Aircraft finance and leasing in England

  1. PROPOSED TRANSACTION STRUCTURE
  2. SEARCHES
    1. Are there any public registers in the Relevant Jurisdiction where a search can be carried out to determine whether an order or resolution for any bankruptcy, bankruptcy protection or similar insolvency proceedings has been registered in relation to the Airline?
    2. If so, specify which public registers, how long such searches typically take and if the fees are more than USD 100, approximately what fees apply?
  3. RIGHTS AND EVIDENCE OF OWNERSHIP
    1. In the case of the transfer of title to an aircraft registered in the Relevant Jurisdiction:
    2. Other than Insolvency laws (see section 8) are there any laws which may have the effect of defeating the Owner’s right in the aircraft – for example, Government requisition? Do the laws of the Relevant Jurisdiction provide for any compensation in such circumstances ?
  4. THE AIRCRAFT REGISTER – NATIONALITY OF AIRCRAFT
    1. Has the Relevant Jurisdiction ratified any of:
    2. If the Relevant Jurisdiction has not ratified the Cape Town Convention, has the Relevant Jurisdiction started official proceedings or given any other official indication that it will accede to or ratify the Cape Town Convention in the near future?  
    3. Is there an Aircraft Register in the Relevant Jurisdiction and if so, what is it called and who operates it?
    4. If so, in relation to registration:
    5. In respect of aircraft transactions connected with the Relevant Jurisdiction generally, are there any foreign Aircraft Registers that are commonly used, or should be considered, as alternatives to or in addition to registration with the Relevant Jurisdiction’s Aircraft Register? If so, what is benefit of such registration?
    6. Are there any other filings or registrations necessary or desirable (other than the registrations already mentioned and Lease Registration – see section 5.7) in the Relevant Jurisdiction in order to ensure the validity, priority or enforceability of the transaction documents, or to perfect the interests of the Owner in the Aircraft or the transaction documents?
  5. LEASES
    1. Will the Relevant Jurisdiction recognise the concept of a lease over an aircraft?
    2. Would the choice of English law to govern the Lease be upheld as a valid choice of law in any action in the Relevant Jurisdiction?
    3. Must the Lease be in a particular form if it is to be valid and enforceable in the Relevant Jurisdiction (for example, must it be in the language of the Relevant Jurisdiction or be notarised, legalised or have the apostille applied)?
    4. If the Lease must be in the language of the Relevant Jurisdiction, is it possible under the Relevant Law also to have an English version, and to provide that the English version should prevail in case of conflict with the Relevant Jurisdiction language version?
    5. Are there any special terms that the Lease must contain or that it is advisable for the Lease to contain?
    6. Are there any circumstances under which the Lease might be re-characterised under the laws of the Relevant Jurisdiction as:
    7. Is there a separate register for aircraft leases in the Relevant Jurisdiction?
    8. If yes, then:
  6. ENFORCEMENT OF LEASES (ASSUMING AIRLINE IS NOT IN A FORM OF INSOLVENCY PROTECTION)
    1. On the occurrence of an event of default under the Lease, assuming that the Owner is permitted to do so under the terms of the Lease, can the Owner terminate the Leasing of the Aircraft under the Lease and enforce the Lease by taking physical possession of the Aircraft?
    2. If so, can the Owner take physical possession of the Aircraft without the need for judicial proceedings in the Relevant Jurisdiction?
    3. Where judicial proceedings in the Relevant Jurisdiction are necessary, please provide details of the proceedings, in particular:
    4. Where judicial proceedings are not necessary, please comment on the time limits relevant to taking possession of the Aircraft, in particular:
    5. Apart from the judicial proceedings described above and ignoring deregistration (see section 7), is the permission of any other party (including any official body) in the Relevant Jurisdiction required to take possession of the Aircraft?  
    6. Is there any history of actual repossession of aircraft by Owners in the Relevant Jurisdiction? If so, please provide details of any matters or issues of which an Owner should be aware.
    7. Are there any circumstances in which the sums expressed to be payable under the Lease or obligations expressed to be assumed by the Airline in the Lease are or will be unrecoverable or unenforceable in the Relevant Jurisdiction?
    8. Are there any restrictions on the ability of the Owner to sell the Aircraft in the Relevant Jurisdiction during the term of the Lease or, following an event of default, on termination of the leasing or pending judicial enforcement of the Lease?
    9. Are there any export restrictions on export of a repossessed aircraft?
  7. DEREGISTRATION POWER OF ATTORNEY/EXPORTATION
    1. Can the Owner apply for deregistration of the Aircraft either at the end of the lease term or following successful repossession (with or without judicial proceedings) and is there any time period within which such application should be made?
    2. Is the consent of the Airline required to deregister the Aircraft either by law or as a matter of custom or practice?
    3. How long does deregistration take, both where there is co-operation from the Airline and where this is no co-operation from the Airline?
    4. Is it possible to obtain an export licence or export permit in advance?
    5. Approximately how long does it take to obtain an export licence or export permit? What are the costs involved?
    6. Is it possible to obtain a certificate of deregistration in advance?
    7. Will a power of attorney empowering the Owner to deregister and export the Aircraft from the Relevant Jurisdiction, either at the end of the lease term or following successful repossession (with or without judicial proceedings), be enforceable in the Relevant Jurisdiction?
    8. If the power of attorney was stated to be irrevocable would this be enforceable against the Airline or can the Airline revoke such power of attorney?
    9. Upon the occurrence of a bankruptcy or insolvency of the Airline is the power of attorney still effective?
  8. INSOLVENCY
    1. In the event that the Airline were to become insolvent either on a balance sheet basis (assets less than liabilities) or unable to pay debts as fall due:
  9. TAXATION
    1. The decision to lease to an airline in the Relevant Jurisdiction assumes that the Owner will not be taxed on receipt of rentals or other payments (including maintenance reserves) under the Lease except by way of tax on its general income, profits or gains payable by the Owner in its place of incorporation or place of main business (if different). Will there be a requirement for the Owner to pay tax in the Relevant Jurisdiction on lease payments on basis that either the Owner is subject to taxation in the Relevant Jurisdiction by reason only of the leasing of the Aircraft under the Lease and is required to make payment itself; or payment of such tax is by way of the airline being required to withhold and account for tax from lease payments, where:
    2. VAT: European Union country: under Article 148(f) of the VAT Directive, an exemption from VAT is applied to “supplies” consisting of chartering or hiring of aircraft which are used by airlines operating for reward chiefly on international routes. Therefore:
    3. Is any stamp duty, notarial or other fee or equivalent payable in respect of the execution of the Lease, a de-registration power of attorney or any other lease related document concerning the aircraft? Will such stamp duty or fee still be payable if the relevant documents are executed and held outside the Relevant Jurisdiction? If any such amount is payable how much is it approximately?
    4. Can any form of consent, authorisation or licence be obtained exempting the payments referred to in this Section from such tax or duty? If so, how would it be obtained?
    5.  Ignoring any taxation consequence already mentioned and any potential taxation issues if the Owner has any other connection to the Relevant Jurisdiction, is there any other Relevant Jurisdiction taxation consequence of the Owner:
  10. EXCHANGE CONTROLS
    1. Are payments to foreign owners by companies incorporated or registered in the Relevant Jurisdiction subject to any form of exchange or similar control?
    2. If yes, can any consents, authorisations or licences be obtained to exempt payments from any such control? How would these be obtained? Are such consents, authorisations or licences transferable?
  11. INSURANCE
    1. Is it a legal requirement to insure the Aircraft within the Relevant Jurisdiction?
    2. If so, is there any restriction on reinsurance of the primary insurance outside the Relevant Jurisdiction?
    3. Is there a minimum percentage of cover which a local insurer is obliged to retain, and if so, what is it?
    4. Is it possible for local insurers to assign contracts of reinsurance? If not, is a cut-through clause enforceable?
  12. LIABILITY FOR DAMAGE
  13. DETENTION/CONFISCATION
    1. Are there any rights to detain or sell the Aircraft pursuant to drug trafficking, tax or other laws or pursuant to rights of airport or air navigation authorities if the Airline fails to pay when due? 
    2.  If so, can the Aircraft be forfeited and sold without the Owner being made aware?
  14. SOVEREIGN IMMUNITY
    1. Is any Airline based in the Relevant Jurisdiction entitled to any form of sovereign or other immunity from suit which might restrict the Owner’s rights under the Lease?
    2. Can such immunity be validly waived in advance by contract?
  15. DISPUTE RESOLUTION AND RECIPROCAL ENFORCEMENT
    1. Do the laws of the Relevant Jurisdiction permit and recognise an “asymmetric” submission to jurisdiction clause under which the lessee submits to the exclusive jurisdiction of the Courts of England but the Owner has discretion to choose a jurisdiction other than the Courts of England?
    2. If the Lease is governed by English Law and a judgment is obtained by the Owner in the English courts, can that judgment be automatically enforced in the Relevant Jurisdiction or will the case have to be re-examined on its merits? If so what procedures must be complied with to enforce such a judgement?
    3. Is the Relevant Jurisdiction party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) or the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the Washington Convention)? Will the courts of the Relevant Jurisdiction recognise and enforce a decision of an arbitrator?
    4. What is the usual choice of dispute resolution in international supply contracts involving a lessor or buyer incorporated in or with its main place of business in the Relevant Jurisdiction?
  16. AIRCRAFT ENGINES
    1. If the equipment being leased to the Airline in the Relevant Jurisdiction was an Aircraft Engine either unattached to an airframe or attached to an airframe belonging to a party other than the Aircraft Engine Owner and being leased to the Airline under a separate engine lease agreement, would there be any significant changes to the responses set out above?
    2. In particular, does the Relevant Jurisdiction recognise the separate ownership of the Aircraft Engine by the Aircraft Engine Owner when the Aircraft Engine is attached to an airframe belonging to a person other than the Aircraft Engine Owner?
    3. Is there a register of Aircraft Engines and is the information given above in relation to registration of Aircraft and the ownership and leasing of Aircraft the same for registration of an Aircraft Engine and the ownership and leasing of such Aircraft Engine at the Aircraft Engine register?
  17. ADDITIONAL INFORMATION – IS THERE ANYTHING ELSE WE SHOULD HAVE ASKED?
Information current as of March 2020

