Aviation Finance & Leasing

in 25 jurisdictions worldwide

Contributing editor: Mark Bisset

2014

Published by

Getting the Deal Through

in association with:

Aviation Finance & Leasing

Advokatfirman Vinge Æ´LEX Al Busaidy, Mansoor Jamal & Co Alegre, Calderón y Márquez Abogados Arnecke Siebold Rechtsanwälte AZB & Partners Basch & Rameh Beijing Run Ming Law Office Blake, Cassels & Graydon LLP Camilleri Preziosi Clifford Chance CIS Limited Clyde & Co LLP Conyers Dill & Pearman (Cayman) Limited Cuatrecasas, Gonçalves Pereira De Brauw Blackstone Westbroek NV Herbst Kinsky Rechtsanwälte

Kim & Chang Maciel, Norman & Asociados McCann FitzGerald Meyer Avocats Patton, Moreno & Asvat Pillsbury Winthrop Shaw Pittman LLP Russin Vecchi & Heredia Bonetti Stephenson Harwood AARPI Verhaegen Walravens

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CONTENTS

Aviation Finance & Leasing 2014

Contributing editor:

Mark Bisset

Clyde & Co LLP

Getting the Deal Through is delighted to publish the first edition of Aviation Finance & Leasing 2014, a new volume in our series of annual reports, which provide international analysis in key areas of law and policy.

Following the format adopted throughout the series, the same key questions are answered by leading practitioners in each of the 25 jurisdictions featured.

Every effort has been made to ensure that matters of concern to readers are covered. However, specific legal advice should always be sought from experienced local advisers.

Getting the Deal Through publications are updated annually in print. Please ensure you are always referring to the latest print edition or to the online version at www.GettingTheDealThrough.com.

Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise.

Getting the Deal Through would also like to extend special thanks to contributing editor Mark Bisset of Clyde & Co LLP for his assistance in devising and editing this volume.

Getting the Deal Through

London June 2014

Global Overview 3

Mark Bisset

Clyde & Co LLP

Aircraft Mortgages - English Law

or New York Law? 6

Thomas A Zimmer and Dominic Pearson

Pillsbury Winthrop Shaw Pittman LLP

Argentina 8

María Laura Maciel and Rogelio N Maciel

Maciel, Norman & Asociados

Austria 14

Christoph Wildmoser

Herbst Kinsky Rechtsanwälte

Belgium 18

Giulia Mauri

Verhaegen Walravens

Brazil 24

Kenneth Basch

Basch & Rameh

Canada 30

Donald G Gray and Jason MacIntyre

Blake, Cassels & Graydon LLP

Cayman Islands 37

Matthew Stocker

Conyers Dill & Pearman (Cayman) Limited

China 42

Liu Yi

Beijing Run Ming Law Office

Dominican Republic 49

Maria Esther Fernandez A de Pou and Raul E Rodríguez Pereyra

Russin Vecchi & Heredia Bonetti

England & Wales 58

Mark Bisset

Clyde & Co LLP

France 63

Edward Campbell

Stephenson Harwood AARPI

Germany 70

Ulrich Steppler and Katja Helen Brecke

Arnecke Siebold Rechtsanwälte

India 77

Ashwin Ramanathan, Nithya Narayanan, Aayush Misra and Manish Jha

AZB & Partners

Ireland 83

Hilary Marren and Joe Fay

McCann FitzGerald

Korea 90

Young Kyun Cho, Young Min Kim and Robert L Gilbert

Kim & Chang

Malta 95

Malcolm Falzon, Steven Decesare and Tara Cann-Navarro

Camilleri Preziosi

Mexico 102

Javier Alegre and Carlos Campillo

Alegre, Calderón y Márquez Abogados

Netherlands 107

Berend Crans and Thijs Elseman

De Brauw Blackstone Westbroek NV

Publisher Gideon Roberton [email protected] Subscriptions Rachel Nurse [email protected]

Business development managers

George Ingledew [email protected] Alan Lee [email protected] Dan White [email protected] Published by

Law Business Research Ltd

87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910

© Law Business Research Ltd 2014

No photocopying: copyright licences do not apply. First published 2014

ISSN 2055-7256

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer– client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of June 2014, be advised that this is a developing area.

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CONTENTS

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Nigeria 114

L Fubara Anga and Chinanu Osuji

Æ´LEX

Oman 119

Mansoor Malik and Nathaniel Armstrong

Al Busaidy, Mansoor Jamal & Co

Panama 128

Maria de Lourdes Marengo

Patton, Moreno & Asvat

Portugal 134

Luís Soares de Sousa

Cuatrecasas, Gonçalves Pereira

Russia 142

Victoria Bortkevicha and Evgeniya Armstrong

Clifford Chance CIS Limited

Sweden 148

Fredrik Wilkens, Emma Stuart-Beck and Malin Sund

Advokatfirman Vinge

Switzerland 154

Frédéric Meyer, Raphaël Baeriswyl, Philippe Renz and Antoine Labaume

Meyer Avocats

United States 160

Thomas A Zimmer

AIRCRAFT MORTGAGES

Pillsbury Winthrop Shaw Pittman LLP

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Aircraft Mortgages – English Law

or New York Law?

