Bermuda: Aviation Financing & Leasing – Bermuda

Last Updated: 20 September 2019
Article by Julie McLean and Angela Atherden

1. AIRCRAFT AND ENGINE PURCHASE AND SALE

1.1 Sales Agreements

1.1.1 Taxes/Duties Payable Upon Execution of the Sales Agreement

No taxes or duties are payable in Bermuda as a consequence of the execution of an aircraft or engine sale agreement, unless the agreement is physically executed in Bermuda and one of the parties is a local Bermuda company, in which case stamp duty would be payable. If the aircraft is physically located in Bermuda when the sale agreement is executed and the purchaser is a Bermuda entity, customs duties may be payable as it could be seen as importation of the aircraft.

1.1.2 Enforceability Against Domestic Parties

It is not necessary for a sale agreement to be translated, certified, notarised or legalised in order to be enforceable against a Bermuda company in Bermuda.

1.2 Transfer of Ownership

1.2.1 Transferring Title

The norm is for a Bill of Sale to be entered into to transfer title to an aircraft or engine, although usually there is also a purchase and sale agreement setting out the commercial terms of the sale. Whether such title transfer includes all installed parts (like an APU) would depend on the terms of the contract.

The sale of the ownership interest in an entity that owns an aircraft or engine would not necessarily be recognised as a sale of such aircraft or engine itself. The sale and purchase agreement relating to the entity would need to specifically cover transfer of title to the aircraft or engine to the purchaser.

1.2.2 Sales Governed by English or New York Law

A bill of sale that is governed by either English or New York law in respect of the transfer of title to an aircraft and physically delivered in Bermuda would be recognised, provided it is enforceable under its governing law.

There are no minimum substantive requirements that must be satisfied for a bill of sale to be recognised in Bermuda.

1.2.3 Enforceability Against Domestic Parties

It is not necessary for a bill of sale to be translated, certified, notarised or legalised in order to be enforceable against a domestic party.

1.2.4 Registration, Filing and/or Consent from, Government Entities

It is not necessary for a bill of sale to be registered or filed, nor is it subject to any consent from any government entity.

There are no government applications or consents required as a pre-requisite to the execution and delivery of a bill of sale in relation to an aircraft or engine registered in Bermuda.

1.2.5 Taxes/Duties Payable upon Execution of a Bill of Sale

No Bermuda taxes or duties are payable in connection with executing and/or delivering a bill of sale or consummating the sale of the ownership interest in respect of an aircraft or engine while said aircraft or engine is located in Bermuda, over international waters or in transit to/from Bermuda. However, stamp duty may be payable if the bill of sale is physically executed in Bermuda.

2. AIRCRAFT AND ENGINE LEASING

2.1 Overview

2.1.1 Non-Permissible Leases

It is not customary in Bermuda for leases to concern only engines or parts. However, such leases are not prohibited.

2.1.2 Application of Foreign Laws

It is permissible for a lease involving either a domestic party or an asset situated in Bermuda to be governed by the laws of a jurisdiction other than Bermuda.

2.1.3 Restrictions Concerning Payments in US Dollars

There are no material restrictions imposed on domestic lessees making rent payments to foreign lessors in US dollars, other than foreign currency purchase tax.

2.1.4 Exchange Controls

Exchange control is prescribed under the Exchange Control Act 1972 and is regulated by the Bermuda Monetary Authority.

Bermuda exempted companies, exempted limited liability companies, permit companies, exempted partnerships and permit partnerships are normally designated non-resident for exchange control purposes and, as such, are able to conduct their day-to-day affairs free of exchange control formalities. This would include rent payments under a lease or any repatriation of proceeds.

2.1.5 Taxes/Duties Payable for Physical Execution of a Lease

If a Bermuda local company executes a lease physically in Bermuda, stamp duty will be payable. Provided none of the parties to the lease are local companies, the lease will not attract stamp duty if brought into Bermuda. There is also no stamp duty in respect of electronic copies.

2.1.6 Licensing/Qualification of Lessors

It is not necessary for a lessor to be licensed or otherwise qualified in Bermuda to do business with a domestic lessee.

2.2 Lease Terms

2.2.1 Mandatory Terms for Leases Governed by English or New York Law

Bermuda law does not require any mandatory terms be included in a lease (or ancillary documents thereto) that is governed by either English or New York law that would not typically already be included. However, it should be noted that aircraft registered on the Bermuda Register of Aircraft cannot be operated for hire or reward, nor for the carrying of passengers or cargo without certain certifications from the Bermuda Civil Aviation Authority (the "BCAA").

2.2.2 Tax and Withholding Gross-up Provisions

Assuming any tax or other withholding gross-up provisions in the lease are enforceable under the governing law of the lease (and do not contravene the laws of any jurisdiction where the aircraft is operated), it is expected that they would be recognised and enforceable in Bermuda.

2.2.3 Parts Installed or Replaced After a Lease's Execution

A lease typically covers parts that are installed or replaced on an aircraft or engine after its execution. The terms of the lease should provide for replacements of similar parts or engines, provided they are of an equal or greater value.

2.2.4 Risk of Title Annexation

No information provided.

2.2.5 Recognition of the Concepts of Trust/Trustee

Bermuda law recognises the concept of trusts and the role of an owner trustee under a lease. The 1987 UK Recognition of Trusts Act was extended to Bermuda in 1989 and incorporates the major provisions of the Hague Convention into the law of the United Kingdom.

