Bermuda: Paradise Found For Private Aircraft Financing

Last Updated: 23 February 2015
Article by Julie McLean and Angela Atherden

Bermuda has historically been and remains an attractive jurisdiction for lenders involved in the financing of the acquisition of both private and commercial aircraft. Often in the case of a private aircraft acquisition, a special purpose company or an individual (the "Borrower") will borrow funds from a bank (the "Lender") to purchase an aircraft. Unlike in a commercial transaction, the acquisition of the aircraft shall be for the Borrower's private use. Therefore, there will not be an operating lease but instead there will usually be a management agreement with an air management company. The purchase price is usually advanced to the Borrower at the time of delivery by the Lender, and the property in (and possession of) the aircraft transferred to the Borrower at the same time as the seller is paid. Concurrently with the purchase of the aircraft, the Borrower will issue a mortgage over the aircraft in favour of the Lender along with other customary security.

Bermuda Registration Offers Reduced Risk to Lenders

When determining whether to fund the acquisition of an aircraft (whether for private or commercial use), a Lender will primarily be concerned with maintaining its collateral, i.e. the aircraft and its value. Such considerations will include how well the relevant aviation authority ensures that proper safety and maintenance standards are upheld and enforced, as well as how responsive and professional such aviation authority is. Lenders view factors such as war risk, insurrection, forced requisitioning and bureaucratic difficulties in relation to registration, deregistration and repossession upon default as very unfavourable. The Borrower, as owner of the aircraft, will also be (or at least should be) concerned to register the aircraft in a jurisdiction where the aviation authority is professional, competent, respected, responsive and readily accessible.

Bermuda Department of Civil Aviation Maintains a Top Tier Register

The Bermuda Register of Aircraft (the "Bermuda Register"), which is maintained by the Bermuda Department of Civil Aviation (the "BDCA"), is a top-tier aircraft register and is ranked as a Category 1 Aviation Regulatory Authority by the Federal Aviation Administration. Aircraft registered in Bermuda are based and operated throughout the world. There is no requirement that such an aircraft be based or operated in Bermuda, and actually, the majority never come to Bermuda. The registration marks for aircraft on the Bermuda Register are very inconspicuous and this can be advantageous when operating the aircraft in areas where there is political instability or security risk. The BDCA are very responsive and always do their best to ensure that registrations occur as soon as practicable, while ensuring that the highest standards of safety are upheld. The BDCA also requires that every aircraft registered on the Bermuda Register submit a copy of the complete operations manual, in respect of the aircraft, to the BDCA. Unlike other jurisdictions, this must be a bespoke manual for the particular aircraft and cannot be a generic form for the relevant model type. This is more expensive and time consuming to produce, but the BDCA wants to ensure the highest standards of operation in respect of Bermuda registered aircraft. Lenders will appreciate this, as their focus is on maintaining and preserving the value of their collateral, the aircraft.

A Robust Environment for Creation, Preservation and Enforcement of Security

The most commonly used aircraft financing structure utilised by Lenders for Bermuda registered aircraft involves the following suite of security documents: an aircraft mortgage between the Lender and the Borrower and a Bermuda law share charge between the Lender and the non-Bermudian shareholder of the Bermuda exempted company. As part of the share charge, the shareholder will issue an irrevocable proxy over voting of the shares in favour of the Lender, the directors will provide executed but undated resignation letters and the shareholder will sign an undated share transfer form in respect of the pledged shares. These documents are beneficial for the Lender to have in the event of a Borrower default, under the loan documentation. As a result of such documentation, upon the occurrence of such an event of default and enforcement of the corresponding security, the Lender will be able to vote the shares of the company, remove the directors and obtain control of the company whose main asset will mostly likely be the aircraft. In connection with the granting of the share charge, the Lender's counsel will want to ensure that the prior approval from the Bermuda Monetary Authority is obtained for the shares to be transferred to the Lender (or one of its affiliates), in the event of enforcement resulting from the occurrence of a default.

Along with this, the Bermuda company will also typically grant a deregistration power of attorney in favour of the Lender. This deregistration power of attorney can be filed with the BDCA, which will make a note on the file of the Lender's interest and provide a written assurance that the BDCA will not permit deregistration of the aircraft without authorisation from the Lender.

