Aviation Law Yearbook - mna.com.ar · ISSUE ONE 2016 THE LEADING GLOBAL PUBLICATION FOR OPERATORS OF AND INVESTORS IN AIRCRAFT AND ENGINES Aviation Law Yearbook

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ISSUE ONE 2016

THE LEADING GLOBAL PUBLICATION FOR OPERATORS OF AND INVESTORS IN AIRCRAFT AND ENGINES

Aviation Law Yearbook

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www.airlineeconomics.co Airline Economics Aviation Law Yearbook 2016 1

EDITOR’S LETTER

This inaugural annual aviation law guide from Airline Economics takes readers on a legal journey around the world to delve into some of the most pressing legal issues affecting aviation today. A truly global industry like aviation is beset by many legal jurisdictional issues, some of which are touched on within these pages. The guide is unashamedly heavily weighted towards discussions on the Cape Town Convention and how it has been implemented in several regions around the world. It is not enough that a country has ratified and implemented Cape Town, it needs to have done so in a certain way to attain real benefits for aircraft operators and owners seeking to tap funding in cross-border markets. This guide takes a look at Cape Town Convention implementation from the perspective of the United States, the United Kingdom, the Cayman Islands, Spain, Colombia and more to provide readers with a sense of both the journey the country has been on towards implementation as well as the current legal situation. With more and more issuers seeking to tap foreign markets to fund their aircraft deliveries, understanding the Cape Town Convention has never been as important.

Tax is a constant concern for airlines and aircraft owners, which is also addressed in the following pages in various jurisdictions, while legal experts from around the world present on particular legal pitfalls specific to their country laws affecting aviation.

We hope you find this guide informative and useful. Please do get in touch with your comments on this new guide from the publishers of Airline Economics. Likewise, if you would like to contribute to the 2017 law guide, please do get in touch.

Best wishes,

Victoria

Victoria Tozer-PenningtonEditor-in-ChiefAviation News Ltd

TALKING CAPE TOWN

ISSUE ONE

January 2016

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CONTENTS

2 Airline Economics Aviation Law Yearbook 2016 www.airlineeconomics.co

1 Talking Cape Town Letter from the editor

4 Commercial aircraft finance

8 EU: Last chance saloon for the “technical delay” defence

10 UK: Accident and liability law

14 UK: The Bribery Act 2010 - A 2015 update for the aviation industry

18 UK: The future for regional airports

22 UK: Air rage incidents taking off

26 UK: Employee fraud

28 USA: The Cape Town Convention - an evolving process

34 The Cayman Islands: Cape Town Convention now in force

36 Canada and Cape Town

38 Spain to ratify aircraft protocol of the Cape Town Convention

42 Foreign aircraft seizures in France – Understanding the process

46 The Italian Chapter

52 Portugal: TAP airline privatisation

54 The Malta Aircraft Registration Act and the Cape Town Convention

58 Aviation financing in Norway

62 Switzerland’s aviation industry

66 Repossession of aircraft in Poland

68 Ten things to know about financing and leasing aircraft in Ukraine

70 Turkey: Legal Diversity and the Cape Town Convention

72 Five key things to know before buying, leasing or financing an aircraft in Germany

74 The Greek aviation finance market

76 Peru: No more delays in the expansion of Lima’s airport

80 Argentina: Nationality or just a domicile for shareholders of local airlines

84 Colombia and Cape Town

88 Kenyan aviation

98 Aircraft leasing and financing in Nepal

102 Mexican promise

106 Chinese lessors expand their reach

110 Screen scrapers beware

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Since the financial crisis, the aviation finance market has been through a great deal of change with the initial heavy reliance on export credit

financing from U.S. Export-Import Bank (Ex Im Bank) and the other export credit agencies (ECAs), the support of which was needed at the time to ensure that there was financing available for new

aircraft deliveries, shifting more recently to a focus on the capital markets and commercial debt with a distinct focus on the Asian markets.

CHINESE AND JAPANESE FOREIGN INVESTMENT China’s outward foreign direct investment (OFDI) has expanded dramatically since the mid-2000s with

an annual average of below $3 billion before 2005 increasing to a record high of $102.9 billion in 2014. At the same time, the effect of so-called “Abenomics” (a mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades) in Japan which has resulted in record low (and even negative) domestic

Commercial aircraft finance: foreign investment, new export credit backed structures and the future of Ex-Im BankBy Graham Tyler, Partner and Adam Beavill, Senior Associate at Pillsbury Winthrop Shaw Pittman

COMMERCIAL AIRCRAFT FINANCE


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yields, has also prompted Japanese investors to invest overseas, where yields are significantly higher.

Earlier this year, Japan overtook China as the largest foreign holder of U.S. Treasuries for the first time since the 2008 financial crisis.

Where, once, the attractive growth opportunities in the domestic Chinese market overshadowed the investment

opportunities abroad, Chinese firms are now looking to pursue higher levels of the value chain and steady investments with investments abroad appearing to be an ideal solution. Similarly, with the Yen currently at over 120 per Dollar coupled with speculation that the U.S. Federal Reserve may start raising interest rates in the near future, and the continued reliance on the Bank of

Japan’s quantitative easing policies, it seems that Japanese investors will continue to look overseas for investment opportunities.

CONSEQUENCES FOR COMMERCIAL AIRCRAFT FINANCEIn the context of commercial aircraft financing, expanding foreign investment from Asia has seen traditional lenders





in the commercial aircraft space facing increased competition from Asian banks, such as China Construction Bank and Development Bank of Japan, and the emergence of new powerhouses in the leasing company space such as Mitsubishi UFJ, which completed its acquisition of Jackson Square in January 2013 and its acquisition of ELFC last year, and Cheung Kong Holdings, both through its Irish leasing arm, Accipiter Holdings, and its joint venture, Vermillion, with MCAP which was announced earlier this year.

Combined with the heavy investor demand in the capital markets, this has led to a squeezing of margins and created the most competitive conditions in aviation finance since before 2008. One bank commented at the Airline Economics conference in Dublin in January this year that it had seen margins drop by 35 percent in the previous year.

EUROPEAN ECAS LEADING THE WAY?Continuing this trend, it was announced in July 2015 that the UK export credit agency, UK Export Finance (UKEF), and HSBC teamed up to arrange the first ever ECA offshore renminbi (RMB) financing for the purchase of an aircraft when it closed a deal for the sale of a new Airbus A330-300 aircraft to China Southern Airlines.

Traditionally, Ex Im Bank has been the pathfinder for new products in the

commercial aviation market, such as the capital markets (Eximbond) structure. The European ECAs on the other hand have always appeared to be slower in developing and evolving their product. It seems though that the roles have recently been reversed.

As well as the adoption of the RMB last year by UKEF which allows it to provide medium and long-term guarantees to support RMB-denominated transactions to aid British exporters in doing business in China, and the recent announcement of the first ever ECA offshore RMB financing mentioned earlier in this article, this year has also seen the delivery of four Airbus A380 aircraft to Emirates funded under the first corporate sukuk bond guaranteed by UKEF. This not only represented the first example of a sukuk bond sold in the debt capital markets to be backed by an ECA but also the largest aviation capital market offering to carry an ECA guarantee.

The current British government has made clear its desire that the UK becomes a world leader in financial innovation to aid British exporters and businesses as well as one of the centres for Islamic finance in the world and these transactions and the new products being offered by UKEF demonstrate the UK’s commitment to these aims.

But it is not only the UK leading the way, as the French ECA, Coface, has

recently introduced a new type of foreign exchange risk guarantee to encourage Euro financings of aircraft and, last year, Turkish Airlines completed the first ever Yen denominated ECA guaranteed Italian tax lease for the financing of two Airbus A330-300 aircraft.

EX IM BANKThis is all coming at a time when Ex Im Bank is unable to do new business, except for transactions approved before the expiry of its authorisation on 30 June 2015.

How and why we have reached this position remains somewhat unclear but the importance of U.S. politics and the upcoming presidential elections cannot be underestimated. The current situation is undoubtedly seen as a victory by a prominent group of Republicans who view Ex Im Bank as an unnecessary form of corporate welfare and, whilst no-one can predict with certainty when, or if, Ex Im Bank’s authorisation will be renewed, as the Republicans currently control both the Senate (54%) and House of Representatives (57%), there is a good chance that nothing will happen during the U.S. presidential primary elections given that this group could have an impact on the party’s nomination. The next key date though is likely to be the end of the U.S. fiscal year on 30 September and the introduction of the 2016 budget on 1 October where,




as a minimum, Congress will have to pass a new budget authorisation for the management of Ex Im Bank’s existing portfolio.

Whilst Boeing Capital has been stepping in to offer back-stop financing to Boeing’s customers where needed, this is not something that they want to do long term and so may well need to find alternative sources of funding for Boeing’s customers to cover the gap that has opened up without Ex-Im Bank’s support.

Notwithstanding that the percentage of transactions being supported by export credit financing is now only at around 10-15% (from the highs of 30-35% in 2009-2012), export credit financing remains an important source of funding for certain airlines and the increased support and innovation from European governments coupled with the opposite approach in the U.S. has created a great opportunity, and a clear competitive advantage, for Airbus over Boeing in the fight for new business.

The danger of course is that the longer this situation lasts, the more likely it is that the justification for Ex Im Bank’s existence is undermined, especially given the buoyancy in the market and the amount of liquidity currently available through other sources not to mention the inevitable talent drain that is likely to occur over time, even though there will still remain a portfolio to manage over a

number of years. It would therefore be questionable whether Ex Im Bank would be in a position to step back in to its role and support new Boeing deliveries in the future if there was another downturn in the market unless its authorisation is renewed soon as there may simply no longer be the manpower and appropriate talent left.

WHAT NEXTAccording to the aircraft manufacturers, the Chinese aircraft market is expected to be worth in excess of $600bn over the next 20 years and it’s anticipated that an increasing proportion of those transactions will be RMB-denominated, especially if it finally achieves full convertibility. There is also speculation that it could eventually replace the U.S. dollar as the base currency for commodities (much as the U.S. dollar replaced sterling). Together with the continued low yields and quantitative easing in Japan, it therefore seems inevitable that the Asian financial markets will continue to play a major role in the future of the industry. Being well-placed to take advantage of the potential opportunities is key for the manufacturers, with Airbus seemingly in prime position with the backing of the European governments and ECAs.

Of course, with the recent devaluation of the yuan and sharp drops in Chinese share prices, it is unclear what the future

holds for the Chinese economy and its investments abroad but it is worth noting that the Chinese stock market is still up some 40% on where it was in June 2014 and the Chinese government appears to be keen to take measures to ensure that China meets it annual growth target of 7% this year.

Even if Ex-Im Bank’s authorisation is renewed in the near future, which is the most likely outcome, we may well see some additional limitations imposed on its activities. If you consider that Ex Im Bank was sued by a number of U.S. airlines for, in their view, subsidising competitor airlines and decreasing U.S. jobs as a result (which, if true, would be contrary to Ex Im Bank’s mandate to increase U.S. jobs), it is possible that we could see some limitations on financing wide body aircraft and on the particular countries of export to address the airline concerns. The hope is that we will know soon if, and when, Ex Im Bank will be re-authorised and on what terms.

Graham Tyler is a partner and Adam Beavill is a senior associate at Pillsbury Winthrop Shaw Pittman. Mr Tyler can be contacted on +44 (0)20 7847 9562 or by email: [email protected]. Mr Beavill can be contacted on +44 (0)20 7847 9586 or by email: [email protected]




NEWS

On September 17, 2015, the European Court of Justice ruled against the airline in the Van der Lans V KLM case, which will come as a huge shock for airlines that have tactically used this case as a reason to slow the flight delay compensation process to a standstill. Ian Skuse, a partner at Blake Morgan based in London, examines the possible ramifications for the airline industry.

Community a ir l ines and all carriers leaving an EU airport are obliged to comply with European Regulation EC 261/2004 (the regulation). This provides for minimum levels of compensation payable to passengers for flights which are delayed, causing a late arrival at their eventual destination in excess of three hours, and on a sliding scale of €250/€400 or €600 depending on the length of journey. Similar compensation is available for passengers on cancelled flights or where there is denied boarding.

The regulation has caused major financial concerns

for the carrier community, where even the best run airlines with modern, highly-maintained fleets, fall victim to claims to which there is a limited or no defence. The regulation has given birth to a large community of claims farmers and legal firms managing volumes of consumer cases, and the English lower tier courts have been swamped with cases for compensation.

Not surprisingly, there have been a series of cases brought in the higher UK Courts and in the European Court of Justice, seeking to establish proper interpretations for the regulation so that their scope and the liability of airlines can be determined.

From the carr ier ’s p e r s p e c t i v e , m a n y u n e x p e c t e d t e c h n i c a l problems can delay a departing flight. Many de fec ts are on the “minimum equipment list” requiring mandatory repair and inspection before departure can occur. There is particular concern where aircraft parts fail within

their usual lifespan, despite an aircraft being maintained to the highest level.

The European Court of Justice has ruled this month in the case of Van der lans v. KLM, that technical defects to an aircraft even if entirely unexpected and despite high maintenance regimes are not “extraordinary circumstances” excusing the airline from paying compensation to delayed passengers. In the Van der lans case, there were two defective components namely the fuel pump and a hydro mechanical unit. Discovery of these faults occurred in Quito, Ecuador on a KLM flight departing for Amsterdam. The replacement parts were not available at such a small airport and had to be flown in from Amsterdam for installation, before the flight could depart. The defective components were both within their average lifetime and there was no advice from the manufacturer about defects possibly arising when these components reached a

certain age. The Court found that these defects could not amount to ‘extraordinary circumstances’.

From the Judgment, it now seems that only hidden manufacturing defects or acts of sabotage a n d t e r r o r i s m w i l l amount to extraordinary circumstances defeating a claim under the regulation.

The national enforcement body in the UK, the CAA, has brought action against Jet2, Aer Lingus and Wizz Air to enforce the Regulation and to bring all airlines into line. For the airlines, it is hoped that a new European regulation will be implemented in the future to take into account the enormous cost of compliance with the regulations and the fact that technical delays are often outside of the carrier’s control. In the meantime, further clarification is likely to be sought over delays caused by cabin crew sickness, defects to airport equipment, strikes, ATC and weather, and whether those circumstances might be ‘extraordinary’.

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UK: AIR ACCIDENTS

The laws and conventions governing air accident investigation and air carrier liability are complex, involving issues of domestic

and international law. This article aims to provide a brief overview of the process that a typical investigation of an accident or serious incident will follow, along with some of the key sources of legislation which are relevant from a UK perspective.

ACCIDENT INVESTIGATION AND REPORTINGIn the United Kingdom the Air Accidents Investigation Branch (also known as the AAIB) is tasked with investigating accidents and serious incidents involving civil aircraft within the UK, its overseas territories and crown dependencies. The AAIB, which is an independent unit within the government’s Department for Transport, also investigates accidents or serious incidents involving civil aircraft

registered in the UK, the Channel Islands, the Isle of Man and other British Overseas Territories, regardless of the location of the occurrence.

In carrying out its investigations the AAIB aims to identify and explain the circumstances and causes of accidents and serious incidents, publishing its findings in publicly available reports. Importantly, the AAIB does not seek to apportion blame or liability on those involved.

Accident and liability lawSimon Amos, Solicitor, asb law LLP, discusses air accident investigation and liability.

ASBLAW AIR ACCIDENT.indd 10 06/01/2016 10:50:35


UK: AIR ACCIDENTS

The European Aviation Safety Agency (EASA) and the UK Civil Aviation Authority (CAA) are obliged to provide the AAIB with information that it requires in support of its investigation; for example, certification data, occurrence reporting information or personal licensing information.

Depending on the complexity of the accident or serious incident the AAIB’s investigation and report can take several years to conclude, and its findings can

often turn out to be quite different from initial media speculation. This means that the investigation of the accident or serious incident will often continue alongside legal proceedings arising out of the occurrence, which much be commenced within strict time limits (addressed in further detail below). During the course of the investigation the AAIB will often need to interview a number of people, cross-check and verify evidence, examine potentially

suspect equipment, and consult with an array of technical experts. European legislation nevertheless stipulates that a preliminary report should be issued after 12 months following the accident or serious incident detailing the progress made and any safety issues identified, followed by publication of a final report as soon as possible thereafter.

Prior to its publication, a draft copy of the report is sent to the individuals involved or their representatives, and



UK: AIR ACCIDENTS

also to those persons or organisations whose reputations may be adversely affected by the AAIB’s findings. They then have a period of 28 days in which they can make representations before the report is finalised and published.

Where appropriate, the AAIB’s report will contain safety recommendations aimed at reducing the likelihood of a recurrence of the relevant circumstances in the future.

Where fatalities have been suffered in unusual circumstances, Her Majesty’s Coroner or Procurator Fiscal (if the accident occurred in Scotland) will normally open an inquest or fatal accident inquiry shortly after it has happened. These proceedings are typically adjourned until the AAIB has concluded its investigation. AAIB Inspectors prepare statements for the courts and are often required to appear as expert witnesses.

The need for representation at and participation in these proceedings can potentially extend to all parties involved in the accident or incident; not just the air carrier and crew; for example, manufacturers, air traffic control, and airport authorities.

THE LEGAL FRAMEWORKThe legal framework which covers aircraft accidents and serious incidents is complex and multi-layered. Accident investigation in the UK is governed

primarily by the Civil Aviation (Investigation of Air Accidents and Incidents) Regulations 1996 and by Regulation EC 996/2010 on the investigation and prevention of accidents and incidents in civil aviation.

Legislation at both EU and UK domestic level has evolved against the backdrop of the Convention on International Aviation (more commonly know as the Chicago Convention), which was signed on 7 December 1944. The Chicago Convention gave birth to the development of civil aviation after the Second World War as we now know it, and set out to establish a set of uniform worldwide rules regulating the activities of the international aviation industry as a whole, not least ‘Annex 13’ to the Chicago Convention, which established international standards (essential requirements) and recommended practices (desirable, rather than essential) for aircraft accident and incident investigation. The success of the Chicago Convention in bringing about the implementation of the standards and recommended practices has to an extent been hampered by their implementation being qualified and subject to the proviso that their adoption by individual states can be restricted to the extent permitted by their national laws. This has compromised the uniformity of standards and recommended practices, and individual states continue to be

required to publish any differences which exist between their national laws and the provisions of the Chicago Convention.

The Chicago Convention is not the only international convention which plays a key role in working towards uniformity and predictability. Certain other conventions also play key roles, particularly in addressing the question of liability in circumstances where accidents or incidents have occurred.

The Montreal Convention, a well known multilateral treaty first adopted in 1999 (formerly known as the Unification of Certain Rules for International Carriage by Air) is of particular importance, laying down global rules on the liability of air carriers in the event of accidents and incidents involving flights between contracting states. At the time of writing 116 of ICAO’s 191 member states have adopted the Montreal Convention, and this number is gradually increasing.

The Montreal Convention, incorporated into English domestic law through the Carriage by Air Act 1961, seeks to enhance uniformity and predictability on the question of air carrier liability in respect of passengers, their baggage, and cargo in the event of accidents or serious incidents. It provides a strict liability regime for air carriers in respect of death or injury to passengers, and loss or damage to baggage and

“The Montreal Convention, incorporated into English domestic law through the Carriage by Air Act 1961, seeks to enhance uniformity and predictability on the question of air carrier liability in respect of passengers, their baggage, and cargo in the event of accidents or serious incidents.”



UK: AIR ACCIDENTS

cargo, without those affected having to prove fault on the part of the air carrier:

• For death or injury to passengers, liability is strict up to a limit of 113,100 Special Drawing Rights (SDRs) per passenger, and passengers do not need to prove negligence on the part of the carrier.

• For claims in excess of 113,100 SDRs carrier liability is not limited but can be defended if the carrier can demonstrate that the event which caused the death or injury was not caused by their negligence, or was caused by the negligence of a third party.

• Liability for loss, destruction damage, or delay to baggage is limited to 1,131 SDRs per passenger, unless a higher value has been declared.

• Liability for loss, destruction, damage or delay to cargo is limited to 19 SDRs per kilogram, subject to any higher value declared by the shipper.

The liability provisions of the Montreal Convention applies to EU carriers by virtue of article 3(1) of Regulation EC 889/2002, which also includes a requirement that EU carriers hold liability insurance to a level which is adequate to cover payment of the full amount of compensation to which all affected persons are entitled.

For many countries the Montreal Convention superseded and replaced the Convention for the Unification of Certain Rules relating to International Carriage by Air, commonly known as the Warsaw Convention, which was first signed in Warsaw on 12 October 1929. The Warsaw Convention (as supplemented and amended by the Hague Protocol of 1955, the Guadalajara Convention of 1961 and a number of further protocols) remains applicable for a number of states which have not adopted the Montreal Convention. Whilst the Warsaw Convention does address the question of liability, assuming liability on the part of carriers in respect of death or injury suffered by passengers, and damage or loss of baggage and cargo (subject to some limited defences), it also - in contrast with the Montreal Convention

- limits carrier liability to 16,600 SDRs for death or injury to passengers, and 17 SDRs in respect of checked baggage or cargo, subject to any higher limits agreed between the carrier and passenger. The continuing application of the Warsaw Convention for some countries, coupled with the fact that a number of other countries are yet to adopt either the Warsaw or Montreal Conventions, mean that there is still significant uncertainty on the question of air carrier liability in some parts of the international aviation market place.

A somewhat restrictive feature of both the Montreal and Warsaw Conventions is a strict requirement for damages claims to be brought by those affected (or their representatives) no later than two years either from the date of arrival of the aircraft at its destination, or from the date on which the aircraft ought to have arrived at its destination, or from the date on which the carriage stopped. This means commencing court proceedings within this period, failing which the right to claim damages is extinguished. That a right of action is ‘extinguished’, rather than ‘time-barred’, if an action is not brought within two years can be significant. Unlike in the case of the latter, where a right of action is extinguished the time limit cannot be extended by agreement of the parties involved, or with the permission of a

Court. The extinguishment of a right of action is absolute and permanent.

SUMMARYThe investigation of air accidents by the AAIB and its overseas counterparts is crucial to the ongoing improvement of aviation safety. Unsurprisingly, given the international nature of the aviation industry, the legal framework applicable to those accident investigations and associated questions of legal liability is complex, involving (in the case of the UK, for example) interaction between international conventions, EU law and domestic law. These laws seek to balance the interests of air carriers with those of passengers and charterers, as well as seeking uniformity and predictability in how different nations investigate accidents and determine questions of liability. The gradually increasing number of countries adopting the Montreal Convention will assist in these aims. However, there is still much work to be done, particularly in what are likely to be key emerging markets in aviation.

Simon Amos, Solicitor, asb law LLP - Simon specialises in aviation sector disputes. He advises airlines, MROs, aircraft charter brokers, aerospace parts companies, and flying training organisations in a variety of disputes, both domestic and international.


By the time this article goes to press, five years will have passed since I wrote an article advising businesses on how to prepare for the

new Bribery Act 2010 (a UK law which came into effect on 1st July 2011) (the “Act”). As anticipated in the 2011 article, the new Act did not result in a plethora of new prosecutions. All the same, many aviation companies quite rightly took a real interest in the new Act and were diligent in updating their anti-bribery compliance policies and practices in this area, both as best business practice and in order to evidence that they had put in place ‘adequate procedures’ to safeguard against bribery.

Five years on and the Act remains a topic of frequent conversation in the industry, most notably due to the ongoing criminal investigation opened by the Serious Fraud Office (SFO) in December 2014 against Rolls Royce’s aircraft engines division. Industry professionals should note, however, that Rolls Royce are not alone in the industry in terms of coming under scrutiny further to allegations of corrupt practices. In recent years, legal settlements have been

reached in corruption cases concerning Dallas Airmotive (a MRO owned by BBA Aviation); Bizjet International (a Lufthansa Technik Company) and the NORDAM Group, whilst big industry names such as Agusta Westland, BAE Systems, Embraer and Airbus subsidiary GPT have been subject to legal investigations.