2.3 Lease Registration

2.3.1 Notation of Owner's/Lessor's Interests on Aircraft Register

The interests of the owner (legal or beneficial) or a lessor of an aircraft will be noted on the aircraft register. The registration of title to the aircraft constitutes prima facie evidence of ownership of the aircraft. However, such evidence is not conclusive.

Where an aircraft is registered by its owner, the Register of Aircraft in Bermuda will contain the name and address of every person who is entitled to a legal interest in the aircraft or a share in it. Where an aircraft is registered by the lessee pursuant to a charter by demise, the name and address of the charterer by demise will be noted on the Register.

2.3.2 Registration if Owner is Different from Operator

Aircraft can be registered in Bermuda either by the owner of the aircraft or by the lessee if there is a valid charter by demise. If the aircraft operator is the owner or has a valid charter by demise in respect of the aircraft, it may act as registrant, provided it is a qualified person as such term is referenced in the Air Navigation (Overseas Territories) Order 2013 (as amended).

2.3.3 Aircraft/Engine-specific Registers

There is no register of leases in Bermuda in respect of either aircraft or engines.

2.3.4 Registration of Leases with Domestic Aircraft Registry

There is no register of aircraft leases in Bermuda. Leases in Bermuda are not subject to any consent from any government entity in Bermuda.

At the time of registering an aircraft in Bermuda in the name of the lessee acting as charterer by demise, the BCAA must be provided with a copy of the lease together with an affidavit that the lease is a true copy.

2.3.5 Requirements for a Lease to be Valid and Registrable

A lease does not need to be in a specific form, nor translated, served, notarised or legalised in order to be filed with the BCAA.

2.3.6 Taxes/Duties Payable for Registering a Lease

As a lease is not capable of registration in Bermuda, there are no associated taxes.

2.3.7 Registration of Aircraft in Alternative Countries

There are no aircraft habitually based in Bermuda that are registered in other countries.

2.3.8 Requirements for Documents Concerning Registration

The BCAA requires the following:

  • a certified copy of the certificate of incorporation, together with a certificate of incumbency or equivalent for the purposes of confirming the signature on the application form; and
  • a PDF copy of the dated and executed Bill of Sale or Bill of Sale and Lease Agreement (where the Registrant is a Charterer by Demise), together with an Affidavit from someone who has seen the original of the document(s) and confirms the PDF supplied is a true copy.

2.4 Lessor's Liabilities

2.4.1 Tax Requirements for a Foreign Lessor

Bermuda does not have any domestic lessees operating aircraft in Bermuda. However, if it did, a foreign lessor would not be required to pay any income or capital gains or other taxes in Bermuda upon leasing an aircraft or engine to a domestic lessee.

2.4.2 Effects of Leasing on the Residence of a Foreign Lessor

A foreign lessor would not be deemed to be resident, domiciled or carrying on business in Bermuda, and would not be subject to any taxes, as a result of its being a party to – or its enforcement of – the lease.

2.4.3 Engine Maintenance and Operations

It is possible for liabilities in respect of aircraft or engine maintenance and operations to be imposed on a foreign lessor under a lease as a result of its being a party to such lease.

Under Bermuda law, aircraft can be detained and, in some cases, forfeited under the criminal law. In addition, an aircraft may be detained and sold for the non-payment of aircraft charges.

2.4.4 Damage or Loss Caused by an Asset

It is possible for a foreign aircraft or engine owner or lessor under a lease or financier financing the asset on lease to be liable under the doctrine of strict liability as a result of damage or a loss caused by the asset.

Schedule 2 of the Civil Aviation Act (Overseas Territories) Order 1969 (SI. 1969 No. 592) applies to Bermuda and extends s. 40 of the UK Civil Aviation Act 1949 (the "Aviation Act") to Bermuda. The Aviation Act has been repealed in the UK but remains law in Bermuda (by virtue of the combination of s. 108 of the UK Civil Aviation Act 1982 and s. 17(2)(b) of the UK Interpretation Act 1978).

Section 40(2) of the Act places strict liability on the owner of an aircraft for damage caused to persons or property on land or water by an aircraft in flight. There is an indemnity available to the owner against the actual wrongdoer.

UK legislation contains an exception to this strict liability in the case of an owner where there has been a bona fide demise letting or hiring out of the aircraft for any period exceeding 14 days to any other person and where no pilot, commander, navigator or operative member of the crew of the aircraft is in the employment of the owner (s. 49(2) of the Aviation Act, now section 76(4) of the Civil Aviation Act 1982). This exception was extended to Bermuda via the Civil Aviation Act 1982 (Overseas Territories) (No. 2) Order 2001.

It is understood that, as a matter of English law, any lessor/owner who falls within this exception would not be exposed to such liability.

2.4.5 Attachment by Creditors

Creditors of a domestic lessee have general common law rights in respect of an aircraft leased to it but owned by a different entity.

2.4.6 Priority of Third Parties' Rights

It is possible for third parties' rights to take priority over a lessor's rights under an aircraft or engine lease, regardless of whether or not such lease/lessor is registered in the national aircraft register.

An example of such exceptional circumstances would be where the aircraft was subject to a possessory lien in respect of work done on the aircraft or aircraft engine on the express or implied authority of any person lawfully entitled to possession of the aircraft or aircraft engine, or if the aircraft was subject to a right of detention in respect of the aircraft or aircraft engine, under any applicable statutory provision.

2.5 Insurance and Reinsurance

2.5.1 Requirement to Engage Domestic Insurance Companies

It is not mandatory for either all or part of the insurances of any Bermuda registered aircraft to be placed with domestic insurance companies.