1. PROPOSED TRANSACTION STRUCTURE

Relevant Jurisdiction: England

The Aircraft will be purchased by the Owner and leased on an operating lease basis to the Airline pursuant to the Lease. 

Is this the usual structure for transactions of this nature in the Relevant Jurisdiction?  

Yes

Note: English law is different from the law in Scotland or Northern Ireland.  The responses below relate to England and Wales and not to other parts of the United Kingdom.

2. SEARCHES

2.1 Are there any public registers in the Relevant Jurisdiction where a search can be carried out to determine whether an order or resolution for any bankruptcy, bankruptcy protection or similar insolvency proceedings has been registered in relation to the Airline?

Yes, a search can be made at Companies House and at the High Court.  While a search conducted in these places will reveal orders for or appointment of most common forms of collective corporate insolvency protection or insolvency proceedings, it may not reveal all forms – for instance, the appointment of a Receiver to charged assets can be initiated out of Court and the Receiver has 14 days to file notice of appointment.

2.2 If so, specify which public registers, how long such searches typically take and if the fees are more than USD 100, approximately what fees apply?

Searches can be made at Companies House and by telephone to the High Court on the same day and the cost is minimal.

3. RIGHTS AND EVIDENCE OF OWNERSHIP

3.1 In the case of the transfer of title to an aircraft registered in the Relevant Jurisdiction:

3.1.1 Is any particular form of transfer required for the transfer to be legally recognised?

No particular form is mandatorily required. In practice a Bill of Sale is generally used.

It is also possible to transfer a beneficial interest by way of creation of a trust.

3.1.2 Must any particular conditions be satisfied for the transfer to be recognised?

The Aircraft or Engine must be located in England or Wales or another country that will recognise a transfer of title in the form proposed for the transaction under English law as a valid method of title transfer under its domestic law.

3.1.3 Will such a transfer still be recognised by the courts of the Relevant Jurisdiction as legally valid where the relevant aircraft is located in another jurisdiction at the time of the transfer?

If the country where the relevant aircraft is located will recognise a transfer of title in the form proposed for the transaction under English law as a valid method of title transfer under its domestic law, yes; if not, then no and local law advice should be taken.

3.1.4 Are any duties, taxes or fees levied on such transfer of ownership?

Where an Aircraft is supplied in England or Wales, VAT may be payable.  Generally VAT is not payable where the Aircraft will be used by an Airline operating flights for reward chiefly on international routes (see ECJ case C33-2011 and 9.3 below for more detail).  Where there is a supply in the Relevant Jurisdiction to a lessor and the Aircraft will then be supplied under a lease to an Airline operating flights for reward chiefly on international routes then it is usually possible to look through the intermediate step to the final supply to the Airline under the lease. 

Aircraft Parts and equipment (including Aircraft Engines) supplied in England or Wales may be zero rated for VAT (so the applicable VAT rate is zero) where they are of a kind ordinarily installed or incorporated in the propulsion, navigation or communications systems, or the general structure and are intended for incorporation or installation in an Aircraft operated by an Airline operating flights for reward chiefly on international routes.

If the Aircraft is to be registered on the UK register then there will be registration fees payable.
An aircraft lessor carrying on the trade of leasing in England or Wales may be liable to UK Corporation Taxes on its profits or gains. Specific advice is recommended if this is likely to be the case.

3.2 Other than Insolvency laws (see section 8) are there any laws which may have the effect of defeating the Owner’s right in the aircraft – for example, Government requisition? Do the laws of the Relevant Jurisdiction provide for any compensation in such circumstances ?

There are certain other statutory rights which could, in certain circumstances, defeat the Owner’s rights in the Aircraft:

  1. Certain designated Airport operators and the CAA have statutory rights of detention of an Aircraft and sister Aircraft in an Airline’s fleet for unpaid airport charges;
  2. The Civil Aviation Authority (CAA) has a statutory right to detain an Aircraft and sister aircraft for unpaid Air Navigation charges in the UK and on behalf of certain other countries; 
  3. In relation to the EU ETS scheme the UK Environment Agency has the right to detain Aircraft and sister aircraft within a fleet operated by (1) a UK administered Airline which has failed to pay a civil penalty within six months of the due date; and (2) an EU operator subject to an operating ban under Article 16(10) of the EU ETS Directive.In each case a right of sale arises to the CAA or the Environment Agency, as the case may be, if, after 56 days from the date of first detention, the relevant amounts remain unpaid.  The right of sale requires the leave of the Court before it can be exercised. Recent case law confirms that termination of the lease to a defaulting Airline before detention will defeat the rights of detention of the Aircraft so far as they relate to Airport or Air Navigation charges arising from the operation of sister aircraft in the terminated operator’s fleet.  The ETS legislation specifically recognises that the right of detention should not apply if an Airline ceases to be the operator of an Aircraft by termination of the lease in its favour.
  4. The UK tax authorities may seize goods (which can include an Aircraft) for unpaid taxes.  If the unpaid taxes are not then paid within a short period, the goods may be auctioned.  The tax authorities may not seize and sell goods (including an Aircraft) which belong to another person so a leased Aircraft should not be seized and sold for the lessee Airline’s unpaid taxes.
  5. Customs officers have various powers to detain an Aircraft – generally where the Aircraft has been used to carry items liable to forfeiture or which have not cleared customs.  Generally the right of detention would not lead to sale without a Court direction.
  6.  An Aircraft may be detained in relation to various crimes including actual or suspected acts of terrorism or where it has been acquired from the proceeds of crime.  Generally the right of detention would not lead to sale without a Court direction.
  7.  The CAA has rights to detain an Aircraft if it has no Certificate of Airworthiness, does not have the appropriate route licensing, if it is unfit for flight or contravenes air navigation requirements or lacks required certifications.  Generally the right of detention would not lead to a sale without a Court direction.
  8. Certain liens can arise as a matter of contract or law including a seller’s lien for unpaid purchase price, a repairer’s lien for unpaid amounts related to labour to improve the Aircraft and liens for salvage.  These liens are dependent on the lien holder having and maintaining possession of the Aircraft.  A lien holder does not have the right of sale although the lien holder could seek a direction for sale of the Aircraft from a Court if the debt it is owed continues to be unpaid for a reasonable period of time.
  9. The UK Government has certain statutory rights of requisition but only in the event of a declared Emergency and then only on satisfaction of certain conditions set out in the Civil Contingencies Act 2004.  The Act provides the power for requisition with or without compensation but where the predecessor powers were exercised during the Falklands War compensation was generally paid.
  10. The Secretary of State within the Department of Transport has rights to detain aircraft. For example, the authorities can prevent aircraft flights where an aircraft does not meet safety or navigation requirements or if it fails to have the necessary certification, including for airworthiness, noise and emissions.