The risks of bribery inherent in the aviation industry remain as great as ever. In terms of the number of cases of bribery and corruption in aviation compared with other industries, the industry comes second only to the oil and gas industry. When one considers how truly global aviation is, this is not surprising. As analysts predict that future aviation industry growth will be skewed in favour of regions such as South America and Asia, continents with higher corruption ‘risk’ scores , it is likely that the number of cases of bribery in the industry is only likely to grow.

Aviation is also an industry in which contracting with government controlled entities is commonplace; many airlines, aviation services companies and airports (particularly in developing countries) are state controlled. As public pressure

against corruption grows on a global basis (aided by better public access to information), governments are putting officials working for such state-owned enterprises (SOEs) under increased scrutiny. It is also not uncommon in privately-held aviation companies in high risk countries, for senior roles to be held by persons who have had previous aerospace careers in the military or government. There is a risk that some of these individuals may have previously witnessed systemic bribery and therefore continue to expect to receive bribes as a prerequisite to the awarding of any commercial contract.

Another inherent risk is the frequent use by global aviation companies of sales agency networks to promote their products and services globally. The SFO’s view is that the use of global sales agents, particularly where they are trying to sell in an area which is not local to them, is a “clear red flag”. It is vital for aviation companies to remain focussed on the risk of any sales agent associated with their organisation offering or receiving a bribe and for such companies to take appropriate measures to mitigate this risk (see below).

The Bribery Act 2010 - A 2015 update for the aviation industryby Tamsin Hayward, Consultant Lawyer at Keystone Law


UK: BRIBERY ACT

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UK: BRIBERY ACT

BRIBERY.indd 15 06/01/2016 10:50:38


UK: BRIBERY ACT

Outlined below are four 2015 noteworthy developments in respect of the enforcement of the Act in the UK. Aviation companies are advised to review their own anti-corruption policies, processes and procedures in light of these developments and in the context of the level of bribery risk their organisations face, depending on the markets in which they operate.

1. 12th February 2015 saw the first contested UK corporate conviction in the Smith and Ouzman case; a case where the individuals involved were sentenced to prison for making corrupt payments of nearly £400,000 in order to win contracts in Kenya and Mauritania. The individuals found guilty were the Chairman and Sales & Marketing Director of a Sussex based printing company. Implications: Company directors who choose to flout the Act will, and do, go to prison. Regrettably, this is an example of the illegal behaviour coming from the very top of an organisation. In securing this conviction the SFO demonstrated that it can successfully bring prosecutions against company

directors, and the company itself, in tough cases (prior to this some commentators previously doubted that the SFO would successfully secure such convictions).

2. On 14th July 2015 the SFO published its annual report confirming that 16 new investigations had been opened in the year to end March 2015 and that nine cases had been successfully prosecuted. 12 new investigations were started (and eight cases successfully prosecuted) in the previous year. Implications: The number of new investigations and prosecutions are not enormous but not insignificant either. The SFO has repeatedly emphasised that they are only interested in taking up what they call the ‘first tier’, or most complex bribery cases. However, it is noteworthy that most of the prosecutions have been of small or mid-size private companies, showing that the SFO is not solely interested in going after large public companies.

3. September 2015 saw the first reported application of s7 of the Act

(the ‘corporate offence’) in respect of a Scottish cabling company called Brand-Rex, that had failed to take sufficient steps to prevent bribery occurring in its organisation. Two points of particular interest in this case were: a. The person who offered the bribe on behalf of Brand-Rex was not an employee but an independent distributor. However, they were deemed to be an ‘associated person’ for the purposes of the Act, and therefore the company was held responsible for their actions. b. This was the first UK reported case (a Scotland Crown Office case) on when offering gifts or corporate hospitality might amount to offering a bribe . Brand-Rex had given its authorised independent distributors holidays and air travel in order to incentivise their performance. Providing this incentive to its staff and distributors was lawful, however, the ‘corporate offence’ arose when the independent installer offered to gift the travel tickets he had been given to an employee of one

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of his customers. As the customer employee given the tickets was in a position to influence whether or not the customer company purchased services from Brand-Rex, gifting the travel tickets to the customer in this case amounted to a bribe. Implications: This case serves as a useful example how a company will be prosecuted if an independent ‘associated person’ (such as a sales agent or distributor) offers a bribe during the course of his engagement by the company, regardless of whether or not the company knew the bribe had been paid. Before engaging an independent sales agent or distributor, it is critical that any aviation company conducts thorough checks on the individual and their company (ideally drawing both on local knowledge of the person and on online global screening services). If the person has successfully passed such screening, they should then undergo annual comprehensive training on the company’s anti-bribery policies and relevant anti-bribery laws. Ideally the ‘employer’ company would also ensure it had comprehensive audit and performance review rights in its

contract with the agent, as part of its procedures to defend against bribery. Although it is not an offence to offer reasonable corporate hospitality or reasonable gifts to customers, the case demonstrates that excessive or inappropriate gifts or hospitality could amount to a bribe. Companies are advised to have a clear corporate policy as to what the company believes is an acceptable amount to spend on gifts and hospitality and maintain a detailed gifts and hospitality register, in order to provide transparency surrounding what gifts are offered, to whom and in what circumstances. The higher the value of the hospitality or gift given to the customer (or potential customer), the more likely it is to be seen as a bribe under the Act. The reasonableness is judged in absolute terms rather than by reference to the wealth of the recipient.

4. On 29th October 2015 the SFO gave its most recent statement (at time of going to press) concerning the circumstances in which a Deferred Prosecution Agreement (or “DPA”) might be offered to a company that has committed a corporate offence

under the Act. The SFO used the speech to reiterate that, not only will a company that does not self-report not have the option of a DPA; a company needs to self-report early in an investigation and demonstrate cooperation to have the best chance of reaching a DPA with the prosecutor. Companies (and their legal advisors!) need to demonstrate cooperation with the SFO in terms of how and when witness interviews are conducted and in respect of the finding, collating and presenting of the relevant documentation and evidence.

The SFO has publicly stated that it hopes that the first two DPAs will be signed by the close of 2015.

Implications: Once the first signed DPAs become publicly available (hopefully in early 2016) they should provide helpful guidance for aviation companies (and their advisors) as to what a successful DPA looks and feels like in practice. Companies should note that a DPA does not mean that the company will escape fines or other penalties. The DPA does however mean that the criminal proceedings against the company are suspended (subject to the fulfilment of the conditions attaching to the DPA) and that the penalties may be more lenient than if the company had failed to self-report. One would also hope that self-reporting would result in less reputational damage to the company than would occur should the SFO discover the bribery offence and prosecute.

In conclusion, developments in 2015 do provide further evidence of the ‘bite’ of the Act and also serve as a useful reminder of the importance aviation companies should attach to understanding and complying with the UK Bribery Act. Whilst this article is restricted to developments in respect of the UK Act, global aviation companies should also appreciate that if they are found guilty of bribery in overseas jurisdictions, they potentially also face prosecution under local laws and, in the case of bribing a public official, potential prosecution under the US Foreign Corrupt Practices Act (if the bribe falls within the scope of the FCPA).

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The Airports Commission was tasked with producing an interim report, published at the end of 2013, setting out the steps

needed to maintain the UK’s global hub status alongside recommendations for making better use if the UK’s existing runway capacity over the next five years. It was also tasked with delivering a final report, which it delivered on 1 July 2015, setting out recommendations on how to meet any need for additional capacity in the longer term. The Commission’s remit included that it should maintain a UK-wide perspective, taking appropriate account of the national, regional and local implications of any proposals.

The final report recommended that a new north-west runway be built at Heathrow, but without ruling out expansion at Gatwick altogether. Thus the recommendations left both options open to the Government, but it could also decide to go with neither option.

When the final report was published the Prime Minister made it clear that the Government would carefully consider the report before responding, but he pledged that a decision on the recommendations for capacity expansion would be made before the end of this year. While a decision is awaited later this year this article considers the implications of Commission’s recommendations for the regional airports particularly in light of the Government’s devolution plans.

THE COMMISSION’S ANALYSIS OF AIRPORT CAPACITYThe Commission observes that the one thing which has not changed significantly is the UK’s physical airport infrastructure, particularly its runway capacity. Heathrow has been “effectively full” for many years, and Gatwick is operating at more than 85% capacity and is completely full at peak times.

The Commission’s review of the aviation market recognises that the

number of domestic routes to Heathrow is declining and restricting access from other UK regions to Heathrow’s international services. The interim report recognised that consistent with this, more UK regional airports are linking to European hubs. The overall message includes that capacity in the south east is also critical to improving connectivity into the UK regions. The Commission strongly supports the link between aviation capacity and the UK’s economy. Whilst the Commission does not recommend new airport capacity outside of the south east to meet future capacity, generated largely in the south east, it does acknowledge the role of other airports, and that more capacity in the south east will also assist regional economies.

In summary, the Commission’s analysis suggests that:A. aviation demand is likely to increase

significantly between now and 2050, even when 2050 carbon emissions

Airports Commission - the future for regional airportsby Sara Wex, Practise Development Lawyer, Bond Dickinson

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are capped at a level which is consistent with the UK meeting its legislated climate commitments

B. this demand growth is likely to be concentrated in the South East, with sufficient demand to utilise 90% or more of available capacity across London and South East airports by around 2030

C. demand is predicted to exceed capacity in London and the South East by 2040 or earlier in all core scenarios, with the gap between capacity and demand rising to approximately 170-200,000 ATMs by 2050 even in the carbon capped forecast, and,

D. there is relatively little scope to redistribute demand away from London and the South East to less heavily utilised capacity elsewhere in the country.

The Commission’s findings include that there is a clear case for at least one net

additional runway by 2030 across a range of scenarios, including where the UK is meeting its climate change targets. The Commission considers that this scale of additional capacity is compatible with a number of airport expansion proposals that have been put to the Commission.

The Commission’s analysis for its Interim Report suggested that the costs of failing to address the existing capacity constraints could amount, over a sixty-year time period, to:

• £18-20 billion of costs to users and providers of airport infrastructure.

• £30-45 billion of costs to the wider economy.

IMPACTS OF EXPANSION IN THE SOUTH EAST ON REGIONAL AIRPORTSThe Commission’s assessment of need forecast appears to show that all regions of the UK are predicted to see passenger growth in a scenario where there is no

new runway. However, building a new runway at Heathrow or Gatwick would reduce the level of passenger growth that could take place at other airports. The necessary reduction in growth elsewhere in the UK is forecast to be greater in the case of a new runway at Heathrow, although this rests on the assumption that the growth facilitated by Gatwick expansion would be predominantly in short haul leisure travel rather than long haul flights.

The expansion of either Heathrow or Gatwick would require a substantial period of time for planning and delivery. The Commission records that it received many submissions on making the best use of existing capacity pointed to the level of unused capacity at many UK airports. It notes that there are benefits to incentivising the use of existing capacity, where this can be done without harming the connectivity of the UK’s busiest airports.

Given the Government’s professed

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political ambition to rebalance economic activity to the regions, it may give further consideration to measures that would provide incentives for the use of under-utilised capacity, or remove obstacles to its use.

The final report notes that efficient and rapid access to the best possible international connectivity, including long-haul links to emerging market destinations, will also play an important role in supporting economic growth in the major city-regions of the Midlands and the North, in line with the Government’s evolving policy to create a Northern Powerhouse, and helping to rebalance the UK economy. Enhanced domestic aviation links to the airport, combined with the direct link to HS2 at Old Oak Common and the Western Rail Link from Reading will ensure that the benefits of expansion at Heathrow are felt across the English regions. Expansion in the south east would create space at the airport for increased frequencies and new links.

The final report includes the additional recommendations to support growth that connectivity across the whole UK encourages. The Government should alter its guidance to allow the introduction of Public Service Obligations on an airport-to-airport basis, and use them to support a widespread network of domestic routes at the expanded airport. Further, Heathrow Airport should implement additional measures to enhance domestic connectivity, including reduced charges and start-up funding for regional services.

The final report states that the economic impacts of expansion at Heathrow would be felt throughout the UK. In total, the analysis indicates that around 60% of the overall boost to GDP would be focused on areas of the UK outside the South East of England. This would deliver an increase in GDP in these regions of approximately £70-80 billion (present value over 60 years) from expansion at Heathrow, compared to just under £50 billion from expansion at Gatwick.

SURFACE IMPROVEMENTS AT AIRPORTS A package of surface transport

improvements to make airports with spare capacity more attractive to airlines and passengers were already announced with the publication of the National Infrastructure Plan 2013 (NIP13). NIP13 confirmed a Government commitment of £50million towards the Commission’s interim recommended package of measures including:

• the enhancement of Gatwick Airport Station;

• further work to develop a strategy for enhancing Gatwick’s road and rail access;

• work on developing proposals to improve the rail link between London and Stansted;

• work to provide rail access into Heathrow from the south;

• the provision of smart ticketing facilities at airport stations;

• trials at Heathrow of measures to smooth the early morning arrival schedule to minimise stacking and delays and to provide more predictable respite for local people;

• the establishment of an Independent Noise Authority to provide expert and impartial advice about the noise impacts of aviation and to facilitate the delivery of future improvements to airspace operations.

In December 2014 the NIP was updated (NIP 14) and included further measures related to aviation. To support delivery of its objectives for the sector, the government included Airport Infrastructure Improvements and Airport Connectivity within its Top 40 priority infrastructure investments. A package of surface access measures was included in the NIP 14:

• the new Roads Investment Strategy includes plans for a comprehensive upgrade of the M42 Junction 6 near Birmingham airport, allowing better movement of traffic on and off the A45, supporting access to the airport and preparing capacity for the new HS2 station;

• Western Rail Access to Heathrow, to provide a direct service from Reading, will commence enabling works in 2017, subject to feasibility;

• Network Rail is producing a

feasibility study into options on Southern Rail Access to Heathrow, to report its findings in 2015;

• Network Rail is consulting on extending the scope of the East Anglian Mainline study to include access to Stansted and will report findings in 2015;

• Network Rail is looking at capacity on the Brighton Mainline as part of the Route Study for Sussex on which it is currently consulting.

AIRPORT PASSENGER DUTYAmongst a number of proposals, the Commission did consider an Airport Passenger Duty (APD) congestion charge to relieve the strain on London and the South East. This would provide an incentive for airlines to make greater use of other less-congested airports including regional and/or devolved airports. The Commission’s findings were that APD would do little to incentivise better use of existing capacity at regional airports in England, and could potentially distort competition between proximate airports on either side of a border, such as Bristol and Cardiff, or Newcastle and Edinburgh. Also, its analysis concluded that regional variations in APD could potentially give rise to perverse incentives, for example to not use spare capacity in London and the South East, as currently exists at Stansted and Luton.

CITIES AND DEVOLUTION BILLThe Cities and Local Government Devolution Bill is progressing through parliament and is due to receive its 2nd reading in the House of Commons in the middle of October 2015. The Bill is intended to support the Conservative Party’s manifesto commitment to “devolve powers and budgets to boost local growth in England”. The Bill would provide a series of order and regulation making powers, allowing for the devolution of functions currently owned by central government and local public bodies to combined authorities that accept a mayor, including transport. It is intended that it will provide the mechanism for delivering local “devolution deals”, agreed between combined authorities and central government, such as the Greater

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Manchester Agreement. Although the Government has said

that its preferred model for accountability as part of the new devolution deals would be for the creation of a mayoral combined authority, the Bill also includes measures to enable changes to be made to the role and the powers of local authorities in England where the Government agrees that it may not be appropriate to establish a combined authority.

The discussion around devolving transport governance continues to grow and a wide range of stakeholders are now involved in a national conversation about how best to move things forward. The prevailing consensus which appears to be emerging is that city regions represent the best scale at which transport governance could be optimised. If indeed transport powers are devolved then this may provide one of the key enabling powers for regions to tackle the surface transport issues associated with unlocking spare regional airport capacity. The devolution process also requires local authorities and local enterprise partnerships to submit bids for funding on the basis of devolution deals with Government. The Government has received 38 such bids from across the country. Where there are surface access issues with regional airports, these new powers and funding stream could assist in providing priority expenditure to alleviate these issues.

COMMENTAs expected the Commission reviews the market changes (while acknowledging that these are difficult to forecast), and notes that Heathrow is now “effectively full” and Gatwick operating at more than 85% of its maximum capacity and full at peak times.

The Commission concludes that in terms of the options presented, Heathrow is in pole position, without ruling out the Gatwick option altogether.

While any big capacity building at other large regional airports like Birmingham and Manchester was discounted, the Commission does interestingly state that it considers that more work is necessary on measures to enable maximum use of existing runway infrastructure at other sites as

part of an overall aviation capacity and connectivity strategy.

There is clear recognition that there is a need for surface transport improvements to make airports with spare capacity more attractive to airlines and passengers. The Commission acknowledges the importance of smaller regional airports and the need for surface access improvements so they can serve their local markets effectively. The recommendations include that central Government should work with local enterprise partnerships and local authorities to ensure proper consideration is given to the needs of airports when priorities are established for local transport investment.

Presenting further potential opportunities for regional airports the Commission’s interim report included recommendations that further consideration be given to removal of physical or planning restrictions on making the maximum use of existing runway infrastructure. It recommended that further consideration is given to whether there is a case to address the constraints contained in planning restrictions and also by the availability of non-runway infrastructure such as terminal and stands able to handle higher than current numbers of passengers or air traffic movements.

It is clear that the Commission considers that the optimal approach is to invest in the airport system as a whole. Whilst it doesn’t suggest individual targets for regional airports, such as those contained in the 2003 White Paper, it is does suggest making maximum use of existing infrastructure capacity. This together with the devolution plan should provide a basis for regional airports to grow as part of a wider planning and transport strategy for each area.

WHAT IS NEXT?In addition to the devolution plans, on 11 September 2015 the Transport Committee announced that it was undertaking an inquiry into surface transport at airports. The Committee states that it is interested to assess the effectiveness of the Government’s approach to planning surface access to airports, as well as understanding whether the government is making full

use of its powers to influence the selection of infrastructure and accompanying modes of transport to and from airports. The Committee is interested in receiving submissions by 12 October 2015 on:

• the range and capacity of current strategic connections

• the importance of surface transport in freeing up existing spare capacity

• the government’s role in planning surface access in conjunction with airport owners, local authorities and local enterprise partnerships

• funding strategic connections to airports; and

• achieving modal shift in decisions about surface transport to airports.

The Chancellor is due to deliver the Government’s Autumn Statement on 25 November which may be the most likely time for a further announcement.

QUICK SUMMARY

• The UK will need one new runway in the south-east by 2030 to keep up with aviation capacity demands. A second additional runway may be needed by 2050. The Government should rule out any future fourth runway at Heathrow.

• Commission’s Final report recommends the Heathrow option for a new north-west runway.

• Stansted and Birmingham expansion will not be taken forward at this stage, but could be options for future expansion, eg when forecast indicate the airports move closer to full capacity.

• The establishment of an Independent Noise Authority to look at how noise affects people living close to airports is recommended.

• A final recommendation will be delivered by the Government towards the end of 2015 on expansion of airport capacity.

• In the meantime there is support for increased growth at regional airports to make maximum use of existing airport infrastructure. This is complimented by devolution powers and a focussed investigation to improve surface access to regional airports.

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UK: AIR RAGE

An increase in disorderly behaviour continues to disrupt flights and cause chaos for passengers, airlines and airports.

Whilst, generally, unruly passengers are a minority, the ramifications of their behaviour can be significant. A recent Jet2 flight from Leeds to Alicante is a prime example. The flight had to be diverted when a male passenger who was intoxicated became verbally abusive, using threatening

behaviour towards cabin staff and other passengers. His actions resulted in the plane being diverted to Toulouse which inconvenienced a total of 1,150 passengers. Accordingly, the airliner took it upon themselves to fine the passenger for the costs of diverting the plane and banned the individual for life from flying with them.

Such a hard-line approach is perhaps necessary to deter obnoxious passengers from behaviour that is far from acceptable.

Unfortunately, this is far from being an isolated incident. There are reports of unruly passengers across the globe. In early 2015, a video went viral showing an alleged foul-mouthed and abusive passenger on board a Siberian Airline flight from Hong Kong to Vladivostok being restrained by staff and other passengers using seat belts and sticky tape.

Recently a passenger on board an easyJet flight from Gatwick to Belfast was tasered by police shortly before the

Air rage incidents taking offDisorderly behaviour by airline passengers is on the rise and airlines need to be prepared to handle difficult incidents. By Alina Nosek, head of aviation, asb law LLP

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aircraft was due to take off. The incident occurred after the passenger allegedly became abusive during an argument over luggage.

In 2014, a Korean Air flight was delayed due to the now infamous “nut rage” tantrum of Cho Hyun-ah, the daughter of the airline’s chairman. This particular air rage incident resulted in a prison sentence for Cho Hyun-ah, illustrating the strong approach that is being taken by certain law enforcement authorities towards such individuals.

Figures released by the Civil Aviation Authority (CAA) under a Freedom of Information request provide a startling indication of the part played by alcohol in air rage incidents reported in the past year. The figures show a 40% increase in alcohol-fuelled air rage incidents from last year, with a total of 271 incidents between April 2014 and March 2015.

In order to address this rise in alcohol induced air rage, Glasgow’s Prestwick Airport has reportedly introduced security staff to specifically

monitor bar areas. Further, Ryanair has recently taken the decision that they will no longer be letting passengers take duty free on board flights travelling to Ibiza from the UK, following reports that five people were removed from a Ryanair flight after being accused of drunken and abusive behaviour towards staff.

Recognising the need to restore order and provide guidance, the CAA has published details of how airliners may respond to unruly and anti social passengers.

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REFUSAL TO CARRY PASSENGERS Air carriers need to know how to deal with unruly passengers that can potentially turn into a life threatening situation.

Airlines have a right to refuse to carry passengers that they consider to be a potential risk to the safety of the aircraft, its crew or its passengers.

Reasons will typically include if the passenger:

• is drunk or under the influence of drugs

• has refused to allow a security check to be carried out on them or their baggage

• has not obeyed the instructions of ground staff or a member of the crew of the aircraft relating to safety or security

• has used threatening, abusive or insulting words towards ground staff, another passenger or a member of the crew of the aircraft

• has behaved in a threatening, abusive, insulting or disorderly way towards a member of ground staff or a member of the crew of the aircraft

• has deliberately interfered with the performance by a member of the

crew of the aircraft of their duties• has put the safety of either the

aircraft or any person in it in danger. • is a danger or risk to themselves,

the aircraft or any person in it due to their mental or physical state or health.

UNACCEPTABLE BEHAVIOUR ON BOARD Passengers must not do certain things while on board including:

• Endangering the safety of an aircraft

• Being drunk in an aircraft • Smoking • Disobeying a lawful command from

the commander of an aircraft, and• Acting in a disruptive manner

(including interfering with the work of a member of the cabin crew).

WHAT CAN THE AIRLINE DOIf a member of crew deems behaviour disruptive, they have the right to take measures they think reasonable to prevent the passenger continuing that behaviour.

Once in the air, the aircraft commander has ultimate authority on how to address the situation (authority

given by the Tokyo Convention 1963 and the Air Navigation Order 2009). In the UK, the Civil Aviation Act 1982 provides a statutory footing for certain practical measures available to a commander who is faced with an unruly passenger. For example, where a commander feels that a passenger poses (or is about to pose) a threat to the safety of an aircraft, its passengers, crew, or the good order and discipline on board, the commander may seek assistance from the crew in restraining the passenger. The commander can also request assistance from other passengers in restraining the unruly passenger. However, as flight crew should not exit the locked flight deck during flight, they must rely on the cabin crew to assess and manage situations and keep them fully informed.

Sometimes the only course of action is to land the aircraft by diverting to the nearest available airport. This carries enormous cost implications including dumping fuel, landing fees, ground handling fees, purchase of new fuel and possibly paying compensation to the other passengers. Another risk is that the crew may run out of hours. However, there is sometimes no alternative and the passenger has to be escorted off

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the aircraft under police escort and the airline can refuse to carry the passenger on the remaining sectors.