In the majority of these transactions, the governing law of the transaction documents is not Bermuda law. As such, for the sake of consistency, the aircraft mortgage is also often governed by the same law as the financing documents. There is no requirement that the aircraft mortgage be governed by Bermuda law.

Pursuant to the Mortgaging of Aircraft and Aircraft Engines Act, 1999 (the "Mortgage Act"), it is possible to register both an aircraft mortgage and an aircraft engine mortgage in Bermuda provided the aircraft is on the Bermuda Register. The BDCA also has a priority notice procedure which allows a pre-filing in respect of an upcoming mortgage to be filed up to 14 days in advance and provides priority over any subsequently registered mortgage.

The Lender will not be deemed to be resident, domiciled or carrying on business in Bermuda merely by the performance and/or enforcement of the transaction documents, nor is it necessary for the Lender to enforce its rights under the transaction documents that it be licensed, qualified or otherwise entitled to carry on business in Bermuda.

There is no concept of "perfection" of a mortgage under Bermuda law, but a mortgage once registered pursuant to the Mortgage Act will have priority over any other aircraft mortgage that is subsequently registered against that aircraft or aircraft engine.

Competitive Fee Structure for Registration of Security

Bermuda as a whole offers competitive pricing when compared to other jurisdictions. The fee in respect of filing an aircraft mortgage is very reasonable. The fee is based upon a sliding scale and, at present, the maximum amount payable is US$800. In comparison, the fees for filing a mortgage in competitor jurisdictions can be as high as US$5,000.

Provided that the Borrower is a Bermuda company (as opposed to an individual or a partnership), the share charge can be registered in the Register of Charges in Bermuda. The current filing fee for such a registration is US$574. As with mortgages, there is no concept of "perfection" of a charge but on registration, to the extent that Bermuda law governs the priority of the charge, such charge will have priority over any unregistered charges and over any subsequently registered charges, in respect of the assets which are the subject of the charge.

Transparency with Regard to Existing/Competing Security

Anyone can request a search to be carried out at the Registrar of Companies in Bermuda to ascertain what charges, if any, are registered over the assets of the subject company. Third parties are effectively put on notice that a charge exists. This contrasts with some other offshore jurisdictions where no public register of securities is maintained by the Registrar of Companies or any other public authority in such jurisdiction. As a consequence, priority of security in Bermuda has more statutory certainty than in some of our competitor jurisdictions.

Confidentiality with Respect to Aircraft Registration Details

Unlike the Isle of Man Aircraft Register (the "IOM Register"), the Bermuda Register is not searchable using the Internet. If one visits the IOM Register website, one can immediately obtain the name and address of the registered owner of any aircraft registered on the IOM Register. Even after an aircraft is deregistered from that register, the details are still displayed. Such a search would show the date the aircraft was deregistered and the place of the new registration. While these features may be attractive to some, anyone who wishes to keep the details of the ownership of an aircraft out of the public domain for security reasons will certainly view this as a disadvantage.

About Bermuda

Bermuda is a British overseas dependent territory and considered to be one of the more sophisticated, taxneutral or tax-efficient jurisdictions. At present, there are no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, state duty or inheritance tax payable by a Bermuda company or its shareholders other than those shareholders who are ordinarily resident in Bermuda. Bermuda is regarded as being both politically and economically stable. These are factors, which are important to aircraft owners, banks and lenders and have helped Bermuda secure its place as a key player in the aviation financing sector. Furthermore, Bermuda's judicial system, which follows English common law principles, is considered to be stable and consistent, with the highest court of appeal in Bermuda being the UK Privy Council.

Conclusion

When choosing a jurisdiction to provide aircraft registration services and the registration of the corresponding security package documents, the interests of the Lender and a commercially astute Borrower should align. Both parties will want consistency of application of laws and procedures, certainty as to how the security may be enforced, and competent and professional support both at the aircraft registry and the law firms that will be trusted to effect the registration and, if necessary, enforce the security. Bermuda can and consistently does provide all of these things to many satisfied customers throughout the world.

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.

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