3. Aircraft Debt Finance
Restrictions on Lending and Borrowing
There are no restrictions on foreign lenders financing an aircraft locally, nor on borrowers using the loan proceeds.
Effect of Exchange Controls or Government Consents
There are no exchange controls or government consents that would be material to any financing or repatriation of realisation proceeds under a loan, guarantee or security document.
Granting of Security to Foreign Lenders
Borrowers are permitted to grant security to foreign lenders.
Downstream, Upstream and Cross-stream Guarantees
Downstream, upstream and/or cross-stream guarantees are permitted in favour of lenders. There are no consideration or corporate benefit or registration requirements. However, directors must act in the best interests of the Company and, if there is any doubt as to whether the guarantee is in the Company's best interest, it can be whitewashed by resolution of the members.
Lenders' Share in Security over Domestic SPVs
It is advisable for a lender to take share security over a domestic special purpose vehicle ("SPV") that owns the financed aircraft. A charge over the shares of a domestic SPV is recognised.
A negative pledge is recognised.
There are no material restrictions or requirements imposed on intercreditor arrangements.
The concept of agency and the role of an agent (such as the facility agent) under a syndicated loan is recognised.
Debt subordination is permissible and recognised.
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 recognised.
There are no usury or interest limitation laws.
Typical Forms of Security and Recourse
The typical forms of security and recourse granted in an aviation finance transaction domestically are a mortgage over the aircraft engine and lease payments and a charge over the shares of the SPV.
Types of Security Not Available
All types of security cannot be taken over an aircraft or related collateral, such as engines, warranties or insurances.
The concept of a trust and the role of a security trustee are recognised.
Assignment of Rights to an Aircraft by a Borrower to a Security Trustee
A borrower can assign its rights to the aircraft or under an aircraft lease (including in relation to insurances) to a security trustee, pursuant to a security assignment or a mortgage.
Assignment of Rights and Benefits Without Attendant Obligations
It is not possible to assign the rights and benefits without also assigning the attendant obligations of the lessor under an aircraft lease.
Choice of Foreign Law
A security assignment or a guarantee may be governed by English or New York law. It does not have to be governed by BVI law in order to be fully enforceable.
Formalities/Mandatory Terms to Create and Perfect Security Assignments
There is no concept of perfection in the BVI. Security is registered to ensure priority. A security assignment does not need to be translated, certified, notarised or legalised in order to be enforceable against a domestic party.
Domestic-law Security Instruments
If an English or New York law-governed security assignment is taken in respect of an aircraft registered domestically, there is no additional domestic law security instrument that a financier should take. The BVI is not a party to the Cape Town Convention. The fee to file BVI security filings is USD200.
Domestic Registration of Security Assignments Governed by Foreign Laws
An English or New York law-governed security assignment or a BVI law security instrument may be registered in the BVI.
Transfer of Security Interests Over Aircraft/Engines
The transfer of security interests over an aircraft and/or engines is recognised.
Effect of Changes in the Identity of Secured Parties
If the identity of the secured parties under a security assignment changes after its execution, the security interests are not jeopardised but a variation of the charge should be filed.
'Parallel Debt' Structures
Parallel debt structures may be used domestically so that the security trustee has an independent right to the secured debt.
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.
Perfection of Domestic-law Mortgages
There is no concept of perfection in the BVI. The security is registered to ensure priority over subsequently registered or unregistered charges.
Differences Between Security Over Aircraft and Spare Engines
There is no difference between the form of security (or perfection) taken over an aircraft and that taken over spare engines.
Form and Perfection of Security Over Bank Accounts
An account charge would typically be used to take security over a bank account (such as a lease receivables account). As there is no concept of perfection in the BVI, it would be registered in order to ensure priority.