The airline does run the risk that the authorities at the diversionary airport may not have the power to deal with actions that are committed on a foreign registered aircraft. It may be that a crew member has to personally press charges against the unruly passenger. Whilst damages may be recoverable from the disruptive passenger(s) – in practice this is often not a practical or simple solution.

The CAA does have a Mandatory Occurrence Reporting Scheme (MORS), the objective of which is to contribute to the improvement of flight safety by ensuring that relevant information on safety is reported but not to apportion blame or liability.

PRACTICAL APPROACHES TO DEALING WITH DISRUPTIVE PASSENGERS1. Clear policy and procedures – a

zero-tolerance policy combined with procedures to ensure that all unruly passenger incidents are reported and documented to enable understanding of the incidents and provide sufficient information

for prosecuting the offending passengers. The airline must support the crew both in the air and on the ground, allowing time for the crew to give statements and attend court.

2. Train all personnel – airlines should ensure that ground handling staff and those of any agents that they may use, as well as cabin crew and flight crew are aware of their responsibilities and the company’s procedures.

3. Improve communication – facilitate the sharing of intelligence between security personnel, ground personnel, cabin and flight crew to help identify and diffuse situations earlier and stop potentially unruly passengers boarding the aircraft.

4. Warning cards – use of notification warning cards to be presented by crew to unruly passengers warning of the consequences of their actions.

5. Airport – work with airports to promote passenger awareness of unacceptable behaviour and the legal consequences. Airports and their concessions including retail outlets, bars and restaurants, need to acknowledge the negative effects

of passengers drinking to excess at the airport and work with airlines on a solution.

6. Breathalyse passengers before boarding – if the aviation industry could work together to decide what is an acceptable alcohol limit for passengers boarding aircraft they could breathalyse passengers who they considered may be over the limit and if so refuse them entry onto the aircraft.

Unfortunately, there is currently no industry-wide standard which deals with air rage incidents and it is often down to the policies of each individual airline as to how they deal with such incidents

With the increase in air rage incidents now is a good time for the aviation industry to work together and implement standards which will be enforced from the time that the passenger arrives at the airport until touchdown at the final destination airport.

This article was written by Alina Nosek, Head of Aviation, asb law LLP. For further information on air rage and dealing with unruly passengers, please contact Alina on +44 (0)1293 603672 or email [email protected]

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Airlines have been praised for their strong safety culture in recent decades. Whether it relates to the ingenuity

of the engineering behind the aircraft , customer screening or in-flight security, the industry has physical security at the top of its agenda.

But in addition to the threat from terrorism hackers and organised groups are increasingly targeting airlines for their data. In January 2015, reports

surfaced that numerous airlines (including United and American) had been targeted by hackers and had suffered data breaches . If information is regarded by many as the new oil - and with some cyber attacks appearing to be state sponsored - data is one of the most valuable assets an organisation can have (and lose).

Sadly, protection from these external threats is not enough. Figures from the Cifas Internal Fraud Database show that the theft of data by staff is a growing

problem . Last year there was a 10 percent increase (compared with 2013) in incidents of customers’ personal data and/or corporate intellectual property being stolen by an employee. Over half of these involved passing the data on to a third party. This kind of stolen data is fuelling a surge in identity fraud and other forms of serious and organised crime.

Any organisation that deals with customer or employee data could be particularly at risk but airlines,

Understanding the danger that can exist inside your organisationSimon Dukes, Chief Executive, Cifas

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UK: INTERNAL FRAUD

along with banks and mobile phone companies, are obvious targets. Airlines store vast amounts of corporate and personal data, including sensitive details like passport numbers and addresses. Reducing the risk of this data falling into the wrong hands means protecting against internal threats as well as external hacks.

In some cases, rather than planting someone directly on the inside, criminal gangs groom existing staff working in data environments. The

National Fraud Intelligence Bureau recently issued a warning that it had become aware of customer services and banking staff being cultivated and “groomed” by fraudsters over long periods of time, to access personal client and customer account data. After being targeted by fraudsters, staff were surveilled during their days off and then carefully befriended over a long time. Organised fraudsters are resourceful , and meticulous planners - capable of coercing or duping employees in any

sector, not just financial services. Internal fraud is not just about

data theft. Cifas research shows that fraudulent job applications also increased last year, by nearly 50 per cent. Knowing that your staff are who they say they are, and have the qualifications and experience that they claim, is vital – not only from the point of view of competence, but also integrity. Around one in six of the application frauds in 2014 were discovered after the applicant had taken up employment , usually around two months after they had started. This suggests that many positions are still being filled before full checks and vetting procedures have been completed. Balancing flexible resourcing with risk management is challenging, but essential.

The reality is that there is no silver bullet for preventing internal fraud. When it strikes, it will have an impact on your bottom line, reputation, staff morale and much more. Treating all staff as suspects would be a blunt, divisive and damaging strategy. So dealing with internal fraud needs a clear and balanced approach.

The good news is that there are effective measures an organisation can take. Clear anti-fraud policies that support staff who raise legitimate concerns will show that you have a ‘zero tolerance’ approach to fraudulent or corrupt behaviour. Smart technology can monitor an employees’ access to data, and being open and frank about instances of fraud will help to bring the issue to light and deter other employees. Sharing data on confirmed frauds is one of the simplest, most cost effective steps an organisation can take to prevent a fraudulent employee from moving from one organisation to another to commit fraud once again. The benefits in doing so are not just financial. Strong internal fraud controls, working together with physical and cyber security measures, also help to combat wider threats, including terrorism.

It is sometimes easier to focus on the external threats that make headlines, but failing to recognise and reduce internal vulnerability will often lead to a type of fraud that is more damaging to an organisation’s mission and more costly to put right.

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The Convention on International Interests in Mobile Equipment (the “Convention”) and the Protocol to the Convention

on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the “Protocol”) (the Convention and the Protocol are collectively referred to herein as the “Treaty”), both signed in Cape Town, South Africa on November 16, 2001, heralded a sea-change in the aircraft industry worldwide. The importance of the Treaty for the aircraft industry cannot be underestimated. Thus, we provide a summary of the important concepts of the Treaty here.

At its inception the Treaty was ratified in 2006 by eight countries,

which number has now grown to over fifty, with many countries still working toward ratification. The purpose of the Treaty is to provide a stable international regime for the protection of creditors, conditional sellers and lessors; however, the implementation and application of the Treaty has created, and continues to create, many issues that the legal community has only begun to examine.

Since its inception in 2006, the International Registry (discussed below) has evolved and continues to identify areas in which the website and registration process can be improved. In September 2013, the IR went through a major upgrade, Generation II, which is intended to improve the way the website operates and make it more user-friendly, which we summarise below.

OVERVIEW OF THE TREATY PROVISIONSThe Treaty creates a new legal concept – the “International Interest”, changes the rules for perfecting priorities and legal rights in aircraft equipment, and adds additional requirements to the perfection of such rights and interests by establishing the Cape Town International Registry (herein the “IR”).

The Treaty applies to “aircraft objects”, which include airframes, helicopters and aircraft engines (each an “aircraft object”) that meet the following size requirements: (i) an airframe must be type certificated to transport eight persons, including crew or goods in excess of 2750 kilograms; (ii) a helicopter must be type certificated to transport at least five persons including crew or goods in excess of 450 kilograms; and

The Cape Town Convention: An Evolving ProcessBy Erin M. Van LaanenAttorney at McAfee & Taft.

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(iii) an engine must have 1750 pounds of thrust (or its equivalent) or 550 rated take-off horsepower (or its equivalent). Aircraft equipment not meeting these size requirements are not subject to the Treaty.

In addition to meeting the size requirements, the debtor, lessee or seller must be “situated” in a Contracting State in order for the interests created by transaction documents to be covered by the Treaty. The location of the creditor, lessor or buyer is irrelevant to Treaty application. Whether a debtor, seller or lessee is “situated” in a Contracting State is a broad concept under the Treaty, and while one would normally look to the place where the entity is incorporated or formed, that is not the only factor to consider. The Convention sets out

four alternative ways in which an entity may be “situated” in a Contracting State: (i) the location in which the entity is incorporated or formed; (ii) the location in which the entity has its registered office or statutory seat; (iii) the location in which the entity has its centre of administration; or (iv) the location in which the entity has its place of business. If an entity is not formed or incorporated in a Contracting State, but has a registered office or a principal place of business in a Contracting State, that entity could be considered as being “situated” in a Contracting State. Additionally, and of particular import, if an entity is an SPE formed in a non-Contracting State, but the SPE is managed and administered by a parent with offices in a Contracting State, then

the SPE would be subject to the Treaty under clause (iii) above.

It is important to note that if the Treaty connecting factors apply, then the aircraft transaction is subject to the Treaty, even if all parties to the transaction are located in the Contracting State and it is not anticipated that the aircraft will be used outside of that jurisdiction. After the Treaty came into force, there was a misconception that the Treaty was inapplicable if the transaction was wholly domestic. That misconception is incorrect; the Treaty applies regardless of where the aircraft will be operated.

The priority rule as set forth in the Convention is simple and meant to be transparent – the first to register takes free of a subsequent registration and from a legal interest that is not registered – even if the registering party has actual notice of a prior, unregistered interest. Therefore, filing or registering transaction documents with local state registries is not enough to protect the legal rights and priorities of the transaction parties. Registration of legal interests with the IR is now an additional and critical step to protection.

Even though the priority rule seems straightforward, there are several exceptions to the general rule of first to register wins. Firstly, Contracting States are permitted to opt in or out of certain provisions of the Treaty, one being whether there are non-consensual liens that would have priority over a registered interest, even though the non-consensual lien is not registered. Secondly, pre-existing interests in the relevant jurisdiction may retain priority even after Treaty ratification in that jurisdiction. Thirdly, the priority rule may be varied by agreement among the transaction parties. Thus a party to an interest may agree to subordinate its interest to an interest registered later in time. For example, if the owner of an aircraft leases the aircraft prior to entering into a security agreement with a lender, that lender will (most likely) require that the previously registered international interest be subject and subordinate to the international interest registered pursuant to the security agreement. If the parties agree that the previously registered lease should be subordinate to the international interest created by

USA: CAPE TOWN CONVENTION

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the security agreement, then the parties should also register the subordination of the international interest created by the lease, otherwise the subordination will not bind an assignee of the subordinated interest. Fourthly, the Revised Official Commentary to the Treaty points out that states may give different weight to the Treaty, as international law, such that the Treaty provisions may be subject to differing interpretation depending on the state in which a priority question arises.

Notwithstanding the possible exceptions to first to register wins, it is essential to register interests with the IR to protect the transacting parties’ priority in aircraft equipment. Registration with the IR is completely electronic through a web-based system; however, the Treaty requires that the international interest be in “writing”. Parties must also determine whether the underlying documents need to be filed with the appropriate aviation authority as required in a particular jurisdiction. In some cases filing the underlying documents with the appropriate aviation authority is a requirement under the Treaty in order to comply with the jurisdiction’s entry point requirements. For example, the United States has designated the FAA as the entry point for all transactions involving aircraft registered in the United States, and Mexico has designated the Dirección General de Aeronáutica Civil as the entry point for all transactions involving Mexican-registered aircraft. It is important for a practitioner to confirm whether the jurisdiction that governs the transaction has designated an entry point because the entry point requirement must be satisfied in order to register the interests created by the transaction documents.

Each party to an IR registration must have a valid Transacting User Entity (“TUE”) account on the IR, through which each party will appoint a person, who can be an employee of the party or an outside agent, as its Cape Town Administrator (the “Administrator”). The IR is a two-party system and requires that both parties to any transaction have a TUE account. It is critical to check the TUE status prior to any transaction, as the process to set up a TUE account can take anywhere from two to five

business days. If the Administrator is an employee of the party, it is important that the Administrator still works for the party and is available prior to the closing. As aircraft closings are often time-sensitive, the maintenance and ongoing work of a TUE Administrator is not for the light-hearted.

Additionally, prior to closing the transaction, the law firm or title company that will be closing the transaction must request Professional User Entity (“PUE”) status from each of the transacting parties for the specific pieces of equipment that are subject to the transaction. A TUE can appoint another entity as its PUE but the appointment is for each specific piece of equipment – it is not a blanket authorisation. Being appointed the PUE gives the PUE entity the ability to register interests on behalf of the TUE for that specific piece of equipment but not the authority. The transacting parties, once the PUEs are in place, must still authorise the PUE, during the closing call or by email, to effect the necessary registrations.

THE RIGHT TO DISCHARGE The “Right to Discharge” is a relatively new concept under the Treaty and one that remains somewhat of a mystery to the industry. Under the Treaty, the only party that can discharge a registration is the creditor under and named in that registration. Prior to 2010, when an assignment of an international interest

was registered, the new creditor would be able to discharge the assignment when the obligation of the debtor had been satisfied, but it would not be able to discharge the underlying international interest without action from the original creditor. Only the original creditor named in the registration could make the discharge. As one can imagine, this created several problems because one would need to locate and request the cooperation of the original creditor in order to discharge the underlying international interest even though the original creditor had since transferred all of its interest to the new creditor. This issue became quite a problem for practitioners in the aircraft industry because there were many cases in which the underlying international interests could not be discharged if the original creditor no longer existed or could not be located. Additionally, if the original creditor’s TUE account had since been disabled or suspended (a TUE account must be renewed annually to remain in effect), there was no way to discharge the underlying international interest without locating the original creditor and asking that entity to re-establish its account (and pay the IR fee to do so). Also, since all registrations require that there be a “writing” to support the registration, it was necessary to obtain something in writing from the original creditor authorising the discharge of the underlying international interest, even

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though that entity no longer had any interest in that equipment.

One way some parties dealt with this issue was to obtain a side letter from the original creditor (i) authorising the discharge of the underlying international interest at such time as the new creditor discharged the assignment, and (ii) agreeing not to revoke the PUE appointments, such that the escrow company or law firm which registered the assignment could also complete the discharge of the underlying registration at the appropriate time. While getting such a side letter at the time the transaction closed was a good idea, practitioners still ran into the problem of TUE accounts being suspended and/or disabled.

This problem was addressed in 2010, when the IR was updated to include a new function – the transfer of the right to discharge (“RTD”). After 2010, if an assignment was registered, the parties could also transfer the RTD for the underlying international interest to the new creditor. Once the RTD is transferred to the new creditor, the original creditor is completely out of the equation and is not needed to complete any further action when the underlying international interest needs to be discharged. It is important to note that while it is now possible to transfer the RTD on the IR, it does not happen automatically once an assignment is registered; the transfer of the RTD is

a separate registration that must be completed after the assignment.

The RTD functionality of the IR is also useful for lessors, owners or lenders such that the RTD can be held by the senior creditor in connection with junior registrations made, for example a lease, so that the senior creditor can discharge the junior registrations when the transaction has been completed or if there has been a default. Without the RTD in the control of the senior creditor, the senior creditor would have no ability to clear the IR of registrations to convey clear title to a third party.

Finally, since the RTD is a relatively new feature of the IR, it may prove useful for practitioners to review transactions that occurred prior to 2010 to determine if registrations were made where the original creditor has assigned its interest and is no longer involved in the transaction. If so, then registering a RTD now could save money and aggravation in the future when the original registration needs to be discharged but the original creditor is long gone. In any event, there are now, and will be more, transactions where original registrations cannot be discharged and will remain on the IR even though the transaction has terminated and no rights exist under those registrations. This will test the aircraft community to determine how to address these registrations in future closings and legal opinions in a way that will not be a detriment to healthy aircraft commerce.

GENERATION IIGeneration II is a complete redesign of the IR website, intended to make the website more user-friendly and enhance several features of the website. Two of the most important enhancements of Generation II are Multiple Object Registrations and the Closing Room.

MULTIPLE OBJECT REGISTRATIONAt its inception, the IR only allowed users to complete one registration at a time. When faced with a multiple collateral transaction (for instance twenty aircraft with two engines each = 60 aircraft objects) requiring multiple registrations (a security agreement, bill of sale, lease and lease assignment = 240 registrations), completing such

registrations took days and sometimes weeks. The IR was cognizant of this fact and addressed this issue through the Multiple Object Registration (“MOR”) feature. MOR allows a user to load multiple pieces of equipment into a list and complete the same registration against all of the aircraft objects in the list. For instance, if a security agreement covers twenty aircraft and associated engines, the user can now load each aircraft and engine into a list, select the debtor and creditor and complete the registration of the international interests against all twenty aircraft and engines at the same time. Although MOR has helped tremendously in reducing the time it takes to complete registrations on multiple collateral transactions, it still takes time, as each aircraft object must be loaded into the list individually.

CLOSING ROOMThe Closing Room (“CR”), which went live in May of 2015, is one of the most interesting new functions of the IR. The purpose of the CR is to allow users to pre-position registrations together with all the consents from all the transacting user entities (“TUEs”) and establish the chronological order and priority of such registrations, in advance of the registrations becoming effective. The assembled information and consents in a CR are (i) not public and not part of the IR database and (ii) not effective, not registered and not searchable until certain requirements are met and the registrations “go live.”

Before a CR can be established, the parties to a transaction must select a Coordinating Entity (“CE”). The selection of a CE is important, as the CE will be the sole user responsible for establishing the CR and assembling and managing all the information required to pre-position the registrations and the order of such registrations. Additionally, once the CR has been created, the CE is the only party who can modify information in the CR, although a CR may be transferred to a different CE.

Once the CE has established the CR and entered all registration information, including the object descriptions, types of interests to be registered and sequence of the registrations, the CE can invite the TUEs to review the

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information in the CR (the TUEs will have read-only access). If any changes need to be made to the registrations or the order of the registrations in the CR, the CE may modify the information in the CR at any time before the CR is locked. After the CR has been locked, the IR will automatically issue a notice to the CR participants which will include a pre-registration report that shows all the prepositioned registrations, including the chronological order of such registrations, and invite the parties to consent to the registrations. A locked CR is available for review, consent and payment for a period of ten days, which can be extended multiple times at the request of the CE. If additional changes are needed after a CR has been locked, the CE may unlock the CR to make edits; however, unlocking a CR revokes any pre-positioned consents and the consent process will start over again after the CR is relocked. Since any previously granted consents will be automatically revoked if a CR is unlocked, it is important that the CE not lock the CR until the parties have confirmed that the registrations and the order of such registrations are correct.

Once the CR is locked (or relocked), all parties have provided their respective consents to the prepositioned registrations, the fees have been paid, and the parties are ready to close, the CE will issue the “release instruction” to the IR. Upon receipt of the release instruction, the IR will enter all the prepositioned registrations in the CR into the IR database in the order specified in the pre-registration report, at which point the registrations will “go live” and will be searchable, and the CR will be extinguished. Of all the benefits of the CR, the most significant is that all registrations for a transaction are completed as soon as the CR is released, instead of hours or days after a closing has occurred.

The MOR and CR are examples of several changes to the IR system that have taken place over the years. Since the IR is a unique, one-of-a-kind system, it is beneficial to the aircraft industry that the IR is continually changing and improving so that the IR continues to serve the industry with a secure, reliable and transparent system for registration of interests in aircraft objects.

CLOSING CHECKLISTFor many practitioners, the Treaty is not a daily part of business. So, it is not easy to sort through the Treaty provisions to determine the process undertaken in connection with a transaction covered by the Treaty. Below is a brief summary of the basic steps taken in connection with such a transaction:

1. Determine if the equipment is large enough to fall under the Treaty (consult the type certificate data sheet).

2. Identify all entities that are parties to the transaction documents.

3. Determine what parties are “situated” in a Contracting State and the country of registration of the aircraft.

4. Review the transaction documents to determine what international interests, assignments thereof, or subordinations are created: security agreement, conditional sale agreement, lease, sale, prospective sale, subordination, discharge.

5. Establish an IR account for each party creating or benefiting from an IR registration (a TUE). Each party must designate a person who will be the “Cape Town Administrator” for the party. The Administrator should be someone familiar with the Treaty and IR functions (and does not need to be an employee of the party).

6. Identify a professional user entity (PUE) or closing room coordinating entity (CE) that will make the

necessary registrations at closing. The PUE/CE will electronically request consent from the Administrator of each TUE for each piece of equipment involved, and the Administrator must electronically consent to such request. If the Administrator is an agent of the TUE (not an employee), then a responsible person with the TUE must authorize the Administrator to consent.

7. At closing, all parties will provide the PUE/CE with signed copies of the transaction documents (to comply with the “writing” requirement of the Treaty). The parties will then direct the PUE to make the required registrations on behalf of all parties. Upon completion of the registrations, the PUE/CE will obtain post-closing priority search certificates from the IR which certificates evidence the registrations made.

FAA NON-CITIZEN TRUSTSThis article would not be complete without an overview of the recent Notice of Proposed Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations involving Non-U.S. Citizen Trustors and Beneficiaries [published in the Federal Register on February 9, 2012 (77 FR 6694)] and Notice of Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations involving Non-U.S. Citizen Trustors and Beneficiaries [published in the Federal Register

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on June 18, 2013 (78 FR 36412)] (the “Clarification”).

Unlike most countries, the United States civil aircraft registry is an owner registry, instead of an operator registry. Thus, aircraft registered with the FAA are registered in the name of the legal owner, and such owner must qualify as a United States citizen as defined by the FAA (essentially, a majority of the ownership interests and management must be vested in United States citizens). For decades, the FAA federal regulations have contained provisions allowing the use of owner trustees to hold legal title to aircraft for the benefit of a trustor under a written trust agreement. The trustor can be a United States citizen or a non-US citizen (hence a non-citizen trust “NCT”). The NCT is an incredibly useful tool for the aircraft industry worldwide: NCTs allow non-US citizens to invest in aircraft, utilise aircraft more fully, obtain FAA-approved maintenance and conversion work, provide a base for aircraft moving to a new lessee or undergoing repossession – to name just a few.

In 2010, the FAA began a comprehensive review of the use of NCTs, based on three concerns: (i) FAA oversight of FAA-registered aircraft in accord with national and international law; (ii) whether the use of NCTs were within the regulatory framework provided by FAA regulations; and (iii) whether the FAA could obtain information about the operation, management and maintenance of aircraft held in NCTs. The FAA’s review included public meetings and intense collaboration and communication with the aircraft industry. During the process, it was unclear where the FAA would end up, with the worse-case scenario being that NCTs would be abolished. The FAA review culminated in the Clarification, which benefits the FAA by providing processes to obtain information about an aircraft, its operations and records, provides clear guidance to the industry for compliance with FAA regulations on NCTs, and reinforces the FAA’s acceptance of this registration vehicle. Issuance of the Clarification is a concrete example of government action at its finest – the FAA saw inadequacies in the use of NCTs, studied the issue, obtained

public comment, and instituted change that fulfilled the FAA’s needs and re-enforced acceptance of the NCT as a valuable registration vehicle for the aircraft industry.

The Clarification contains suggested changes to the standard form owner trust agreement, which changes have been universally adopted by the industry. Those changes include the following:

1. 1. Aircraft Information. Trust agreements now contain information the FAA may seek from an owner trustee in relation to an aircraft under trust, and timelines by which the owner trustee should provide such information to the FAA. Similar provisions are contained in standard form trust agreements whereby the trustor agrees to provide such information to the owner trustee and consents to the dissemination of such information by the owner trustee to the FAA.

2. 2. Instruments Affecting a Legal Relationship under the Trust Agreement. The Clarification requires that the trustee state what documents, other than those filed with the FAA, affect a legal relationship under the trust. Specifically, the Clarification focuses on whether an operating agreement will be executed between the trustee and the trustor and, if so, the operating agreement must be submitted to the FAA along with the trust and title documents. The reason for the requirement is because the FAA regulations require that all instruments legally affecting a relationship under a trust be submitted to the FAA. In the Clarification, the FAA makes it clear that an operating agreement necessarily affects such relationship and, thus, must be filed with the FAA as a part of the registration process. Parties may choose to have the FAA return the operating agreement after processing the title documents. If not returned, then the operating agreement is made a part of the FAA trust file. The operating agreement may also be filed for recording by the FAA and,

if so, would be placed in the FAA aircraft file. The trustee’s affidavit of citizenship must now contain a statement as to all documents legally affecting a relationship under the NCT.

