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Part E Guarantees and Security, 33 Charges Over Aircraft

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

Content type:
Book content
Product:
Financial Law [FBL]
Published in print:
01 March 2015
ISBN:
9780199685585

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Subject(s):
Regulation of banks — Mortgage — Security issuer

(p. 623) 33  Charges Over Aircraft

Introduction

33.01  Aircraft are complicated pieces of equipment and it is perhaps unsurprising that the processes involved in their registration and operation are likewise fairly involved. At least for larger aircraft flown internationally by recognized airlines, the sums involved can also be very significant.

33.02  For these reasons, aircraft finance and security is a relatively specialized subject and it is proposed here to consider the topic in general outline only. For obvious reasons, this chapter is principally aimed at aircraft registered in the United Kingdom, but a brief consideration of security over foreign aircraft will also be included.

UK Aircraft

33.03  At the outset, it should be appreciated that provision is made for the registration of UK aircraft on the national register by the terms of the Air Navigation Order 2005.1

33.04  For present purposes, the key provision is article 4 of the 2005 Order. This provides for the Civil Aviation Authority to maintain a register of UK aircraft, and that an aircraft can only be entered or remain on the UK register if it is owned by a ‘qualified person’. This term includes (i) the UK Government, (ii) Commonwealth citizens and corporations,2 and (iii) EEA citizens and companies. In addition, the aircraft may be registered in the United Kingdom if it is chartered by demise to a qualified person, even though the owner would not itself be so qualified. However, the duration of the registration is limited to that of the demise charter,3 so the aircraft would have to be re-registered elsewhere upon expiry.

(p. 624) 33.05  The main legislation of interest to finance lawyers in this field is the Mortgaging of Aircraft Order 1972.4 The main provisions of this Order include the following:

  1. (a)  An aircraft which is registered in the United Kingdom nationality register (including any store of spare parts for that aircraft) may be charged by way of security for a loan or other good consideration.5

  2. (b)  A mortgage against such an aircraft may be registered against it by delivery of a certified copy of the mortgage6 and a registration form as set out in Part I of schedule 1 to the Order.

  3. (c)  Where it is intended to create a mortgage over an aircraft, it is possible to lodge a ‘priority notice’, which secures priority for that mortgage if registered within the ensuing 14 days even though another mortgage is registered within the intervening period.7

  4. (d)  All persons are at all times deemed to have express notice of all information which appears on the register, so that any person taking a mortgage over an aircraft is taken to have notice of any prior charge over the asset. However, registration of an aircraft mortgage is not evidence of its validity.8

  5. (e)  It is specifically provided that the Bills of Sale Acts 1878 and 1882 do not apply to any mortgage over an aircraft on the UK register. This confirmation is helpful in the sense that the excessive formalities of the Bills of Sale Acts are not readily applied to security over an aircraft. In practice, however, the point is only material where the mortgagor is an individual, since it has been decided that the Bills of Sale Acts do not apply to bills of sale executed by way of security by a body corporate.9

33.06  From a security perspective, it should also be borne in mind that, if the owner is a company incorporated in the United Kingdom, then the relevant charge will also require registration at Companies House within 21 days after the date of its creation.10

33.07  As noted above, there is no statutorily prescribed form of aircraft mortgage. In practice, these may be quite detailed documents and may include the following:

  1. (a)  warranties that the aircraft is free of encumbrances or other third-party interests;

  2. (b)  an extension of the security not only to the aircraft itself but also to spare parts and other equipment;

  3. (c)  detailed obligations as to the insurance of the aircraft and (except in the case of liability insurance), an assignment of the relevant policies in favour of the bank;

  4. (d)  if the aircraft is to be chartered, an assignment of the hire or other resultant income; and

  5. (e)  numerous other undertakings will be imposed as to the repair, condition, servicing, and maintenance of the aircraft.11

(p. 625) 33.08  Finally, it should be appreciated that an aircraft is not a single chattel but several, comprising the airframe, the engines, and other spare or removable parts.12 This can give rise to practical difficulties, in that the original engines may be removed or replaced for servicing, or under engine pooling arrangements. If engines are replaced, then the lender needs to ensure that it obtains valid and effective security over the replacement parts.