2.5.2 Mandatory Insurance Coverage Requirements

There are no specific insurance coverage requirements for Bermuda registered aircraft, as this is not prescribed in the Air Navigation (Overseas Territories) Order 2013. In practice, the determination of insurance coverage is undertaken by the operator and is based on multiple considerations, such as their base of operations and the places where they fly to and from.

2.5.3 Placement of Insurances Outside of Jurisdiction

As there are no specific insurance requirements in Bermuda, it is permissible for reinsurance to be placed outside of Bermuda.

2.5.4 Enforceability of 'Cut-through' Clauses

It is expected that any "cut-through" clauses in the insurance/reinsurance documents would be enforceable if they comply with the terms under the governing law.

2.5.5 Assignment of Insurance/Reinsurance

It is expected that any assignments of insurances/reinsurances would be permitted if they comply with the terms under the governing law.

2.6 Lease Enforcement

2.6.1 Restrictions on Lessors' Abilities

As a matter of Bermuda law, there are no restrictions on the ability of a lessor to terminate an aircraft lease, provided that termination occurs in accordance with the terms set out in the lease.

There are also no restrictions on a lessor's ability to re-export an aircraft from Bermuda upon terminating a lease. An export permit is neither required nor issued in respect of an aircraft being exported from Bermuda. For various reasons, a lessor may sometimes require an Export Certificate of Airworthiness.

There are no restrictions on the ability of a lessor to sell the aircraft following the termination of an aircraft lease.

2.6.2 Lessor Taking Possession of Aircraft

Aircraft registered in Bermuda are rarely physically present in Bermuda, so the laws of where the aircraft is physically situated will need to be considered.

A lease would usually contain express terms giving the lessor the right to take possession of the aircraft following an event of default by the lessee, pursuant to the terms of the lease.

Under Bermuda law (which follows English common law), the lessor can exercise its contractual right of possession by self-help without a court order, provided that peaceful methods are used.

If the lessor chooses to pursue the judicial procedure for possession, they would not be able to take possession before judgment unless there is a proven probability of damages arising in relation to the aircraft in addition to the event of default under the lease. After acknowledgment of service of originating process, the lessor would need to obtain a summary judgment.

2.6.3 Specific Courts for Aviation Disputes

The Supreme Court of Bermuda is the first instance court in Bermuda and has unlimited jurisdiction, so is competent to hear aviation disputes. There have not been any reported cases of aviation disputes in Bermuda.

2.6.4 Summary Judgment or Other Relief

A summary judgment can be obtained in Bermuda in relation to the lease, for money awards and also for an Order for Possession in circumstances where there exists no genuine defence to the claim. The requirements of a summary judgment are that the defendant enters a Memorandum of Appearance and that the application is supported by an Affidavit setting out the case and attesting to there being no defence to the claim.

The rules of the Supreme Court of Bermuda provide that a plaintiff who is based outside of Bermuda may be required to post security for costs. The amount of the security would vary depending on the circumstances of the case.

2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments

Pursuant to the provisions of the Judgments (Reciprocal Enforcement) Act 1958, a final and conclusive judgment in the superior courts of Australia, the Bahamas, Barbados, Dominica, Gibraltar, Grenada, Guyana, Jamaica, the Leeward Islands, Nigeria, St. Lucia, St. Vincent or the United Kingdom against a Bermuda company under which a sum of money is payable (not being in respect of multiple damages, or a fine, penalty, tax or other charge of similar nature) would, upon registration, be enforceable in the Supreme Court of Bermuda against a Bermuda company without the necessity of any retrial of the issues that are the subject of such judgment or any re-examination of the underlying claims.

However, where such foreign judgment is expressed in a currency other than Bermuda dollars, the registration will involve the conversion of the judgment debt into Bermuda dollars on the basis of the exchange rate prevailing at the date of such judgment.

The courts of Bermuda would recognise as a valid judgment a final and conclusive judgment in personam obtained in any court other than the foreign courts listed above against a Bermuda company based upon documents under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon, provided that:

  • such courts had proper jurisdiction over the parties subject to such judgment;
  • such courts did not contravene the rules of natural justice of Bermuda;
  • such judgment was not obtained by fraud;
  • the enforcement of the judgment would not be contrary to the public policy of Bermuda;
  • no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda; and
  • there is due compliance with the correct procedures under the laws of Bermuda.

The present policy of the Bermuda Monetary Authority is to give consent for the Bermuda dollar award made by the Supreme Court of Bermuda to be paid in the original judgment currency.

2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards

Final judgments for a sum of money will normally be registered in Bermuda under the Judgments (Reciprocal Enforcement) Act 1958, without re-examination of the merits. If there is no treaty between Bermuda and the corresponding country for the reciprocal enforcement of judgments, it would be necessary to launch a writ action in Bermuda suing on the debt obtained in the foregoing judgment to obtain summary judgment in Bermuda in respect of the writ action. Res Judicatas and/or issue estoppels arising from the foreign law judgment would normally prevent the re-examination of the merits in Bermuda.

2.6.7 Judgments in Foreign Currencies

Foreign judgments are generally recognised and enforceable in Bermuda, subject to certain exceptions. The process for recognition and enforcement will vary depending on the jurisdiction in which the judgment was obtained.

Bermuda Courts are empowered to give judgments in any currency.

2.6.8 Limitations on Lessors' Actions Following Termination

Whether there are any limitations on a lessor's ability to recover default interest (or the compounding thereof) or to charge additional rent following termination of the lease for default, including where the lessee fails to return the aircraft, would be determined in accordance with the terms of the lease and its governing law.