Thomas A Zimmer and Dominic Pearson

Pillsbury Winthrop Shaw Pittman LLP

Aircraft mortgages: English law or New York law?

When taking a mortgage over an aircraft, financiers will often be faced with a choice between expressing the document to be gov-erned by either English or New York law. Both are equally popular, but while a validly created and properly filed mortgage governed by either law will provide financiers with broadly similar remedies, the validity and filing requirements themselves under the laws of each jurisdiction can vary significantly. Financiers may not always be aware of these differences and what cost implications may flow from them. This article explores and highlights some of those differences and the bumps in the road that exist when granting a valid mortgage in each jurisdiction.

Validity

Looking first to validity requirements, provided that the amount secured by a New York law governed mortgage against an aircraft (a New York aircraft mortgage) is more than US$250,000, a court located in New York will give effect to the selection of New York law to govern the enforceability of the contractual terms between the borrower and the financier. The vast majority of New York air-craft mortgages will easily meet this threshold. However, New York law and federal law impose certain requirements for the valid grant of a mortgage. New York law requires that the document granting the mortgage must be in writing – not a difficult requirement.

Additional requirements are imposed by US federal law, and treaties that pre-empt New York law in certain circumstances, in order for a New York aircraft mortgage to be valid.

Firstly, if the aircraft is registered in the United States, the valid-ity of the mortgage is governed by the laws of the place where the document granting the New York aircraft mortgage is delivered, even though the contractual relations between the borrower and the financier remain governed by New York law. In this way, federal law distinguishes between the validity of the New York aircraft mort-gage – in other words the creation of the rights the financier has in the aircraft (a ‘security interest’) – and the contractual rights the par-ties have against each other. In practice, this only becomes an issue for US-registered aircraft if the document granting the New York aircraft mortgage is delivered outside the State of New York, which the lawyers can usually manage without much difficulty.

Secondly, if the aircraft is registered in a country which, like the United States, has adopted the Convention on the International Recognition of Rights in Aircraft signed in Geneva on 19 June 1948 (the Geneva Convention), then there is a risk that a New York air-craft mortgage may not be valid under New York law unless it is also valid under the laws of that other country. As a practical matter such a formality represents additional costs, as it creates a require-ment to engage foreign lawyers licensed in that other state to advise what additional steps, if any, are needed to ensure the New York air-craft mortgage is properly constituted in that country and is there-fore valid as a matter of US federal and New York law.

An English law-governed mortgage against an aircraft (an English aircraft mortgage) may be granted orally without a writ-ten contract, although customarily and for evidentiary reasons it is executed and delivered as a deed – a special form of written con-tract, allowing the financier to take advantage of additional legal protections. The selection of English law to govern the contractual relations between the borrower and the financier under the English aircraft mortgage will be given effect by the English courts. Unlike a New York aircraft mortgage, there is no interplay between different tiers of laws such as state law, federal law and international treaties.

Under English law, a mortgage is more than just a contract. It actually works by transferring ownership of the aircraft to the finan-cier on the condition that it will be transferred back again when the debt it secures is paid off. It therefore creates for the financier property rights – known as a ‘proprietary interest’ – in the aircraft. While it is this proprietary right that gives rise to powerful rem-edies exercisable by the financier, this legal concept also gives rise to a serious drawback, the lex situs problem. Put simply, English law requires that the law of the place where the aircraft was situated at the time the English aircraft mortgage was granted also recognise the validity of the mortgage. If it does not, then the financier will not have a valid mortgage even though it may still have a valid contract with the borrower to grant a mortgage. The difference is important: a valid mortgage means the financier is treated in much the same way as an owner and therefore has property rights in the aircraft enforceable against a third party. In contrast, a valid contract means the financier has no rights to the aircraft as against third parties and may resort only to enforce the contract against the borrower. As a result, it may not have priority in the assets of the borrower ahead of other unsecured creditors.

The lex situs problem is potentially a very costly one in prac-tice due to the inconvenience involved. At the time the mortgage is granted, the aircraft must be physically located in a jurisdiction whose domestic law recognises the validity of the English aircraft mortgage. This may require that the aircraft be flown into or over the airspace of a qualifying jurisdiction at the time of closing or that the grant of the English Aircraft Mortgage be delayed until such time that the aircraft is located in a qualifying jurisdiction.

Both English and New York law impose one additional formal-ity. Where an aircraft mortgage is granted by a foreign corporation or other foreign entity not being an individual (which will often be the case), the person executing it on behalf of that foreign entity must be authorised to do so in accordance with the law of that enti-ty’s jurisdiction of incorporation.

Enforceability and priority against third parties

A New York aircraft mortgage and an English aircraft mortgage also impose different filing requirements to ensure they are enforceable or take priority against third parties (such as a bankruptcy trustee, or competing creditors of the borrower). An important observation here is that while certain filings may be strictly required to ensure

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AIRCRAFT MORTGAGES

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the mortgage is enforceable or takes priority against third parties in the courts of the jurisdiction of its governing law, other filings may be desirable to make sure it is enforceable or takes priority against third parties, either directly or pursuant to an English or New York law judgment, in such other jurisdictions as the aircraft may be situ-ated or registered.