Priorities and Enforcement

33.09  In terms of the priority of competing mortgages and security interests over aircraft, (i) a registered mortgage always takes priority over an unregistered mortgage, even if the holder of the registered security was in fact aware of the prior interest, (ii) registered mortgages rank according to the dates on which they are entered on the register, save that a mortgage in respect of which a priority notice was given and which is in fact registered within the 14 day priority period will rank ahead of any other charge registered during that period, and (iii) possessory liens for work done on the aircraft may continue to rank ahead of registered mortgages.13

33.10  In terms of the enforcement of an aircraft mortgage following a default, a charge governed by English law will usually include a right for the lender to take possession of and to sell the aircraft, whether via private contract or public auction. However, the usual duty to obtain the best price reasonably available will apply, with the result that a sale to a connected party after a ‘half-hearted’ public auction may not satisfy this requirement, and may also involve a breach of duty to any second and subsequent mortgages who suffer loss as a result.14

Foreign Aircraft

33.11  A transfer or mortgage over a chattel must usually be effective according to the law of the place where the relevant asset is situate at the time of the charge. There are exceptions to this rule and it may be argued that an aircraft should be deemed to be situate in the jurisdiction in which it is registered. The English courts have, however, rejected this view and adhere to the line that the validity of the transfer of the chattel is governed by the physical lex situs.15 As a matter of practice, however, the mortgagee will usually wish to register the mortgage in the state of registration of the aircraft. Consequently, it may be prudent to ensure that a charge over an aircraft is valid in both the country of registry and the place of physical location at the time of the charge.16

33.12  However, this practical approach should not obscure the fact that, so far as the English courts are concerned, the essential validity of the mortgage is governed exclusively by (p. 626) the lex situs of the aircraft as at the date of the creation of the security interest.17 Where the mortgage is valid by reference to this criterion, the English courts will allow the mortgagee to exercise its enforcement rights, for example through the detention and sale of the aircraft.

33.13  It may be objected that a charge over an aircraft amounts to a bill of sale for the purposes of the Bills of Sale Act 1878 (as amended). A bill of sale is an instrument under which a chattel is charged to a lender but under the terms of which the relevant asset is to remain in the possession of the chargor. Under section 9 of the Bills of Sale Act (1878) Amendment Act 1882, a bill of sale made or given by way of security for the payment of money by the grantor thereof is to be void unless it is made in the form set out in the schedule to that Act. However, the expression ‘bill of sale’ specifically excludes ‘…bills of sale of goods in foreign parts or at sea…’18 and thus would not apply to a charge over an aircraft which is outside this country as at the date of the creation of the security. Furthermore, and most decisively, it now appears to be accepted that the Bills of Sale Act does not apply to security created by limited companies,19 which will almost invariably be the relevant category of chargor in this type of case. It follows that this legislation will not generally be of concern when taking security over a foreign aircraft.

International Issues

33.14  It hardly needs to be stated that aircraft are not infrequently physically situate in countries other than their State of registration. This has consequences for the recognition and enforcement of proprietary interests in—including mortgages over—aircraft.

33.15  The Convention on International Recognition of Rights in Aircraft, 1948 (the Geneva Convention) was designed to protect proprietary and security interests in aircraft according to the law of the State of registration. Whilst the United Kingdom signed the Geneva Convention, it never ratified it.20 The Geneva Convention was in any event regarded as inadequate in many respects. In particular, whilst it provided for the recognition of rights created by the State of registration, this merely created a rule of private international law and did not create a uniform system of registration, recognition or enforcement. The Geneva Convention is, in any event, in the process of being superseded by the Convention on International Interests in Mobile Equipment 2001 (the Cape Town Convention) and the associated Protocol on Matters Specific to Aircraft Equipment.21

(p. 627) 33.16  The Cape Town Convention creates the framework for an ‘international interest’ in aircraft and related equipment, and a charge over an aircraft is classified as an international interest for the purposes of the Convention if the agreement creating the security:

  1. (a)  is in writing;

  2. (b)  relates to an aircraft over which the chargor has power to create security;

  3. (c)  enables the aircraft to be identified in accordance with the Protocol; and

  4. (d)  provides for the identification of the secured obligations (although without any necessary requirement to state a maximum secured amount).

33.17  If a security amounts to an ‘international interest’ within these relatively unchallenging parameters, then two essential consequences will follow. First of all, that interest may be registered with the International Registry. Secondly, a uniform menu of default rights must be recognized and applied throughout Contracting States.

33.18  The International Register22 is established to record international interests and certain other rights.23 There are various formal requirements as to the validity and time periods allowed for registration24 and the International Register is searchable by electronic means.25 Competing, registered international interests (whether by way of security or otherwise) rank according to their date of registration, and any registered interest ranks ahead of an unregistered interest, regardless of the respective dates of creation.26 The effect of a registered international interest must be recognized in any subsequent insolvency proceedings affecting the chargor.27

33.19  The regime of default remedies applicable to an international interest are set out in chapter III (Articles 8–15) of the Cape Town Convention, as varied and extended by Article XI of the Protocol. These provide that, following a default by the debtor, the creditor may exercise a number of remedies including (i) taking possession of the aircraft, (ii) selling or granting a lease in respect of it, or (iii) collecting hire or other income. Article XI of the Protocol adds to these remedies by allowing the charge to deregister the aircraft and to remove it from the territory in which it is physically situate.