4. THE AIRCRAFT REGISTER – NATIONALITY OF AIRCRAFT

4.1 Has the Relevant Jurisdiction ratified any of:

The Chicago Convention of 1944 on International Civil Aviation? 
Yes

The 1948 Geneva Convention on the International Recognition of Rights in Aircraft?
No

The 1933 Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft?
No

The 2001 Cape Town Convention on International Interests in Mobile Equipment and the associated Protocol on Matters Specific to Aircraft Equipment (the Cape Town Convention)?
Yes. The United Kingdom ratified the Cape Town Convention on 27 July 2015.

4.2 If the Relevant Jurisdiction has not ratified the Cape Town Convention, has the Relevant Jurisdiction started official proceedings or given any other official indication that it will accede to or ratify the Cape Town Convention in the near future?  

Not applicable

4.3 Is there an Aircraft Register in the Relevant Jurisdiction and if so, what is it called and who operates it?

Yes, it is called the UK Register of Civil Aircraft and it is operated by the Civil Aviation Authority.  The CAA maintains a website: http://www.caa.co.uk from which searches can be made on line and which contains other useful information.

There is no separate register and it is not possible to make a separate registration for Aircraft Engines or Spares.

Interests may also be registered at the International Registry if they fall within the scope of the Cape Town Convention. 

4.4 If so, in relation to registration:

4.4.1 Who is responsible for registering the Aircraft – is it an owner registry or an operator registry?

It is an owner registry but this vocabulary is loose – the register will record the details of the owner or the operator as “registered Owner” and will note whether they are “Owner” or “Charterer”. The details recorded depend on the details submitted in the application for registration. The register is not definitive as to ownership.

4.4.2 What details would normally be recorded on the Aircraft Register upon registration of an aircraft in the Relevant Jurisdiction? If not normally recorded, is it possible to record the Lease and/or an Aircraft Mortgage on the Aircraft Register?

The main details registered are the identity of the Registered Owner (who may be the owner or charterer (but if charterer, it must be a Qualifying Person and requires the CAA to consent)) and the details of the Aircraft.  Aircraft mortgages may be registered on the Aircraft Mortgage Register which is a separate register from the UK Register of Civil Aircraft and, if the security provider is a UK company, Companies House (more information is provided with regard to Companies House at paragraph 4.8).

4.4.3 If the Aircraft Register is an operator register, is it possible to record the details of the aircraft owner/lessor and any financier with an Aircraft Mortgage?

It is not an operator registry.

4.4.4 If the Aircraft Register is an owner register, is registration on the Aircraft Register definitive to determine ownership of the Aircraft?

No, it is not.  The “Registered Owner” may be a charterer and not the owner depending on who made the application for registration, whether both owner and operator qualify for registration on the UK register and whether CAA consent to charterer being registered instead of owner.  However, an Aircraft cannot be registered in the UK if it is already registered outside the UK and that other registration would not terminate with registration in the UK. 

4.4.5 Are any distinctions made between aircraft employed on international routes and those used purely for domestic flights?

No, not for this purpose.  However, for VAT purposes, a distinction is made between airlines operating chiefly on international routes and those that do not with VAT being payable on certain transactions where the operator is not chiefly engaged in international flights for reward. 

4.5 What documents and/or consents are required to obtain registration on the Aircraft Register and will these require any formalities (for example, notarisation, legalisation or application of apostille)?

An application form must be completed and signed, a fee paid and evidence supplied of compliance with required minimum insurance criteria, or a declaration that the aircraft will not fly until such criteria is met.

4.6 Are there any restrictions on the legal status and/or nationality/domicile of parties seeking to register an aircraft on the Aircraft Register?

Yes, registration is generally limited to Qualifying Persons which can be summarised as the UK Government, British and European Economic Area nationals including legal persons (which include Scottish partnerships), British Protected persons and Commonwealth bodies.  However, some further commentary is required. As noted at paragraph 4.4.4, the CAA has the discretion to register as “Registered Owner” a lessee who is a Qualifying Person.  Although Commonwealth bodies are eligible, the CAA will only permit registration if there is not a more appropriate national register in which the relevant Aircraft could be registered.  Finally a person who is not a Qualifying Person but who has an ownership interest in an Aircraft and who resides or has a place of business in the UK may be permitted to register at the CAA’s discretion.  If this is relevant it is recommended that a discussion with the CAA is opened at an early stage.

4.7 In respect of aircraft transactions connected with the Relevant Jurisdiction generally, are there any foreign Aircraft Registers that are commonly used, or should be considered, as alternatives to or in addition to registration with the Relevant Jurisdiction’s Aircraft Register? If so, what is benefit of such registration?

No, there are no foreign registers.  However, the International Register is also used and should be considered if the interest falls within the scope of the Cape Town Convention.

4.8 Are there any other filings or registrations necessary or desirable (other than the registrations already mentioned and Lease Registration – see section 5.7) in the Relevant Jurisdiction in order to ensure the validity, priority or enforceability of the transaction documents, or to perfect the interests of the Owner in the Aircraft or the transaction documents?

Aircraft Mortgages and certain other security documents require registration at Companies House where the person giving the mortgage or security document is a UK company (which term includes certain other corporate legal personalities).  Although registration is not strictly mandatory, if not registered within 21 days of creation the security constituted by such mortgage or security document is void against creditors of the person giving security and as against certain insolvency officials who might on insolvency be appointed to the person giving security and so not registering within the prescribed time period would remove any advantage of taking such security.

Interests may also be registered at the International Registry if they fall within the scope of the Cape Town Convention. 

5. LEASES

5.1 Will the Relevant Jurisdiction recognise the concept of a lease over an aircraft?

Yes.

5.2 Would the choice of English law to govern the Lease be upheld as a valid choice of law in any action in the Relevant Jurisdiction?

Generally yes, the parties are free to choose the applicable law and the choice of English law would be respected.  The European Union legislation provides that such choice must not prejudice mandatory provisions of the law of another country to which the lease is closely connected. 

5.3 Must the Lease be in a particular form if it is to be valid and enforceable in the Relevant Jurisdiction (for example, must it be in the language of the Relevant Jurisdiction or be notarised, legalised or have the apostille applied)?

No, there are no such requirements.

5.4 If the Lease must be in the language of the Relevant Jurisdiction, is it possible under the Relevant Law also to have an English version, and to provide that the English version should prevail in case of conflict with the Relevant Jurisdiction language version?

N/A

5.5 Are there any special terms that the Lease must contain or that it is advisable for the Lease to contain?

There are no special terms that the lease must contain.  Generally leases under English law are reasonably long and comprehensive documents stipulating detailed terms which are entered into after negotiation between lessor and lessee.  It is advisable for a prospective lessor or lessee to retain experienced English law lawyers to advise on terms.

5.6 Are there any circumstances under which the Lease might be re-characterised under the laws of the Relevant Jurisdiction as:

5.6.1 a secured loan?

Yes, the Courts in England have in certain circumstances re-characterised sale and leaseback transactions as disguised secured loans (the security element of which would require registration at Companies House or be void against creditors of the person giving security and as against certain insolvency officials who might on insolvency be appointed to the person giving security). A simple operating lease transaction that is not a sale and leaseback would not be at risk of re-characterisation.  It is also highly unlikely that a sale and operating lease back transaction would be at risk of re-characterisation. Detailed advice should be obtained for a proposed transaction comprising a sale and finance leaseback or similar.

5.6.2 a finance (or capital) lease?