2.6.9 Lessor's Requirement to Pay Taxes/Fees

There are no taxes associated with a lessor wishing to enforce a lease in Bermuda, and any government fees would be nominal.

2.6.10 Mandatory Notice Periods

A lessor would generally comply with mandatory notice periods in respect of an aircraft lease either operated in Bermuda or leased domestically.

2.6.11 Lessees' Entitlement to Claim Immunity

A lessee is not entitled to claim sovereign or other immunity from suit. This cannot be waived.

2.6.12 Enforcement of Foreign Arbitral Decisions

Pursuant to the Bermuda International Conciliation and Arbitration Act 1993 (which incorporates the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards), an award granted pursuant to arbitration proceedings in a jurisdiction other than Bermuda and conducted in accordance with the laws of such jurisdiction against a Bermuda company based upon the documents being considered by the Bermuda courts would be enforceable in Bermuda either by action or by leave of the Supreme Court or a judge thereof, in the same manner as a judgment or order to the same effect, and where leave is so given, judgment may be entered in the terms of the award. Enforcement of an award may be refused if the person against whom it is invoked proves:

  • that a party to the arbitration agreement was (under the law applicable to him) under some incapacity;
  • that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made;
  • that he was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings, or was otherwise unable to present his case;
  • that the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration (except that in such case an award on matters submitted to arbitration may be enforceable to the extent these matters can be separated from those not submitted);
  • that the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, with the law of the country where the arbitration took place; or
  • that the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

2.6.13 Other Relevant Issues

The present policy of the Bermuda Monetary Authority is to give consent for the Bermuda dollar award made by the Supreme Court of Bermuda to be paid in the original judgment currency.

2.7 Lease Assignment / Novation

2.7.1 Recognition of the Concepts of Contractual Assignment and Novation

Bermuda law recognises the concepts of contractual assignment and novation.

2.7.2 Assignment/Novation of Leases Under Foreign Laws

Provided an assignment and assumption agreement or novation agreement or deed complies with the terms under its governing law, the courts of Bermuda will recognise and give effect to such agreement or deed in accordance with its terms.

Whether the lessee's consent is required would be determined in accordance with the terms of any such agreement.

There are not any mandatory terms required to be included under Bermuda law.

2.7.3 Enforceability of Lease Assignments/Novations

There is no requirement as a matter of Bermuda law for an aircraft or engine lease assignment and assumption/novation to be translated, certified, notarised or legalised in order to be enforceable. However, it is advisable that such documents are properly witnessed and notarised, if applicable.

2.7.4 Filing/Registration of Lease Assignments/Novations

It is not possible to register an aircraft and/or engine lease assignment and assumption/novation with the BCAA.

2.7.5 Taxes/Duties Payable on Assignment/Novation

If a Bermuda local company physically executes an assignment and assumption/novation agreement in Bermuda, stamp duty will be payable. Provided none of the parties to the agreement are local companies, the document will not attract stamp duty if brought into Bermuda. There is also no stamp duty in respect of an electronic copy.

2.7.6 Recognition of Transfer of Ownership Interests

Where there is any change of ownership (including the beneficial interest of a trust) in respect of an aircraft registered in Bermuda, the BCAA must be notified within 28 days. They must also be informed of any change in the particulars that were furnished in the application for the registration of the aircraft, and of the termination of any demise charter. Such details will be noted on the Register of Aircraft.

2.8 Aircraft Deregistration and Export

2.8.1 Deregistering Aircraft in this Jurisdiction

Only the person in whose name the aircraft is registered (the "Registrant") is entitled to apply to deregister the aircraft. However, if the Registrant has granted an Irrevocable De-Registration and Export Request Authorisation ("IDERA") naming another entity as an authorised party and such IDERA has been registered with the BCAA, then such authorised party is the only entity entitled to deregister the aircraft.

The steps for deregistration are as follows:

  • all outstanding fees must be paid to the BCAA;
  • any mortgages registered against the Aircraft in the Register of Aircraft Mortgages must be released (unless the mortgagee consents);
  • a letter needs to be provided from the Registrant addressed to the BCAA, requesting the deregistration and providing the details of the new registry; and
  • certified copies of the board resolutions of the Registrant approving the deregistration should be provided to the BCAA.

2.8.2 Lessee's/Operator's Consent

Only the Registrant or an authorised party pursuant to an IDERA is entitled to apply to deregister the aircraft. This can be done without the operator's consent.

2.8.3 Required Documentation

The Registrant needs to provide a letter, addressed to the BCAA, requesting the deregistration and providing the details of the new registry, and a certified resolution of its board approving the deregistration. A mortgagee should provide a copy of the duly registered IDERA or any deregistration power of attorney.

2.8.4 Duration of Deregistration Process

The deregistration process typically takes one to two business days to complete.

2.8.5 Aviation Authority's Assurances

Pursuant to the Cape Town Convention, the BCAA will apply Article X of the Protocol in its entirety. The time-limit laid down in Article X(2) of the Protocol is ten calendar days in Bermuda from the date the application for relief is filed.

2.8.6 Costs, Fees and Taxes Relating to Deregistration

There are no significant costs/fees/taxes chargeable in respect of the deregistration of an aircraft. However, all outstanding fees to the BCAA must be settled.

2.8.7 Deregistration Power of Attorney

Prior to January 1, 2018, when the Cape Town Convention came into force in Bermuda, it was possible for the Registrant to grant a deregistration power of attorney ("POA") and obtain a letter of assurance from the BCAA that they had made a notation of such POA and would not effect a deregistration if so requested by the Registrant without the consent of the attorney named in the POA. It is no longer possible to file a deregistration power of attorney in Bermuda. An IDERA from the Registrant can be filed instead.

