The Cayman Islands has long been a leading jurisdiction for aviation finance transactions in both the commercial and business jet sectors. Among the reasons for this are the Cayman Islands' tax neutral status, its political stability, the developed, English-based legal system, supporting infrastructure and high-quality service providers, the flexible and commercial nature of its legislation and its adherence to international standards of compliance.
In addition, in relation to locally-registered aircraft for private use (note that Cayman also has a Bis83 arrangement in place with Saudi Arabia), the Cayman Islands Aircraft Register maintained by the Civil Aviation Authority of the Cayman Islands (the "CAACI"), has earned a reputation as one of the most highly respected, user-friendly and recognized aircraft registers across the aviation industry.
In the corporate and private jet sphere, whilst many such aircraft are (and will continue to be) cash purchases, in recent years an increasing number of such aircraft have been financed with bank finance – whether with respect to new or used aircraft and/or pre-delivery payments. Such financings are very frequently structured using a Cayman Islands exempted company as the vehicle which finances, acquires title to, and then operates the aircraft.
This article, therefore, explores some of the features and issues which may arise in corporate and private jet financing transactions involving the Cayman Islands.
Typically, the structure will involve the establishment of a new company, a special purpose vehicle ("SPV"), the sole activities of which will be to finance, own and operate the aircraft. Unlike in a commercial aircraft transaction, the acquisition of the aircraft is mostly for the operator's private use and, consequently, there will not generally be a leasing arrangement to a lessee/airline but there may instead be an operator/management agreement with a professional operator/MRO.
Additionally, again unlike in many commercial deals which often involve a bankruptcy-remote orphan trust structure, the SPV will generally be within the direct ownership of the principal behind the transaction, whether a large multi-national corporate or a high net worth individual.
Some features of a Cayman Islands exempted company:
- the establishment and maintenance of a Cayman exempted company is straightforward, quick and cost-competitive. The company is incorporated on a same day basis and the certificate of incorporation may be obtained overnight;
- the Cayman Islands is a tax neutral jurisdiction and, as such, there are no direct taxes or withholdings applicable to the SPV under Cayman Islands law. In addition, the SPV, as a Cayman exempted company, may obtain an undertaking as to tax concessions issued by the Governor-in-Council of the Cayman Islands, which guarantees an exemption from any changes to the zero tax regime in the Cayman Islands for a period of 20 years from the date of the undertaking;
- there are no minimum capital requirements for a Cayman exempted company under the laws of the Cayman Islands (save in the case of certain regulated entities), although there must be at least one share in issue at all times;
- there is no Cayman law requirement to have locally resident directors or other officers or to hold shareholder or director meetings physically in Cayman. A Cayman exempted company must, though, maintain a registered office in the Cayman Islands and keep certain corporate records and registers at such registered office;
- there is no statutory requirement to prepare annual accounts or to file accounts in the Cayman Islands. The SPV will be required to keep such books of account that give a true and correct view of its affairs; and
- the Cayman AML/KYC regime complies with international standards and will, therefore, be familiar to most transaction parties.
Financing and Security Documentation
The SPV will enter into certain documentation providing for the financing of the aircraft, including, typically, an aircraft sale and purchase agreement, a loan facility agreement and security documentation.
Title to the aircraft will be transferred to the SPV by way of a bill of sale. If the aircraft is new, this will come from the manufacturer; if used, title will be derived through the chain of ownership effected via bills of sale back to the manufacturer.
The security package would normally include an aircraft mortgage between the aircraft owner (and, if, for example, a US foreign owner trust structure, also the beneficial owner) and the lender and one multi-party agreement or separate security assignment/s of the SPV's/operator's rights under the various contracts relating to the maintenance and operation of the aircraft – for example, the operating/management agreement, maintenance programmes and policies of insurance over the aircraft and assignments of manufacturers' warranties.
Additionally, the lender may take a charge over the shares of the SPV. As part of the share charge, the lender will also receive and retain certain ancillary "deliverables", all designed to facilitate and allow the lender to take control of and potentially sell, the SPV and, thereby, the underlying aircraft on an enforcement. These may consist of some or all of the following - (i) the original share certificate (if any) with respect to the charged shares, (ii) an executed, undated blank share transfer form, (iii) executed but undated resignation letters from the SPV's directors and accompanying letters of authority to date the same on an enforcement, (iv) an irrevocable proxy in favour of the lender permitting it to vote the shares in the SPV on an enforcement, and (v) an undertaking from the SPV (and, potentially also from its registered office provider), inter alia, to co-operate with and take instructions directly from the lender on an enforcement. The SPV's articles of association may also be amended to include certain share charge-related provisions. As a further protection for the lender in this context, it is also possible in Cayman to have a "stop-notice" recorded with the Cayman courts and served upon the registered office of the SPV, which will have the effect of preventing the registered office from registering a transfer of the relevant shares until 14 days after sending notice thereof to the lender.