3. 3. Removal of the Trustee. The owner trust agreement now includes expanded language governing what circumstances a trustor may remove an owner trustee for cause. The Clarification reinforces the regulatory requirement that a trustor holding more than 25% of the power to remove cannot exercise that power. Instead the power to remove must be exercised by an authorised person not under the direct or indirect influence of the trustor. In reality, this means that a non-US citizen trustor holding 100% of the beneficial interest may never remove the trustee regardless of the circumstances. However, the Clarification does not change, alter or prohibit the right of a trustor to terminate the trust at any time for any or no reason.

4. 4. ACC Opinion. All trust agreements must be approved by the Aeronautical Center Counsel’s office (“ACC”). If an opinion is not provided to the FAA with the filing of the trust and title transfer documents, then the FAA will forward the filing package to the ACC’s office for review and issuance of its opinion. Thus, it is wise to obtain an opinion prior to the closing of any transaction involving an NCT.

CONCLUSIONThe stated purpose of the Treaty is a simple concept and in theory works very well; in application the Treaty has created, and continues to create, ongoing issues and perplexing questions. As with any area of law, application and interpretation of the Treaty concepts and protections is an evolving process. Over the coming years, case law will shed more light on several of these issues that are unsettled. But until then, knowledge of the issues and how the industry is dealing with them is critical to full representation of clients in aircraft transactions.

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Cayman Islands special purpose vehicles are commonly used as borrower vehicles for bankruptcy remote financing structures

for both commercial and private aircraft. Such vehicles are also used as issuers in capital markets transactions (including wrapped bonds, ABS and EETC deals) and for a wide range of investments in the aviation sector. Until recently the Cayman Islands did not offer as part of its legal framework the protections for creditors provided by the Cape Town Convention (the Convention on International Interests in Mobile Equipment concluded in Cape Town, South Africa on 16 November 2001). The Cayman Islands is a British Overseas Territory and as a result implementation of the Convention in the Cayman Islands required the Convention to be ratified by the United Kingdom. On 1 November

2015 the Convention came into force in the United Kingdom and - pursuant to the declaration made by the United Kingdom in respect of Article 52 of the Convention - in the Cayman Islands.

The Cayman Islands is not itself a Contracting State within the meaning of the Convention and is instead a territorial unit of a Contracting State (the United Kingdom). Article 52(5) of the Convention (Territorial Units) and Article XXIX(5) of the Protocol (Territorial Units) provide that a company, which is a debtor (such as a lessee under a lease or the chargor under a security agreement), and which is incorporated in the Cayman Islands, is considered to be situated in a Contracting State for all purposes of the Convention.

DECLARATIONSArticle 52 of the Convention provides that a Contracting State may make

declarations permitted under the Convention in respect of its territorial units that are different from the declarations made regarding that Contracting State itself and/or the declarations made regarding any other territorial unit of that state.

The declarations permitted by the Convention that have been made with respect to the Cayman Islands include:

Declarations pursuant to Article 39 of the ConventionA declaration has been made under Article 39(1)(a) of the Convention that as a matter of Cayman Islands law all categories of non-consensual rights or interests which, under the laws of the Cayman Islands have priority over an interest in an aircraft object equivalent to that of the holder of a registered international interest shall, to that extent have priority over a registered

The Cayman Islands: Cape Town Convention now in forceWalkers Global explores the implementation of the Cape Town Convention in the Cayman Islands

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CAYMAN ISLANDS: CAPE TOWN CONVENTION

international interest, whether in or outside insolvency proceedings.

A declaration has also been made under Article 39(4) of the Convention with the effect that a right or interest of a category covered by the declaration made under Article 39(1)(a) of the Convention

shall have priority over an international interest registered prior to the date of deposit of United Kingdom’s instrument of ratification.

No declaration pursuant to Article 40 of the ConventionA declaration has not been made with respect to Article 40 (Registrable non-consensual rights or interests) which means no categories of registrable non-consensual rights or interests are provided for under Cayman Islands law.

Declaration pursuant to Article 60 of the ConventionA declaration has not been made with respect to Article 60(1) of the Convention and therefore the Cape Town Convention does not apply to a pre-existing right or interest, which retains the priority it enjoyed under applicable law before 1 November 2015.

Declaration pursuant to Article XXX(3) of the Aircraft ProtocolAlternative A under Article XI of the Protocol applies to the Cayman Islands in its entirety to all types of all insolvency proceedings and that the waiting period for the purposes of Article XI(3) of that alternative is sixty (60) calendar days.

AMENDMENTS TO LEGISLATIONThe International Interests in Mobile Equipment (Cape Town Convention) Law, 2015 provides that the Convention and the aircraft protocol have the force of law in the Cayman Islands from 1 November 2015. The law also repeals the Cape Town Convention Law, 2009 and stipulates that the Convention does not prejudice rights or interests that existed prior to that commencement date.

Certain other legislative changes and updates have been made to support the introduction of the Convention, including (a) the Mortgaging of Aircraft Regulations, 1979 (which addresses the registration of and priority of mortgages over aircraft registered in the Cayman Islands) was repealed and has been replaced with the Mortgaging of Aircraft Regulations, 2015 which regulates the priority of aircraft mortgages made after 1 November 2015 and (b) the Air Navigation (Overseas Territories) Order 2013 (as amended) was amended on 1 November 2015 by the Air Navigation (Overseas Territories) (Amendment No.2) Order 2014 to address, amongst other things, recognition of the rights of an IDERA holder.

IMPACT OF THE CONVENTIONThe implementation of the Convention means that a Cayman Islands special purpose vehicle can now be used for transactions for which the parties require the Convention to be applicable law in the jurisdiction of the special purpose vehicle. A point of distinction between the Cayman Islands and other jurisdictions in which such vehicles are established has been removed and should mean that the selection of the jurisdiction / structure can be made on the basis of factors other than the Convention such as the broader legal framework (including flexibility of Cayman Islands corporate law), tax neutrality, cost and expertise.

On 1 November 2015 the Convention came into force in the United Kingdom and - pursuant to the declaration made by the United Kingdom in respect of Article 52 of the Convention - in the Cayman Islands.

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Canada is comprised of ten provinces (Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia,

Ontario, Prince Edward Island, Quebec and Saskatchewan) and three territories (Northwest Territories, Nunavut and Yukon). Aviation is a federal responsibility and the department of the federal government that has the oversight for aviation is Transport Canada. The principal legislation for the registration of aircraft is the Aeronautics Act and the Canadian Aviation Regulations (the “CARs”). The licensing

of air operators to provide domestic air services is governed by the provisions of the Canada Transportation Act and the Air Transportation Regulations. The Canadian Transportation Agency is the agency which issues such domestic licenses.

Canada and a number of the provinces ratified the Cape Town Convention (the “Convention”) on April 1, 2013, and it now applies in all provinces and territories except for the Province of New Brunswick. The legislation to implement the Convention has been adopted in New Brunswick but no declaration has been lodged by Canada yet under articles 52

and 53 of the Convention to include the Province of New Brunswick.

AIRCRAFT REGISTRATIONCanada has an operator based system of aircraft registration. The party having the legal custody and control of a Canadian aircraft (as opposed to title to an aircraft) is entitled to be the “registered owner” of the aircraft. Any “Canadian” is qualified to be the registered owner of a Canadian aircraft with the proviso that no individual is qualified to be the registered owner of a Canadian aircraft unless the individual is at least 16 years of age.

Canada and Cape TownMiriam Kavanagh, Miriam Kavanagh Professional Corporation, provides an overview of aircraft registration and the Cape Town Convention in Canada.

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CANADA: CAPE TOWN CONVENTION

“Canadian” is defined in the Canada Transportation Act and means:

(i) a Canadian citizen or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act ;

(ii) a government in Canada or an agent of such a government; or

(iii) a corporation or other entity that is incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians and of which at least 75%, or such lesser percentage as the Governor in Council may by regulation specify,

of the voting interests are owned and controlled by Canadians.

Transport Canada maintains the Canadian Civil Aircraft Register. An aircraft can be registered as a state aircraft, a commercial aircraft or a private aircraft. The CAR’s set out the various requirements for the identification and registration of Canadian aircraft as well as any transfer of legal custody and control. Liens on aircraft cannot be registered with Transport Canada and the deregistration of an aircraft from the Canadian Civil Aircraft Register is no indication of its lien status.

THE CONVENTION AND PERSONAL PROPERTY SECURITY REGISTRIESAs stated above, the Convention became effective in Canada on April 1, 2013. Canada has opted for Alternative A in its adoption of the Convention. Generally, this means that an insolvent debtor is required to cure all defaults within 60 days and agree to perform all future obligations, failing which the lessor or secured party can repossess the aircraft without any further waiting periods.

The applicable law for taking security is determined at the provincial level and not at the federal level. With respect to leases and security interests of aircraft objects (as defined in the Convention), registrations are required at the International Registry and it is prudent to also file financing statements in the relevant provincial or territorial personal property security registry. It is not necessary to file the lease or security agreement with the personal property registries; the registrations act as notice to third parties. The Province of Quebec is different from the other provinces in that it has a civil code and registrations in that province are made at the Register of personal and movable real rights.

In accordance with the Convention, Irrevocable De-registration and Export Request Authorizations (an “IDERA”) can be filed with and will be recorded by Transport Canada. While its main purpose is to allow for the lessor or secured party to request deregistration of an aircraft in a default situation, an added benefit is that any changes to the registration status of an aircraft that is subject to an IDERA, will require the consent of the lessor or secured party, as the case may be.

“Canada and a number of the provinces ratified the Cape Town Convention (the “Convention”) on April 1, 2013.”

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Back in October 2013, and much to the surprise of many practitioners, the State’s Official Gazette of 4 October 2013 published

Spain’s ratification of the 2001 Cape Town Convention on International Interests in Mobile Equipment. The accession process had begun in December 2012 by a decision of the Spanish Government, and the Convention entered into force for Spain on 1 October 2013. However, at that point in time Spain’s ratification was merely a “virtual” one, because only the Convention, but none of its protocols were ratified.

That was certainly an unusual ratification process. The main reason

for such a course of action was that the Convention and its Protocols raised serious concerns due to perceived problems with some basic aspects of existing Spanish law. According to Spanish officials involved in the discussions which led to the Convention and the 2001 Protocol on Matters Specific to Aircraft Equipment (“the Aircraft Protocol”), by ratifying the Convention the Spanish Government intended, on the one hand, to send a signal to the international markets about Spain’s willingness to ratify the Convention and its Protocols and, on the other, to force the various bodies involved in the legislative process to focus on implementing the Aircraft

Protocol in Spain.The initial expectations were that the

implementation process should finish in the fall of 2014, but matters are taking a bit longer. Nevertheless, two significant steps have already been taken: the Spanish Parliament has begun the proceedings to ratify the Aviation Protocol and new Regulations for the Aircraft Registry have been approved.

1. RATIFICATION PROCESS OF THE AIRCRAFT PROTOCOL – PRESENT STATUSOn 4 August 2015, the Spanish Congress decided to begin the ratification process of the Aircraft Protocol and to apply the so-called urgency procedure. This

Spain about to ratify aircraft protocol of the Cape Town ConventionBy Sergi Giménez Binder, partner, Fornesa Abogados

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SPAIN

greatly reduces the deadlines to obtain final approval. For example, the period for submitting amendments to the proposed ratification expired on 14 August, with no submissions being filed. On 18 August, the Foreign Affairs Commission issued a report endorsing the ratification of the Aircraft Protocol. After the approval of the Aircraft Protocol by the Plenary Session of the Congress, it was submitted to the Senate, where it entered on 25 September 2015. In principle, the period for final approval by the Senate expires on 15 October. According to statements made by the Spanish Government, general elections will be called for in November 2015, so that the ratification process should be completed before then.

It is worth noting that Spain, along with the other EU Member States, is not entirely free in how it ratifies the Convention and the Aircraft Protocol. In fact, Member States are limited by the terms of the Decision 2009/370/EC, whereby the EU acceded to the Convention and Aircraft Protocol. In that Decision, the EU made certain declarations relating to the interim relief measures foreseen under Articles 13 and 43 of the Convention and to the applicability of Article XXI of the Aircraft Protocol. Through its recent Decision (EU) 2015/1380, of 10 August 2015, issued in connection with Denmark’s ratification of the Convention and the Aircraft Protocol, the European Commission reminded Denmark (and thus Member States indirectly) that it should respect the declarations made by the EU in 2009. Spain is not expected to raise objections in these matters.

2. APPROVAL OF THE NEW AIRCRAFT REGISTRY REGULATIONS

It is well known that Spain has historically had a dual-registry system: Spanish-registered aircraft have to be recorded at the Aircraft Matriculation Registry (“Registro de Matrícula de Aeronaves”) and, under certain circumstances, also at the Movable Assets Registry (“Registro de Bienes Muebles”). Both registries are however separate bodies and with different objectives: while the Aircraft Matriculation Registry falls under the jurisdiction of the Spanish

Air Safety Agency (“Agencia Estatal de Seguridad Aérea”) and is familiar with the problems surrounding the aviation industry, the Movable Assets Registry is controlled by the Ministry of Justice and is set up as a formalistic registry of title and charges over assets.

The Aircraft Matriculation Registry has been mainly governed by certain Regulations originally issued in 1969. Last May the Spanish Government approved Royal Decree 384/2015 whereby the new Regulations were approved. Certain aspects of these new Regulations directly relate to the future operation of the Cape Town Convention and the Aircraft Protocol in Spain.

a. Firstly, it is clear that the dual registration system will be maintained. In this respect, the Government has opted not to change the “status quo” and thereby keeps an old-fashioned system in place. The Aircraft Matriculation Registry will continue being the administrative body in charge of granting the registration marks to aircraft and thus awarding the Spanish nationality to this type of assets. But this registry is not a registry of title or charges – this role continues being reserved to the Movable Assets Registry, although changes of ownership, charges and liens over aircraft, etc. can be annotated at the Aircraft Matriculation Registry.

b. Secondly, the new Regulations establish the following procedure as regards the recordation of an international interest under the Cape Town Convention:

a. The international interest (including prospective international interests) must be submitted first to the Movable Assets Registry, who will analyse the documents to ensure their validity and conformity. This Registry will then inform the Aircraft Matriculation Registry so that the international interest can be annotated there.

b. In accordance with Article 18.5 of the Convention, the Movable Assets Registry is designated to

be the single entry point for the recordation of an international interest at the International Registry. It seems clear that the Government has disregarded previous international experiences that have shown that single entry points are difficult to implement. At the time of writing this note it is unclear how an international interest is to be submitted (electronically, in paper form, etc.) or whether specific formalities (e.g. notarization of signatures, translations into Spanish, etc.) will need to be complied with. Implementation provisions are required to this end, and depending on the contents of these provisions one of the main objectives of the Convention –the speediness of recordation- might be impaired. There is also a concern among practitioners that additional costs will have to be faced ( just for instance, all documents submitted to the Movable Assets Registry require an official translation into Spanish and are, as a general rule, subject to Stamp Duty Tax, which is calculated on the basis of the value of the transaction).

c. If the international interest is governed by Spanish law (e.g., due to an express choice of law by the relevant parties), the Movable Assets Registry will firstly review the conformity of the interest and of the documents with Spanish law and only then forward the application to the International Registry. Pursuant to Spanish law, the Registrar must review the substantial aspects of the contracts it receives, and experience shows that this takes quite some time. It is therefore likely that the aviation industry will hardly ever chose Spanish law to govern an international interest.

d. The new Regulations expressly foresee that when ratifying the Aircraft Protocol the Spanish legislator will state which domestic rights and privileges will have priority over an international

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interest created over assets located in Spain, even if such rights and privileges are not recorded at the International Registry.

At the time of writing this note, works are underway to issue a new body of regulations to coordinate both registries, but it seems that rather than simplifying the recordation of international interests the new provisions may add an additional layer of formalities.

3. MAIN LEGAL CHALLENGESWhile the ratification process of the Aircraft Protocol seems well underway, it cannot be denied that Spain’s legal system faces a number of challenges before the terms of the Convention and the Aircraft Protocol can be fully implemented and accepted without reservations by the Courts. The main issues arise from the Convention’s uniform provisions relating to the creation, protection, priority and enforcement of certain rights over mobile equipment, which alter the domestic provisions of the States Parties. The new International Registry, supervised by ICAO, which prevails over domestic registries in matters such as the creation, enforcement and priority of international interests over such assets, is also a reason for concern among certain Spanish practitioners.

Further to those outlined previously, these are the main aspects in which the provisions of the Convention could conflict with Spanish laws and which need to be resolved for a smooth implementation:

a. Under Spanish law, self-help measures are strictly forbidden and may even be considered as a criminal offence. As recent experience shows, and with very few exceptions that only apply under truly exceptional circumstances, in default situations owners and lessors of aircraft can only repossess their asset from the Spanish operator if the operator is willing to cooperate or if a formal court order is obtained. The Convention aims to change this by specifically offering self-help default remedies to creditors. This contradiction

has already been solved, to the detriment of the solution proposed under the Convention: in the accession instrument of October 2013 Spain already declared that, in accordance with article 54.2 of the Convention, all remedies foreseen under the Convention can only be exercised with the prior authorisation of a judge. Hence, Spain does not not allow creditors to use the self-help remedies of the Convention without first getting a judge’s approval. Although this declaration was somehow expected in the international legal community, it does not change the fact that it deprives secured creditors from a powerful weapon and thus, indirectly, Spanish airlines from potentially more favourable financing terms.

b. The Convention affords priority to international interests recorded in the International Registry. This is one of the most conflicting aspects, because the Spanish registry system in respect of securities over assets is quite formal and isolated from external influence. In fact, the very existence of an International Registry faces strong resistance among many Spanish Registrars of Movable Assets. The provisions inserted in the new Regulations governing the Aircraft Matriculation Registry are concerning in this respect: it looks as if rather than simplifying the recordation of international interests the new provisions may add an additional layer of formalities.

c. As happens with other jurisdictions, the remedies foreseen by the Convention for situations of bankruptcy must also be carefully analysed in the light of existing Spanish bankruptcy law. Not only the time periods contemplated by the Convention (alternatives “A” and “B”), but also mechanisms such as IDEERAs face resistance. The Spanish Insolvency Act 2003 has already been amended four times since it entered into force in 2004, and it will have to be changed again for the purposes of the Convention. In any event, IDEERA’s are

perceived as self-help remedies and therefore seem to have been rejected under the terms of Spain’s accession. Furthermore, some legal scholars argue that the super-privilege that the Convention attempts to give to creditors in insolvency situations may face resistance given the present political and social trend of reducing the privileges of secured creditors. Tensions between the provisions of the EU Insolvency Regulation (particularly its article 5) and the system devised by the Convention have also been pointed out.

d. Similar remarks can be made in respect of the validity of deregistration powers of attorney, which are questionable under Spanish law. In practice, the aviation and judicial authorities refuse to act on the basis of such powers only. The new Regulations governing the Aircraft Matriculation Registry expressly foresee that leased aircraft can only be de-registered if the parties submit “a document which shows the conformity of both parties to cancel the marks” or “upon a firm judicial decision”. With this in mind, it is hard to see which benefits owners and lessors may obtain from Spain’s ratification of the Convention, since one of its declared aims is to facilitate repossession of aircraft in default situations.

e. Finally, certain bodies of the Government have stated that the Convention has been ratified precisely as a first step towards a revision and modernization of the entire body of Spanish legal provisions relating to rights “in rem” over movable assets. This is of course a very ambitious project which affects many different pieces of legislation, and is therefore unlikely to be completed in the short term.

Although it may sound topical, at this point in time, the only possible conclusion as regards the future of the Cape Town Convention and its Protocols in Spain is the usual one in TV series: “to be continued”…

Global Leadersin Aviation Finance

KPMG is the leading provider of cross-border advisory services to the international

aviation finance and leasing sector

To find out how we can help, please contact Tom Woods,

t: +353 1 410 2589e: [email protected]

kpmg.ie/aviation

© 2015 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

SPAIN.indd 40 06/01/2016 10:52:25

Global Leadersin Aviation Finance

KPMG is the leading provider of cross-border advisory services to the international

aviation finance and leasing sector

To find out how we can help, please contact Tom Woods,

t: +353 1 410 2589e: [email protected]

kpmg.ie/aviation

© 2015 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

SPAIN.indd 41 06/01/2016 10:52:25


FRANCE

Recent cases in France are the demonstration that foreign aircraft are vulnerable to attachment or forced sale actions

while in transit at French airports or undergoing maintenance on French soil.

French and foreign aircraft are open to two principle forms of seizure in France by secured and unsecured creditors alike. Preventative measures exist enabling a creditor pursuing repayment of indebtedness to immobilize the

aircraft on French soil. Creditors with an enforceable title to payment can force the sale of the aircraft and the distribution of the proceeds. French common law also provides alternative forms of seizure (“saisie revendication” and “saisie apprehension”) for creditors seeking enforcement of their property rights.

The rules governing attachment and forced sales of foreign aircraft are found in domestic legislation and international treaties. The French Transport Code and

Civil Aviation Code set forth restrictive rules specifically applicable to aircraft seizures and the general French Civil Procedure Code for Execution (“CPCE”) provides the framework in respect of issues not covered by these special rules. France has not ratified the Rome Convention of 1933 and at the date hereof has not ratified the Cape Town Convention of 2011. France is a party to the Geneva Convention of 1948 on the International Recognition of Rights in Aircraft.

Foreign Aircraft Seizures in France – Understanding the Process

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FRANCE

ATTACHMENTS (“SAISIE CONSERVATOIRE”)An attachment is a temporary measure destined to immobilize an asset to prevent its owner from disposing thereof and in respect of foreign aircraft, to prevent their departure. Aircraft is defined for the purpose of the Transport Code as «any apparel capable of elevating itself and circulating in the air » (Article L6100-1 Transport Code). The Geneva Convention provides that “ for the purposes of this Convention,

the term “aircraft” shall include the airframe, engines, propellers, radio apparatus and all other articles intended for use in the aircraft whether installed therein or temporarily separated therefrom”(Article XVI). Aircraft fuel is considered to fall within the rules applicable to the attachment of the aircraft itself.

The Transport Code provides for two types of attachment in favour of (i) creditors and (ii) certain identified administrative authorities.

Aircraft are open to attachment by creditors in accordance with the procedure set forth in the Transport Code, the Civil Aviation Code and the CPCE.

In order to protect the public and airlines from the impact of creditor reprisals and to preserve air traffic in general, the French Transport Code does however restrict the possibility for creditors to take an attachment over certain aircraft provided the criteria set forth in Article L6123-1 of the Transport Code is fulfilled. Article L6123-1 provides that French and foreign registered aircraft affected to State service or public transport are not subject to attachment unless the debt sought to be recovered from the aircraft owner is in relation to the acquisition of the aircraft or the training or maintenance contracts linked to its activity.

Foreign State owned aircraft may also benefit from immunity against enforcement, under certain conditions.

In the attachment process, special procedural rules apply to foreign owners and aircraft. Article R123-9 of the Civil Aviation Code provides that when the owner is not domiciled in France or the aircraft is of foreign nationality, a creditor is entitled to take an attachment over an aircraft in France with the prior authorization of the local judge having jurisdiction at the place of landing.

To obtain authorization a creditor will need to (i) satisfy the general criteria set forth in the CPCE for granting such an attachment order i.e. prove that its receivable is founded (albeit not certain) and persuade the judge that the circumstances regarding genuine risks of non-recovery justify recourse to such an exceptional measure, and (ii) in theory, satisfy the judge that the aircraft targeted does not benefit from the State or public transport exemption.