Although what constitutes a finance lease and an operating lease is defined for tax purposes, the definition refers to Accounting Practice.  How these leases are treated depends on the lessee’s accounting standards.  January 2019 introduced IFRS16 which moved most operating leases onto the balance sheets of lessees. Operating leases which were previously off-balance sheet are now required to be reported on the lessee’s balance sheet, with the exception of short-term leases or low value assets (which will rarely be applicable in relation to aircraft leasing).  Lessors are not directly impacted. The risk of recharacterization of a Lease as a finance lease exists in theory and might be exacerbated by asymmetrical accounting treatment between Lessor and Lessee where the Lessee balance sheet recognises obligations under a Lease which support the Finance Lease analysis.

5.7 Is there a separate register for aircraft leases in the Relevant Jurisdiction?

No.  As noted at paragraph 4.4.4, the interest of a lessee may, at the discretion of the CAA, be registered as “Registered Owner” but no record of the lease is made.

5.8 If yes, then:

5.8.1 What documentation and/or consents are required for the registration of the Lease?

N/A

5.8.2 What registration fees are payable (if any)?

N/A

5.8.3 What information is recorded on the register? How is the eventual discharge of the Lease recorded?

N/A

5.8.4 Does any registration in respect of the Lease remain valid throughout the tenure of the Lease or does such a registration require periodic renewal? If renewal is required when must this be done and what is the approximate cost of renewal?

N/A

6. ENFORCEMENT OF LEASES (ASSUMING AIRLINE IS NOT IN A FORM OF INSOLVENCY PROTECTION)

6.1 On the occurrence of an event of default under the Lease, assuming that the Owner is permitted to do so under the terms of the Lease, can the Owner terminate the Leasing of the Aircraft under the Lease and enforce the Lease by taking physical possession of the Aircraft?

Yes, this remedy is generally available and is frequently used in lease repossessions.  It is possible for the lessee to apply for relief from forfeiture if it believes the action is disproportionate (but it is likely to have to make good any default) or if the repossession is not justified, to seek an injunction on the basis of the warranty of quiet enjoyment and peaceful possession.

6.2 If so, can the Owner take physical possession of the Aircraft without the need for judicial proceedings in the Relevant Jurisdiction?

Yes.

6.3 Where judicial proceedings in the Relevant Jurisdiction are necessary, please provide details of the proceedings, in particular:

6.3.1 What documents would the Owner as lessor need to present in order to obtain possession of the Aircraft, both before and subsequent to judgment? Can documents be copies?

The documents required by the Owner as lessor to obtain possession of the Aircraft through judicial proceedings will vary from case to case but will include documents evidencing ownership of the Aircraft, documents evidencing a right to repossess the Aircraft or a right to compensation and documents evidencing breach by the lessee of its obligations.  This might include a copy of the mortgage, the loan agreement, the lease, documentation relating to the debt, evidence as to when payment was due and documents demonstrating non-payment, evidence of an event of default and/or evidence of service of a notice of default. (Documents which are not in English will need to be translated.)

It is often helpful if original documents are available, but the court in England & Wales will usually accept certified copy documents, where for example urgent action is required and original documents are overseas.  Local lawyers can certify that the copy documents are true copies of the originals. Certified true copies can only be made by a person who has the original documents in his or her possession.

6.3.2 What is the approximate cost of issuing proceedings?

The cost of issuing proceedings will vary considerably depending on the nature of the dispute.  Where there is a straightforward uncontested right to possession under a lease it is likely that a non-judicial route will be adopted, and so it is more likely that any proceedings in court will relate to complex, contested matters and so can be more costly. Examples might be the need to seek an injunction that the aircraft be returned to the Owner; this might be combined with an application for a freezing order where it is feared that the lessee may dispose of its assets to avoid any judgment. Alternatively, it might be necessary to seek an injunction detaining the aircraft in the jurisdiction while the dispute is determined.  The Court has discretion whether to grant such injunctions and will need to be convinced that on balance ordering an injunction is the best course of action.

A dispute is usually resolved in the court by issuing a claim.  Where there is an urgent matter to resolve, proceedings can be commenced for urgent interim injunctive relief; this can if necessary be done without notice to the lessee before issuing proceedings. If an interim injunction is granted it is necessary then to issue a claim to have the matter determined conclusively through a full court process.   

To issue an application for an injunction the claimant must produce an application notice, a supporting affidavit or statement setting out the background to the case, supported by documents and a draft order and must liaise with court for a hearing, (including payment of a small court fee).  Costs vary depending on the complexity of the issues and factual background, but the cost of issuing a straightforward injunction application might cost: £5-10,000.  The costs of the steps that follow will vary depending on the process ordered by the court and the response of the opponent.

Issuing a claim in court requires a claimant to draft and issue a claim form, pay a court fee and then, in most cases, to provide greater detail by setting out a comprehensive document giving particulars of the claim.  The claim will need to be served on the defendant.  The cost of these steps will again vary depending on the complexity of the issues and factual background and the location of the defendant, but in straightforward proceedings issuing proceedings might cost:  £10-15,000.  In addition, Court fees to issue a claim vary, but even on high value disputes are currently under £2,000.  Again the costs of the steps that follow will vary depending on the process ordered by the court and the response of the opponent.

Under English law if a party is unsuccessful in an action it is likely to have to bear the reasonable costs of its opponent, as well as its own legal costs. However, there will always be an element of unrecoverable costs and parties who are successful in action should not necessarily expect to recover 100% of their costs.

6.3.3 Would the Owner be required to provide a bond, guarantee or other security in order to issue proceedings?

If a claimant seeks an urgent injunction to prevent the defendant from taking steps in relation to the Aircraft or seeking repossession, the claimant will have to offer a cross-undertaking in damages.  That is the claimant will be required to promise to reimburse the defendant for any losses incurred if it later becomes clear that the urgent order was not required.  If the defendant is not confident that the promise has real value,  for example because the claimant is located outside of the EU and so is difficult to enforce against, or because the claimant appears to be impecunious, then the defendant can apply to the court for the cross undertaking to be fortified by the provision of security for costs. The court can then order a party to produce financial security before continuing to hear the matter.

In a standard claim the Owner would not as a matter of course be required to provide a bond, guarantee or other security in order to issue proceedings.  However, again if the defendant believes that the claimant would not be able to meet an order of costs, should the defendant eventually succeed in the proceedings, the defendant can apply to the court for an order for security for costs against the claimant.  Again the court can order a party to produce security before continuing to hear the matter.  

6.3.4 What is an estimate of the normal duration of possession proceedings from time at which all required documentation is made available – if uncontested?

Uncontested proceedings can be resolved quite promptly. If a defendant makes no response at all to a claim and 14 days expire after service of the particulars of claim, then the claimant can apply to the court for a judgment in default.  This order will usually grant the claimant the remedy it seeks in full.  Depending on the speed of the court in dealing with the application, it may be possible to achieve judgment within a week or two of making the application. The response of the court can, however, be slow at times. (Time limits vary if the claim form is served out of the jurisdiction and permission of the court may be required.)

6.3.5 What is an estimate of the normal duration of possession proceedings from time at which all required documentation is made available – if contested?

Proceedings are likely to be brought in the court if there is not a straightforward right of possession, for example if the right to repossess is contested, or if it is unclear whether an event of default has occurred.  In normal circumstances it will take at least a year to progress a contested claim through the court and could take considerably longer; there may also be an appeal process.  

If, however, it is clear that the defendant’s arguments have no prospect of success it may be possible to apply for summary judgment after the defence has been served and to have a court determination within a few months.

Without notice injunction processes can be swift:  it can be possible to have an initial determination from the court within a few days, although this would then have to be followed by a fuller claim process. Contested injunction processes could take months to be resolved.

6.4 Where judicial proceedings are not necessary, please comment on the time limits relevant to taking possession of the Aircraft, in particular:

6.4.1 Is there a waiting period before action may be taken?

There is no set period of time but if there is no risk of loss or damage to the Aircraft, the lessee should be notified of the default and given a reasonable period of time to make good the default before action to repossess is taken.

6.4.2 Is there a long stop date by which action must be taken?

The right to take action prescribes after six years if not pursued within that period.  The period of six years is extended to twelve years if the lease is entered into as a deed, although this would be unusual.

6.4.3 Is a Public Auction of the aircraft required?

No.

6.5 Apart from the judicial proceedings described above and ignoring deregistration (see section 7), is the permission of any other party (including any official body) in the Relevant Jurisdiction required to take possession of the Aircraft?  