2.8.8 Documents Required to Enforce Deregistration Power of Attorney

No additional documents are required in order to enforce a deregistration power of attorney.

2.8.9 Choice of Laws Governing Deregistration Power of Attorney

It is not necessary for a deregistration power of attorney to be governed by the laws of Bermuda.

2.8.10 Revocation of Deregistration Power of Attorney

A power of attorney can only be irrevocable when it is coupled with an interest. In practice, a power of attorney that is expressed to be irrevocable is often revoked once the mortgage pursuant to which it was granted has been satisfied.

2.8.11 Owner's/Lessor's Consent

As a practical matter, aircraft registered in Bermuda are rarely physically present in Bermuda. As such, in order to determine whether consent of the lessor is required in order for the aircraft owner, mortgagor or lessee to export the aircraft from where it is habitually located, both the terms of the lease agreement and the laws of where the aircraft is physically situated need to be considered.

2.8.12 Aircraft Export Permits/Licences

There are no restrictions on a lessor's ability to re-export an aircraft. An export permit is neither required nor issued in respect of an aircraft being exported from Bermuda. For various reasons, the lessor may sometimes require an Export Certificate of Airworthiness.

2.8.13 Costs, Fees and Taxes Concerning Export of Aircraft

The cost of an export certificate of airworthiness is calculated based upon the weight of the aircraft, per 500 kg, with a minimum fee of BMD5,000. It is advisable to contact the BCAA to determine the exact cost. There are no associated taxes.

2.8.14 Practical Issues Related to Deregistration of Aircraft

Any outstanding mortgages must be released or the mortgagee's written consent will be required before the aircraft can be deregistered in Bermuda. The BCAA will need to know the details of the new register where the aircraft is going or whether it is being sold for parts.

2.9 Insolvency Proceedings

2.9.1 Effect of Lessee's Insolvency on Deregistration Power of Attorney

As a general rule, a power of attorney that is conferred for the purpose of supporting or effectuating any security is irrevocable while the relevant security subsists. Subject to the precise terms of the POA, it is likely that such an irrevocable power of attorney would not terminate upon the presentation of a petition, upon the appointment of liquidators, or upon the making of a winding up order. However, this issue has not been considered by the Bermuda Courts. Upon the dissolution of the lessee, the POA would cease to operate. If further steps were required under the POA, there would have to be an application to restore the lessee entity.

2.9.2 Other Effects of Lessee's Insolvency

On the assumption that a lessee has possession of the aircraft and is put into liquidation, administration or a similar process, whether the lease can be set aside or the lessor would be prevented or delayed from repossessing the aircraft on termination of the lease will depend on the law governing the lease and also the law of the jurisdiction in which the insolvency proceedings take place. On the basis that the lease and the insolvency proceedings are subject to Bermuda law, the following applies:

  • The lease would not be set aside automatically as a matter of Bermuda law. It may be terminated by either party if they are permitted to do so by the terms of the lease, and the liquidators may disclaim the lease as 'onerous property' with leave of the Court.
  • Upon termination of the lease, the right of possession reverts to the owner. Provided there is no stay of proceedings against the lessee, there ought not to be any prevention or delay in obtaining possession in the ordinary course of events. However, this would be subject to the laws of the jurisdiction in which the aircraft was located, and it is possible that a third party in possession of the aircraft may claim a lien over the aircraft or exercise some other right of detention.

Bermuda is a party to the Cape Town Convention and has declared that, upon an insolvency-related event, the liquidator (or debtor where appropriate) must return possession of the aircraft within 60 days or by the time by which the lessor would otherwise have been entitled to possession, whichever is earlier. Therefore, if there was a stay of proceedings, the lessor would be entitled to apply under those proceedings for an order compelling the liquidator to comply with his obligations.

  • The aircraft will not be deemed part of the lessee's property under Bermuda law. The rights of the lessee in relation to the aircraft granted pursuant to the lease do form part of the lessee's property. Whether those rights continue upon insolvency is determined by the terms of the lease.
  • Apart from limited exceptions (eg, employee pay, government taxes), as a matter of Bermuda law all unsecured creditors are given equal priority in any distribution of the assets of the lessee (which, as stated above, would not include the aircraft).

2.9.3 Risks for a Lender if a Borrower, Guarantor or Security Provider Becomes Insolvent

If a borrower, a guarantor or an entity providing security becomes insolvent, the main risk for the lender is that it will not be able to obtain satisfaction of the loan. There is also a potential risk that an 'ipso facto' clause could include such other entities, causing the lessee to be in breach in the insolvency of a guarantor or other security provider, thereby potentially terminating the lease.

2.9.4 Imposition of Moratoria in Connection with Insolvency Proceedings

After the presentation of a winding up petition of a Bermuda company, a Bermuda Court may stay proceedings against such company, subject to such terms as the Court deems fit, including the length of the stay.

There is an automatic stay on all proceedings against the company if a winding up order is made, or if joint provisional liquidators are appointed. The stay is of an indefinite period. However, a party may seek the leave of the Court to continue or issue proceedings.

2.9.5 Liquidation of Domestic Lessees

There is no administration procedure in Bermuda. A Bermuda lessee may be liquidated voluntarily without a Court order by the shareholders where the lessee is solvent, by the creditors, or involuntarily by court order.

2.9.6 Ipso Facto Defaults

"Ipso facto" clauses are generally valid and enforceable under Bermuda law. In a contract governed by a foreign law, provided the clause was valid under the foreign governing law, Bermuda courts would recognise it.

