction has primary responsibility for the regulation of aviation Other used ≤ 20 years as from the date and the registration of aircraft? Is it an owner registry aircraft of manufacture to the date of or an operator registry? If the aircraft register is an importation in Vietnam under operator register, is it possible to record the details of the purchase/financing lease an owner or lessor and any financier with an aircraft 3 agreement. mortgage? ≤ 30 years as from the date of manufacture to the due date of According to Article 3.1 of Decree No. 66/2015/ND-CP, lease agreement. the Civil Aviation Authority of Vietnam (CAAV) under the management of the Ministry of Transportation has primary responsibility for the regulation of aviation and the registration 3.4 Can aircraft leases be registered? If so, in what of aircraft. CAAV is not only the owner registry but also the circumstances? Must the lease be in a particular form if it is to be valid and enforceable (for example, must it operator registry (Article 15.4 of the mentioned Decree). be in a particular language or be notarised, legalised or Pursuant to Articles 4.4 of Decree No. 68/2015/ND-CP and apostilled)? 8.1 of Decree No. 102/2017/ND-CP, if the aircraft register is an operator register, which could be the airline, it has all rights towards the aircraft registration, including but not limited to Under the laws of Vietnam, the aircraft lease agreement itself registration of details of an owner or lessor and any financier is not required to be registered. According to Article 4.1c of with an aircraft mortgage. Circular No. 81/2014/TT-BGTVT and Articles 5.2e, 16.2c, 16.2d of Decree No. 68/2015/ND-CP, amended by Decree No.

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07/2019/ND-CP, the aircraft lease agreement under different 4.4 What other forms of security can be taken over forms must be submitted to the CAAV in the following an aircraft and/or engine and can these other forms be circumstances: registered? ■ With respect to application for approval of aircraft lease between Vietnamese and foreign entities: a copy of the According to Article 292 of the Civil Code, Articles 4.1c and lease agreement. 4.2c of Decree No. 102/2017/ND-CP, other forms of security ■ With respect to registration of aircraft nationality and taken over an aircraft and/or engine are pledges, title retention possession of aircraft: a copy and an original for the in the case of selling and purchasing, deposits, security collat- purpose of comparison, or a notarised copy. eral, guarantees and lien. Set out below are the legal regulations on registration of secu- 3.5 How is deregistration affected and what steps can rity measures: a lessor take to de-register the aircraft on termination of the lease? Required to Allowed to Cannot be be registered be registered registered Upon deregistration of aircraft nationality, the aircraft is not allowed to be operated in Vietnam. According to Articles 8.1c, 8.1d and 9.2 of Decree No. Pledge x 68/2015/ND-CP, a lessor or appointed person in the regis- tered IDERA document must submit the application dossier for Title reten- tion in case deregistration of aircraft nationality to the CAAV. Within five x working days, Deregistration Certificate of Aircraft Nationality of sell and shall be issued, and the issued Registration Certificate of Aircraft purchase Nationality shall be revoked by CAAV (Article 9.5). Deposit x Security 42 Security x collateral 4.1 Is it possible to create a mortgage over an aircraft Guarantee x or engine in your jurisdiction? If so, what are the types of aircraft mortgage and engine mortgage available and what formalities are required in order to perfect it? Lien x

Pursuant to Articles 28.1c and 28.2 of the Law on Vietnam Civil 4.5 What claims and rights would take priority in your Aviation, an aircraft or engine is allowed to be mortgaged. jurisdiction over a registered mortgage? A mortgaged aircraft or engine entitled to transfer of owner- ship is available if agreed by the mortgagee, pursuant to Article According to Articles 34.1, 32.3 and 32.4 of the Law on Vietnam 5 of the mentioned law. Civil Aviation, priority payment over a registered mortgage is as Under Articles 4.1c and 4.2 of Decree No. 102/2017/ND-CP, follows: the mortgage of aircrafts/engines must be registered with the 1. court fee and expenses for judgment enforcement; CAAV, and with the National Registration Agency for Secured 2. remuneration for aircraft salvage and preservation and Transactions if necessary. related expenses; and 3. creditors whose mortgage has been registered and paid for 4.2 Can spare parts, including future parts, be subject in the order of registration. to the aircraft mortgage or engine mortgage (as the case may be)? If not, are there any other forms of security that can be taken over spare parts? 4.6 What other forms of security can be granted over an aircraft and/or engine lease?