While the costs of making all filings mentioned below are relatively low, in practice the making of such filings can present a bureaucratic and logistical hassle and can often require the assis-tance of specialised lawyers.

A New York aircraft mortgage must be filed in one or more of three different places, depending on the circumstances, to ensure it is enforceable or takes priority against third parties as a matter of New York law, as pre-empted by federal law and treaties.

In respect of aircraft registered in the United States, the docu-ment granting the mortgage must be filed with the Federal Aviation Administration (FAA) in order to be enforceable against any third party who does not have notice of it.

The United States has adopted the Convention on International Interests in Mobile Equipment and the associated Protocol to the Convention on Matters Specific to Aircraft Equipment signed on 1 March 2006 (the Cape Town Convention). The Cape Town Convention established an international registry where certain inter-ests in aircraft, including mortgages, could be registered. If the air-craft mortgaged by a New York airair-craft mortgage is registered in the United States or in any other Cape Town Convention contracting state, or if the borrower is situated in the United States or in any other Cape Town Convention contracting state, then the New York aircraft mortgage must be registered at the international registry as an ‘international interest’, in order to take priority over any unreg-istered interests or any subsequent regunreg-istered interests. If the aircraft is registered in the United States, the New York aircraft mortgage must first be filed with the FAA before a filing can be made with the international registry.

Where a New York aircraft mortgage has been granted and the aircraft is neither registered nor the borrower situated in a Cape Town Convention contracting state, no filings are required at either the FAA or the international registry. If the aircraft is registered in a country that has adopted the Geneva Convention, the laws of such country should be examined to determine whether the New York aircraft mortgage is valid, and whether any filing in such country is necessary. Otherwise, a filing must be made in the applicable state or in Washington DC pursuant to article 9 of the Uniform Commercial Code (UCC) as implemented in New York, to ensure that the New York aircraft mortgage is enforceable as against third parties with-out notice. UCC filings need to be renewed every five years.

In practice, precautionary UCC filings for New York aircraft mortgages are made even though filings elsewhere may be sufficient. This practice also helps to establish imputed notice of the existence

of the mortgage, which may be useful in foreign jurisdictions at the enforcement stage.

No filings need be made for an English aircraft mortgage to ensure it is enforceable in the English courts as a matter of English law, except in two circumstances.

Firstly, for aircraft registered in the United Kingdom the doc-ument granting the mortgage must be registered with the Civil Aviation Authority (the CAA, the UK equivalent of the FAA) to ensure that it gains priority ahead of any subsequently registered mortgages and against any unregistered mortgages given in favour of third party creditors, and to ensure that it is enforceable against a bankruptcy trustee of the borrower.

Secondly, where the borrower is a UK company or a UK-registered limited liability partnership, and whether or not the aircraft is registered with the CAA, the document granting the mort-gage must be registered with UK Companies House within 21 days of the date of execution of the mortgage, otherwise it will be void as against a bankruptcy trustee or competing creditor of the borrower.

Finally, even though the Cape Town Convention does not have any legal force or effect under English law, due to the likelihood of needing to enforce an English aircraft mortgage in other jurisdic-tions, either directly or pursuant to an English law judgment, law-yers will ensure that the English aircraft mortgage is registered with the international registry where the English aircraft mortgage quali-fies for registration under the Cape Town Convention.

For both New York aircraft mortgages and English aircraft mortgages, lawyers will also seek to make any filings necessary and desirable in the country of registration of the aircraft and in the country of incorporation of the borrower, to ensure the mortgage is enforceable in such places to the greatest extent possible.

Which to choose?

So, given the issues outlined in this article, should financiers choose one law over the other to govern the terms of an aircraft mortgage? As demonstrated, each jurisdiction has its own pitfalls, with the lex

situs problem of an English aircraft mortgage arguably presenting

bigger problems on validity requirements. However, should the UK ratify and bring into law the Cape Town Convention, some lawyers are of the opinion that this may overcome the lex situs problem. Others are skeptical. While beyond the scope of this article, other considerations might include litigation costs, choice of forum or venue for resolving disputes, and the relative likelihood of enforcing a judgment rendered by the court of one jurisdiction over the other in the country of registration or habitual base of the aircraft.

Whatever the relative benefits of one governing law over the other, it is likely that financiers will continue to rely on either an English aircraft mortgage or a New York aircraft mortgage as the predominant and most valuable form of security in aircraft finance transactions, as supplemented by any available local law security instruments.

Thomas A Zimmer

[email protected]

Dominic E Pearson

[email protected]

Four Embarcadero Center, 22nd Floor

Tel: +1 415 983 1333

San Francisco, CA 941111

Fax: +1 415 983 1200

United States

www.pillsburylaw.com

Strategic Research Partner of the ABA Section of International Law

Official Partner of the Latin American Corporate Counsel Association

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