2.9.7 Impact of Domestic Lessees' Winding-up

In the event of the winding up of a Bermuda incorporated lessee, liquidators would be appointed. If the lease agreement contains provisions that the lease terminates automatically upon the making of a winding up order (or on the earlier presentation of a petition), then the liquidators would not be entitled to retain possession of the aircraft, and the lessor would be entitled to obtain possession.

Termination of the lease will result in the automatic termination of any sub-lease or rental. As this is a potential source of revenue, the lessor may prefer a right to terminate upon notice, and require the sub-lessee to make payments directly, which are then offset against the debt of the lessee.

The impact on the lease security deposit and maintenance reserves will depend upon the terms of the lease, to which the liquidator will be bound. The lessor may be able to set off such sums in its possession against any sums owed by the lessee.

2.10 Cape Town Convention and Others

2.10.1 Conventions in Force

The Bermuda International Interests in Mobile Equipment (Cape Town Convention) Act 2016 extends the Convention on International Interests in Mobile Equipment (the "Convention") and the related Protocol on Matters specific to Aircraft Equipment (the "Protocol") to Bermuda. Bermuda is not a Contracting State to the Convention in its own right but rather a "territorial unit" of a Contracting State, namely the United Kingdom. As such, there is no requirement to obtain "authorised entry point" ("AEP") codes domestically. The norm is for the lessor or creditor to attend to registering international interests themselves.

2.10.2 Declarations Made Concerning Conventions

Bermuda adopted a number of creditor-friendly declarations under the Convention and Protocol, including Alternative A. Under the Convention, Bermuda made the declarations under Articles 39(1), 39(4), 53, and 54(2). Under the Protocol, Bermuda made the declarations pursuant to the following:

  • Article XXX(1) (that it will apply Articles VIII, XII, XIII);
  • Article XXX(2) (that it will apply Article X in its entirety and that the number of days to be used for the purposes of the time-limit laid down in Article X(2) shall be ten business days in Bermuda from the date the application for relief is filed); and
  • Article XXX(3) (that it will apply Article XI, Article A in its entirety to all types of all insolvency proceedings and all other insolvency-related events, and that the waiting period for the purposes of Article XI(3) of that Alternative shall be 60 calendar days).

2.10.3 Application of Article XIII of the Protocol on Matters Specific to Aircraft Equipment

As noted, Article XIII applies in Bermuda. An IDERA (in the form prescribed by the BCAA) can be filed with the BCAA as long as it relates to an interest created after 1 January 2018 (the date the legislation became effective in Bermuda).

2.10.4 Enforcement of Conventions

Bermuda courts do not yet have any experience in relation to parties enforcing the Convention or the Protocol.

2.10.5 Other Conventions

As an overseas territory of the United Kingdom, Bermuda cannot be a party to either the 1948 Geneva Convention on the International Recognition of Rights in Aircraft or the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft until such time as the United Kingdom has ratified such Conventions and then extended them to Bermuda. The United Kingdom has not ratified either of these Conventions at this time.

3. AIRCRAFT DEBT FINANCE

3.1 Structuring

3.1.1 Restrictions on Lending and Borrowing

There are no restrictions on foreign lenders financing an aircraft locally, nor on borrowers using the loan proceeds.

3.1.2 Effect of Exchange Controls or Government Consents

Bermuda exempted companies (ie, companies that are not owned by Bermudians resident in Bermuda) are not subject to any exchange controls, nor any there any government consents required for the repatriation of any realisation proceeds under a loan, guarantee or security document.

3.1.3 Granting of Security to Foreign Lenders

Borrowers are permitted to grant security to foreign lenders, provided that no land in Bermuda is used as security.

3.1.4 Downstream, Upstream and Cross-stream Guarantees

Downstream, upstream and/or cross-stream guarantees in favour of lenders are permitted, provided that shareholder consent must be obtained if there is a question of corporate benefit.

3.1.5 Lenders' Share in Security over Domestic SPVs

It is advisable for a lender to take share security over a domestic special purpose vehicle that owns the financed aircraft, as such security will mean that the lender can take control of the SPV in the event of default, to protect its interest in the financed aircraft. Commercial practice is for the borrower to grant a share charge (where the borrower retains title as long as there is no default) rather than a share pledge (where title transfers).

3.1.6 Negative Pledges

A negative pledge may be recognised.

3.1.7 Intercreditor Arrangements

There is no Bermuda law material restriction or requirement imposed on intercreditor arrangements.

3.1.8 Syndicated Loans

The concept of agency and the role of an agent (such as the facility agent) under a syndicated loan would be recognised by Bermuda courts.

3.1.9 Debt Subordination

Parties are free to agree contractually to whichever method of debt subordination they choose, subject to any prior contractual undertaking given (such as a negative pledge).

3.1.10 Transfer/Assignment of Debts Under Foreign Laws

The transfer or assignment of all or part of an outstanding debt under an English or New York law governed loan is permissible and would be recognised by Bermuda courts.

3.1.11 Usury/Interest-limitation Laws

There are no usury or interest limitation laws in Bermuda, although a Bermuda court may deem an interest clause to be punitive, depending on the facts and circumstances.

3.2 Security

3.2.1 Typical Forms of Security and Recourse

Typical security in an aviation finance transaction would include an aircraft mortgage, security agreements including assignments of rights to insurance proceeds, lease revenue, etc, bank account pledges and potentially a share charge.

3.2.2 Types of Security Not Available

There are no restrictions from a Bermuda law perspective on the type of security that can be taken over an aircraft or related collateral such as engines, warranties or insurances.