There are practical issues such as clearance to repossess an Aircraft which is “airside” at an Airport.  Generally a specialist aviation consulting firm with familiarity of such issues would be used to effect repossession. There is, however, no formal permission required – simply compliance with ground security and similar requirements. 

6.6 Is there any history of actual repossession of aircraft by Owners in the Relevant Jurisdiction? If so, please provide details of any matters or issues of which an Owner should be aware.

Yes, the self-help remedy of repossession has successfully been used frequently.

6.7 Are there any circumstances in which the sums expressed to be payable under the Lease or obligations expressed to be assumed by the Airline in the Lease are or will be unrecoverable or unenforceable in the Relevant Jurisdiction?

There are a number of circumstances which might affect the recoverability of sums payable or enforceability of obligations.  There is an automatic stay on enforcement of rights when a Company enters administration (a form of collective insolvency protection) although this would not prevent repossession where the lease has been terminated prior to the start of administration.  Rent will only be paid during the administration by leave of the administrator or the Court and this is only likely if the administrator will use the leased asset in the business.  If the lease is not properly drafted recovery of amounts due after repossession may be compromised and even if well drafted account would need to be taken of the time value of money with a claim for damages being discounted to reflect early receipt of future rent.  Other grounds on which the enforceability of obligations under a lease may be challenged by a lessee include mistake, fraud, incapacity of the lessee, illegality, sovereign immunity and public policy. Insolvency rules provide for set aside of a lease that has been entered into within defined time periods before an insolvency where the lease is intended to benefit one creditor over others or where the obligations on the lessee under the lease are significantly below the value of the benefits of the lease.  A liquidator may disclaim an onerous contract and a lease may be an onerous contract.  It is also worth noting that the administrator has power to sell a leased asset even though it is owned not by the lessee but by the lessor.  Broadly the administrator would need to account for value realised.  In practice this power is seldom exercised except with agreement of the affected lessor and it is believed has not been utilised in respect of aircraft.

6.8 Are there any restrictions on the ability of the Owner to sell the Aircraft in the Relevant Jurisdiction during the term of the Lease or, following an event of default, on termination of the leasing or pending judicial enforcement of the Lease?

Provided the lessee is not in administration, as a matter of law, the Owner is free to sell at any time (subject to the lease and taking account of the warranty of quiet enjoyment and peaceful possession if the lease has not been terminated for default).  Contractually the lease could restrict the Owner’s ability to sell or to assign the lease but this is a matter of contract rather than law.  If the lessee is in administration then consent of the administrator or leave of the Court would be required for a sale.  Whether this would be given depends on whether the administrator believes the Aircraft is essential to achieving the objectives of the administration or not.  Generally administrators will reach a conclusion on this within a few days of appointment.

6.9 Are there any export restrictions on export of a repossessed aircraft?

An Export Certificate of Airworthiness is required.  Procedures and requirements differ depending on whether export is to another EASA country, to the US or Canada or to another non-EASA country and further information is available on the CAA website.  VAT and Customs Duty may also be applicable and clearance on both may be required depending on the particular circumstances.


7. DEREGISTRATION POWER OF ATTORNEY/EXPORTATION

7.1 Can the Owner apply for deregistration of the Aircraft either at the end of the lease term or following successful repossession (with or without judicial proceedings) and is there any time period within which such application should be made?

The Registered Owner is the person entitled to apply.  If the aircraft is to be exported the Export Certificate of Airworthiness should be obtained prior to deregistration.  If the Aircraft is repossessed or sold and the consequence is a Qualifying Person is no longer entitled to the Aircraft then, unless the CAA has exercised discretion to the contrary, the registration of the Aircraft would be void and the certificate of registration should be returned to the CAA.

Under the Cape Town Convention, the Registered Owner may also issue an irrevocable deregistration and export request authorisation (“IDERA”) in favour of an “Authorised Party”. There is a standard CAA form which must be completed and filed with the CAA.  Only one IDERA can be issued and recorded at any one time and must relate to an existing international interest created before 1 November 2015.  The IDERA gives the Authorised Party the power to request the aircraft is deregistered by submitting a form to the CAA.  The consent of the Owner is not required at the time of a deregistration request, but mortgagee consent may be required.  If there is a mortgage entry against the aircraft on the Register of Aircraft Mortgages predating 1 November 2015, either the mortgage must be discharged or the mortgagee must give written consent.  However, the consent of mortgagees entered onto the Register on or after 1 November 2015 will not be required prior to a deregistration request.

The consent of the Airline is not required if the Registered Owner is the owner.  The Airline’s participation is only required if the Airline is the “Registered Owner” by virtue of the CAA accepting an application for registration from the Airline as lessee.  The use of a deregistration power of attorney should allow the Owner to deregister in such circumstances.  The terms of the lease would usually include a prohibition on the lessee changing the registration of the Aircraft without consent of Owner.

As per paragraph 7.1 above, consent of a mortgagee under a pre-November 2015 mortgage will be required if the deregistration request is made by an Authorised Person under an IDERA.

7.3 How long does deregistration take, both where there is co-operation from the Airline and where this is no co-operation from the Airline?

If the Registered Owner is the Owner cooperation from the Airline is not required to effect deregistration and deregistration can be completed within a day.  If the Airline is the Registered Owner then either the Owner must apply for deregistration in the name of the Airline using a deregistration power of attorney or the Airlines cooperation is required to make the application for deregistration.  The CAA should accept use of a correctly drafted and properly executed deregistration power of attorney and deregister the Aircraft within the day on which application is made but it would be prudent to raise the matter with them and check requirements the day before deregistration is requested.  If the Airline is the Registered Owner and makes the application then deregistration should occur on the same day the request is made.

The CAA will generally action IDERA deregistration requests under within 3 days, however this can be delayed in a Certificate of Airworthiness is required. The certificate must be obtained prior to deregistration.

7.4 Is it possible to obtain an export licence or export permit in advance?

Export licences are not required for all goods and generally there are no requirements for a licence to export civil aircraft.  Where UN sanctions are implemented in the UK there may be a complete prohibition on export to an affected country or an export licence may be required.

7.5 Approximately how long does it take to obtain an export licence or export permit? What are the costs involved?

If an Export Licence is required, currently 70% of licences are processed within 20 working days.

7.6 Is it possible to obtain a certificate of deregistration in advance?

No, but the CAA will, by special arrangement, stay open to facilitate a change in registration.

7.7 Will a power of attorney empowering the Owner to deregister and export the Aircraft from the Relevant Jurisdiction, either at the end of the lease term or following successful repossession (with or without judicial proceedings), be enforceable in the Relevant Jurisdiction?

Yes

Will the courts recognise a power of attorney in the form of an IDERA and governed by English law?

Yes

7.8 If the power of attorney was stated to be irrevocable would this be enforceable against the Airline or can the Airline revoke such power of attorney?

If the power of attorney is given by an English corporate entity, is stated to be irrevocable and is coupled with a security interest then it will be irrevocable.

7.9 Upon the occurrence of a bankruptcy or insolvency of the Airline is the power of attorney still effective?

If the power of attorney is given by an English corporate entity, is stated to be irrevocable and is coupled with a security interest then it will be irrevocable even in the event of a collective insolvency of the Airline.  However, where the Airline is in administration, such a power of attorney will not be exercisable except with the consent of the administrators or the court.  In practice, third parties dealing with the holder of a power of attorney will commonly refuse to transact without the involvement of the administrators or liquidators.


8. INSOLVENCY

8.1 In the event that the Airline were to become insolvent either on a balance sheet basis (assets less than liabilities) or unable to pay debts as fall due:

8.1.1 Would the airline be required to file for insolvency protection?

No.  There is no mandatory requirement to file for insolvency proceedings.  However, where an insolvent liquidation has become unavoidable, the directors must take every step to minimise losses to creditors, which may or may not involve ceasing to trade.  Failure to take such steps can lead to personal liability for the directors.  There are further rules concerning the incurrence of new credit in those circumstances, breach of which can be a criminal offence.  Directors who think they may be in such a situation would require detailed advice as to their duties: where a company is insolvent, the directors’ principal duties are to the creditors of the company and not its shareholders.