Available spare parts (not including future parts) could be subject As per as our practice, the other forms of security which can be to an aircraft mortgage or engine mortgage, under Articles 28.1c granted over an aircraft and/or engine lease are a letter of credit, and 28.2 of the Law on Vietnam Civil Aviation. As per our the undertaking letter, and guarantees in cash. experience of Vietnam practice, future parts of an aircraft or engine have not yet been mortgaged. However, they may be registered under the mortgage of movable assets to be formed 52 Enforcement and Repossession in the future at the National Registration Agency for Secured Transactions, if necessary, pursuant to Article 4.2a of Decree 5.1 What are the circumstances in which a mortgagee No. 102/2017/ND-CP and Article 105.2 of the Civil Law. or owner can take possession of the aircraft and/or sell the aircraft? What requirements must the mortgagee or owner comply with? 4.3 Is there a register of mortgages or rights over aircraft and/or engine? Regarding the sale of an aircraft, in principle, the owner can always sell its asset. A novation agreement between the lessor, According to Articles 28.1 and 29 of the Law on Vietnam Civil the new lessor and the lessee shall then be signed, as well as a Aviation, ownership rights, possession rights (including hire letter of quiet enjoyment, allowing the lessee to use the aircraft purchase or lease of six months or more), pledges and/or the mort- without any disturbance from the new lessor or any mortgagee or gaging of an aircraft/engine must be registered with the CAAV. security trustee. However, in case the owner cannot pay back its loan, only the security trustee will be allowed to sell the aircraft.

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Regarding the repossession of an aircraft, because of the lease document must be registered in accordance with Article 23 of agreement and the letter of quiet enjoyment, the owner, mort- Decree No. 68/2015/ND-CP. gagee or security trustee cannot repossess the aircraft. Only in the case of event of default payment (as stipulated in the lease 5.6 If recovery of the aircraft is contested by the lessee agreement or loan agreement) can the owner, mortgagee or and a court judgment is obtained in favour of the lessor, security trustee repossess the aircraft. how long is it likely to take to gain possession of the The process for repossession or re-sale is outlined in the lease aircraft? agreement or loan agreement. A mortgagee or owner must comply with the requirements of deregistration and registration under Articles 29 and 30 If the lessee requests for an appeal against the court judgment of Decree No. 102/2017/ND-CP, Article 9 of Decree No. in favour of the lessor, under Article 271 of the Code of Civil 68/2015/ND-CP and Article 5 of Decree No. 68/2015/ND-CP. Procedure, an appellate procedure for revision must commence. If the aircraft is transferred to a foreign entity, the owner must In case the lessor or the lessee is a Vietnamese entity, request the issuance of the Export Certificate of Airworthiness, according to Article 286 of the Code of Civil Procedure, within under Article 10.1 of Decree No. 68/2015/ND. four months, if there is an appropriate reason, the Court must send an application to the Appellate Court, amend such deci- sion, or abolish such decision and transfer the application file to 5.2 What is the procedure for repossession of the the first-instance Court for continuing the settlement. aircraft? In case the lessee or the lessor is a foreign entity, a Court session could be commenced no later than 13 months as from To repossess an aircraft, the following procedures must be the date of accepting the case, pursuant to Article 476.2b of the implemented in accordance with Articles 9 and 10 of Decree Code of Civil Procedures. No. 68/2015/ND-CP: Within 30 days as from the effective date of the court judg- ■ Application for deregistration of aircraft nationality. ment, the Court must deliver such judgment to the Civil ■ Upon issuance of the Deregistration Certificate of Aircraft Judgment Enforcement Agency, pursuant to Article 28.1 of the Nationality, the owner/lessor or person appointed in the Law on Enforcement of Civil Judgments, as amended by Article IDERA document must request the issuance of the Export 1.11 of the Amended Law on Enforcement of Civil Judgments. Certificate of Airworthiness. Upon completing enforcement of the judgment, the lessee must deregister the aircraft and relinquish their possession. Within three working days, the CAAV shall revise and issue 5.3 Will local courts recognise a choice of foreign law the Deregistration Certificate of Aircraft Possession Right and in an aircraft mortgage? Are there any mandatory local revoke the issued Registration Certificate of Aircraft Possession rules that apply, despite a choice of foreign law? Right, pursuant to Article 21 of the Law on Civil Aviation.

