This paper deals with the offshore arrangements put in place in the typical aircraft financing transaction involving the establishment of a special purpose offshore company ("SPC") in the Cayman Islands.


This paper does not propose to examine in detail all considerations which may lead to the inclusion of an offshore element in any given financing transaction. These considerations will vary on a deal-by-deal basis.

The structure on which we will concentrate in this paper is the typical offshore leasing structure where ownership of the Aircraft vests with an SPC, is acquired through funding by way of loan from the Lender and is leased by way of operating lease to the Airline. This basic structure is illustrated in Appendix A. The SPC will typically be established as an "off-balance sheet vehicle" with its issued share capital held by an offshore bank or trust company on charitable trusts. The Lender will typically take security over the Aircraft, over the SPC's rights as lessor and usually security over the issued share capital of the SPC itself.

The attraction of this structure from a Lender's perspective is as follows:

a) Ownership of the Aircraft does not vest with the Airline but with an SPC controlled by a bank or trust company which has no commercial interest in the transaction other than its fees for undertaking its role as service provider. Ownership therefore vests in a structure which is unlikely to be hostile to the Lender in a default scenario when the Lender is seeking to enforce its security. From the Lender's perspective this "friendly ownership" arrangement may provide the Lender with the advantages that would come with retaining title to the Aircraft itself whilst avoiding the consolidation of the Aircraft on its own balance sheet. The assignment by the SPC of its rights under the lease with the Airline will also give the Lender direct control of the enforcement of rights of the SPC as against the Airline under the lease.

b) In a default scenario where deregistration in the Airline's jurisdiction is sought, the Lender should be able to count on the exercise of the owner's deregistration rights rather than having to rely solely on a mortgagee's rights. Certain jurisdictions do not recognise the mortgagee's right to deregister and may otherwise limit the mortgagee's remedies (for example to a local judicial sale), thus making exclusive reliance on a mortgagee's rights potentially unsatisfactory for the Lender.

c) The principal loan and security documentation will be entered into by the SPC rather than the Airline, thus avoiding potential enforcement problems in the Airline's own jurisdiction where the legal system may be very different from the English or American systems. The Cayman Islands, for example, is a common law jurisdiction (where English common law will be of persuasive authority) and the basic legal framework will be instantly recognisable to the English practitioner. The "unfamiliar legal system" consideration alone has, for example, led to the offshore structuring in the Cayman Islands of transactions for airlines in the People's Republic of China where the relevant airlines have been permitted to establish the SPCs as on-balance sheet vehicles.

d) Ownership of the Aircraft will be in a politically stable jurisdiction which may give comfort to a Lender in cases where the Airline is based in a jurisdiction where there is a perceived political or country risk.

e) Ownership of the Aircraft will vest in a bankruptcy-remote structure which should be unaffected by the bankruptcy of the Airline, thus avoiding potential problems that could arise if title to the Aircraft vested with the Airline or in a special purpose subsidiary established by it.

f) The principal reason for establishing the SPC in an offshore jurisdiction is taxation or, more properly, the absence of taxation and therefore the absence of withholdings on account of any charge to tax. The Cayman Islands, for example, currently have no relevant direct forms of taxation whatsoever. Accordingly, the adoption of an offshore leasing structure should be entirely tax neutral. In order to give comfort that the nil-tax regime will continue the SPC may obtain from the Cayman Islands government a guarantee against the imposition of taxation in the future, known as the "Undertaking as to Tax Concessions", which undertakes to exempt for a period of twenty years the recipient SPC and its shareholders from most forms of relevant taxation if introduced in the Cayman Islands during that period. Longer guarantees are available on specific request. Thus, the Lender may be assured not only that the SPC structure will not involve adverse tax consequences based on current legislation but that that will remain the situation for the duration of the transaction.



The SPC will enter into an administration or management agreement with a local bank or trust company as administrator (the "Administrator") in the relevant offshore jurisdiction. This agreement will set out the services to be provided by the Administrator. The principal service will be to provide directors and officers to the SPC. It may be convenient to include the Lender as an additional party to this agreement to take covenants from the Administrator in respect of the business and management of the SPC. If there is no charge over the shares in the SPC being granted by the Administrator there may be no other transaction document in which both the Lender and the Administrator will be a party.

The Lender should not be so aggressive in its demands to control the SPC that it risks being construed as a shadow director or, even worse, the risk of the SPC being disregarded as a separate legal entity in the Lender's own jurisdiction or falling within controlled foreign company legislation in the UK and within equivalent legislation in other jurisdictions. It is typically considered sufficient to take covenants from the Administrator to procure that the directors it supplies do not cause the SPC to engage in other transactions and to procure that the SPC performs its transaction obligations (although, of course, falling short of an obligation on the part of the Administrator to expend own funds).

If there is no other provision in the transaction documentation to meet the SPC's ongoing fees and expenses (for example, through the payment of additional rent under the lease) the Airline (which will typically be directly responsible for meeting the offshore costs) may be included as an additional party to the administration agreement to undertake to meet these costs.

The Cayman Islands are home to a significant number of subsidiaries of "household name" financial institutions providing local administrative services to SPCs and the larger local law firms and major accounting practices will typically either control or have an interest in a local trust company offering such services. The available quality offshore administrators that have no competing commercial interest in the transaction, coupled with the typical "security package", should afford the Lender a high degree of confidence in adopting an offshore structure.

