Australia: Ten things to know about leasing and financing aircraft in Australia

1 | Registration of an Aircraft in Australia

Pursuant to the Civil Aviation Act, s20AA a person must not fly an aircraft in Australian territory unless it is registered in accordance with the Civil Aviation Safety Regulations 1998 (the CASR) (or the aircraft is employed in private operations and has the nationality of a contracting State under the Chicago Convention). Under the CASR an application to register an unregistered aircraft may be made by the owner or a person who is acting their behalf. If the registration holder is not an eligible person, the registration holder must appoint an eligible person to be the registered operator.

An "eligible person" means:

  1. a resident of Australia who is:
    1. 18 years of age or older; and
    2. an Australian citizen or the holder of a permanent visa;
  1. a corporation or body incorporated in Australia;
  2. the Commonwealth of Australia, a State or a Territory or their agencies;
  3. a foreign corporation that is lawfully carrying on business in Australia.

2 | Security Perfection - PPSA & Cape Town Convention

A new security regime was established by the Personal Property Securities Act 2009 (PPSA) on 30 January 2012. The PPSA has significant implications for lessors of aircraft as an aircraft lease is often characterized as a security interest under the PPSA. As a result:

  • ownership of the aircraft is not sufficient to protect the lessor's interest in the aircraft (without perfection by registration under the PPSA);
  • a lessee may be able to grant a security interest in the leased goods to parties other than the lessor;
  • a failure to perfect in accordance with the time limits required under the PPSA, may leave the aircraft available to satisfy the obligations owed by the lessee to its creditors;
  • the lessor's interest in the aircraft may be lost in its entirety on insolvency of the lessee if the lessor has failed to perfect its interest;
  • a purchaser of the aircraft may take free of the lessor's interest where the lessor has not perfected its interest.

Sub-leases may also be security interests under the PPSA and therefore may be subject to the risks referred to above (which can multiply through lease chains where there is a failure to perfect a security interest at any level in the chain).

This is an area of considerable uncertainty and a number of submissions requesting clarification are being made by the industry as part of the 3 year review of the PPSA currently being undertaken by the Australian government.

Australia has also recently passed legislation to adopt the Cape Town Convention on International Interest in Mobile Equipment (2001) (the Convention) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to aircraft Equipment (the Protocol and together with the Convention, the Cape Town Convention). There are a number of steps which the Australian government needs to take in order to put the Convention into effect. These are expected to be completed in late 2014 or early 2015.

The interaction of the PPSA and the Cape Town Convention is also currently being considered in the market. It is expected that due to some differences in coverage of the PPSA and the Convention, registration will be undertaken under both regimes for most aircraft financings.

3 | Choice of law

As a matter of Australian law, parties are generally free to choose the governing law of a contract provided the choice was not (a) made in bad faith, (b) made illegally, (c) contrary to rules of public policy or mandatory laws of the forum. The PPSA contains specific rules as to the law which governs the validity, perfection and effect of perfection of security interests despite the governing law chosen by the parties.

4 | Enforcement of Foreign Judgments

A foreign judgment may be recognized by the courts of Australia either at common law or under the Foreign Judgments Act 1991 (FJA). The FJA provides for the registration of "enforceable money judgments" obtained in the superior courts of a country to which the FJA applies. The United Kingdom is such a country. The application for registration of the judgment must be made within 6 years. Once registered it is as though the judgment was given by the Australian court (and there is no reconsideration of the merits). An order for delivery-up or possession would not be a "money judgment" registrable under the FJA.

5 | Aircraft Requisition

The Crimes Act 1914 allows for a member of the defence force or a member of the Australian Federal Police to seize an aircraft they reasonably believe to be pirate controlled. Various legislation also exists which empowers a court to order forfeiture of property used in the commission of a criminal offence. The federal government also has the power to acquire property on "just terms" (generally requiring payment of compensation). The royal prerogative inherent in the Australian parliaments also allows requisition of aircraft by government in the course of war like operations.

6 | Sovereign Immunity

An airline should generally not be entitled to sovereign immunity from legal action or proceedings in Australia where the airline is participating in commercial activity.

The High Court recently unanimously dismissed an appeal by P T Garuda Indonesia Ltd ("Garuda") and held that Garuda had no claim to immunity. The Australian Competition regulator (ACCC) alleged that, with respect to commercial freight services to Australia, Garuda and several other airlines had engaged in anti-competitive conduct. The High Court held however, that Garuda could not claim immunity because the proceedings against it concerned a commercial transaction.

7 | Stamp Duty

Stamp duty is generally not payable where the aircraft is not physically present in a State of Australia on the date the documentation is executed.

Conveyance or transfer duty is imposed on the sale (Including agreements for sale), assignment, transfer of "dutiable property". However exceptions will sometimes apply, depending on the circumstances, where the property dealt with only comprises goods such as aircraft. South Australia and Western Australia do not have this exception.

NSW is the only state which continues to impose mortgage duty. Care therefore needs to be taken in relation to the timing of the mortgage. Duty generally will not be imposed if the aircraft is not physically located in NSW (or in its airspace) on the date the documents are executed.

8 | Security over Aircraft

Australian law recognises the creation of security over a moveable object such as an aircraft. As stated above, parties are generally free to choose the law governing an aircraft mortgage however specific rules may apply in relation to the validity, perfection and effect of perfection of security under the PPSA. It should be noted however that the validity of the transfer of title to a tangible movable (for example, an aircraft) and its effect on the proprietary rights of the parties thereto and of those claiming under them, are likely to be governed by the laws of the country where that aircraft is located at the time of the transfer (i.e. the lex situs).

9 | Repossession and Deregistration

Australian courts will uphold provisions in security documents allowing for repossession of an aircraft. There are no waiting periods imposed (other than to the extent agreed between the parties in the default provisions in the transaction documentation). Court proceedings are not required to effect repossession. Injunctions are available for preservation of assets (grounding etc). Certain consents (to enter land etc) and clearance of statutory liens may be required to effect the repossession.

However if the mortgagee enters into administration, there may be a stay on enforcement in certain circumstances (see below) without the consent of the administrator or leave of the courts.

Deregistration of the aircraft with the Civil Aviation Safety Authority is typically undertaken utilizing a deregistration power of attorney taken at the outset of a transaction (or a provision in the documentation of similar effect).

10 | Insolvency

A lessee may be subject to winding up/liquidation, receivership or voluntary administration under the Corporations Act. Due to the personal liability under Australian law that directors have for trading while insolvent, voluntary administrations are common.

Voluntary administration gives rise to a stay on civil actions against a company during the administration (which will continue until an agreement is reached with creditors or a decision is made to liquidate the company). During this time creditors may only enforce security if they hold security over the whole or substantially the whole of the assets of the company (which will often be the case for an aircraft mortgagee provided a special purpose vehicle holds title to the aircraft).

In the case of leases, if a company enters into administration, the Administrator has 5 business days in which to give a notice to the lessor notifying whether it wishes to exercise rights in respect of the lease. If the administrator elects to continue the lease, the administrator would be liable for rentals.

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