Usually, the security package will include a deregistration power of attorney/irrevocable deregistration and export request authorization (IDERA). Where the aircraft is registered on the Cayman Aircraft Register, it is possible to file a copy of such deregistration power of attorney/IDERA with the CAACI and obtain their acknowledgement thereof. Additionally, where the Cayman Cape Town Convention Law applies (see below), that Law provides that the CAACI will in general terms honour a request for deregistration and export in accordance with the relevant provisions of the Cape Town Convention.
Further, it is typical in a corporate/private jet financing for the principal/the ultimate beneficial owner of the SPV (in many transactions, the "true credit") to provide a guarantee.
In a PDP financing, the security package may consist of the aforementioned guarantee, a security assignment of the purchase contract for the aircraft (or of the SPV's assignment thereof) and often also a share charge.
All of the principal transaction documents – save for the charge over shares, which will commonly be Cayman law-governed - will be written under laws other than Cayman Islands law, for example English law/New York law/Hong Kong law.
Almost invariably, Cayman counsel will render a Cayman Islands law corporate and enforceability opinion addressed to the lender/other interested parties as to the SPV and its entry into and performance of the transaction documents. Where the aircraft is registered on the Cayman Aircraft Register, and additionally where a mortgage over that aircraft is registered on the Aircraft Mortgage Register, such opinion will also include confirmations as to such registrations.
Security Filings etc.
Save as described below, there is no security register in Cayman and, accordingly, no Cayman concept of "perfection" by security filing. As an internal administrative matter, the SPV is required to maintain at its registered office in Cayman, a register containing details of all mortgages and charges specifically affecting its property. This is not a perfection matter and does not go to the effectiveness of the security created nor to priority. It is, however, in the lender's interest that this register is properly updated at the time of closing and a certified copy of such updated register is customarily, therefore, a closing deliverable. Further, in the context of a share charge, the lender may also require that the SPV's register of members be annotated to record the details of the relevant security over the SPV's shares. (Of course, if the chargor is also a Cayman company, its own register of mortgages and charges will need to be similarly updated.)
With respect to aircraft registered on the Cayman Islands Aircraft Register, it is possible to register a mortgage over such aircraft on the Cayman Islands Aircraft Mortgage Register maintained by the CAACI. Such registration will go to priority but not validity. There is no prescribed form of mortgage that may qualify for registration and it can be, and most often is, governed by a foreign law. A registered mortgage is given statutory priority over subsequently registered mortgages and unregistered mortgages, although possessory liens for work done to the aircraft (whether before or after the mortgage was created) or over persons lawfully entitled to possession of the aircraft, or with a right to detain the aircraft, will have priority over a registered mortgage. It is also possible to file one (or successive) 14-day priority notice/s with the CAACI to preserve the mortgagee's priority position pending a mortgage registration.
Cayman Cape Town Convention Law
It should be noted that, whilst the Convention on International Interests is Mobile Equipment and the corresponding Protocol on matters specific to Aircraft Equipment have not yet been adopted by the Cayman Islands, Cayman has enacted its own legislation in the Cape Town Convention Law, 2009. This provides for a regime for the constitution, recognition and registration of statutory "international interests" which reflects the principles and framework for the constitution, recognition and registration of international interests found in the Convention itself and allows, inter alia, for an SPV to opt to make an election that the provisions of such Law shall apply to it.
The Cayman courts will commonly recognize and enforce foreign law contractual and security arrangements, provided such matters are validly created under such other laws. They will also customarily recognize self-help remedies, which will, thus, allow a lender to take possession of the SPV or the aircraft via the security granted in its favour without the requirement for a Cayman court order.
The lender will not be deemed to be resident, domiciled or carrying on business in the Cayman Islands as a result solely of the entry into/performance and/or enforcement of the relevant transaction documents, nor is it the case that the lender must necessarily be licenced, qualified or otherwise entitled to carry on business in the Cayman Islands in order to enforce its rights under such transaction documents.
In the event of the insolvency of the SPV, as a matter of Cayman Islands law, the lender's position and priority as a secured creditor would in general terms be preserved.
When selecting a jurisdiction for an aircraft transaction and/or to provide aircraft and aircraft mortgage registration services, the parties will require consistency of application of laws and procedures, a safe and stable political environment with no unnecessary jurisdictional risks, a lack of additional tax consequences, certainty as to how security and contractual rights may be enforced, a universally recognized aircraft registry, and high-quality professional support. Cayman meets all of these needs.
Originally published in Corporate Jet Investor in September 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.