Once the authorization of the judge obtained, the creditor will be entitled to pursue the attachment process with the assistance of a local process server to immobilize the aircraft. This process will involve informing the local airport authority and air traffic control authorities to ensure that the aircraft remains grounded and the relevant aircraft registrar. The court will order that the aircraft be entrusted

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to a nominated guardian; issues regarding storage, protection, insurance and maintenance etc. will need to be addressed.

In order to ensure the efficiency of the measure granted, the obtaining of the court order is an ex parte application and the creditor is only required to formally notify the debtor within 8 days of the obtaining of the attachment order, through service by a process server.

If the foreign owner offers to deposit a guarantee for the full amount of the debt the French judge will be required to grant the discharge of the attachment and release the aircraft. If the debt claimed is contested, the judge has discretionary power to fix a lower amount of the guarantee to be delivered.

In the event of a dispute as to the validity of the attachment (notably under Article L6123-1 of the Transport Code), owners may nevertheless find their aircraft immobilized at a French airport pending the obtaining of a discharge from the judge to allow the aircraft to depart; this may take several days or even weeks.

An Equatorial Congo Airlines (ECAir) Boeing 757-200 (the Republic of Congo national airline) was grounded at Paris Charles de Gaulle in April 2015 by way of attachment to secure the payment of a debt due by the Republic of Congo. Disputing liability for the debt claimed, ECAir also relied on the public transport exemption to successfully contest the attachment and secure its release 13 days later. In March 2015 an aircraft belonging to Republic of Gabon was attached at Orly airport during maintenance to secure payment of debt owed to a Swiss subcontractor. The aircraft was released six weeks later on grounds that the aircraft benefitted from immunity and State service exemption.

The availability of the exemption is key for aircraft owners seeking to avoid or discharge attachment. It has been held by French courts that the exception is open to aircraft effectively operating public transport at the time of the attachment and that aircraft stationed in France pending sale and delivery to a new owner may fail the test.

French courts will accept to award damages to owners who claim to have suffered loss and prejudice as a result of

an unjustified attachment, which should discourage abuse.

Aircraft are also open to attachment orders for nonpayment of various administrative airport duties and fines, due by not only the owner of the aircraft but also by the operator (Article L6123-2 Transport Code). This specific attachment process is an exemption to the general principle under French law that attachments may only be taken over assets that belong to the debtor.

In addition to the seizures described above, Article R123-9 of the Civil Aviation Code authorizes the detention of a foreign aircraft or an aircraft owned by a person domiciled abroad, for 48 hours, in the case of certain damages caused to third parties on the ground or breach of the code in order to enable the assessment of damage caused and fines and costs incurred.

Undischarged attachments are generally converted into a sale in execution, once and provided the enforceable debt instrument is obtained.

SALE IN EXECUTIONSale in execution of indebtedness or a forced sale may be implemented either through the conversion of a valid attachment order or through a direct sale in execution process. The procedure is specifically detailed by the regulatory provisions of the Civil Aviation Code.

Creditors who hold an enforceable order for the debt to be recovered can proceed directly to the forced sale of the aircraft, without having to procedure with attachment as a prerequisite or obtain the prior authorization of the judge. The direct process applies to French and foreign registered aircraft alike and the public transport exemption set forth in L.6123-1 of the Transport Code does not, in principle, apply to forced sales.

Articles R123-2 - 123-7 of the Civil Aviation Code set forth in detail the procedure to be followed:

The first step is the service by a process server on the owner in person or at its domicile with an order to pay. It is imperative that the order to pay (“commandment à payer”) contain the information set forth in the Code.

A minimum period of eight days must be given to the debtor prior to launching

the forced sale procedure (CPCE Article R.221-10). Once that period has passed the creditor can serve upon the owner of the aircraft the execution order and summons to appear before the court in the jurisdiction where the sale will take place. Such service is to be made within 5 days of the execution order and for foreign domiciled owners this period will be increased by the appropriate time period extension for overseas service.

If the owner is not domiciled in France and has no authorized representative in France, the execution order and the summons may be delivered personally to the pilot in command of the aircraft.

An interesting case was recently judged by the Court of Appeal in Colmar. The court was asked to consider the regularity of a service of the order to pay and the seizure order and summons on the pilot in command at a short interval (a question of minutes) whilst a foreign aircraft was landed at a French airport between scheduled flights. The seizure was held to be invalid by the Court of Appeal on several grounds and the Court held that the Civil Aviation Code and the Transport Code are to be interpreted strictly and in the absence of specific provision, the general rules for enforcement set forth in the French Civil Procedure Code for Enforcement will apply.

The Civil Aviation Code does not specifically authorize the order to pay to be delivered to the pilot in command

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FRANCE

and serving the order to pay and the seizure documents quasi simultaneously in an attempt to ground the aircraft was considered a breach of the requirement to provide a reasonable minimum delay to voluntarily pay the debt claimed. The Colmar Court of Appeal did not however go so far as to say that the 8 day period required under the general rules of the Civil Procedure Code for Execution would apply.

Notwithstanding the powers granted to pilots in command under the Transport Code, it was also confirmed that the isolated faculty granted to creditors in the context of serving seizure for sale papers, does not entitle creditors to consider the pilot in command as an authorized representative of the aircraft owner for service of legal acts in general.

It should be noted that different local jurisdictions still adopt different positions, recognizing service of all documents on pilots in command and the validity of quasi-simultaneous orders to pay and seizure for sale notices.

The Colmar Court of Appeal decision is currently before the French Supreme Court which considers questions of law which will hopefully clarify the legal position to obtain a homogenous application of the rules and restate its position regarding the period between service of the order to pay and the seizure notice to be applied.

Whatever the outcome, the need to obtain the authorization of the court

for attachments and the requirement to appropriately serve an order to pay before proceeding with the service of seizure for sale papers, means that creditors must be properly prepared upfront before attempting seizure on foreign aircraft, landing in France.

Once the seizure for sale notice has been correctly served, it is registered at the aircraft registry, which in turn provides the creditor with a certificate of the existing aircraft inscriptions. Notice is thereafter made by process server or by registered letter to the recorded creditors at their elected domicile, indicating the date on which they are required to appear before the local French court.

In order to protect creditor rights generally, if a seized aircraft is registered in a state, party to the Geneva Convention, no forced sale of the aircraft can take place unless the rights of creditors having priority over the claim of the seizing party can be fully extinguished by the sale price to be received or are agreed to be assumed by the future purchaser of the aircraft (Article L6123-3 Transport Code).

In light of such prohibition, the French administration has indicated that the seizure of aircraft by the public accountants presents no interest unless the value of the aircraft and its accessories are susceptible of covering the value of the privileged receivables and mortgages recorded prior to the date of origin of the French Treasury’s own privilege. (BOFIP

- BOI-REC-FORCE -50-20) The local court fixes the price and

conditions of sale of the seized aircraft and the sale will take place after the specific publicity formalities have been accomplished.

After the sale, the creditors are invited to attend a court hearing to attempt to agree upon the distribution of the sale proceeds. French and foreign creditors will be granted à 15 days’ notice period before the hearing will take place.

In the absence of an agreement, each of the creditors (including privileged creditors) must lodge a formal request for allocation of part of the sale proceeds and appoint legal counsel. The court will render judgement on the allocation, which is open to appeal.

The nationality of the aircraft will dictate the allocation of sale proceeds. The French judge will apply the rules of preference set forth in the Geneva Convention for qualifying foreign aircraft and will respect the order of priority for French aircraft as set forth in the Transport Code. In both cases legal costs for the sale of the aircraft and the distribution of the price in the common interest of the creditors, the compensation for salvage of the aircraft and indispensable costs engaged for aircraft preservation have priority over recorded mortgages or other contractual rights validly recorded in the state of registration of the Aircraft. By way of exception, victims of ground damage benefit from a special privilege in accordance with the provisions of Article VII -5 of the Geneva Convention.

In all other cases the court will look to the principles of international private law to determine how allocation shall operate.

Once the allocation process is definitive, the aircraft registry will be authorized to discharge all outstanding unallocated registrations, at the request of any interested party (R123-7 Civil Aviation Code).

The special regimes applicable to the attachment and forced sale of aircraft described above require creditors to be well prepared upfront with the required authorizations and paperwork in hand and vigilant in respecting the formal procedures which are imposed to ensure the validity of the measures taken.

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By way of introduction, the main set of rules governing the aviation sector in Italy are provided in the Italian Navigation

Code (approved by Royal Decree no. 327/1942, as subsequently amended

from time to time). The Code constitutes the essential legal framework in terms of, inter alia: administrative bodies in charge; air safety and security; aircraft ownership, airworthiness and operation; air transport services; voluntary and statutory liens; management of airports

and ground handling services; lease, transport and charter agreements; air accidents and insurance matters.

Since Italy is a Member State of the European Union an important role is also reserved to the community legislation, composed of both self-

The Italian ChapterLaura Pierallini’s (Studio Pierallini) guide to Italian aviation law.

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executing provisions (Regulations) and others to be implemented by the national laws (Directives). A significant example is the Regulation (EC) No. 1008/2008 “on common rules for the operation of air services in the community”, which established the administrative,

financial and technical requirements to obtain an operating license from the local civil aviation authorities of each Member State. Other examples are the Regulation (EC) No. 785/2004 “on insurance requirements for air carriers and aircraft operators”, the Directive

2008/101/EC (that included aviation activities in the scheme for greenhouse gas emission allowance trading within the community) and the Directive 2009/12/EC “on airport charges”.

Additional key rules are regulations and circulars issued by the Civil Aviation

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Authority (namely “Ente Nazionale per l’Aviazione Civile”, hereinafter “ENAC”), which is the main body regulating the aviation field in Italy. The Ministry of Infrastructures and Transports - acting through its General Direction for Airports and Air Transport - is the governmental entity having general competence and supervising authority over ENAC and the other sector bodies: ENAV, the Air Traffic Control Authority (namely “Ente Nazionale per l’Assistenza al Volo”); Assoclearance, the association delegated by the Ministry of Infrastructures and Transports to coordinate the slot allocation at the Italian airports (according to Regulation (EEC) No. 95/1993, as amended by Regulation (EC) No. 793/2004, and Circular EAL-18 issued by ENAC on 24 August 2009); the Transports Regulation Authority (namely “Autorità di Regolazione dei Trasporti”), established in 2011 with the purpose of regulating ground, rail and air transports, related infrastructures and determining the quality levels to be guaranteed by the service providers.

Foreign air carriers willing to operate commercial flights to/from Italian airports are subject to different provisions, depending on whether they are European or otherwise extra-EU based. Indeed there are no restrictions are for EU carriers, to the extent that they must obtain the allocation of slots by Assoclearance in advance of the intended flight operations. Domestic cabotage is allowed as well, in compliance with the requirements set out by Regulation (EC) No. 1008/2008. Licensed EU carriers are also entitled to apply ENAC for the designation on extra-EU routes to/from Italy (i.e. traffic rights under international air transport agreements signed by the Italian Government) provided that they must hold a permanent establishment within the Italian territory pursuant to article 7 of ENAC Circular EAL-14B.

On the contrary, extra-EU carriers are authorized to fly to/from Italy when they are designated by the State of origin holding traffic rights granted by Italy under bilateral or multilateral air services agreements. If no air service agreement is in force between Italy and a foreign State, the flight schedule can be authorized only upon prior request

from the CAA of the operator’s State of origin to ENAC. Still it is remarkable that under certain “open skies” regimes extra-EU airlines are permitted to fly without restrictions to/from Europe (always subject to slot allocation), such as per the agreements signed by the European Union with the United States (2007), Morocco (2006), Ukraine (2015) and Israel (effective from 2018).

AIRCRAFT TRADING, FINANCE AND LEASING

Aircraft Registry

In our country aircraft are registered in the Italian Aircraft Registry held by ENAC (hereinafter “IAR”). IAR is an owner registry, meaning that a record therein constitute proof of ownership in an aircraft against any third parties. Also operators (if different than the aircraft owners) can be recorded in IAR by filing the relevant title (e.g. leases). In compliance with Regulation (EC) No. 1008/2008, according to article 756 of the Italian Navigation Code aircraft can be registered in IAR as long as:

i. they satisfy the so called “nationality requirements”, therefore if they are owned by: State, Regions or other Italian or

European Union Member State’s public or private body; Italian citizens or citizens of other European Union Member States; companies established or with registered offices in Italy or other European Union Member States, whose share-capital is whole or major property of Italian or other European Union Member States’ citizens, or Italian or other European Union Member States’ body corporate with the same characteristics of shareholding and whose president and most part of the directors - including the managing director - are Italian or other European Union Member States’ citizens; or otherwise

ii. the aircraft is used by (but not property of) an EU licensed air carrier. If so the aircraft is registered in the name of such an operator (based on the relevant title, usually a lease) and details of the relevant owner are both recorded in IAR and mentioned on the certificate of registration of the aircraft.

There are no separate registries for aircraft liens and engines in Italy. Liens can be divided in voluntary (only

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aircraft mortgages exist in our system), which can be registered in IAR, and statutory (arising by operation of law, e.g. airport charges), that otherwise cannot be registered in IAR nor in any other public registry. Besides aircraft engines are subject to a peculiar regime, since they are treated as separable parts of aircraft. It means that their ownership must result from a document having undisputable date (data certa) - such as an engine lease - in order to be enforced against any third party (including aircraft owners and/or mortgagee of the hosting aircraft recorded in IAR).

Mortgages

Aircraft mortgages are governed by specific provisions of the Italian Navigation Code, as well as by general sections of the Italian Civil Code pertaining to registered movable assets (including vehicles, vessels, airplanes and helicopters). A mortgage is the sole lien which can be voluntarily created over aircraft in our legal system. For such purpose it is required that the owner of the registered aircraft (acting as mortgagor) executes a mortgage deed in favour of the secured party (mortgagee) in front of an Italian notary public. A mortgage deed can be structured as a bilateral agreement as well, in which

case the same is executed also by the mortgagor for acknowledgment and acceptance. In order to be effective and encumber the relevant aircraft a notarized mortgage deed must then be filed with ENAC for registration in IAR (lacking such registration the mortgage deed is null and void, so that no security is created over the aircraft). Once a mortgage is registered in IAR, under the Italian laws the same will: (1) grant the mortgagee with security and priority over all subsequent mortgages with a lower rank; (2) create a right in rem over the aircraft in favour of the mortgagee; (3) grant the mortgagee with the right to obtain the judicial sale of the aircraft and to be paid from the sale proceeds (or insurance proceeds in the event that the aircraft is lost or damaged); (4) give public notice of the mortgage to any third party; (5) prevent that any modifications to the essential features of the aircraft can be made without the mortgagee’s express consent; (6) prevent the deregistration of the aircraft without prior cancellation of the mortgage.

Other Liens

Article 1023 of the Italian Navigation Code contains a detailed list of the statutory liens arising by cause of the aircraft operation, e.g. judicial expenses

due to the State, airport charges and duties, expenses for the custody and maintenance of aircraft, salaries and mandatory social contributions for the aircraft crew. Those liens are not registered in IAR nor in any other public registry.

Conventions

We deem also remarkable that Italy has signed and implemented most of the main conventions and treaties on international aviation (the Rome Convention of 1933 on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft; the Chicago Convention of 1944 on International Civil Aviation; the Geneva Convention of 1948 on the International Recognition of Rights in Aircraft; the Montreal Convention of 1999 for the Unification of Certain Rules for International Carriage by Air), while the Cape Town Convention of 2001 on International Interests in Mobile Equipment (and its Protocol on matters specific to aircraft equipment) has not been ratified yet. Therefore the rules of Cape Town does not apply to Italian registered aircraft.

LITIGATION AND DISPUTE RESOLUTION

General

As a general consideration Italian ordinary courts are competent for aviation disputes. Their competence can be grounded either by the “flag rule” (i.e. in relation to aircraft registered in IAR), by the “territoriality” principle (in the event of disputes over aircraft located in Italy when a certain title is to be enforced or a damaging event occurs) or according to a contractual clause agreed by the parties.

There are 3 levels of jurisdiction: (1) the first instance is shared between the so called Judge of Peace (Giudice di Pace), for disputes with value up to Euro 5.000, and the Tribunal (value over Euro 5.000), which is composed by a single professional judge; (2) the second instance is assigned to the Court of Appeal (Corte di Appello), acting through a panel of 3 judges who has to review the first instance from a factual and legal perspective (note that

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the Tribunal holds the second level of jurisdiction over decisions taken by the Judge of Peace); (3) the third instance is reserved to the Supreme Court (Corte di Cassazione), based in Rome and having jurisdiction over decisions issued by all Courts of Appeal throughout the Italian territory. This is the highest court of the judicial system and must ensure the proper application and uniform interpretation of the Italian laws. It takes decisions by way of panels composed of 5 judges.

Contractual clauses providing for the application of foreign laws and the jurisdiction of foreign courts are valid towards, and binding on, the Italian party(ies) having executed the relevant contract, to the extent that: (i) such foreign laws are not in conflict with the Italian public order rules (including the Italian Constitution; public safety regulations; mandatory provisions of law); (ii) the judicial decisions issued by such competent foreign courts can be recognized and enforced in Italy according to the applicable laws (namely: Law no. 218/1995 for decisions issued in Extra-EU countries; Regulation (EU) no. 1215/2012 for decisions issued in EU Member States).

Arbitration

Under the Italian system a dispute can also be deferred to arbitration procedure by decision of the parties (unless the arbitration is expressly excluded by law in light of the specific topic of the dispute, such as in case of labour matters or exertion of individual rights guaranteed by the Italian Constitution). The relevant rules are contained in articles 806 to 840 of the Italian Civil Procedure Code. The parties can either chose the arbitration by way of a written arrangement once the event giving rise to the dispute has already occurred (so called compromesso) or otherwise in advance, inserting an arbitration clause under an agreement they enter into. Arbitrators cannot grant interim and precautionary measures (e.g. seizures), which are left the competence of the ordinary courts. Final awards can be appealed before the ordinary judge (Court of Appeal) except when it is expressly excluded by the parties in the

compromesso or in prior agreement.

Self-help remedies

Self-help remedies are not enforceable in Italy to the extent that they would entitle the enforcing party to directly take measures with respect to aircraft without seeking remedies through the judicial system. Indeed self-help remedies are possible only when and if exercised with the express consent of the party having the possession of the aircraft (e.g. lessee). Otherwise, in case of non-cooperation by a lessee, it is required a judicial order of the competent court in order to obtain repossession of the aircraft. Therefore, the interested party can either act before the Italian competent court (also to seek precautionary measures), or enforce a foreign judgment in Italy. In that connection, extra-EU judgements are recognized in Italy pursuant to article 64 of Law no. 218/1995, setting forth the requirements for recognition (among others: competence of the foreign judge; the judgment being final and conclusive under the applicable laws; proper summoning of the defendant; the judgment being compliant with the Italian public order rules). Besides, judgements rendered in a European

Union Member State are recognized by the Italian courts without review on the merits, according to article 36 of Regulation (EU) no. 1215/2012, always provided that the recognition can be denied at a later stage upon application by any interested party pursuant to article 45 of the said Regulation (for instance, whether the defendant was not properly summoned or if the judgement is in conflict with a prior judgment issued between the same parties in Italy).

COMMERCIAL AND REGULATORY

Competition

The general regulatory framework on the competition of undertakings (including airlines) is provided by Italian laws no. 287/1990 (the Italian Competition Law) which adopted the general principles established by the Treaties and legislation of the European Union. The Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato) is the administrative body in charge for implementing the regime and the oversight of compliance within the market.

In terms of mergers and acquisitions in the aviation sector, the Italian

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Competition Authority has distinguished between the charter and scheduled flights markets. For charter flights, the geographical market is divided into long-haul routes and medium or short-haul routes that are then divided between European countries and the Mediterranean area. The relevant market for scheduled flights is defined on the basis of the single routes operated point-to-point or city-pair by air carriers involved in the competition assessment. M&A and joint venture transactions are subject to compulsory notification to the Italian Competition Authority if the turnover thresholds are met. Generally speaking, a concentration that does not have a Community dimension under Art. 1 of the EU Merger Regulation must be filed to the Authority when one of the following alternative turnover thresholds is met: (i) the combined aggregate Italian turnover of all the undertakings concerned exceeds EUR 489 million; or (ii) the aggregate Italian turnover of the target(s) exceeds EUR 49 million (such thresholds are amended on yearly basis by resolution of the Italian Competition Authority). Upon such filing, the Italian Competition Authority is called to grant clearance to the specific operation, by assessing whether or not it may cause

potential detriment or decrease of competition within the relevant business field.

Other regulations relevant to the aviation industry

In connection with the aviation field it is also remarkable that:

i. Regulation (EC) No. 261/2004 (establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights) is directly applicable and enforceable in the Italian jurisdiction. Nowadays a considerable number of disputes is pending before the Italian Courts for the compensation of passengers who have suffered delays or cancellation of flights scheduled to/from national airports;

ii. under certain circumstances the general consumer protection set forth by the Italian Consumer Code (Legislative Decree no. 206/2005) applies to the relationships between

passengers (as individuals) and airlines and/or handlers and/or airport operators and/or other providers of the industry (such as manufacturers or advertising agencies). A clear example is the strict liability provided for producers of defective products (including aircraft equipment) in case of damages caused to consumers, as well as the prohibition to use unfair commercial practices and publish misleading/false information on the services offered to the public;

iii. the acquisition, retention and use of passenger data are governed by a specific Data Protection Code (Legislative Decree no. 196/2003). Pursuant to article 7 of the Code any passenger shall have the right to: receive confirmation as to whether, and which, personal data have been filed; obtain information on the purposes of the collection and the intended use of their personal data; be informed on the expected recipients of personal data; update and amend personal data held by airlines (as well as by other providers); and deny the processing of personal data. A strict liability and indemnity obligation are applied to anyone (comprising air carriers) causing damages by treatment of personal data (e.g. the event of data loss), except if satisfactory evidence is given that all suitable measures to avoid such damages have been taken by the data controller.

In conclusion we mention once again the key role of ENAC in regulating the aviation industry at a secondary level in Italy. Indeed ENAC holds the essential task to implement European and national laws, by issuing circulars, orders and regulations on a regular basis in relation to a broad range of aeronautical themes (including air safety, authorizations and licenses, traffic rights, airports, ground-handling services, registration, airworthiness, operation and insurance of commercial aircraft and drones).

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PORTUGAL

The second public tender procedure for privatization of the Portuguese national air carrier TAP Air Portugal was successfully completed

by the Portuguese government. Under the approved privatization plan, Atlantic Gateway consortium acquired 61% equity stake of TAP while the Portuguese government will retain a 34% minority

shareholding and the remaining 5% shall be distributed by TAP’s employees.

It must also be noted that under European Union (EU) rules on “ownership and effective control” of Community air carriers only nationals of EU Member States may (i) own more than 50% of EU airlines and (ii) effectively control it, whether directly or indirectly [article 4(f ) Regulation

(EC) Nr. 1008/2008]. The tests of ownership and control are separate and both have to be met to achieve compliance. Experience has shown that it is possible for the ownership control to be satisfactorily met, while effective control has not, and also for the reverse to be possible.

Article 4(f ) could be seen as introducing a liberalising provision, as

TAP airline privatisation and the ownership and control requirements under EU lawby João Marques de Almeida, Partner

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PORTUGAL

it allows that any EU national may own and control a Community air carrier. Before this provision was introduced [by Council Regulation (EEC) Nr. 2407/92, of 23 July] each individual Member State basically reserved ownership of air carriers to their own nationals. Others take an opposite view and see article 4(f ) as a protectionist measure with the objective of safeguarding the interests of the Community’s air transport industry which implies, in particular, that companies from third countries must not be allowed to take full advantage, on a unilateral basis, of the Community’s liberalized internal air transport market. Notwithstanding, EU legislation consent a more liberal exchange of equity between Community airlines and non-EU investors as long as the respective third countries liberalise their own rules on foreign investment in airlines and an agreement is made with the EU in that respect [cfr. article 4(f) Regulation 1008/2008, in fine].