3.2.3 Trust/Trustee Concepts

The concept of a trust and the role of a security trustee would be recognised by Bermuda courts.

3.2.4 Assignment of Rights to an Aircraft by a Borrower to a Security Trustee

Pursuant to a security assignment or a mortgage, a borrower may assign its rights to an aircraft or under an aircraft lease (including in relation to insurances) to a security trustee.

3.2.5 Assignment of Rights and Benefits Without Attendant Obligations

A lessor may assign the rights and benefits only without also assigning the attendant obligations of the lessor under an aircraft lease.

3.2.6 Choice of Foreign Law

A security assignment or a guarantee can be governed by whichever law the parties agree to contractually (often English or New York law). There is no requirement that such documents must be governed by Bermuda law in order to be enforceable.

3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments

There is no concept of "perfection" under Bermuda law. A security assignment would be enforceable in accordance with its terms. However, it is recommended that the security assignment be registered with the Register of Companies to ensure priority over any subsequent charges granted over the same assets. A security assignment does not need to be translated, certified, notarised or legalised in order to be enforceable against a Bermuda company.

3.2.8 Domestic-law Security Instruments

If an English or New York law governed security assignment were to be taken in respect of an aircraft registered domestically, the Bermuda courts would recognise the security granted. No domestic law security agreement would be required. Neither domestic law security instruments nor local law filings are mandatorily required in order to make Cape Town filings.

3.2.9 Domestic Registration of Security Assignments Governed by Foreign Laws

An English or New York law governed security assignment or a domestic law security instrument can be registered in Bermuda with the Register of Companies, provided that the entity granting the charge is a Bermuda company or that the charge is being granted over assets physically situated in Bermuda.

3.2.10 Transfer of Security Interests Over Aircraft/Engines

The Bermuda courts would recognise the transfer of security interests over an aircraft and/or engines under an assignment agreement, assuming that such agreement is enforceable under its governing law.

3.2.11 Effect of Changes in the Identity of Secured Parties

Provided that the security assignment was registered as a charge with the Register of Companies in Bermuda, if the identity of the secured parties under a security assignment changes after its execution, the new secured parties can file statutory forms to reflect the assignment of the right to such charge to themselves, thus maintaining the priority in respect of such security.

3.2.12 'Parallel Debt' Structures

It is not common in Bermuda for "parallel debt" structures to be used so that the security trustee has an independent right to the secured debt.

3.2.13 Effect of Security Assignments on Residence of Secured Parties

A secured party under a security assignment would not be deemed to be resident, domiciled, carrying on business or subject to any taxes as a result of its being a party to or its enforcement of such security assignment.

3.2.14 Perfection of Domestic-law Mortgages

There is no concept of "perfection" under Bermuda law. A domestic law mortgage over an aircraft or engine would be enforceable in accordance with its terms but it is recommended that the aircraft or engine mortgage be registered on the relevant mortgage register maintained by the BCAA. Such registration acts as notice to third parties and also ensures that such registered mortgage has priority over subsequent mortgages granted in respect of the same aircraft or engine.

3.2.15 Differences Between Security Over Aircraft and Spare Engines

From a Bermuda law perspective, there is no real difference in the form of security taken over an aircraft versus that taken over spare engines.

3.2.16 Form and Perfection of Security Over Bank Accounts

Typically, an account pledge would be used to take security over a bank account (such as a lease receivables account).

3.3 Liens

3.3.1 Third-party Liens

There are essentially three kinds of liens available to a third party to take over an aircraft or engine:

  • a seller's lien, where an unpaid seller takes a lien over the unpaid purchase price;
  • a possessory lien used where a lienholder has continuous possession of an aircraft or engine on which it has done work (as authorised by the owner) that has improved the aircraft or engine in some way; and
  • a contractual lien created by contract.

There is no system of registration of such liens in Bermuda.

Generally, an aircraft lienholder would not need to apply to the Bermuda courts to enforce its lien, other than in the case of a possessory lien where the secured party would not be allowed to sell the aircraft without the consent of the Bermuda courts.

3.3.2 Timeframe to Discharge a Lien or Mortgage

Once provided with a certified copy of a Deed of Release releasing a mortgage over an aircraft, the BCAA will normally confirm the discharge of such registration on the Register of Aircraft Mortgages within one business day.

3.3.3 Register of Mortgages and Charges

The BCAA maintains a Register of Aircraft Mortgages pursuant to the Mortgaging of Aircraft and Aircraft Engines Act 1999 (as amended from time to time). Registration of the mortgage on the Mortgages Register means that such mortgage has priority over any subsequent mortgages over the same aircraft. However, the registered mortgage may not necessarily have priority over any possessory lien in respect of work done on the aircraft.

3.3.4 Statutory Rights of Detention or Non-consensual Preferential Liens

Statutory rights of detention over an aircraft can arise in certain circumstances, such as non-payment of airport charges, forfeiture under Bermuda customs laws, if the aircraft is used for criminal activity (such as drug trafficking) or if there is a war or national emergency.

3.3.5 Verification of an Aircraft's Freedom from Encumbrances

If a potential purchaser of an aircraft wishes to verify that an aircraft is free of encumbrances, he could request a mortgage transcript in respect of the aircraft from the BCAA. If the owner of the aircraft is a Bermuda company, he could also run a charges search at the Bermuda Register of Companies. It is not possible to search for liens.

3.4 Enforcement

3.4.1 Differences Between Enforcing Security Assignments, Loans and Guarantees

From a Bermuda law perspective, there are no differences between enforcing a security assignment as opposed to a loan or a guarantee.