8.1.2 Do the available forms of insolvency protection in the Relevant Jurisdiction involve the appointment of either an officer of the court or a specifically court appointed official to take control of the Airline (an Insolvency Official) while in insolvency protection?

Yes.  The most common types of collective insolvency procedure are administration (a rescue process, which creates a statutory moratorium); and liquidation (a terminal process).  Both administrators and liquidators are officers of the court but they are not always appointed by the court.  An administrator can be appointed by the company, directors or secured creditors of the company by filing notices at court, or can be appointed by those persons or any creditor through application to the court.  A liquidator can be appointed by the shareholders of the company by meetings (and approved by a creditors’ meeting) and the company, shareholders or creditors by application to the court.  There is no process directly equivalent to Chapter 11 in the US whereby the insolvent company’s management remain in control but are protected from actions by creditors.

8.1.3 Does the Insolvency Official have authority to negotiate and reach agreement with the Owner in relation to matters such as the payment of unpaid rent, continuation or termination of the Lease and repossession of the Aircraft without the need for court approval?

In the case of administration, yes.  Unlike (for example) US insolvency proceedings, all commercial matters in administration are determined by the Insolvency Official without court approval.  In the case of liquidation, an Insolvency Official will make all commercial decisions but can in certain circumstances require the sanction of a creditors’ committee or the court in order to compromise claims.  Actions of Insolvency Officials are capable of being challenged in court (assuming there are good grounds for such a challenge) by interested parties.

8.1.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official in the Relevant Jurisdiction have the effect of prohibiting the 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 any unpaid amounts due under the Lease? This question will depend on the precise terms under which the security deposit is held and the applicable collective insolvency proceedings.  In administration, there is a moratorium on enforcement of security rights and, if not properly constructed, this would apply to the security deposit arrangements.  However, if properly constructed there is a strong argument that the security deposit is Financial Collateral and subject to the Financial Collateral Regulations which permit appropriation of the deposit to satisfy unpaid amounts without regard to the moratorium.  There are no restrictions on enforcing security in this way in liquidation.
  • (b.) Accepting payment of rent or other lease payments from:
    1. the Airline? After commencement of administration or liquidation, the Owner should only deal with the administrators/liquidators and not other representatives of the insolvent Airline (unless authority has first been evidenced to the Owner).  Lease payments can be accepted from the insolvent Airline acting by its administrators or liquidators and, if the administrators or liquidators choose to use the Aircraft, they must pay lease payments for the period of beneficial use as an expense of the insolvency process.  Expenses of a collective insolvency process are given favourable priority in a collective insolvency process and rank ahead of the Insolvency Officials’ own remuneration.
    2. a guarantor? Assuming the Guarantor is not itself in insolvency proceedings then there is no limitation on accepting payments under the guarantee from the Guarantor.  If the guarantee has been correctly drafted then such amounts need not be applied immediately against amounts outstanding under the Lease but can be placed in a “suspense account”, enabling the full claim for unpaid lease amounts to be maintained in the administration/liquidation with a view to maximising recovery.
    3. a shareholder? Assuming the shareholder is not itself in insolvency proceedings then there is no limitation on accepting payments from the shareholder. 
  • (c.) Giving notice of default under the lease? Notice of default may be given.
  • (d.) Obtaining a judgment or arbitral award for unpaid lease payments? After commencement of administration, commencing proceedings or an arbitration process to enforce the lease is prohibited except with the consent of the administrators or leave of the court.  A similar prohibition applies in compulsory liquidations (liquidations commenced in court).  While there is no automatic moratorium on legal proceedings in liquidations commenced by meeting, a liquidator can apply for (and will usually obtain) a stay on proceedings in such cases if required.
  • (e.) Giving notice to terminate the leasing of the Aircraft? It is permitted to give contractual notice to terminate the leasing of the Aircraft.  However, in administration, it will not be possible to take further steps against the Airline in reliance on that termination except with the consent of the administrators or leave of the court.  There is no such prohibition in liquidation except to the extent a stay applies (see (d)).
  • (f.) Exercising rights to repossess the Aircraft? After commencement of administration, exercising rights to repossess the Aircraft under the lease is prohibited except with the consent of the administrators or leave of the court.  However, the Insolvency Official must give possession of the Aircraft to the holder of an International Interest with priority within 60 days, but that right is subject to any prior unregistered rights of lien or detention (see Para 3.1.4 above). There is no such prohibition in liquidation, except to the extent a stay applies (see (d)). 
8.1.5 Can the commencement of Insolvency Proceedings have retrospective effect in relation to any such actions taken before commencement? If so, for what period can there be a look back?

Yes.  There are lookback periods relating to transactions at an undervalue, preference and the creation of floating charges.  The lookback period will vary depending on the type of transaction and depending whether the parties were connected or unconnected to the insolvent entity.  In general terms, a transaction with a corporate entity that took place more than 2 years prior to the commencement of the insolvency process should not be at risk of review unless the transaction was for the purpose of putting assets beyond the reach of creditors.  Separately there are other applicable periods for reviewing the conduct of the directors.

8.1.6 Is there, either under law or as a matter of practice in the Relevant 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 of the insolvency or “reject” the lease and permit the Owner to enforce such rights as it may have under the lease?

Under current case law, Insolvency Officials do not “adopt” contracts but the holder of an International Interest with priority is entitled to possession of the Aircraft on or before expiry of a 60 day period so in effect the Insolvency Official must either cure all defaults and preform the lease obligation or give back possession within that timeframe. The right to possession is subject to unregistered rights of lien or detention (see 3.1.4 above).   However, the Insolvency Officials will be required to pay as an expense amounts in respect of lease payments for the period of beneficial use of the Aircraft.  In practice, administrators and liquidators will try and make decisions about which assets are required quickly after taking office.  An Owner would be well advised to contact the administrators of an Airline as soon as possible after appointment to determine the intentions of the administrators.  Administrators do not have a formal power to terminate leases but if the leased asset is not required for the purposes of the administration, the administrators will inform the Owner and the Owner could treat this as a repudiatory breach triggering a right to terminate (if one did not exist previously).  Where the administrators do not require the Aircraft for the purpose of the administration, the administrators would normally give leave for the Owner to repossess the Aircraft or the court would be expected to make an order to such effect.  The insolvent Airline will not be permitted both to retain possession of the Aircraft and not pay lease payments indefinitely.  Equivalent rules apply in liquidation save that there is no moratorium and, in addition, the liquidators have the power to “disclaim” onerous contracts and so bring them to an end.  In this case the Owner’s rights under the contract are replaced by a claim in damages. 

8.1.7 If the lease is “adopted” will the Insolvency Official also pay any unpaid lease payments due as at commencement of the insolvency protection?

Prior to the Cape Town convention taking effect the answer was no - the obligation to pay lease payments as an administration or liquidation expense is only in respect of the period of beneficial use.  In practice, if the administrators or liquidators continue to use the Aircraft, lease payments are likely to be due from the date of commencement of the insolvency proceedings. Since the Cape Town took effect the Insolvency Official’s right to retain possession as against the holder of an International Interest is dependent on their curing all defaults within the 60 day “Waiting Period”.

8.1.8 If not or if the lease is “rejected”, would the Owner’s claim for any outstanding sums rank equally with other ordinary unsecured creditors of the Airline?

Yes, unless the Owner has security over assets of the Airline.

8.1.9 Are there certain types of preferred creditors whose claims will rank above claims of the Owner?

Yes.  The regimes in administration and liquidation are different.  In administration, fixed charge claims, administration expenses, the costs of the administration, preferential claims (these include a prescribed amount for employees and contributions to certain types of pension scheme) and – subject to the prescribed part - floating charge claims rank in priority.  The prescribed part is an amount of up to £600,000 for unsecured creditors that ranks ahead of floating charge claims.  In liquidation, the position of unsecured creditors is the same but in some circumstances liquidation expenses rank behind floating charge claims.

8.1.10 If the Aircraft is in the possession of a person other than the Airline at the commencement of Insolvency Protection of the Airline, for example an independent maintenance facility, will such person be entitled, under the laws of the Relevant Jurisdiction, 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 Airline?