Ownership Of The SPC

The issued share capital of the SPC will typically be registered in the name of a local trust company. This will usually be the same entity that serves as administrator. The issued share capital (usually US$1,000) will be held by the Administrator on discretionary charitable trusts pursuant to a declaration of trust that the Administrator will execute. This ensures that the SPC is not consolidated on the Administrator's balance sheet and the discretionary nature of the trust also ensures that no charity has a vested interest in the trust property until an appointment is made by the Administrator on the termination of the trust, which will be tailored to the transaction period.

The Lender may also be included as a discretionary beneficiary during the transaction period, although it is unusual for the trust in practice to generate any income during that period. The presence of the Lender as a discretionary income beneficiary provides a justification for the Administrator to deal with the shares in the SPC in a manner which benefits the transaction but which was not contemplated on set up, such as a purchase of the SPC by the Airline on a restructuring, but which has no direct benefit for the discretionary charitable beneficiaries. This arrangement seeks to avoid any argument that such a dealing by the Administrator would be in breach of trust or otherwise than for a proper trust purpose.

To the extent that the Lender is granted certain powers or discretions under the trust, then its presence as a discretionary income beneficiary will assist deal with the point that such powers may be fiduciary powers or discretions exercisable only for the benefit of a beneficiary. Typical powers or discretions would be in relation to any disposition of the shares in the SPC or in relation to its winding up. These tend to be drafted as provisions prohibiting the Administrator from taking such actions without the consent of the Lender. This is usually not thought to be a degree of control that would give a Lender control or consolidation issues in its home jurisdiction.

Following the termination of the transaction the trust will terminate and the trust property (namely, the net value of the SPC, which will be the issued share capital and any transaction fee earned by the SPC) will be distributed to such one or more charities as the Administrator determines.

Security Package

The SPC will usually grant security over the Aircraft in the form of a mortgage and will always grant security over its rights under the lease with the Airline, which will allow the Lender to enforce directly the rights of the SPC as against the Airline on a default. The SPC will typically also grant a deregistration power of attorney permitting the Lender, acting in the name of the SPC, to deregister the Aircraft on a default. Under Cayman Islands law such a power of attorney when granted to secure an obligation owed to the Lender will be irrevocable until that obligation is discharged.

Frequently, the Lender will also take security over the issued share capital of the SPC which will give the Lender the ability to take control of the SPC on a default. Accordingly, on a default the Lender has the option either of enforcing security granted by the SPC or of acquiring the SPC itself.

The share charge granted by the Administrator will differ in a few respects from a share charge granted by a parent in respect of its on balance sheet subsidiary. These differences reflect that the Administrator's role is that of a service provider rather than a commercial transaction party. It also reflects that a default is likely to be triggered by a default by the Airline rather than by any fault on the part of the SPC or the Administrator. These differences will include a provision that each party will bear its own expenses rather than imposing an obligation on the part of the Administrator as chargor to meet the expenses of the Lender. It is also inappropriate to place on the Administrator any obligation, whether as primary obligor or as guarantor, in respect of the SPC's payment obligations.

The trust arrangements in respect of the issued share capital of the SPC will need to accommodate the share charge either by express permissive provisions or by providing that the shares are settled on the trust subject to the share charge.

As an alternative to a share charge, the Lender may consider a call option arrangement under the trust on which the shares are settled by the Administrator requiring the Administrator to transfer the shares to the Lender on request and usually on payment of par value.

Limited Recourse And Commercial Benefit

The SPC is a corporate entity and its directors will be subject to the typical common law fiduciary duties (adopting English common law principles). Relevant here is the duty of a director to act in which he believes to be his company's commercial interests.

In determining the level of benefit or fee payable to the SPC the directors may be expected to undertake the usual risk-reward analysis: that is, the directors will want to satisfy themselves that the profit opportunity or fee payable to the SPC is commensurate with the perceived risk assumed.

The importance of directors' duties for the other transaction parties is well established in common law jurisdictions by the English decision of Rolled Steel Products (Holdings) Ltd. v. British Steel Corp. The risk is that other transaction parties, if fixed with actual or constructive knowledge of such breach of duties, may find themselves unable to enforce their contractual rights as against the SPC at the instigation of a liquidator or third party creditor. There is also the risk of personal liability on the part of the Directors.

The solution, which avoids either a breach of duty or the payment of significant transaction fees to the SPC to balance the assumption of open-ended loan repayment obligations, is to limit those obligations both in amount and recourse to the security granted by the SPC. As the SPC will grant security over all its material assets (namely, the Aircraft and its rights under the lease) the Lender is not being deprived of recourse against any significant asset. As the potential or theoretical downside to the SPC is limited: namely, to the loss of assets it would not have had had it not participated in the transaction but with no prospect of insolvency, the directors typically take the view that a modest transaction or profit fee of US$1,000 is appropriate, which should on the ultimate winding up of the SPC on the termination of the transaction be distributed to charity together with the issued share capital.


The lack of publicly available information precludes the accurate calculation of exactly how many aircraft are financed through offshore structures. However, there is sufficient information to know that it is an extremely popular route. Over the last five years at least ten per cent of the annual Aircraft production of the two or three major commercial manufacturers has been financed through offshore structures in which this firm has been involved.

Note: This article is intended to provide only general information for the clients and professional contacts of Maples and Calder/Maples and Calder Asia/Maples and Calder Europe. It does not purport to be comprehensive or to render legal advice.

For further information please Click Contact Link to contact our Cayman Islands Branch or alternatively contact:

Suite 1002
One Exchange Square
8 Connaught Place
Hong Kong

Tel No: 852-2522-9333
Fax No: 852-2537-2955

7 Princes Street
London EC2R 8AQ

Tel No: 44-171-466-1600
Fax No: 44-171-466-1700