3.4.2 Security Trustees' Enforcement of their Rights

Bermuda courts seek to uphold the contractual terms of any legally binding commercial contracts, such as a security document, unless common law or equitable principles would dictate otherwise. As such, if a lessor has granted security under a security assignment and there is an event of default, then whether the security trustee can enforce its rights under the security assignment pursuant only to a notice and acknowledgement executed by that lessor and the relevant lessee respectively would depend on the contractual terms of the security assignment.

3.4.3 Application of Foreign Laws

The choice of a foreign law as the governing law of a finance or security document would be recognised and given effect in any action brought before a court of competent jurisdiction in Bermuda, with the following exceptions:

  • for those laws that the court considers to be procedural in nature;
  • for laws that are revenue or penal laws; or
  • for laws whose application would be inconsistent with public policy, as such term is interpreted under the laws of Bermuda.

The submission in the finance or security document to the jurisdiction of the courts of a foreign jurisdiction would be valid and binding upon the company.

3.4.4 Recognition and Enforcement of Foreign Judgments and Arbitral Awards

Where the foreign court is based in certain Commonwealth jurisdictions, Bermuda courts will recognise and enforce a final and conclusive judgment in the superior courts of a foreign jurisdiction under which a sum of money is payable (not being in respect of multiple damages, or a fine, penalty, tax or other charge of similar nature). The judgement of such foreign court would, upon registration in accordance with the provisions of the Judgments (Reciprocal Enforcement) Act 1958 (the "1958 Act"), be enforceable in the Supreme Court of Bermuda against the Company without the necessity of any retrial of the issues that are the subject of such judgment or any re-examination of the underlying claims; however, where such foreign judgment is expressed in a currency other than Bermuda dollars, the registration will involve the conversion of the judgment debt into Bermuda dollars on the basis of the exchange rate prevailing at the date of such judgment as is equivalent to the judgment sum payable. The present policy of the Bermuda Monetary Authority is to give consent for the Bermuda dollar award made by the Supreme Court of Bermuda to be paid in the original judgment currency.

For jurisdictions where the 1958 Act does not apply, the courts of Bermuda would recognise as a valid judgment a final and conclusive judgment in personam obtained in the foreign courts based upon the documents under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty), and would give a judgment based thereon, provided that:

  • such courts had proper jurisdiction over the parties subject to such judgment;
  • such courts did not contravene the rules of natural justice of Bermuda;
  • such judgment was not obtained by fraud;
  • the enforcement of the judgment would not be contrary to the public policy of Bermuda;
  • no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda; and
  • there is due compliance with the correct procedures under the laws of Bermuda.

3.4.5 Secured Parties' Right to Take Possession of Aircraft

Bermuda courts seek to uphold and enforce legally binding commercial contracts such as a security agreement or aircraft mortgage according to their terms, unless common law or equitable principles would dictate otherwise. As such, as long as the security agreement includes an express provision that the secured party is entitled to take physical possession of the aircraft without the lessee's or operator's consent, this would be upheld by the Bermuda courts. Bermuda law would also recognise the secured party exercising "self-help" without a court order, provided that only peaceful methods are used to take possession of the aircraft.

3.4.6 Domestic Courts Competent to Decide on Enforcement Actions

The Bermuda commercial courts are well respected and would be competent to decide enforcement actions under a security agreement/aircraft mortgage.

3.4.7 Summary Judgments or Other Relief

Bermuda did not opt out of Article 13 of the Cape Town Convention as it is consistent with the powers of the Bermuda courts generally. As such, summary judgment is available to a secured party under Bermuda law. There are no conditions applicable to a claim for summary judgment. Interim relief, including injunctive relief, is also available pending final resolution of judicial proceedings, including proceedings to enforce security. Injunctions are often obtained to preserve the aircraft and its value, or to prevent the removal or dissipation of the asset. Also, receivers can be put in place (where permitted under the contract) to receive revenue from assets that generate income. There is not usually a requirement to post a bond, but the applicant may be required to give an undertaking in damages, whereby if the claim is not upheld, the applicant undertakes to the Court that it will pay for any loss to the respondent. This undertaking may have to be fortified, for example by a payment into court.

3.4.8 Judgments in Foreign Currencies

If a secured party obtains a foreign judgment that is expressed in a currency other than Bermuda dollars, the secured party will need to register such judgment under the Judgments (Reciprocal Enforcement) Act 1958. Registration will involve the conversion of the judgment debt into Bermuda dollars on the basis of the exchange rate prevailing at the date of such judgment as is equivalent to the judgment sum payable. The present policy of the Bermuda Monetary Authority is to give consent for the Bermuda dollar award made by the Supreme Court of Bermuda to be paid in the original judgment currency.

3.4.9 Taxes/Fees Payable

A secured party would not be required to pay any Bermuda taxes or fees in a non-nominal amount in connection with the enforcement of a security agreement/aircraft mortgage.

3.4.10 Other Relevant Issues

There are no other relevant issues from a Bermuda law perspective that a lender should be aware of in relation to the enforcement of its rights.

4. OTHER ISSUES OF NOTE

4.1 Issues Relevant to Domestic Purchase, Sale, Lease or Debt Finance of Aircraft

There are no material court judgments or other issues that are relevant to the purchase, sale, lease or debt finance of an aircraft registered in Bermuda and/or involving a Bermuda party.

4.2 Current Legislative Proposals

Currently there are no Bermuda legislative proposals relating to the foregoing items which could alter the same.

This article was first published in Chambers and Partners.

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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