Returning to the subject of TAP’s privatization, it is clear that the Portuguese airline must fully comply with the ownership and effective control requirements in order to maintain its operating licence.

Considering that 61% of TAP is now owned by Atlantic Gateway consortium, it seems only logical to assume that whoever controls Atlantic Gateway will also control TAP. This is actually a pivotal issue in TAP’s privatization, since Atlantic Gateway is formed (directly or indirectly) by entrepreneurs Mr. “PT” (Portuguese national) and Mr. “US-B” (American-Brazilian investor). Additional concerns result from the fact of US-B being a shareholder and CEO of the Brazilian airline, “Azul Airlines”, and also being a founder of the American airline, “JetBlue”. Hence, the said extra-Community airlines could have an indirect influence in TAP’s business.

According with the information disclosed during the public tender, US-B holds 51% of Atlantic Gateway while PT only holds a 49% equity stake. Apparently, this should be sufficient to assure full compliance with EU law requirements. However, the effective control of an airline is not only measured in terms of equity percentage.

”Effective control” is defined in

article 2(9) of Regulation 1008/2008, as a relationship constituted by rights, contracts or any other means which, either separately or jointly and having regard to the considerations of fact or law involved, confer the possibility of directly or indirectly exercising a decisive influence on an airline, in particular by:

i. the right to use all or part of the assets of the said airline (also called the “financial test”); or

ii. rights or contracts which confer a decisive influence on the composition, voting or decisions of the bodies of the airline or otherwise confer a decisive influence on the running of the business of the said airline (the management test).

The EU Commission has taken the view that effective control of an airline should be measured by determining who has the ultimate decision-making power in the management of the air carrier concerned (Commission Decision of 19 July 1995 in Swissair/Sabena case). And the “ultimate decision-making power” can be achieved by several different ways – e.g., through the appointment of decisive corporate bodies of the carrier, veto powers, etc. The interpretation of “effective control” made by the European Commission also appears to preclude any possibility of control being jointly exercised by the EU nationals together with another non-EU party (this is also the view taken by several civil aviation authorities of EU Member States, as it is the case of the UK Civil Aviation Authority - see the CAA Guidance on the Criteria for Judging Nationality of Ownership and Control).

The pivotal question is: who has the final say on such key matters as, for example, the carrier’s business plan, its annual budget or any major investment or cooperation projects? And here lies the issue in what concerns TAP privatization.

It has been made public in the Portuguese press that US-B (who controls 49% of Atlantic Gateway) owns preferential shares of the consortium which grant him the right to 75% of the profits, while PT (who controls 51% of Atlantic Gateway) will only be entitled to 25% of the said profits. This

could, however, be justified by the fact that US-B has made a significant larger financial investment which deserves to be compensated. Atlantic Gateway has also defended that financial rights and voting rights are different matters and that a shareholder could have a minority stake (and minority voting rights) while being entitled to receive the majority of earnings. The critics are not convinced and suspect that US-B’s financial rights are also protected, at least by some sort of veto power and/or the right to appoint a number of directors sufficient to block any major business decision. In theory, this could allow him to have effective control in key management issues both of Atlantic Gateway and TAP.

Probably not surprisingly, it was recently reported in the press that the privatization decision will be challenged by one of the defeated bidders on the grounds that the shareholders’ agreement will allow for a non-European national to be able to exercise a “decisive influence” on the conduction of TAP business. As to the merits of such appeal, we will have to wait and see since this is a highly complex and technical issue that involves not only matters of aviation and competition law, but also issues of corporate governance. It will be up to the ANAC (Portuguese civil aviation authority) and the European Commission to decide.

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Over the past few decades, Malta has established itself as a financial centre of excellence. Although having very limited

natural resources, its professional workforce has gained a reputation of being hard-working and professional. Previously a British colony, British influence in Malta is still felt to this very

day, whereby a number of laws have been modeled on English common law, which tends to be more creditor friendly and provide for self-help remedies, rather than the traditional civil law legislation which is inclined to protect the debtor.

A huge step towards the creditor friendly approach was taken in 2010 with the enactment of the Aircraft Registration Act (Chapter 503 of

the Laws of Malta) (the “ARA”). In the process of enacting the ARA, the legislator realized that the main players to attract in order to promote the aviation industry in Malta were first and foremost the financiers and the lessors. Malta therefore chose to to accede to and implement the Cape Town Convention and the Aircraft Protocol (together the “CTC”).

The Malta Aircraft Registration Act and the Cape Town Convention.by Dr Matthew Xerri, Associate GANADO Advocates and Karl Cini, Partner, Nexia BT

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REGISTRATION OF AIRCRAFTThe aircraft register in Malta is an operator register, which means that most registrants of Maltese aircraft are predominantly operators and generally one that satisfies one of the following criteria:

i. An owner of an aircraft who operates the said aircraft;

ii. An owner of an aircraft under construction or temporarily not being operated or managed;

iii. An operator of an aircraft under a temporary title; or

iv. A buyer of an aircraft under a conditional sale or title reservation agreement.

Furthermore, if the aircraft is to be used

for commercial purposes, then together with the criteria already mentioned above, the registrant must be:

i. The Government of Malta;ii. A citizen of Malta or a citizen of a

Member State of the EU or of an EEA State, or Switzerland;

iii. An undertaking formed and existing in accordance with the laws of

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MALTA

Malta, of a Member State of the EU, of an EEA State or of Switzerland (nationality requirements of the ultimate beneficial owner apply); or

iv. Trustees for such interests (the beneficiaries of the relevant trust would be considered to determine eligibility to register).

EU legislation, in particular Regulation (EC) 3922/1991, also provides that commercial operators must hold a valid Air Operator Certificate and Air Operator Licence which are issued by the Malta Civil Aviation Directorate.

SECURITY OVER AIRCRAFT UNDER MALTESE LAWAircraft which are registered in the Malta register can also be the subject of security interests, whereby mortgages are registered over such aircraft in order to secure the obligations of the owner or of a third party where the owner is guaranteeing the obligations of such third party. In terms of the ARA, aircraft constitute a particular class of movables forming separate and distinct assets within the estate of their owners and in the case of bankruptcy and/ or insolvency of the owner, all actions and claims to which the aircraft may be subject, shall have preference on the aircraft, over all other debts of the estate. Any security over aircraft shall also extend to the engines attached to the aircraft as

well as any replacement engines which have been designated for use for that particular aircraft, as long as the owner of the aircraft, engines and replacement engines are the same person.

MORTGAGEThe mortgage over the aircraft entitles the mortgagee in whose favour the mortgage is registered to a number of self-help remedies, should there be an event of default. Self-help remedies are not common under Maltese law due to its civil law background, however, the ARA, with the implementation of the CTC, has moved away from the debtor friendly approach and adopted more commercial sensitive remedies. In fact, should there be an event of default the following remedies can be exercised without the need of the leave of any court, and upon giving notice in writing to the debtor:

i. To take possession of the aircraft or share therein in respect of which the mortgage is registered;

ii. Sell the aircraft;iii. Apply for an extensions, pay fees,

receive certificates and generally do all such things in the name of the owner or registrant as may be required in order to maintain the status and validity of the registration of the aircraft;

iv. Lease the aircraft so as to generate

income therefrom;v. Receive any payment of the

price, lease payments, and any other income which may be generated from the management of the aircraft.

IDERAThe ARA also allows for the owner and operator of the aircraft to issue irrevocable de-registration and export request authorizations (IDERAs) in favour of the mortgagor and register same at the Civil Aviation Directorate in Malta.

The person in whose favour the authorization has been issued shall be entitled to procure:

i. The de-registration of the aircraft object; and

ii. The export and physical transfer of the aircraft object from the territory in which it is situated.

CAPE TOWN CONVENTION The CTC came into play since the aviation industry, in particular, the financiers and lessors, felt that due to the international nature of aviation, an international instrument had to be introduced in order to facilitate the acquisition and financing of international mobile assets by creating rights recognized by states who are party to such an international instrument. In order to achieve such

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an objective, first of all the CTC created the electronic International Registry whereby international interests are recorded in such registry, thus creating priority and also serves to give notice to third parties. Secondly, the CTC provides creditors recourse to default and insolvency remedies designed to offer rapid relief and re-possession of the aircraft.

INTERNATIONAL INTERESTSOnly international interests can be registered in the International Registry and such international interests are defined as the following:

i. Interests granted by a chargor under a security agreement (such as a mortgage);

ii. Vested in a person who is the conditional seller under a title reservation agreement;

iii. Vested in a person who is the lessor under a leasing agreement.

Once the registration of the international interest is finalized, then such registration means that third parties have been duly notified and gives the creditor priority over unregistered interests as well as over subsequent registered interests.

DEFAULT REMEDIESThe remedies which can be exercised by the holders of the international interests are in line with those mentioned under the ARA above. The main difference being that under the ARA these can only be exercised by the mortgagee holding a registered mortgage in the national aircraft register, however, the CTC has extended such rights to a chargee under a security agreement, a conditional buyer under a title reservation agreement and a lessee under a lease agreement.

In line with the creditor friendly approach, the CTC also allows the creditor interim relief pending a final determination of the creditor’s claim, as long as the debtor has agreed thereto. Therefore, the creditor is entitled to obtain speedy relief from a court in the form of one or more of the following orders as the creditor requests:

i. Preservation of the aircraft object

and its value;ii. Possession, control or custody o f

the aircraft object;iii. Immobilization of the aircraft

object;iv. Lease or management of the aircraft

object and the income thereform;v. If at any time the debtor and

creditor specifically agree, sale and application of proceeds therefrom.

INSOLVENCYInsolvency has always been a very delicate issue and the CTC addresses insolvency issues clearly . First of all, an international interest is effective in insolvency proceedings if it has been registered against the relevant debtor prior to the commencement of insolvency proceedings. Subsequently, should there be an occurrence of an insolvency-related event, the insolvency administrator or the debtor, shall give possession of the aircraft object to the creditor no later than the earlier of:

i. The end of the waiting period; andii. The date on which the creditor

would be entitled to possession of the aircraft object if the insolvency related event did not occur.

The waiting period is defined as being the period of 30 calendar days commencing

on the date of the insolvency-related event.

Therefore, this consolidates the creditor-friendly approach being adopted by Malta, which runs contrary to its civil law roots. Creditors and lessors are gaining confidence lending or leasing aircraft to owners and/or operators whose aircraft is registered in Malta since should there be an event of default or an insolvency issue, the creditors and lessors can exercise rapid relief.

The implementation of the CTC in Malta has already left its mark. The number of aircraft registered in Malta has recently reached 200 and the number of Maltese Air Operator Certificate holders has increased to approximately 26, each of which have offices in Malta employing a number of personnel. It is safe to assume that a number of these aircraft are business jets which are financed or leased, by financial institutions and lessors who would have not considered Malta as a safe jurisdiction if Malta had not implemented the CTC.

Malta is fast becoming a respected player in the field of aviation. Many practitioners are investing time, money and energy in this sector and are determined to keep the current momentum to make this yet another Maltese success story.

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The basic thinking of Norwegian aviation law, and the aircraft registry in particular, are greatly influenced by the

Norwegian and Scandinavian traditions within shipping and maritime law. Thus, there are several similarities between Norwegian aviation law and Norwegian/Scandinavian maritime law.

Undoubtedly, however, Norwegian aviation law has also been under the

influence of international trends and conventions. Norway has ratified and implemented the 1948 Geneva Convention on the International Recognition of Rights in Aircrafts (the “Geneva Convention”) as well as the 2001 Cape Town Convention - Aircraft Protocol (the “Cape Town Convention”). Consequently, Norwegian courts do to a very large extent recognize international rights in and to aircrafts.

It might be worth mentioning that

the Norwegian aviation industry itself has also been under Scandinavian and international influence ever since its inception. Since its establishment in 1946, the largest airline in Scandinavia has been Scandinavian Airlines (SAS) which is owned by Sweden, Denmark and Norway. However, the quickly expanding Norwegian Air Shuttle (Norwegian) is expected to pass SAS as the largest Scandinavian airline in 2015, aiming to pass other major European

Aviation financing in Norway - protection and enforcement of aircraft rightsby Kyrre W. Kielland, Advokatfirma Ræder

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airlines in time. With Norwegian’s continuous international growth over the last decade, the Norwegian aviation industry has become more internationally exposed than ever before.

Aircraft financing as part of the aviation industry is not an exception. In fact, Norwegian financial banking institutions have a very small market share, particularly if compared to Norwegian banks’ exposure in ship financing. Aircraft financing in Norway

has to a large extent been provided by international players. Traditionally, financing agreements related to Norwegian airlines or Norwegian aircrafts have typically been governed by English or New York Law, with Norwegian law only as a necessity for certain security documents. However, Norwegian law has become more acceptable for certain transactions involving Norwegian aircrafts or lessees also with international financiers.

The purpose of this article is not to give a broad introduction to aviation finance in Norway, but rather to specifically discuss two key elements of any aviation financing, namely protection and enforcement of rights in and to aircrafts in Norway. The next Chapter (Protection of (International) Rights in Norwegian Aircrafts) discusses protection of rights through registrations in the Norwegian Civil Aircraft Registry (the “NCAR”) and the International Registry. The final Chapter (Enforcement of Aircraft Rights in Norway) provides a short overview of possibilities and challenges surrounding enforcement of aircraft rights in Norway.

PROTECTION OF (INTERNATIONAL) RIGHTS IN NORWEGIAN AIRCRAFTS

Registrations with the Norwegian Civil Aircraft Registry (NCAR)

NCAR is administrated by a government agency, the Norwegian Civil Aviation Authority (the “NCAA”). Registration fees of the NCAR are affordable and based on a “self-cost” principle. Rights registered with the NCAR are internationally recognized through the Geneva Convention.

A key feature of the NCAR is that it was structured to give absolute reliability to its users. This means that the owner, mortgagee, lessee or other right holder can rely entirely on its registered right being enforced with priority over any rights subsequently being registered with NCAR. Further, a potential purchaser, financier or lessee may also safely assume that it does not have to take into account any rights not registered in the registry will not be enforced.

After the introduction of the International Registry, however, this absolute reliability is no longer accurate. Norway has not made a declaration with respect to Article 60 of the Cape Town Convention, which means that mortgages and other rights registered in the Norwegian Registry prior to Norway’s accession to the Cape Town Convention are not affected by the convention.

For rights registered after 1 April 2011 however, international rights registered with the International Registry will

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take priority over competing rights registered with NCAR as long as the international rights were registered first. Under current Norwegian law, it would therefore be more accurate to say that the users will only achieve absolute reliability by searching in both registries together.

Another feature of the NCAR is that it is an owner-based registry and not asset-based or operator-based. Only Norwegian or European owners may register aircrafts in Norway. This nationality condition only applies to ownership, not other aircraft rights (e.g. foreign mortgagees can of course register rights in a Norwegian aircraft). Unless otherwise indicated in the registry, the registered owner is also the owner of the aircraft’s parts and equipment, including engines, even if such parts are temporarily dismantled from the aircraft.

NCAR recognizes Irrevocable De-registration and Export Request Authorisations (“IDERA”), giving the authorised banks, agents etc. the possibility of repossessing the aircraft quickly and taking it out of NCAR. The IDERA must be signed by the owner in ink and submitted to NCAR in original (notarised in case of foreign owners).

Registrations with the International Registry

Ownership of Norwegian aircrafts has to be registered with NCAR. For all other rights in and to Norwegian aircrafts, each owner, lessee, mortgagee or other holder of rights may choose to register its rights with the NCAR or the International Registry – or both.

Please note that not all international rights are accepted for registration with NCAR. For instance, registration of lease agreements or engine mortgages is not accepted. The aircraft mortgagee will also be the designated mortgagee of the engines, as well as the aircraft’s other parts and equipment. The International Registry, on the other hand, allows registration of mortgages over engines and parts, purchase contracts, lease agreements, and even prospective interests. Interests in an aircraft which are not capable of being registered in the NCAR, should therefore always

be considered for registration in the International Registry.

Secondly, the International Registry may provide some added certainty with respect to potential enforcement of rights in foreign jurisdictions, although most jurisdictions are party to both the Geneva Convention and the Cape Town Convention and should therefore enforce rights registered with NCAR.

Thirdly, registration in the International Registry also means that you have published easily searchable international rights on that particular asset, avoiding risk of conflicting rights. However, the International Registry is only searchable for registered users. To date, Norway has not pointed out an Entry Point under the Cape Town Convention, which means that each lessor, mortgagee, legal counsel or other person intending to register or search for international rights in aircrafts must register as a user with the International Registry directly.

One other less user friendly characteristic of the International Registry is that it does not provide the users with absolute reliability. A potential lessor/lessee, mortgagee or other rights holder may not safely assume by a search in the International Registry that there are no other rights with better priorities. Unless and until the International Registry is fully integrated with the various national registries, users have to look into both registries for the same aircraft.

The first years after the implementation of the registry (2011 and 2012), there were very few Norwegian transactions with the International Registry. Statistics for the latest years are not available online, but we have reason to believe that Norwegian transactions have increased as Norwegian banks, lessors, lessees and others have become more aware of the benefits of registering rights in the International Registry.

3 ENFORCEMENT OF AIRCRAFT RIGHTS IN NORWAY

Introduction

In aviation finance, the establishment and protection of a right is not much worth unless the rights may be

enforced when and where necessary. In the following we shall therefore look into judicial enforcement of claims and rights in aircrafts under Norwegian jurisdiction.

In this Chapter, the term judicial enforcement of rights in aircrafts may relate to at least three different situations: i) repossession of an aircraft by the lessor/owner, ii) enforcement of a registered security right over an aircraft by way of forced sale or use, or iii) enforcement of unsecured claims by attaching execution liens on aircrafts which may then be subject to enforcement.

Norwegian courts will normally take jurisdiction on enforcement proceedings related to aircrafts registered in NCAR or foreign aircrafts which are, or are reasonably expected to be, within Norwegian jurisdiction at the time of enforcement.

If enforcement proceedings have already been instituted in a foreign jurisdiction at the time a matter is brought before a court in Norway, however, the courts of Norway must stay or dismiss Norwegian proceedings in accordance with the rules of the 2007 Lugano Convention on jurisdiction and the enforcement of judgment in civil and commercial matters (the “Lugano Convention”), which is parallel to the European Union’s Brussels Regulations 44/2001. Further, the jurisdiction of Norwegian courts may be limited by jurisdiction clauses included in the financing agreements or relevant security documents.

Direct enforcement of certain rights in aircrafts

Judicial enforcement in Norway is in general subject to a final award in a Norwegian court or, as discussed below, a foreign court or arbitral tribunal which is recognised by Norwegian courts. However, certain rights in and to aircrafts may be enforced directly without obtaining a prior award.

A very practical example of direct enforcement is that the Enforcement and Enforcement Commissioner (No: namsfogden) (the “Enforcement Commissioner”) may enforce the lessor’s claim for repossession of an aircraft if

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the lease agreement includes a written confirmation from the lessee that the lessor may enforce repossession without prior award in case of (a) non-payment of rent and/or (b) expiry of a defined leasing period, cf. the Norwegian Enforcement Act section 13-2. In combination with the NCAR also recognizing Irrevocable De-registration and Export Request Authorisations (“IDERA”), the Norwegian enforcement laws are therefore quite lessor friendly. The time frame for enforcement of repossession should not take more than 1-2 months, shorter if the lessee does not object.

Another example of direct enforcement is enforcement of aircraft mortgages registered with NCAR and international security rights registered with the International Registry, cf. the Norwegian Enforcement Act sections 11-2 (a) and 11-2 (d). Enforcement of such mortgages or international interests will normally be carried out as a forced sale of the aircraft(s), but the court of enforcement may also award the claimant forced use/possession of the aircraft. The time frame for enforcement would depend on the work load of the enforcement court and the market interest for the aircraft(s), but might take up to 4-6 months because the enforcement order and subsequent

sale is subject to approval from the enforcement court.

Unsecured, undisputed claims may also become enforceable against an aircraft without a prior written award. According to the Enforcement Act section 7-2 (f ), a written statement of a monetary claim against the debtor constitutes legal basis for enforcement. If the debtor raises no objections, the Enforcement Commissioner may establish execution lien(s) on the debtor’s aircraft(s) within Norwegian jurisdiction, which may then subsequently be enforced as a security interest, cf. the Norwegian Enforcement Act section 11-2 (b). The time frame for such enforcement process is normally 6-9 months.

If the debtor’s behaviour gives reason to believe that enforcement might be rendered impossible or considerably more difficult with time, or has to take place outside of Norwegian jurisdiction, the claimant may simultaneously with the enforcement proceedings file for arrest of the aircraft(s) in question. If successful, the arrest order should be granted within a few days after submitting the motion to the court.

Enforcement on basis of foreign awards

Unless there is legal basis for direct enforcement as discussed above, the

claimant would have to present a final award on the merits of the case. In addition to final awards from a Norwegian courts or arbitral tribunals, the courts of Norway will recognise and enforce, without re-examination of the merits of the case, any final judgment obtained in any other court of a country party to the Lugano Convention. Recognition and enforcement of foreign awards would, however, be subject to Norwegian rules of public policy (ordre public) and certain circumstances where the judgment is given in default of appearance.

Further, the courts of Norway will recognise and enforce, without re-examination of the merits of the case, any final judgment against a company obtained in any state or country not being party to the Lugano Convention, if the relevant parties have agreed to such court’s jurisdiction in writing and for a specific legal action or for legal actions that arise out of a particular legal relationship, in accordance with the Dispute Act section 19-16, cf. section 4-6, and if not in conflict with Norwegian public policy rules (ordre public) or internationally mandatory provisions.

Norway has also ratified the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”). Thus, arbitral awards obtained in any jurisdiction whether party to the New York Convention or not, will be recognised and enforced without re-examination of the merits of the case. However, recognition and enforcement of arbitral awards will be subject to, inter alia, arbitrability, Norwegian public policy rules (ordre public), internationally mandatory provisions and certain circumstances where the judgment is given in default of appearance.

Any award which is recognised will be enforced by the Enforcement Commissioner establishing execution lien(s) on the aircraft(s) within Norwegian jurisdiction, which may then subsequently be enforced as a mortgage, cf. the Norwegian Enforcement Act section 11-2 (b). The total time frame for an enforcement based on a Norwegian or foreign award would normally be 6-9 months.

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SWITZERLAND

Due to its geographical position in the heart of Europe, its healthy and strong economy, its sophisticated and diverse

financial markets and high quality standards as well as its most reliable and efficient legal system, Switzerland has been, and still is, one of the leading jurisdictions for aviation worldwide. Aviation is thus an important sector

for Switzerland’s economy. This is not only with respect to airlines, business jet operators, airports, maintenance and completion centres but also with respect to its highly professional and experienced financial institutions rendering worldwide services from their Swiss base. Further, Switzerland hosts the United Nations, is headquarter of multinational organisations and NGOs, a highly export-oriented country as well

as a famous tourist destination and, therefore, attaches a great importance to its connections around the world.

INFRASTRUCTUREInternational air carriers operating to or from Switzerland do not face any limitations as airport concession holders are obliged to grant access to all aircraft flying on international routes. The five international airports of Switzerland

Switzerland’s aviation industryContributed by Philippe Wenker, LL.M. and Michael Eitle, Blum&Grob Attorneys at Law, Zurich, Switzerland

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are located nearby the cities of Zurich, Geneva, Basel, Berne and Lugano whereby the latter two airports have a reduced role compared to the other three. Certain requirements regarding safety, noise protection or environmental matters and so forth may vary between Switzerland’s airports.