No, unless consent of the administrator or leave of the Court is obtained.  The assertion of the lien rights would constitute an action to enforce security against the insolvent company contrary to the moratorium which takes effect on commencement of administration.  However, the court may make an order to provide the third party with adequate protection (such as equivalent cash collateral) as part of an order requiring a third party to deliver up the Aircraft.

8.1.11 Is a person other than the Airline, for example an airport authority, entitled under the laws of the Relevant Jurisdiction to seize possession of the Aircraft after commencement of Insolvency Protection and assert a lien arising under law or contract over the Aircraft in respect of amounts then due and unpaid to such person by the Airline?

No, the CAA and an airport authority are also subject to the moratorium on enforcing rights once administration has commenced and would also require consent of the administrators or leave of the court.  However, the court may make an order to provide the third party with adequate protection (such as equivalent cash collateral) as part of an order requiring a third party to deliver up the Aircraft. Note that while this response correctly reflects the legal position, certain airports and the CAA on behalf of NATS and Eurocontrol asserted rights of detention over aircraft which had been operated by Monarch Airlines at the time it entered administration. In practice lessors paid off these charges to permit quick repossession as the cost of contesting them in Court was disproportionate to the inherent cost of delay in repossessing and redeployment.


9. TAXATION

9.1 The decision to lease to an airline in the Relevant Jurisdiction assumes that the Owner will not be taxed on receipt of rentals or other payments (including maintenance reserves) under the Lease except by way of tax on its general income, profits or gains payable by the Owner in its place of incorporation or place of main business (if different). Will there be a requirement for the Owner to pay tax in the Relevant Jurisdiction on lease payments on basis that either the Owner is subject to taxation in the Relevant Jurisdiction by reason only of the leasing of the Aircraft under the Lease and is required to make payment itself; or payment of such tax is by way of the airline being required to withhold and account for tax from lease payments, where:

9.1.1 the Owner is incorporated and is tax resident in Ireland?

No

9.1.2 the Owner is incorporated and is tax resident in the United Kingdom?

No

9.1.3 the Owner is incorporated and is tax resident in Hong Kong?

No

9.1.4 the Owner is incorporated and is tax resident in Singapore?

No

9.1.5 the Owner is incorporated and is tax resident in Malta?

No

9.1.6 the Owner is incorporated and is tax resident in the Channel Islands?

No

9.1.7 the Owner is incorporated and is tax resident in the Isle of Man?

No

9.1.8 the Owner is incorporated and is tax resident in Mauritius?

No

9.1.9 the Owner is incorporated and is tax resident in Bermuda?

No

9.1.10 the Owner is incorporated and is tax resident in the Cayman Islands?

No

9.2 If there is a requirement in the Relevant Jurisdiction for the airline to withhold tax on lease payments, will the courts of the Relevant Jurisdiction recognise and permit enforcement of a “gross up” clause in the Lease requiring the payment by the Airline of an additional sum to ensure the Owner receives and is entitled to retain the same net amount as would have been received in the absence of the withholding, taking account of any further withholding on account of tax required in relation to such additional sum?

Yes

9.3 VAT: European Union country: under Article 148(f) of the VAT Directive, an exemption from VAT is applied to “supplies” consisting of chartering or hiring of aircraft which are used by airlines operating for reward chiefly on international routes. Therefore:

9.3.1 New lease to airline operating for reward chiefly in domestic routes: VAT will be applied to lease rentals at current rate:

20%

9.3.2 New Lease to airline operating for reward chiefly on international routes: VAT will not be applied to lease rentals by reason of application of exemption:

Yes

9.3.3 Sale of aircraft by an aircraft lessor to another aircraft lessor of an aircraft subject to a lease to an airline operating for reward chiefly in domestic routes: 

Assuming that completion and delivery takes place in the UK, VAT will be applied to the purchase price. If the seller and the purchaser are both EU entities and the purchaser supplies its EU VAT Number to the seller then the VAT charge will be a reverse charge. Otherwise VAT will be applied to purchase price at current rate: 20%.

9.3.4 Sale of aircraft by an aircraft lessor to another aircraft lessor of an aircraft subject to a lease to an airline operating for reward chiefly on international routes: VAT will be applied to purchase price:

No

9.3.5 If no, is this because of application of the exemption under Article 148(f) to the airline following the decision in ECJ Case C-33/2011?

Yes

9.3.6 If yes, is this because the Relevant Jurisdiction does not apply the decision in ECJ Case C-33/2011?

N/A

9.3.7 If the transaction involves the first importation of the aircraft into the EU (and assuming the aircraft is intended for use as a civil and not military aircraft) what rate of Customs Duty will apply? 

0% (Due to the availability of end-use relief – the importer must apply to HMRC for authorisation to claim end use relief).

No stamp duty, notarial or other fee will be payable.

An importer must apply to HMRC to claim end use relief (0% customs duty on the import of aircraft). If an aircraft owner / lessor receives interest payments from a UK resident corporate borrower, it must obtain a Double Taxation Treaty Passport from HMRC in order to obtain the benefit of any double taxation treaty relief from withholding tax on such interest payments.

9.6 Ignoring any taxation consequence already mentioned and any potential taxation issues if the Owner has any other connection to the Relevant Jurisdiction, is there any other Relevant Jurisdiction taxation consequence of the Owner:

9.6.1 Being owner and lessor of an aircraft registered in the Relevant Jurisdiction and operated/leased by a company incorporated or registered in the Relevant Jurisdiction?

No

9.6.2 Making available a lease facility to a company incorporated or regulated in the Relevant Jurisdiction?

No

9.6.3 Receiving rent and other lease payments under the Lease from the lessee incorporated or registered in the Relevant Jurisdiction?

No

9.6.4 Repossessing the aircraft and exporting the aircraft from the Relevant Jurisdiction?

No - UK direct tax will be chargeable provided that the owner does not have a UK permanent establishment. If the owner has a UK permanent establishment, it may be liable to pay tax on any increase in value of the aircraft in between repossession and export.

9.6.5 Selling the aircraft at a profit, whether such sale is after repossession or is subject to the Lease and the lessee’s rights?

No UK direct tax will be chargeable provided that the owner does not have a UK permanent establishment.  The sale of Aircraft within the UK attracts a charge to VAT but, again, supplies of certain Aircraft will be zero-rated.  Where the sale will be zero-rated, the Seller must either register for UK VAT or apply to the UK tax authority for exemption from registration.

10. EXCHANGE CONTROLS

10.1 Are payments to foreign owners by companies incorporated or registered in the Relevant Jurisdiction subject to any form of exchange or similar control?

No, there is exchange control regime in the Relevant Jurisdiction.

10.2 If yes, can any consents, authorisations or licences be obtained to exempt payments from any such control? How would these be obtained? Are such consents, authorisations or licences transferable?

N/A


11. INSURANCE

It is a legal requirement that adequate insurance will be maintained but there is no requirement that the risk is placed with insurers or underwriters in the Relevant Jurisdiction.

11.2 If so, is there any restriction on reinsurance of the primary insurance outside the Relevant Jurisdiction?

N/A

11.3 Is there a minimum percentage of cover which a local insurer is obliged to retain, and if so, what is it?

N/A

11.4 Is it possible for local insurers to assign contracts of reinsurance? If not, is a cut-through clause enforceable?

It is possible for an insurer in the Relevant Jurisdiction to assign a contract of reinsurance.  There are doubts as to whether a cut-through clause could be enforced by the beneficiary as they are not party to it.  There is legislation in the Relevant Jurisdiction which allows a third party beneficiary to enforce a contract to which they are not party to obtain that benefit but this legislation can be and commonly is excluded.  With the prevalence of the London primary aviation insurance market, in practice this issue is not significant for transactions involving Airlines in the Relevant Jurisdiction.


12. LIABILITY FOR DAMAGE

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 Owner is an innocent owner with no operational control of the Aircraft?

The Owner is strictly liable for loss and damages caused by an aircraft to third parties and properties under the English Civil Aviation Act 1982 when the aircraft is not subject to a lease with a term of 14 days or more, or if the aircraft is wet leased by the Owner.  In those circumstances the Act provides that unless the claimant caused or contributed to the loss or damage by its own negligence, the claimant will be able to recover damages without proof of negligence, intention or other cause of action from the Owner, as if the Owner had wilfully been at fault.  