Parties to any agreement have the right to select the applicable law at their own discretion, pursuant to Article 683.1 of the Civil 5.7 Are there any restrictions on the ability of the lessor to export the aircraft from your jurisdiction on Code. However, foreign law shall not be applied if the conse- termination of the leasing? quences of application of such foreign law are inconsistent with the basic principles of Vietnamese laws; or the contents of such foreign law are not identifiable regardless of the adoption of The laws of Vietnam have adopted the Cape Town Convention. necessary measures prescribed by procedural law, according to As such, any restrictions shall be applied in accordance with the Article 670.1 of the Civil Code. Cape Town Convention. Basic principles of civil law are prescribed under Article 3 of the Civil Code. 5.8 Are exchange controls prevailing in your jurisdiction as regards payments in foreign currency? 5.4 Will local courts recognise and enforce a foreign Will any consents be required for the remittance of the court judgment in favour of a mortgagee or lessor? Are sale proceeds abroad? any interim relief measures available? Normally, all transactions, payments, quotations, pricing, prices Yes, according to Articles 423 and 425.1 of the Code of Civil in contracts of residents and non-residents are not allowed to be Procedure. Aircraft may be detained to ensure the lawsuit settle- conducted in foreign exchange, pursuant to Article 3 of Circular ment, pursuant to Article 114.16 of the Code of Civil Procedure. No. 32/2013/TT-NHNN. However, there are exceptions listed in Article 4 of the mentioned circular. In particular, non-residents are allowed to price contracts in foreign currency and make payment 5.5 Are powers of attorney from a local airline in favour of exported goods and services in foreign currency by transfer for of a lessor or mortgagee likely to be effective to allow the lessor or mortgagee to deregister the aircraft? Can residents. Residents are allowed to make quotations, fix prices such powers be irrevocable, be governed by a foreign in foreign currency or receive payments in foreign currency by law and/or do they need to be in any particular form for transfer when they supply goods and services for non-residents. local recognition? 5.9 If the lease is governed by English law and a Under Article 3.7 of Decree No. 68/2015/ND-CP, Irrevocable judgment is obtained by the lessor in the English courts, Deregistration and Export Request Authorisation (IDERA) is can that judgment be automatically enforced in your the power of attorney issued in accordance with Cape Town jurisdiction or will the case have to be re-examined on its Convention, which appoints a person who has the right to merits? request for deregistration or export of aircraft. This person could be the lessor, mortgagor or security trustee. The IDERA The judgment cannot be automatically enforced but must be

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recognised and enforced, pursuant to Articles 423 and 431 of an object equivalent to that of the holder of a registered inter- the Code of Civil Procedure. national interest shall have priority over a registered interna- tional interest, whether in or outside insolvency proceedings and whether registered before or after the Socialist Republic of 5.10 What is the applicable procedure for repossession of an aircraft under other forms of security interests? Vietnam’s accession.

■ General declaration under Article 39(1)(b): Another form of security interest is a pledge of an aircraft; the The Socialist Republic of Vietnam declares that nothing in pledgor may repossess the aircraft by deregistration of a pledge the Cape Town Convention shall affect its rights or that of any of an aircraft in accordance with Articles 29 and 30.1 of Decree State entity, any intergovernmental organisation or other private No. 102/2017/ND-CP. provider of public services to arrest or detain an object under its However, as per our practice, we have not encountered any laws for payment of amounts owed to it. pledges of aircrafts at the time of writing this chapter. Please see https://www.unidroit.org/status-2001capetown?id =1743 for more information. 62 Conventions