The airport of Zurich, Switzerland’s financial centre, is the largest airport in the country with the highest passenger

volume. In 2014, the airport of Zurich was host to 25.5 million passengers – a year-on-year increase of 2.5% compared to the precedent year and in the first half of 2015 the increase compared to the precedent year period amounts to 2.7%. Especially during the annual World Economic Forum held in Davos, the airport of Zurich is host to numerous personalities from the worlds of business and politics and an increased number

of up to 1,100 movements during that certain week due to business jets and helicopters. In early 2010 Zurich Airport was made fit for daily take-off and landings by Singapore Airlines’ Airbus A380 and Dubai-based Emirates has launched a daily A380 service to Zurich which has been increased to two daily services in 2015. “Europe’s Leading Airport”, “Best Airport for Food and Drink”, “Air Cargo Excellence



SWITZERLAND

Award”, “Swiss Award for Steel construction”: Zurich Airport has again received a variety of awards in different categories. At Basel-Mulhouse Airport, Switzerland’s third largest airport which is divided into a Swiss and a French sector, AMAC Aerospace, Air Service Basel as well as Jet Aviation have new hangars competing to provide international VIP customers with high quality handling, maintenance and completion services for corporate aircraft. Despite the worldwide financial situation and due to their long term orders, completion and maintenance providers seem to not only resist the downturn but are increasing their capacity. Last but not least Switzerland’s second largest airport, Geneva International Airport, also known as home of EBAA’s annual European Business Aviation Convention & Exhibition (EBACE), regularly ranks within the top five of the most popular business aviation departure airports in Europe.

CARRIERSIn 1998 the internal Swiss market has been deregulated by the fall of the monopoly of Swissair and the Swiss Confederation ceased its support of the national airline. The crisis of the Swiss aviation sector ended with the fall of the Swissair group and the grounding of the airline in early 2002. The Swiss government provided financial aid and got involved in the creation of a new international airline - SWISS. After years of struggling, Switzerland’s “national” carrier, being since 2007 entirely part of the Lufthansa Group, is doing well compared to its European competitors. However, and like its ‘legacy’ competitors in Europe, SWISS is faced with a strong competition of the Mid East carriers flying not only directly into Switzerland with very competitive ticket prices but also with acquiring minority stakes in regional airlines based in Switzerland which shall act as distributors in Europe for such Mid East carriers. Etihad just recently purchased a minority of Lugano based Darwin Airlines and further invested more than fifty million Swiss francs. The carrier expanded and is now flying all over Europe not only with ATR-72 but under a new marketing brand as ‘Etihad Regional’ and for very

competitive ticket prices which even low cost carriers can’t beat. SWISS is operating a fleet of currently 82 aircraft; 29 for longhaul and 52 for medium- and shorthaul routes. The thirty orders of the all new Bombardier C-Series (CS100s and CS300s) will soon replace SWISS’ Avro RJ100 Aircraft and, also commencing in 2016, the Airbus A340 fleet will be replaced by Boeing 777-300ER of which nine aircraft have been ordered. SWISS has again earned several distinctions in this year’s Business Traveller Awards, where it was, amongst other awards, declared ‘Best Airline for Europe’ for the fifth consecutive year. Another national carrier is Helvetic Airways which currently operates seven Embraer 190s (four of which are operated under a wet-lease arrangement for SWISS), six Fokker 100s (four of which are operated under a wet-lease arrangement for SWISS) and one Airbus 319-100. Edelweiss Air (since 2008 a subsidiary of SWISS), celebrating its 20th anniversary this year, remains to be a success story and is operating a fleet of currently seven aircraft, consisting of two Airbus A330s for long-haul routes, and five Airbus A320s for short- and medium-haul routes.

In 2014 the German based airline Germania launched a new Swiss operating company which aims to serve various charter destinations with two Airbus A319 aircraft, whereby one A319 flies for a Swiss tour operator under the new brand HolidayJet. Sky-Work Airlines with home base in Berne-Belp airport disposed of its three Bombardier Dash 8Q-400 (which are now operated by Air Berlin) but continues operation with its five Dornier 328-110 aircraft serving 20 different destinations all across Europe.

MANUFACTURERSWorld known Swiss aircraft manufacturer Pilatus has been famous for its single turboprop engine-powered aircraft such as the PC-12, of which close to 1500 aircraft have been delivered so far. In 2013 Pilatus’ first twin-engine business jet PC-24 was revealed to the public. According to manufacturer, the aircraft is intended to be capable of operation from unpaved runways and grass strips, which unique

capability gives the jet access to over 21,000 airports worldwide that other business jets cannot use. Some of the jets that the PC-24 will compete with include Embraer’s Legacy 450, which is scheduled to enter service this year, as well as the Bombardier’s Learjet 75 or the Eclipse 550. During the 2014 European Business Aviation Convention & Exhibition (EBACE), Pilatus actually sold of 84 PC-24s, which covers the total number of aircraft that the manufacturer was planning to build within the first three years of production. One aircraft has been ordered by the Swiss Air Force with the intention to use the jet as executive transport for the Swiss Federal Council. The first test flights have been successfully performed this year and the first deliveries are expected to take place 2017.

BUSINESS AVIATIONOver the last couple of years a high level demand in Switzerland for the charter of, and owner-ship in, business aircraft



SWITZERLAND

has increased. There are currently around 1700 aircraft registered in the Swiss aircraft registry, many of them corporate and private jets. Switzerland is home base of many high quality business and private jet operators, such as Jet Aviation, G5 Executive, Comlux Aviation, ExecuJet (which has just recently been acquired by Luxaviation, Luxemburg), Premium Jet, Jet-Link (now a subsidiary of DC Aviation, Germany), Cat Aviation and PrivatAir, to mention a few.

FINANCINGThe financing situation not only in Switzerland but also across the world has changed in the past decade. The coming together of the financial crisis and the deterioration of aircraft values over the last years has had significant effect on financiers worldwide. As an outcome of the foregoing it can be seen that in aircraft finance purely asset based financing has almost disap-peared. Financiers do nowadays require additional securities in form of guarantees and other assets as aircraft values have proven not to be sustainable and reliable sources. As a further consequence borrowers or lessees sometimes find themselves unable to pay back their lenders or lessors in case of margin calls due to the deterioration of the aircraft’s value leading to default scenarios and recoveries. However, even in these circumstances Swiss based financiers such as UBS, BNP Paribas Leasing Solutions Switzerland, Credit Suisse, SG Equipment Finance, GE Capital Solutions, J.P. Morgan Suisse and so forth remain strong players and reliable partners, even if faced with new competitors such as Banque CIC and Raiffeisen Bank Austria that have entered the Swiss aviation financing market.

LEGAL FRAMEWORKThe Swiss Federal Office of Civil Aviation (FOCA) as supervision authority is responsible for the safety and the general aviation matters in Switzerland. The FOCA provides for a well proven, reliable and efficient civil aviation authority which was attested by the last ICAO audit report to provide for an appropriate organisation, well operating

procedures and well qualified personal to secure supervision of safety. With regards to aviation’s legal aspect, even though Switzerland is not a member of the European Union, legislation in respect of aviation derives from two sources: on the one hand Swiss national law and on the other hand the EU legislation according to the bilateral treaty between the European Community and the Swiss Confederation on Air Transport. The latter provides for the formal adoption of the regulation which shall be binding for Switzerland. As a result, Swiss law offers significant advantages not only from a corporate, contractual or aviation law perspective but also regarding tax law. The administrative registration of aircraft (certificates of registration etc.) is effected in the Aircraft Register (“Luftfahrzeugregister”). Furthermore, Swiss law does not only recognise foreign mortgages (as Switzerland is a member state of the Geneva Convention on the Recognition of Rights in Aircraft) but also allows the registration and protection of ownership, mortgages, certain leases and other encumbrances in the Swiss Aircraft Record (“Luftfahrzeugbuch”) and provides for one of the strongest securities world-wide; amongst others avoiding the same to become subject to workman or other possessory liens. As a result a registered right can only be altered or deleted by amending the respective registration in the Aircraft Record. Further, the promoted self-help remedies allowed under English law have proven again not to be as reliable as advocated. Recent recovery cases revealed that enforcing rights privately in most cases creates more liability than offering fast relief to creditors. In comparison the well established and straight forward enforcement regime under the Swiss legal system, however, covers not only the needs of aviation financiers but also addresses debtor’s and operator’s concerns which result in a more efficient enforcement than most other jurisdictions. Taxwise, with the loophole for privately managed aircraft to be brought in to free circulation within the European Union effectively free from VAT through the United Kingdom being closed as of 2011, Switzerland, with an import VAT of currently 8%, has become a viable option in the heart of

Europe. Furthermore, Switzerland has not (yet) joined the European Emissions Trading System (EU ETS), which covers all aviation activities with take-off and landings within the European Union, and may therewith be considered as a white spot for intercontinental flights. Finally, the Swiss Federal Council has granted a mandate to enter into negotiations with the EU on an extension of air traffic rights to so-called cabotage flights which may pave the way for Swiss commercial aircraft operators to freely serve destinations within any EU country.

The aviation sector in Switzerland has been experiencing steady growth within the last years and passenger frequencies in the largest Swiss airports are rising. Being located in the centre of Europe and home to several well-known aircraft financiers and a stable political and legal environment, Switzerland provides for various advantages and a level playing field for many participants involved in the aviation industry.



POLAND

Growing traffic at Polish airports is causing an increase in interest in legal aspects of commercial aviation in Poland. Our

practice shows that one of the most pressing issues is the legal options for effectively regaining possession of an aircraft when the airline operating the aircraft has financial difficulties. One question is how Polish law currently governs this matter. Another is whether there are solutions that could improve the legal situation of the aircraft owner.

In the most common business configuration, airplanes are now usually operated by Polish-based airlines pursuant to a leasing agreement. These planes are often entered in the Polish aircraft register, while the leasing company, which also owns the aircraft, is most often based outside of Poland.

The need for the owner of the aircraft to regain possession efficiently may arise in various instances. First, the lessor may decide to repossess the aircraft because of a breach of the leasing agreement by

the lessee airline. Often the need for repossession arises because the airline goes bankrupt. Rapidly regaining possession of the aircraft in these cases is essential to assure the continuing economic vitality of the lessor. When the lessor repossesses the aircraft, it can then lease the aircraft to another lessee. If repossession takes too long, the lessor loses this stream of income.

In any of these cases, depending on the circumstances of the specific case, regaining possession of the aircraft may prove a difficult challenge for the lessor. The lessor will need to deal with a number of international and local legal regulations. Just determining which regulations to apply may be difficult because there may be several legal systems involved at the same time (the law governing the lessor, the law governing the lessee, the law governing the leasing agreement, the law governing the location of the aircraft, and so on). In the case of repossession of aircraft operated by Polish airlines, the lessor must primarily take into consideration

the laws in force in Poland.

POLISH REGULATIONSIt should first be stressed that Poland is not a signatory to the Convention on International Interests in Mobile Equipment signed at Cape Town on 16 November 2001 or the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment. Consequently, the provisions concerning repossession of aircraft in those documents, including provisions which help expedite the repossession process, will not apply.

Therefore, the regulations set forth in national law will be crucial. Under the basic rule of Polish law, regaining possession by a creditor may be conducted only through a special execution procedure conducted with the participation of the execution authority. This rule also applies to repossession of aircraft. It is therefore prohibited to employ measures to regain possession outside of the official procedure provided for execution of claims. This

Repossession of aircraft in PolandBy Pawel Mazur and Krzysztof Wojdylo, partners at Wardynski & Partners.

POLAND.indd 66 06/01/2016 10:52:54


POLAND

means that apart from specific instances, if the debtor does not consent to release of the aircraft, the creditor’s actual taking possession of the aircraft must be preceded by the owner’s obtaining an enforcement order, typically in the form of a legally final judgment.

A HELPFUL INSTRUMENTAs may be seen from the foregoing, under the specific circumstances it may be very difficult to regain possession of an aircraft quickly and effectively. One instrument that can help is voluntary submission to enforcement. Under Polish law, a debtor (e.g. in this case the lessee) may voluntarily submit to enforcement, through a notarial deed, with respect to both monetary claims and non-monetary claims (e.g. for delivery of possession of property). In this case, the notarial deed constitutes an enforcement order, which upon issuance of an enforcement clause may constitute the basis for conducting execution.

This aspect of a voluntary submission to enforcement means that the creditor

holding it need not conduct judicial proceedings on the merits before commencing execution against the debtor. A judgment against the debtor is not required in this case in order to commence execution. The only requirement is to obtain an enforcement clause for the voluntary submission to enforcement, but that is issued by the court in a highly simplified procedure, in which the merits of the creditor’s claim are not examined at all, but the court only examines the formal aspects related to the voluntary submission to enforcement.

The lessor should seek to obtain a voluntary submission to enforcement before delivering the aircraft to the lessee under the leasing agreement. The voluntary submission to enforcement may state that it applies to both the monetary claims and the claim for delivery of possession of the aircraft. It is recommended that the voluntary submission to enforcement also expressly mention the obligation to deliver possession of the documentation

associated with the aircraft. Despite the undeniable advantages

of this instrument, it is necessary to be aware of its limitations. This instrument may be used only in a situation where it is permissible to conduct execution against the debtor. Therefore, it could generally not be exercised if the debtor is declared bankrupt. In that case, any execution against the assets of the debtor is governed by special regulations set forth in the bankruptcy law applicable to the debtor.

The voluntary submission to enforcement will therefore be useful primarily when the lessee is in financial difficulty but has not yet entered bankruptcy. In that case, it may prove essential for the creditor to be able to show that it regained possession of the aircraft before the debtor was declared bankrupt. Voluntary submission to enforcement enables the creditor to move to execution without going through the stage of judicial proceedings on the merits, which undoubtedly improves the creditor’s chances of achieving this goal.

POLAND.indd 67 06/01/2016 10:53:04


UKRAINE

Asters is a full-service independent national law firm that has maintained a strong presence in Ukraine since 1995. The

firm provides transactional legal advice and client representation on a broad spectrum of matters that arise in the course of doing business in Ukraine.

Asters has developed one of the strongest aviation practices in Ukraine. The firm’s lawyers regularly advise manufacturers of aircraft and their components, Ukrainian and

international cargo and passenger carriers, airports, banks, insurance companies and tour operators on various aviation, corporate, financial, licensing, antimonopoly, tax, administrative and labour law issues. The firm’s aviation attorneys have significant expertise in aircraft sale, purchase, lease, fractional ownership, management and finance transactions delivering top-quality solutions to clients.

Oleksiy Demyanenko is a Partner at Asters. He focuses on aviation, corporate and M&A, dispute resolution and

consulting of private clients.Oleksiy is the Head of the WSG’s

Aviation Practice Group and a member of the European Air Law Association, the European Aviation Club and the Aviation Advisory Board at the Ministry of Infrastructure of Ukraine. He is actively involved in law-making activity and, in particular, advised the State Aviation Administration of Ukraine on implementation of the Cape Town Convention and preparation of regulations on the IDERA and authorization codes.

Ten things to know about financing and leasing aircraft in UkraineBy Oleksiy Demyanenko, Partner at Asters law firm.

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UKRAINE

TEN THINGS TO KNOW ABOUT LEASING AND FINANCING AIRCRAFT IN UKRAINE

1. Registration of an AircraftCivil aircraft are registered in the Civil Aircraft Register maintained by the State Aviation Administration of Ukraine (the “SAAU”). Application on aircraft’s registration shall be submitted by the owner of an aircraft or a person authorized by the owner. Record of person’s ownership in the Civil Aircraft Register does not evidence title to an aircraft. Information recorded in the Civil Aircraft Register is publicized on the SAAU’s web-site.

2. Security over AircraftUnder Ukrainian law, security established in relation to aircraft is registered with the State Register of Encumbrances over Movable Property, which is maintained by the Ministry of Justice of Ukraine. The registration is performed based on the encumbrancer’s application and establishes the priority of claims at enforcement. The registration fee is UAH 34 (approximately EUR 1).

3. Registration of International InterestsUkraine has designated the SAAU as an authorizing entry point for registration of an international interest under the Cape Town Convention. Upon receipt of an application from the party seeking to effect registration, the SAAU issues a unique authorization code which must be submitted to the International Registry. The authorization code shall be issued within 30 business days upon submission of an application.

4. Currency ControlUkrainian law restricts a Ukrainian resident’s ability to make a payment abroad and, unless such payment falls under a statutory exemption from the licensing regime of the National Bank of Ukraine (the “NBU”), the resident should only be permitted to make such a payment after having obtained an individual license from the NBU (the “Foreign Payment License”). There is no special exemption, for instance,

for lessee’s deposit or guarantee payments abroad. As a result, such payment is conditional upon receipt of the Foreign Payment License. The Foreign Payment License is not required if the payment is performed by a foreign (non-Ukrainian) legal entity, e.g. special purpose company associated with the Ukrainian lessee.

Transfer of funds from Ukraine under the cross-border aircraft lease agreement in excess of EUR 25,000 is subject to obtainment of the price evaluation act from the State Information and Analytical Center of Monitoring of Foreign Commodity Markets. Absent price evaluation act, transfer of lease payments can be banned by Ukrainian servicing bank.

5. Aircraft Deregistration Application on deregistration of an aircraft from the Civil Aircraft Register shall be submitted by the owner of an aircraft or a person authorized by the owner. An application must be reviewed by the SAAU within 10 business days. In order to perform deregistration, an applicant has to provide original of the aircraft registration certificate (placed on the board of an aircraft during flights) and present an aircraft for inspection by the SAAU, which may be problematic absent cooperation from the operator.

6. RepossessionThe ability of lessor or a creditor to repossess an aircraft depends on conditions of lease or finance agreement. Ukraine made a declaration under Article 54(2) of the Cape Town Convention allowing repossession of an aircraft without an application to court. In addition to IDERA, parties normally execute a repossession Power of Attorney. However, the benefits of such Power of Attorney are limited as Powers of Attorney issued by Ukrainian entities generally may not be irrevocable.

7. Choice of LawAs a matter of Ukrainian legislation, the parties (subject to certain exceptions) are free to choose the law regulating their commercial

relationship. In addition, Ukraine has acceded to Article VIII of the Aircraft Protocol to the Cape Town Convention, which provides that the parties to an agreement, a contract of sale, or a related guarantee contract or subordination deed may agree on the law governing their contractual rights and obligations.

8. Enforcement of Foreign Judgements and Arbitral AwardsAs a general rule, a foreign judgment can be recognized and enforced in Ukraine if (i) an international treaty ratified by the Ukrainian Parliament provides for such recognition and enforcement; or (ii) under the reciprocity principle (reciprocity is deemed to exist unless there is evidence that the courts in particular country do not extend reciprocal recognition to Ukrainian judgments). Ukraine has signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is considered to be a part of Ukrainian law, and further implemented its provisions into national legislation.

9. Aircraft RequisitionThe governmental authorities may deprive the owner of the title to an aircraft as an exceptional measure for the reasons of public necessity (epidemic, epizootic and other extraordinary events) on the condition of preliminary and full compensation of its cost. Special rules apply to military and emergency state. In such circumstances the owner may be deprived of the title to an aircraft with subsequent cost compensation.

10. Operator’s Insolvency and Liquidation ProceedingsIf an operator is declared insolvent or liquidation proceedings have been launched, the administrator or liquidator cannot include an aircraft into the liquidation estate and impose the rights of any creditor in priority of the owner. If an aircraft is, nevertheless, included into the liquidation estate, the owner will have a segregation right and may contest such liquidator’s action in court.

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The Cape Town Convention on International Interests in Mobile Equipment (2001) (“Convention”) purports to harmonize the

law of secured interests in international transactions dealing with high value mobile equipment. The importance of the Convention does not only stem from the fact that it deals with high value mobile equipment ; it also creates universal substantive laws to govern transactions relating to them.

The Convention defines an international interest as one that is: granted by the chargor under a security agreement; vested in a person who is the conditional seller under a title reservation agreement; or vested in a person who is the lessor under a leasing agreement. According to paragraph (d) of the Article 2 of the Convention, it is

the applicable law which determines whether an interest falls under one of the international interest definitions. Consequently, it is possible to state that available remedies vary according to the definition and interpretation of the relevant domestic applicable law. Existence of an interest, as defined under the scope of the Convention, may depend on the applicable national law because different families of law have different definitions for the concept of “property”. Therefore, the concept of security varies from jurisdiction to jurisdiction, again depending on the definitions of concepts of ownership and possession.

This article will initially explore how the property and security interest concepts differ in common and civil law systems; more relevant distinction between functionalist and formalist approaches to security interests;

and the effects of legal diversity on the interpretation and formation of the Convention.

COMMON LAW V. CIVIL LAW:

The Concept of PropertyIn common law systems, possession means either physical possession or control through a physical possession, which can even be physical access to an asset such as a key. In view of that, intangibles cannot be pledged since it requires the delivery of possession.

The Nature of Security InterestsIn common law jurisdictions, the nature of security interest remains uncertain: In England and Wales, Hong Kong, Malaysia and Singapore security interests are regulated by their legal form. The principal issue to identify is whether

Legal Diversity and the Cape Town ConventionBy Serap Zuvin and Mehmet Ali Akgun

TURKEY


TURKEY

the interest in question falls under one of the four classes of security interest types as recognized by the common law, which are regulated as charge, mortgage, pledge or lien.

In other common law systems, based on the United States Uniform Commercial Code (“UCC”) (functional approach), namely, Canada and recently New Zealand and Australia; countries adopt a functional and economic approach by classifying title retention agreements and certain leasing agreements as forms of security and the title of the conditional seller or lessor as limited to a security interest. For example, a lessee is viewed as having a special property interest in movable property in his or her possession in the countries which adopt a similar system to the U.S.A.’s UCC. However, a lessee is viewed as having only a possessory

interest under most civil law systems and in the other common law countries. As a consequence, the default remedies of a conditional seller and of a lessor whose lease is treated as a security agreement will be governed under the provisions of the Convention dealing with security agreements, not by Article 10 dealing with conditional sales and leases.

This explanation underlines the fact that the differing nature of security interests among countries stems from their approach rather than their legal family. Therefore, the relevant comparison is between the functional and formalist approaches.

FUNCTIONAL APPROACH V. FORMAL APPROACHA leasing transaction would be characterized as a lease in a jurisdiction that applies a formal approach. However, it could be classified as a security agreement under a jurisdiction that applies a functional approach. This is a result of the fact that most legal systems outside of North America (and Australia, New Zealand) make a clear distinction between security agreements and title-retention and leasing agreements. They treat a conditional seller or lessor as the full owner. On the other hand, the United States, Canada, New Zealand and more recently Australia, adopt a functional and economic approach, treating title reservation agreements and certain leasing agreements as forms of security and the title of the conditional seller or lessor as limited to a security interest.

The Usinor Industeel v. Leeco Steel Products, Inc case clarifies the distinction between the two approaches. In this case, the seller, a French company with its place of business in France, sold steel plates to the buyer, an Illinois corporation with places of business in the United States. The parties’ contract provided that the seller retained title to the steel until the buyer paid the purchase price. The buyer took delivery of the steel but did not make full payment. Before the seller sued the buyer to recover possession of the steel that had not been sold by the buyer to third parties, the buyer had granted a security interest in the steel to a bank that took due steps to publicize its interest. Had French law been applied, the seller might

have recovered possession of the steel, because the ownership was retained in the goods under the title reservation clause contained in the contract. On the other hand, the applicable law was U.S law and according to UCC 2-401(a) it is provided that: “Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the Article on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.”

CONCLUSIONWhile the Convention reflects some similarities to national laws, generally, it has nothing to do with traditional formalism. Instead, the Convention employs a simple, functional approach to the identification of secured financing devices. The main focus of the Convention is on the everyday needs of the parties and persons affected by secured financing transactions, and not the theoretical and the conceptual organization of any particular national system. Because according to the Convention, title reservation agreements and leasing agreements create registrable rights same as security interests. Same procedure applies to US and the countries that adopt functional approach. However, in civil law systems and the common law systems which adopt formal approach such as England the strict categorization of security interests and exclusion of quasi securities cause difficulties. That being said, it would not be unfair to say that the Convention clearly parallels the functionalist systems in the U.S. and Canada (excluding Quebec). Therefore, the purpose of the Convention is an overall simplification of quasi and real security interests even though the remedies for security interests and quasi security interest may differ depending on the national law. There will still be a secured party irrespective of the individual countries’ approaches towards defining the interests. Therefore, there is a great level of approximation in secured finance law regarding high value mobile equipment under the Convention.