It is believed that the following aircraft liens exist under BVI law:
- possessory lien – a common law lien that requires the lienholder to have continuous possession of an aircraft on which it has bestowed labour authorised by the owner that has improved the aircraft in some way; and
- contractual lien (including pledge) – a lien created by contract; for example, the owner of an aircraft may pledge it to a creditor as security for a debt, or a lien may arise as a result of a person expending labour on an aircraft that improves its value in some way in accordance with a contractual agreement (such as frequently occurs in respect of aircraft repairs).
Timeframe to Discharge a Lien or Mortgage
There is no guidance on the timeframe in which to discharge a lien or mortgage in the BVI, as this has not been tested in the BVI.
Register of Mortgages and Charges
The Mortgaging of Aircraft and Aircraft Engines Act 2011 and the Mortgaging of Aircraft and Aircraft Engines Regulations create a framework for registration in the British Virgin Islands of security over aircraft and, separately, aircraft engines.
Aircraft that are registered in the BVI or that are capable of being so registered, and aircraft engines owned by or in the lawful possession of a British Virgin Islands entity, may be made the subject of a mortgage for the purposes of registration. The application for registration of the mortgage must be in the prescribed form, and must be made to the Registrar by or on behalf of the mortgagee in question. It must be accompanied by a certified true copy of the mortgage and the prescribed fees. A mortgage entered on the register has priority over any other mortgage or charge on that aircraft or aircraft engine. It is also possible for the priority of a mortgage to be fixed by filing a priority notice with the Registrar, pursuant to which the priority of a yet-to-be-executed mortgage can be fixed for a 14-day period. When entered in the register within the 14-day period, that mortgage shall be deemed to have priority from the time the priority notice was registered.
Statutory Rights of Detention or Non-consensual Preferential Liens
Statutory rights of detention or non-consensual preferential liens can arise over an aircraft and/or on a "fleet-wide" basis.
Verification of an Aircraft's Freedom from Encumbrances
To verify that an aircraft is free of encumbrances, a potential purchaser can search the aircraft mortgage register and the register of charges maintained by the Registrar of Corporate Affairs if the owner/lessor is a domestic SPV.
Differences Between Enforcing Security Assignments, Loans and Guarantees
There are no relevant differences in enforcing a security assignment as opposed to a loan or a guarantee.
Security Trustees' Enforcement of their Rights
If a security assignment states that security is granted to a security trustee by a lessor in respect of its rights under an aircraft lease, the security trustee may enforce its rights under the security assignment pursuant only to a notice and acknowledgement executed by that lessor and the relevant lessee respectively in connection with such security assignment.
Application of Foreign Laws
The BVI courts will uphold a foreign law as the governing law of a finance or security document, and the submission to a foreign jurisdiction.
Recognition and Enforcement of Foreign Judgments and Arbitral Awards
The domestic courts will recognise and enforce a final monetary judgment of a foreign court or an arbitral award without re-examination of the matter.
Secured Parties' Right to Take Possession of Aircraft
A secured party may take physical possession of the aircraft to enforce a security agreement/aircraft mortgage without the lessee's or operator's consent.
Domestic Courts Competent to Decide on Enforcement Actions
The domestic courts are competent to decide enforcement actions under a security agreement/aircraft mortgage.
Summary Judgments or Other Relief
A secured party may obtain a summary judgment, equitable or other injunctive relief pending the final resolution of judicial proceedings to enforce a security agreement/aircraft mortgage if there is an immediate threat of the aircraft being disposed of, but each case will turn on its own facts. An injunction is usually only made if the applicant makes an undertaking to make good any damages caused by the imposition of the injunction. In some circumstances, the court will require the applicant to provide certification of the undertaking – ie, money paid into court, or a banker's letter or monies held on a solicitor's account.
Judgments in Foreign Currencies
A secured party under a security agreement/aircraft mortgage may obtain a judgment in a foreign currency.
A secured party is not required to pay taxes or fees in a non-nominal amount in connection with the enforcement of a security agreement/aircraft mortgage.
Other Relevant Issues
There are no other relevant issues that a lender should be aware of in relation to the enforcement of its rights.
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.