6.4 Has your jurisdiction adopted the remedies on 6.1 Has your jurisdiction ratified any of the following: insolvency provided under Article XI of the Protocol to (a) The Chicago Convention of 1944 on International the Cape Town Convention? Civil Aviation (the Chicago Convention); (b) The 1948 Convention on the International Recognition of Rights in Aircraft (the Geneva Convention); (c) The 1933 In relation to the content of Article XI of the Cape Town Convention for the Unification of Certain Rules Relating Convention, Notice No. 67/2014/TB-LPQT, dated 29 to the Precautionary Arrest of Aircraft (the 1933 Rome September 2014, announces to apply all remedies prescribed in Convention); and (d) The Convention on International item A, Article XI, “Cape Town Remedies on insolvency” for all Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Cape Town Convention) and the litigation procedures regarding insolvency. Protocol on the Convention on International Interests However, regulations provided in Article XI have not been in Mobile Equipment on Matters Specific to Aircraft directly specified in regulations of laws on civil aviation but Equipment? are generally specified in Article 3.1dd of Decree No. 68/2015/ ND-CP as well as other rights in accordance with international treaties of which Vietnam is a member. Ratified Entry into force The Chicago 6.5 What is the procedure to file an irrevocable 13 March 1980 12 April 1980 deregistration and export request authorisation under Convention the Cape Town Convention (IDERA)? The Geneva 18 June 1997 16 September 1997 Convention According to Article 23 of Decree No. 68/2015/ND-CP amended The 1933 Rome Not ratified - by Decree No. 07/2019/ND-CP, any aircraft’s owner or applicant Convention for registration of aircrafts who wishes to apply for registration of The Cape Town the IDERA document shall send the application to the CAAV. 17 September 2014 1 January 2015 Convention An application for registration of IDERA must include: The Protocol a) two application forms; on Cape Town 17 September 2014 1 January 2015 b) certified true copies or copies enclosed with their originals Convention of documents proving the legal status of the applicant; c) if such documents are issued by a competent foreign authority, they must be legalised, except in the case of 6.2 Has ratification of the Cape Town Convention exemption; and caused any conflicts or issues with local laws? d) certified true copies or copies enclosed with the original copies of documents proving international interests of the To our knowledge, the ratification of the Cape Town Convention authorised party of the Vietnamese nationality aircraft. has not caused any conflicts with local laws. Documents in foreign languages shall undergo consular legalisation.

6.3 What is the legal position regarding 72 Liability for Damage and Environmental non-consensual rights and interests under Article 39 of the Cape Town Convention? 7.1 Can the owner be strictly liable – liable without a requirement to prove fault or negligence – for any According to the declarations lodged by the Socialist Republic damage or loss caused by the aircraft assuming the of Vietnam under the Cape Town Convention, ratified on 17 owner is an innocent owner with no operational control September 2014 and entered into force on 1 January 2015 is as of the aircraft? follows:

■ General declaration under Article 39(1)(a): According to Article 177 of the Vietnam Civil Aviation Law, the The Socialist Republic of Vietnam declares that all catego- aircraft operator shall be liable for damages sustained to third ries of non-consensual right or interest which under its law parties. However, in case of illegal use of the aircraft causing have, and will in the future have, priority over an interest in damages, the person who has committed the illegal use, as well as the possessor of the aircraft, shall be held both severally and