33.20  The Cape Town Convention has come into force, having been ratified by the United States and various other countries. Pending ratification by the United Kingdom,28 the recognition and enforcement of mortgages over foreign aircraft will continue to depend on the ordinary rules of private international law.29(p. 628)

Footnotes:

1  SI 2005/1970. The Order also makes extensive provision for other matters, including airworthiness, aircraft crew and licensing, aircraft operation, air traffic services, and similar issues.

2  This expression would of course include citizens of, and companies incorporated within, the UK.

3  ie a charter under which the charterer assumes full responsibility for the maintenance, operation, and control of the aircraft. This means that an aircraft owned by (say) a non-qualified finance company can still be registered in the UK if the charterer itself is a qualified person.

4  SI 1972/1268.

5  Article 3 of the 1972 Order.

6  Note that, in contrast to the position for ships, there is no prescribed form of aircraft mortgage and its contents is therefore a matter for negotiation between the parties.

7  See art 5 of the Order. This procedure is in some respects similar to that applicable to registered land, discussed in Chapter 32 above.

8  On these provisions, see art 13 of the Order. As in the case of registration at Companies House, the registration process does not have the effect of validating an invalid charge: see para 27.24(g) above.

9  On this point, see Slavenberg’s Bank NV v Intercontinental Natural Resources Ltd [1980] 1 All ER 955.

10  This registration requirement will not apply where the mortgagor is incorporated outside the UK—see the discussion at paras 27.36–27.37 above.

11  These are designed to ensure that—in the event of a default and repossession of the aircraft—the mortgagee will acquire an asset in a condition in which it can be sold and without requiring significant additional expenditure.

12  Although an aircraft may be regarded as a chattel, the creation of security over it does not amount to a bill of sale: see the discussion at paras 33.11–33.13.

13  On these rules, see art 14 of the 2005 Order. Note that the priority for possessory liens in some respects mirrors the position for maritime liens: see para 34.04 below.

14  For an illustration of this rule in the present context, see Alpstream AG v PK Airfinance Sarl [2013] EWHC 2370 (Comm).

15  Air Foyle Ltd v Center Capital Ltd [2002] EWHC 2535 (Comm).

16  On this subject, see Dicey, Morris, and Collins, para 22E-060. It should be noted, on the other hand, that international instruments adopt the approach that the validity of dealings with an aircraft are generally to be governed by the laws of the State of registration: see Arts 17–19 of the Chicago Convention on International Civil Aviation (1944).

17  Blue Sky One Ltd v Mahan Air [2010] All ER (D) 02 (Jun); [2010] EWHC 631 (Comm).

18  See s 4 of the 1878 Act.

19  In NV Slavenberg’s Bank v Intercontinental Natural Resources Ltd [1980] 1 All ER 955, the court decided that the security provisions of the Act were aimed at charges over chattels which remained in the possession of an individual debtor.

20  Section 90 of the Civil Aviation Act 1982 (as amended) provides for an Order in Council to implement the Convention, but no such Order has been made.

21  The Cape Town Convention was sponsored and promoted by the International Civil Aviation Organisation (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT). It may be added that the Cape Town Convention also applies to security over railway rolling stock and space assets. However, these specialist areas are felt to lie beyond the scope of this work.

22  The International Register is operated and maintained by Avarieto Ltd, a company based in Shannon, Ireland, under the supervision of the ICAO in accordance with Art 17 of the Convention.

23  See Art 16 of the Cape Town Convention.

24  See in particular Arts 19–21 of the Cape Town Convention.

25  Article 22 of the Cape Town Convention.

26  Article 29 of the Cape Town Convention.

27  Article 30 of the Cape Town Convention. This is an obvious requirement if the Convention is to be effective. However, Art 30 acknowledges that an international interest created as a preference or in fraud of creditors can be set aside under national law, and that enforcement may be subject to procedural protections in favour of the relevant insolvency official.

28  In December 2013, the UK Government indicated that it proposed to ratify the Cape Town Convention, but did not set a specific timeline for that purpose. However, the mode of implementation is currently the subject of a public consultation exercise: see ‘Ratification of the Convention on International Interests in Mobile Equipment and Protocol thereto on matters specific to Aircraft Equipment—Consultation on Options for Implementation’ (Department for Business, Innovation and Skills, June 2014).

29  See the discussion on ‘Foreign Aircraft’, at para 33.11 above.