Where there is a (dry) lease with a term of 14 days or more the Act passes liability to the lessee and provides that unless the claimant caused or contributed to the loss or damage by its own negligence, the claimant will be able to recover damages without proof of negligence, intention or other cause of action from the lessee, as if the lessee had wilfully been at fault.  

The lease would typically ensure that this risk remains with the lessee and the lessee would indemnify the Owner for a liability arising from operation of the Aircraft. In some circumstances the lessee may have a right of counter-indemnity from, for instance, the manufacturer.


13. DETENTION/CONFISCATION

13.1 Are there any rights to detain or sell the Aircraft pursuant to drug trafficking, tax or other laws or pursuant to rights of airport or air navigation authorities if the Airline fails to pay when due? 

Please see paragraph 3.2.

13.2 If so, can the Aircraft be forfeited and sold without the Owner being made aware?

Where payment is being sought the relevant authorities would, in any event, be likely to seek payment from the Owner.  The Owner may then have to pay the charges and seek indemnification from the lessee or other defaulting party.  Legislation supports this process, s.88 of the Civil Aviation Act 1982 requires an aerodrome authority proposing to sell an aircraft as a result of payments due to bring the proposed sale to the notice of interested parties, allowing them to become involved in any proceedings and on any sale the authority must try to achieve the best possible sale price. Once the authorities have a court judgment in their favour, they may enforce that judgment without further notice to the Owner.

On the other hand where it is believed that some illegal activity has taken place, it is likely that the authorities will not wish to “tip off” the Owner before taking steps such as forfeiture.

It is also possible that in the event of hostilities or national emergencies requisitioning might occur without prior notice, although it is likely that the Owner could expect financial compensation.

Although the UK Aircraft Register is an “Owner” registry, in practice the CAA often permit a UK Operator to register as “Owner”. In such a case there may be no public record of the true ownership of the Aircraft leaving the possibility that the Aircraft could be sold on without notice to the Owner. This possibility is more theoretical than real because there is a statutory waiting period of 56 days before the Aircraft can be sold in relation to the statutory powers and because the Aircraft Records should correctly document the ownership and correct, up to date records are essential for a sale of the Aircraft.  Where commercially possible an Owner is advised to register the Aircraft in its name on the Aircraft Register even where there is a UK lessee/operator.


14. SOVEREIGN IMMUNITY

14.1 Is any Airline based in the Relevant Jurisdiction entitled to any form of sovereign or other immunity from suit which might restrict the Owner’s rights under the Lease?

In general terms the UK recognises sovereign immunity for States and in some circumstances also where a separate entity carries out acts under State authority. However, there are a number of important exceptions which are likely to apply to an aircraft leasing transaction: a waiver of sovereign immunity and a submission to the jurisdiction of the English Courts or submission to arbitration, for instance, will suffice to displace sovereign immunity to adjudication. There are currently no civil airlines in the UK which are organs of the UK State and so the issue is more relevant in relation to airlines which are related to another State. Specific advice is recommended in such circumstances.

14.2 Can such immunity be validly waived in advance by contract?

Yes, although this may be limited to immunity from adjudication rather than enforcement of a judgment against State assets. Again, if a transaction with a body which may be an organ of a State is contemplated, specific advice is recommended.


15. DISPUTE RESOLUTION AND RECIPROCAL ENFORCEMENT

15.1 Do the laws of the Relevant Jurisdiction permit and recognise an “asymmetric” submission to jurisdiction clause under which the lessee submits to the exclusive jurisdiction of the Courts of England but the Owner has discretion to choose a jurisdiction other than the Courts of England?

Parties in England & Wales are, in the main, free to contract on the terms they choose, provided these are not illegal, so it is possible to rely on an asymmetric submission to the jurisdiction clause.  

Where, however, burdens imposed on parties are not equal, then the court, if called on to exercise its discretion, will often interpret agreements to give the party with the heavier burden the benefit of the doubt on contentious issues.

15.2 If the Lease is governed by English Law and a judgment is obtained by the Owner in the English courts, can that judgment be automatically enforced in the Relevant Jurisdiction or will the case have to be re-examined on its merits? If so what procedures must be complied with to enforce such a judgement?

An English judgement can be enforced in England & Wales automatically without the case being re-examined on its merits.

Once a judgment has been obtained there are a number of enforcement routes, for example: 

  • The Owner may make a claim to take control of goods. A writ or warrant of control can often be issued administratively by the court office, following production of documents and payment of a fee. This enables on officer of the court to seize and sell the debtor’s goods to satisfy the judgment. This would include the Aircraft and other assets situated in England & Wales. A specialist enforcement officer should be appointed with experience of aircraft. A copy of the writ of control should be attached both outside the plane and in the cockpit to alert people entering the aircraft of the seizure of the plane.
  • A receiver may be appointed to sell the Aircraft or other secured property.

15.3 Is the Relevant Jurisdiction party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) or the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the Washington Convention)? Will the courts of the Relevant Jurisdiction recognise and enforce a decision of an arbitrator?

England is a party to the New York Convention and the Washington Convention and will recognise and enforce a decision of an arbitrator.

15.4 What is the usual choice of dispute resolution in international supply contracts involving a lessor or buyer incorporated in or with its main place of business in the Relevant Jurisdiction?

Dispute resolution choices vary from company to company.  

The English High Court is very capable of dealing with aviation disputes and has a good reputation in providing thoroughly considered, commercial decisions.  If emergency relief is required it is often advantageous to be able to turn to the court which is experienced in dealing with such matters and has the weight to ensure its decisions are upheld. Contracts governed by English law frequently select the jurisdiction of the courts of England &Wales for the resolution of disputes.

Where there are international parties involved, however, there can sometimes be a preference for arbitration.  Parties in international contract often turn to institutions such as the ICC and LCIA to regulate their arbitration.  These institutions do have the ability to make some injunctive awards.  Arbitration also offers a degree of confidentiality where this is preferred.  Arbitration awards can be easier to enforce internationally than court decisions and so contracts with counterparties from a former Soviet Union country or involving a Chinese lessee may well select an arbitration agreement for the resolution of disputes.


16. AIRCRAFT ENGINES

16.1 If the equipment being leased to the Airline in the Relevant Jurisdiction was an Aircraft Engine either unattached to an airframe or attached to an airframe belonging to a party other than the Aircraft Engine Owner and being leased to the Airline under a separate engine lease agreement, would there be any significant changes to the responses set out above?

See 16.2 and 16.3.  Subject to 16.2 and 16.3 generally, no significant changes are required in relation to Aircraft Engines.

16.2 In particular, does the Relevant Jurisdiction recognise the separate ownership of the Aircraft Engine by the Aircraft Engine Owner when the Aircraft Engine is attached to an airframe belonging to a person other than the Aircraft Engine Owner?

Ownership is governed by the laws of contract and will follow the parties’ intentions.  Correctly drafted documentation and maintenance of correct Aircraft Engine records will preserve separate ownership of an Aircraft Engine.  Lessors of Aircraft Engines are advised to obtain recognition of rights acknowledgements from the owner of airframes to which such Aircraft Engines are attached.

16.3 Is there a register of Aircraft Engines and is the information given above in relation to registration of Aircraft and the ownership and leasing of Aircraft the same for registration of an Aircraft Engine and the ownership and leasing of such Aircraft Engine at the Aircraft Engine register?

There is no register of Aircraft Engines nor is it possible to make any registration entry on the Aircraft Registry.


17. ADDITIONAL INFORMATION – IS THERE ANYTHING ELSE WE SHOULD HAVE ASKED?

Are there any other matters, issues, recommended courses of action or steps which can be taken to protect and/or perfect the Owner's interests, as owner and lessor of the Aircraft in the Relevant Jurisdiction or of which the Owner should be aware when contemplating leasing an aircraft to a company incorporated and operating in the Relevant Jurisdiction?

The full impact of the United Kingdom’s departure from the European Union on the aircraft finance and leasing market is yet to be seen and will depend on how negotiations between the UK Government and the EU progress.  For now, during the “transition period” between the UK leaving the EU until the end of 2020, EU law will continue to apply in the UK. There are not, therefore, any immediate changes as a result of the UK leaving the EU.

Portrait ofKeith Wilson
Keith Wilson
Consultant
London