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jointly responsible. Therefore, if the possessor and the owner 8.4 Does the commencement of insolvency protection are the same party, it shall be automatically liable. Yet, pursuant involving the appointment of an Insolvency Official to Article 177.2, if the possessor manages to prove that it has in your jurisdiction have the effect of prohibiting the applied every necessary measure to prevent such illegal use, it owner from taking the following actions to enforce will not be held liable. the lease after commencement of such protection: (a) applying any security deposit held by the owner against any unpaid amounts due under the lease; (b) accepting 7.2 Does the EU Emissions Trading System (EU ETS), payment of rent or other lease payments from the lessee, or any similar scheme, apply to aircraft and aircraft a guarantor or a shareholder; (c) giving notice of default operators in your jurisdiction? Will charges levied under the lease; (d) obtaining a judgment or arbitral according to the EU ETS, or its equivalent, give rise to award for unpaid lease payments; (e) giving notice to any in rem rights in relevant aircraft which are part of the terminate the leasing of the aircraft and/or engine; or fleet of the operator concerned and, if so, will such rights (f) exercising rights to repossess the aircraft and/or rank in priority ahead of any mortgage interests properly engine? registered in the relevant aircraft and/or engine? All activities described from (a) to (f) can be carried out after The EU ETS and other similar schemes do not apply to the decision of the initiation of bankruptcy, as long as they do Vietnamese jurisdiction at the time of writing this chapter. not result in a Prohibited Activities as listed in Article 48 of the Law on Bankruptcy: 7.3 What liabilities (actual or potential) could an owner, a) dispersing and hiding assets; lessor or financier of an aircraft incur in your jurisdiction b) paying the unsecured debts, except the unsecured debts because of a failure to comply with local environmental incurred after the initiation of bankruptcy process and the law and/or regulations on the part of an operator of employees’ salaries; aircraft leased or financed by it? c) renouncing the right over debt claim; and d) making an unsecured debt into a secured or partly-secured In this case, no regulations under the laws of Vietnam provide debt with collateral which are assets of the entity. liabilities incurred by an owner, lessor or financier. 8.5 Can the commencement of insolvency proceedings 82 Insolvency and Searches have retrospective effect in relation to any such actions taken before commencement? If so, for what period can there be a look back? 8.1 Are there any public registers in your jurisdiction where a search can be carried out to determine whether an order or resolution for any bankruptcy, bankruptcy The decision on commencement of insolvency proceedings shall protection or similar insolvency proceedings has been take effect from the date of decision, pursuant to Article 42.6 registered in relation to an operator or lessee? of the Law on Bankruptcy. Therefore, the commencement of insolvency proceedings has no retrospective effect in relation to According to Article 43.1 of the Law on Bankruptcy, a notifi- any actions taken before commencement. cation of the decision on initiation of the bankruptcy process issued by the Court must be publicised on the National Business 8.6 Is there, either under law or as a matter of practice Registration Portal (https://bocaodientu.dkkd.gov.vn/) and the in your jurisdiction, a period of time within which the Electronic Portal of Supreme People’s Court (http://congbo- Insolvency Official will either ‘adopt’ the lease and banan.toaan.gov.vn/). pay rent and other lease payments as an expense of the insolvency or ‘reject’ the lease and permit the owner to enforce such rights as it may have under the 8.2 In the event that an operator or lessee were to lease? (a) If the lease is ‘adopted’, will the Insolvency become insolvent either on a balance sheet basis (assets Official also pay any unpaid lease payments due as at less than liabilities) or is unable to pay debts as fall commencement of the insolvency protection? (b) If not due, would an operator or lessee be required to file for or if the lease is ‘rejected’, would the owner’s claim for insolvency protection? any outstanding sums rank equally with other ordinary unsecured creditors of the lessee? Yes, the legal representative of each enterprise or cooperative is required to send a written request for initiation of the bank- According to Article 4.12 of the Law on Bankruptcy, the expense ruptcy process when the entity is insolvent, pursuant to Article of insolvency shall include the amount of money paid for the 5.3 of the Law on Bankruptcy. bankruptcy settlement, audit, publication and other expendi- tures according to the law. The payment of the rent shall not 8.3 Do the available forms of insolvency protection be considered as an expense of insolvency. It will therefore in your jurisdiction involve the appointment of either be rejected by the Insolvency Official and the owner would be an officer of the court or a specifically court appointed considered as ordinary unsecured creditors of the lessee. official to take control of the operator or lessee (an ‘Insolvency Official’) while in insolvency protection? 8.7 Are there certain types of preferred creditors whose claims will rank above claims of the owner? According to Article 9.3 of the Law on Bankruptcy No. 51/2014/ QH1, the Court shall make the decision of appointing the asset management officer, specialised in management and liquidation According to Articles 53 and 54 of the Law on Bankruptcy, of assets during the process of a bankruptcy settlement. claims of preferred creditors rank above that of the owner as follows:

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1. secured debts, in particular: 92 Detention and Confiscation ■ secured debts formed before the date the Court accepts the request for commencement of bankruptcy proceedings shall be paid by such secured asset; 9.1 Other than insolvency laws (see section 8), ■ in case the value of the secured asset is not enough to are there any laws which may have the effect of defeating the owner’s right in the aircraft – for example, pay the debt, the remaining debt shall be paid during Government requisition? Do the laws of your jurisdiction the liquidation process; provide for any compensation in such circumstances? 2. cost of bankruptcy; 3. the unpaid salaries, severance pay, social insurance and medical insurance to employees, other benefits according to Regarding Government requisition, please refer to the Law on Compulsory Purchase and Requisition No. 15/2008/QH12. the labour contracts and collective bargaining agreements; According to Articles 2.4 and 3.2 of the mentioned law, any 4. debts incurred after the initiation of bankruptcy which are organisation which has the right to own or operate the aircraft, used for resuming the business operation; and incurs any damage arising from such aircraft due to the requi- 5. financial obligations to the Government, unsecured debts sition, shall be entitled to compensation in accordance with payable to the creditors on the list of creditors, and secured market price. Pursuant to Article 34.1 of the mentioned law, debts which are not paid because the value of collateral is the owner/operator shall be entitled to compensation in the not enough to cover such debts. following cases: 1. the aircraft is lost; 8.8 If the aircraft is in the possession of a person 2. the aircraft is damaged; or other than the operator or lessee at the commencement 3. revenue of the owner/operator is lost, which was directly of Insolvency Protection of the operator or lessee, for caused by the requisition. example, an independent maintenance facility, will such person be entitled, under the laws of your jurisdiction, to assert a lien arising under law or contract over the 9.2 Are there any rights in relation to third parties to aircraft in respect of amounts then due and unpaid to detain or sell the aircraft pursuant to illegal activities, such person by the operator or lessee? tax or any other laws if the operator or lessee fails to pay when due? If so, can the aircraft be forfeited and sold without the owner being made aware? According to Article 346 of the Civil Code, lien means that the lienor, who legally possesses the property being an object of a bilateral contract, is entitled to retain the property when the Pursuant to Article 44.1 of the Law on Vietnam Civil Aviation, obligor fails to perform the obligations. the Court may detain the aircraft in the interests of any cred- itors, owners or third parties on the grounds of incurring However, the payment, if it has not been paid to a third party damages or other persons who have rights and benefits arising by the operator or lessee when due, is considered an unsecured from the aircraft. debt. Such person shall be the creditor of unsecured debt, Pursuant to Article 20.4 of Ordinance against Procedures of pursuant to Article 4.4 of the Law on Bankruptcy. The unse- Detaining Aircrafts, the decision of detaining the aircraft issued cured debt payable to the creditor as prescribed in the list of by the judge shall be delivered to the owner of such aircraft. As creditors shall be the final rank under the order of distribution such, the owner will be aware of such event. of asset when the Court announces bankruptcy, under Article 54.1d of the Law on Bankruptcy.

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Dr. Michael Loc Pham is a senior advisor in tax, finance, investment, international trade and contract sectors at LIFT Consulting Group. Michael has over 45 years of experience as a practising legal professional in investment, international trade, development project, tax and litigation in the US and Vietnam. Before joining LIFT as a partner, Michael has practised law as an attorney since 1980, founding his own law firm in San Jose, California. In Vietnam, Michael has been in charge of the legal consultancy for a large number of high value projects across Vietnam, from US $10 million to US $1 billion. In addition, Michael has taught commercial law and international contract law at major universities in Vietnam. Many of his works were published, including: Wise Money (1985); and Perfect Entrepreneur – Who are you? (2014). At LIFT, Michael provide in-depth advises on aviation, investment, contract, corporate, tax and dispute resolutions related to international transactions. LIFT Consulting Group Tel: +84 382 809 908 Vincom Center, 72 Le Thanh Ton St. & Email: [email protected] 45A Ly Tu Trong St., Ben Nghe Wd., Dist. 1, Quận 1 URL: www.liftgroups.com Ho Chi Minh City 710000 Vietnam

Julien Tran is a senior counsel at LIFT Consulting Group advising on transportation, corporate and cross-border transactions. Julien has been working in external and in-house roles based in Asia and Europe, with nearly 10 years’ experience in advising on a variety of transactions in the aviation, international business law, finance and corporate sectors. At LIFT Consulting Group, Julien leads his associates in advising leading financial institutions, aircraft/engine lessors, and airlines companies on all aspects of financing, leasing and restructuring, across a variety of jurisdictions in relation to aircraft industry. In addition, Julien’s valuable experience extends to numerous expertise fields, including notary, civil and corporate laws. Julien is also a member of the Board of Directors of the French Chamber of Commerce and Industry in Vietnam.

LIFT Consulting Group Tel: +84 382 809 908 Vincom Center, 72 Le Thanh Ton St. & Email: [email protected] 45A Ly Tu Trong St., Ben Nghe Wd., Dist. 1, Quận 1 URL: www.liftgroups.com Ho Chi Minh City 710000 Vietnam

LIFT Consulting Group has devoted its main attention to the aviation sector. ■ obtaining all required licences and approval from aviation agencies, Based in Vietnam (Ho Chi Minh City), LIFT has strategically positioned itself maintaining relationship with relevant authorities; and in the centre of this growing market with the ambition to be the number one ■ working and negotiating with insurers, brokers for insurance and South-East Asian law firm in this area. reinsurers. Its core strength comes from its experienced legal team, who are experts in www.liftgroups.com all transactions related to aviation industry: ■ advising, assisting and leading airlines, investment companies or financial institutions on carrying out transactions on aircraft and engines, such as lease, lease back, refinancing, novation, sale and purchase; ■ financial analysis, benchmarks, implementation of investment strategies and securities;

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