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1. CAPE TOWN CONVENTION AND LEGAL FRAMEWORKAlthough Germany signed the Cape Town Convention (officially: the Convention on International Interests in Mobile Equipment), the Convention has never been ratified. Thus the Cape Town Convention is not part of the German legal system.

Germany has on the other hand ratified the International Conventions of Warsaw 1929 (effective date 29 December 1933), including the Hague Protocol for the amendment of the Warsaw Convention 1955 (effective date 1 August 1963), the Conventions of Chicago 1944 (effective date 8 June 1956), Geneva 1948 (effective date 5 October 1959) as well as Montreal 1999 (effective date 28 June 2004).

The ‘basic law’ on aviation in Germany is the Air Traffic Act (Luftverkehrsgesetz, LuftVG). It is modeled after the Chicago Convention and contains provisions on registration, operation, conduct and liability in regard to aircraft, personnel, air carriers and airports. It is inter alia supplemented by the Air Traffic Licensing Regulation (Luftverkehrs-Zulassungs-Ordnung, LuftVZO) on the

prerequisites for aircraft to be allowed to fly in Germany.

The Aircraft Mortgage Act (Gesetz über Rechte an Luftfahrzeugen, LuftFzgG) concerns aircraft used as security by way of a registered mortgage (Registerpfandrecht) and contains numerous specific regulations on registered liens.

2. TITLE TRANSFERTitle of an aircraft is transferred according to the rules of German civil law on the transfer of ownership of movable property. This requires an agreement between the seller and the buyer as well as effective transfer of physical possession. Thus a bill of sale alone is not sufficient to transfer title, as a sale and purchase agreement only imposes a contractual duty on the seller to transfer the ownership of the aircraft on the buyer.

To actually transfer title in an aircraft, the owner – in execution of the underlying contract of sale – usually has to deliver the aircraft to the buyer while both parties agree that the change of direct possession also results in a

change of ownership. Other forms of transfer are permissible – and often more practical – especially if the aircraft is to be used as collateral security. In this case the former owner (debtor) while effectively making the acquirer (creditor) new owner of the aircraft, will only provide him with indirect possession and remain in direct possession himself. This enables him to still use the aircraft and eventually pay back the loan from the proceeds of operation. In case a dispute arises and a court would have to review the title transfer, the transfer of possession can be difficult to prove. Therefore, documentary evidence should be produced.

3. AIRCRAFT REGISTER The German Aircraft Register is an owner register maintained by the Federal Aviation Office (Luftfahrt-Bundesamt/ LBA). Although the registration lists the owner, it does not have a legal impact on the transfer of title, i.e. ownership is not constituted by registration and entry in the aircraft register. Unlike cadastral register, the aircraft register has a declaratory character. Registration

Five key things to know before buying, leasing or financing an aircraft in Germanyby Katja Brecke, Arnecke Sibeth.

GERMANY.indd 72 06/01/2016 10:54:32


GERMANY

serves mainly public purposes of supervising air traffic safety, identifying individual aircraft and enables the Federal Aviation Office to use the stored data to provide information as statutorily specified. Thus, the good faith (‘bona fide’) regarding the ownership of the registered party is not legally protected. Regardless of the public law nature and character of the Register, it is common practice to make use of the Aircraft Register for transactions under civil law.

The data to be registered encompasses type, design, serial number of the airframe, as well as nationality sign and registration mark. The operator will be listed, however obtaining this information will require the consent of the operator. Data may be accessed mainly by the owner of the aircraft. The buyer of an aircraft has no right to obtain an excerpt from the aircraft register.

Aircraft that are owned by German or EU nationals or alternatively by companies owned and effectively controlled by German or EU citizens can be registered in Germany. This has to be proved by passport entry or commercial register extract. Aircraft owners of non-EU countries can only pursue registration if the aircraft is leased to a German air carrier for a period of at least 6 months and the aircraft is regularly located at an aerodrome in the Federal Republic of Germany. Thus a lease or operation agreement must be submitted for proof. However, disclosure of commercial details is not necessary. The Federal Aviation Office generally accepts documents in English language, i.e. there is no need for a certified translation.

After registering an aircraft in the German Aircraft Register, the Federal Aviation Office issues a certificate of registration that has to be carried on board of the aircraft at all times. The document is bilingual, German and English, and contains information on the register itself (volume, page), on the aircraft (class, nationality sign and registration marks, manufacturer, designation, serial number) as well as on the owner (name, address, possible entries on change of ownership on the backside) and it certifies that the aircraft has been duly registered in the Aircraft Register.

There is no separate registry for

aircraft engines in Germany. How to deal with the legal relationship between the aircraft and its engines is still much discussed in Germany. However, it seems to be the prevailing opinion that engines are not classified as integral part. Therefore engines do not automatically share the legal fate of the aircraft itself (airframe, fuselage etc.), but may be object of independent rights or claims of a third party.

4. REGISTRY OF MORTGAGES ON AIRCRAFTThe Registry of Mortgages on Aircraft is not to be confused with the afore-mentioned Aircraft Register. It is a separate registry maintained by the Local Court Braunschweig.

However, registration in the Aircraft Register is a prerequisite for the registration of a mortgage in the Registry of Mortgages on Aircraft, i.e. only German-registered aircraft in the aforementioned statutory sense can be encumbered with a registered mortgage. Securities on foreign aircraft follow different provisions, even if enforcement rules are somewhat similar.

When using registered aircraft as security, the German Aircraft Mortgage Act provides for an exclusive registered mortgage (Registerpfandrecht). To create such a registered mortgage, the owner of the aircraft – in case of aircraft financing usually also being the debtor of the claim to be secured – has to agree with the creditor to procure such mortgage and register the mortgage with the Registry of Mortgages on Aircraft.

In order to properly register a mortgage on an aircraft, at least the approval of registration by the owner of the aircraft has to be notarized. As the agreement to procure a mortgage does not become binding on the parties before registration, the agreement itself, as well as the application for registration commonly also are notarized. Thus, recordings in the Register of Mortgages on Aircraft are not only declaratory but have a constitutive effect for the creation of the mortgage. Documentary costs vary in regard to the amount of the secured claim. Registering an aircraft mortgage may be a rather lengthy process that asks for several steps to be taken. Registration of a security interest usually confers

priority over other securities that might be registered subsequently.

Third parties can rely on the accuracy of the public registration of the security interest, as it is presumed by law that the person that is registered as the mortgage´s beneficiary in the Aircraft Mortgage Register actually is entitled to such right as long as there is no proof to the contrary.

As mentioned above, aircraft engines do not automatically share the legal fate of the aircraft itself, Therefore, extra liens separate from the aircraft could rest on the engines without being registered in the Register of Mortgages on Aircraft. In Germany no separate register of mortgages on aircraft engines exists. However, so far the German Federal Court of Justice (Bundesgerichtshof) has not ruled on this qualification and therefore the questions have not been clarified yet beyond doubt.

5. DEREGISTRATION The owner of the aircraft has to apply for deregistration, including cases of export, at the Federal Aviation Office, using a standard form that is available in German and English (LBA-Form No 11). It is necessary to submit the original certificate of registration, the original certificate of airworthiness and the original noise certificate with the application for deregistration. Furthermore, it is advisable to submit the so called ‘negative statement’ (Negativbescheinigung), certifying that the aircraft is not registered in the Registry of Mortgages on Aircraft, in order to allow for deregistration in a timely manner.

The mortgagee does not have the authority to have the encumbered aircraft deregistered or exported. On the other hand he neither has to consent to such action by the owner, as a registered mortgage does not expire in case of change of ownership.

A representative of the owner with deregistration power of attorney and presenting the standard form signed by the owner may have an aircraft deregistered and exported. Powers of attorney are usually revocable; if not, they still may be revoked for good cause. They are grantable to more than one attorney, but cannot be registered.

GERMANY.indd 73 06/01/2016 10:54:33


Greece’s aviation market has consistently experienced a significant growth in 2015 by registering many

commercial aircraft and private jets, either owned or leased, to cater for the increase of tourists commenced in 2013 and thereafter. Majors players from the EU and U.S.A. together with domestic participants have invested to match the on-going demands for aircraft.

I. VAT EXEMPTION ON TRANSFER OF OWNERSHIP OVER AIRCRAFT WHILE REGISTERED ON THE GREEK REGISTRY AND DELIVERED EITHER IN GREECE OR ABROAD.An aircraft registered on the Greek Registry and leased, or subleased, to a Greek airline generating income in excess of 50% from international flights is not subject to import customs duties and

VAT on rentals; in fact, this represents (i) a temporary import for a qualifying end-use with full suspension of duties, under the provisions of EU Regulations 2913/1992 (art.21 & 8) and 2454/1993 (art.291-300), while the exempt from VAT on rental is provided in art. 27 of L.2859/2000 (corresponding to art. 15 of Directive 77/388/EEC, as amended).

A major development occurred in November 2014 leading to exemption from transfer tax/VAT on sale of aircraft while registered on the Greek Registry, subject to certain provisions; in particular, pursuant to the relevant guidelines provided by the Ministry of Finance in its recent Circular Pol.1246/November 24, 2014 (the “Circular”), acquisition of an aircraft by a legal entity incorporated in the EU or outside the EU, which occurs while the aircraft is registered on the Greek Registry, pursuant to a lease or sublease with

a Greek operator, and is delivered in Greece, is exempt from VAT on the grounds that the Greek airline operating the aircraft for reward chiefly on international routes, i.e. more than 50% of its annual revenues derive from operation of flights on international routes. The above factor is evidenced by the Revenues Certificate issued by the competent tax office of the local operator usually issued at the beginning of each year covering income generated during the previous fiscal year.

Consequently, under the laws of the Hellenic Republic, no value added, turnover, transfer or other taxes or duties are payable either by the new owner or by any other person, in respect of the transfer of ownership over aircraft to the owner. Furthermore, registration of the new owner on the Hellenic Civil Aviation Authority (HCAA) Registry shall not create any obligation to the owner or to

The Greek aviation finance market - key tax and other issues that you need to knowBy Calliope Metaxotou, Partner, V&P Law

GREECE.indd 74 06/01/2016 10:54:36


GREECE

any other person for the payment of any such value added, turnover, transfer or other taxes or duties.

Prior to release of the Circular on November 24, 2014, VAT at 23% had to be paid burdening transfer of ownership and calculated on the market value of aircraft, which made transactions of this nature not commercially viable.

II. SEAPLANE TRANSPORTATION IN GREECE; NEW OPPORTUNITIES FOR CONNECTING ISLANDS, CITIES, LAKES AND ISOLATED PARTS OF THE COUNTRY.

LEGAL FRAMEWORKThe relevant law on the waterways (“ydatodromio”) of the Seaplanes has passed on the Parliament aiming to simplify procedure for the establishment and construction of waterways by creating a revised framework for fast track investments and by establishment

of a new transport market, to be effective as per provisions of law 4146/2013.

The new innovation of said law is, among others, that if there is no “ydatodromio”, location and, consequently, the creation of marine corridor, this will be made during examination of the technical dossier of the candidate investor. Said law would allow all port and marina operators to be awarded concessions area with interested investors either directly or by tender. Already, major tourist and hotel groups have expressed their interest in the initiative. The law also regulates the supply of seaplane fuel, through reservoirs or small tanker vessels.

Therefore, a network of waterways shall be created, which will not require high investment size but rather small capital to Euro 100,000 from public or private and mixed forms of public and private sector, and may act as an alternative to the need for new ports and airports requiring large investments, and easily meet the transport needs of most islands, indicatively Patmos, Folegandros, Anafi, Astipalea, Tilos, Leros, Halki, at the Aegean Sea or Ithaki, Paxi, Lefkada at the Ionian Sea without airport or inland places and lakes thus bringing back the seaplanes in Greece; in fact, war seaplanes operated in Flisvos harbor, near Athens, in the early 20th century and seaplanes operated by Air France before the World War II reaching the islands of the Southern Aegean Sea including Kasterolorizo close to the Turkish coasts.

It is no coincidence that there is enormous interest and lobbying for seaplane operations from all the country’s islands and their local communities.

The aim of the Ministry of Infrastructure is the foundation of waterways, although the use of “airfields on water surface” as it is called officially, under national law, as governed by law of the interwar years, and there are critical details, the void which purports to cover this law.

The original plan envisaged the establishment of sea lanes by the State, a process crucial to the location of waterways, but it was time consuming. The Planning Division of the Ministry of Infrastructure shall be responsible for implementing the investment,

which will act as one stop shop (see details below).

ADOPTION IN TWO MONTHS.An official response on the acceptance or not of the proposed investment has to be granted in 20 days, while 2 month time shall be required for granting the license upon filing of the required documents by the interested parties.

If the business plan and related investment is approved, then the investor should file a statement to comply with environmental legislation and/or environmental impact study to the relevant department (Regional office or Ministry of Environment). Last step to complete the process will be the issuing of a joint decision of the Ministers of Infrastructure and Public Order, and in case of waterways in lakes, only the signature of one of the above is needed. The aim of the Ministry of Infrastructure is the total time from submission of the dossier to approval not to exceed two (2) months.

CORPORATE FORMATION IN TWO DAYS.It is to be noted that the legislative framework on the incorporation of legal entities has also been substantially amended. These amendments, which introduce the one-stop-shop incorporation philosophy, have entered into effect on April 4, 2011. In particular, Law 3853/2010, as in force, which provides for the establishment of a unified General Commercial Registry (GEMI) and the operation of one-stop shop services for the incorporation of all kinds of corporations (partnerships, limited liability companies, companies limited by shares, etc) is now into full effect and operation. In fact, approval of incorporation and registration of any type of said legal entities now requires two (2) business days time (formerly more than one month was required).

The one-stop shop service simplifies and accelerates the procedures for the incorporation and the operation of all kinds of commercial companies in Greece. This, as a result, reduces existing obstacles in the way of any person seeking to commence a business activity in Greece as well as the significant decrease of costs and expenses involved in the setting up of a new company.

GREECE.indd 75 06/01/2016 10:54:37


The government shall deliver the construction sites to Lima Airport Partners (LAP) before this upcoming December so LAP may start

the expansion project of Jorge Chavez International Airport. According to the concession agreement and its addenda, the armed forces’ ramp areas shall be temporarily handed over while the second runway and second terminal works are completed.

Air transport is an essential tool for economic growth and development of every country. As we all know, it develops tourism and foreign trade, it attracts foreign investment, and

therefore enhances the productivity and competitiveness of a country.

Air connectivity is key in terms of economic opportunity and growth for Peru, as well as for job creation, social integration and for the exchange and transfer of knowledge.

From January to June of this year, the world’s air cargo increased by 3.5% compared to 5.8% in the same period in 2014, figures that IATA finds “uninspiring” as the global air cargo transport continues slowing their growth.

However, the supply capacity of air cargo transport rose by 5.4% in the first six months of this year compared with

the same time period a year earlier, while the load factor was of 43.2%. Specifically, cargo transportation grew by 3.9% in the international market, while the supply capacity grew by 6.4%, with a load rate of 48%. Carriers around the world prepared increasing fleet, training crews, purchasing maintenance parts and pieces, infrastructure, etc., and, unfortunately, the global market did not respond to this expectation.

As in the rest of the world, the market trends in Peru continue to decline, but its graphics are stunning. According to COMEX (Peru’s foreign trade association), between January and June this year, total exports have

No more delays in the expansion of Lima’s airportby Patricia Siles, Esq. Director of AETAI (International Air Transport Businesses Association)

PERU

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PERU

fallen by 15.5%. On the one hand, exports of the traditional agricultural sector suffered a drop of 33.9%, while non-traditional sectors maintain, thank God, a cumulative growth of 2.2%. Additionally, in the same time period, exports from textiles have fallen by 27%, with a drop of 27.2% in June.

A new report prepared by the prestigious institution Oxford Economics confirms the importance of the civil aviation sector for Peru’s economy. Such is the case that in 2013 the contribution of the aviation sector to the country’s GDP amounted to 3 460 million dollars and created 205000 jobs.

Over 60% of international tourists

visiting Peru arrive by air (the global ratio is 53%) and every year more than 300 000 tonnes of air cargo go through Jorge Chavez International Airport (AIJCH) in the city of El Callao, which, in terms of value, accounts for nearly a third of the Peruvian foreign trade.

One of the results of the forecast studies for AIJCH, prepared by the international company Traffic Forecast Advisory Services in 2014, clearly states that AIJCH is the main gateway to Peru, both for passengers and cargo: in 2013, AIJCH handled 14.9 million passengers and the average annual growth has been of 9.5% since 2001. In 2013 only, the growth was of 11.9%.

Now, unlike other forms of transportation, the Peruvian air cargo market continues to experience growth and, considering the agricultural projects that are being developed in the north and south parts of the country, these ratios of small growth in 2015 are expected to pick up exponentially beginning in September 2016.

According to the analysis of the Oxford Economics study, should there be no “capacity” restrictions, the total number of passengers arriving and departing Peruvian airports would rise from 16 million in 2015 to 29 million in 2025, and a similar percentage increase would occur in cargo transportation.

PAST TRENDS IN TOTAL PASSENGERS (LIMA AIRPORT)

TOTAL PASSENGER GROWTH (LIMA AIRPORT)

Source: LAP Statistics

Source: CORPAC Statistics

14

12

10

8

6

4

2

0

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-9.1%

5.3%5.3%

11.8% 11.6%

24.3%

10.4%

6.0%

17.0%

14.7%

13.0%

Total Passengers Growth

Ann

ual P

asse

nger

s (m

illio

ns)

Ann

ual R

ates

of G

row

th

4.5 4.1 4.3 4.5 5.1 5.7 6.0 7.5 8.3 8.8 10.3 11.8 13.3

16%

14%

12%

10%

8%

6%

4%

2%

0%

Aver

age

Ann

ual G

row

th R

ate

1992-2012 2002-2012 2007-2012

9.4%

12.5%

13.5%

14

12

10

8

6

4

2

0

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-9.1%

5.3%5.3%

11.8% 11.6%

24.3%

10.4%

6.0%

17.0%

14.7%

13.0%

Total Passengers Growth

Ann

ual P

asse

nger

s (m

illio

ns)

Ann

ual R

ates

of G

row

th

4.5 4.1 4.3 4.5 5.1 5.7 6.0 7.5 8.3 8.8 10.3 11.8 13.3

16%

14%

12%

10%

8%

6%

4%

2%

0%

Aver

age

Ann

ual G

row

th R

ate

1992-2012 2002-2012 2007-2012

9.4%

12.5%

13.5%

PERU.indd 77 06/01/2016 10:54:39


PERU

BENEFITS OF NECESSARY INFRASTRUCTURE

Aeronautical development is not possible without the appropriate infrastructure, and developing the infrastructure within the country brings along a number of positive effects, including:

• improvement of the welfare of the population,

• reduction of the logistics costs of various industries,

• positive impact on GDP growth,• improvement of the competitiveness

of the economy, and• invigoration of the flow of our

foreign trade, among others.

As it is known, Jorge Chavez International Airport is our main entrance and exit point of air cargo (98%), but this is almost “at full capacity for passengers, cargo, and aircrafts flow”.

This situation is already causing a direct effect on the growth of the aviation industry in Peru and, therefore, in the country’s competitiveness in foreign trade and tourism.

Lima Airport Partners (LAP), the current AIJCH concessionaire, the General Civil Aviation Administration (DGCA), the airlines, and the local and international airline associations (AETAI / IATA / ALTA / ACEP) are

coordinating the development of short-term solutions that address the critical infrastructure challenges to be overcome and the growth management until the expansion project of this airport is completed in 2021.

One of the alternatives with the most technical and practical support is to negotiate the use of ramp areas that are currently occupied by the armed forces. Below are some of the graphs developed by IATA, showing the importance of the ramp areas currently under-utilized by the armed forces:

These graphs clearly reflect the

under-utilization of the armed forces’ ramp areas and how the country’s development would be impacted by their temporary hand over to LAP. According to the concession agreement and its addenda, this will only be while the AIJCH concessionaire completes the work on the second runway and the second terminal.

Therefore, and as pointed out by IATA, a joint effort between the public and private sectors is required in order to ensure that the entire aviation value chain is involved in this airport’s strategic planning process, so that sustainability

AIJCh DISTRIBUTION OF AREAS

165,000

322,972

LAP

Armed Forces

Platform Area2001 (m2)


373,792

322,972

2011 2012 2013 2014

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

Concessionaire Armed Forces

135,083148,326

153,100 155,094

5,407 5,758 5,707 5,254

165,000

322,972

LAP

Armed Forces



373,792

322,972

2011 2012 2013 2014

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0


135,083148,326

153,100 155,094

5,407 5,758 5,707 5,254

PERU.indd 78 06/01/2016 10:54:40


PERU

and competitiveness are guaranteed, through a balanced air service for the passenger and cargo sectors.

PLANNING OF INTERNATIONAL AIR CARGO OPERATIONS

AIJCH will only be able to compete with other regional hubs – such as Bogota and Panama – as long as the current problems that restrict its capacity are resolved; therefore, the four organizations of national and international aviation companies (AETAI / IATA / HIGH / ACEP) are concerned and constantly

consulting the transportation sector regarding progress on this issue.

There can be no more delays in the expansion of Lima airport. It is therefore essential that the Peruvian government, through the Department of Transportation, complies with the deadline of December 31, 2015 for the hand-over of the construction sites to LAP and for the expansion project to begin. Thus, ensuring the construction of the infrastructure the country requires and that was determined by agreement for the 2019-2022 time period. It would be disastrous for Peruvian tourism

and foreign trade if the Department of Transportation and Communications were to once again delay the fulfillment of its obligations.

In the meantime, and while LAP complies with its obligations regarding infrastructure, the Peruvian government should cooperate by giving the armed forces’ ramp areas annexed to AIJCH, which will ensure the sustainability and growth of commercial air operations and therefore of tourism and foreign trade.

Only greater internal and external connectivity will provide one of the most important long-term development platforms in the Peruvian economy; therefore, the public and private sectors shall walk hand in hand and wisely develop the current network of the country’s airports and aerodromes, so that they appeal to their main customer: AIRLINES.

We all say it is vital to facilitate our trade with the world, but it is essential to take steps TODAY to address the internal circumstances we face, such as the imminent lack of space at AIJCH. We hope that the Peruvian government and entrepreneurs can keep up to solve our biggest problem: the expansion of Jorge Chavez International Airport, because only then we can increase the productivity and competitiveness of Peru’s tourism and foreign trade.

USE OF AIJCh (MOVEMENT)

165,000

322,972

LAP

Armed Forces



373,792

322,972

2011 2012 2013 2014

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0


135,083148,326

153,100 155,094

5,407 5,758 5,707 5,254

PERU.indd 79 06/01/2016 10:54:41


Section 99 of the Argentine Aeronautical Code enacted in 1967 provides that the majority voting capital of Argentine airlines must

be owned by nationals with residence in Argentina.

Said provision reflected the trend in many other countries which required

that the majority share capital of their airlines were held by nationals. Accordingly, USA restricts foreign shareholding to 25%, Brazil to 20%, and some European countries, to percentages not above 49%. This trend derived from article I, section 5 of the International Air Services Transit Agreement adopted at the 1944 Chicago Convention, which

provides that: each contracting State reserves the right to withhold or revoke a certificate or permit to an air transport enterprise of another State in any case where it is not satisfied that substantial ownership and effective control are vested in nationals of that State.

All such legislation reflected the ideas prevailing by the end of the

Nationality or just a domicile for shareholders of local airlines in Argentina?Asks Rogelio N. Maciel

ARGENTINA

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Second World War, a time dominated by concepts around the control countries exercise over their own air space and airlines, through theses such as that of John C. Cooper. However, more than 60 years since then, other realities came to replace those ideas, showing that the right to fly all countries had did not necessarily match their flying capacity

which only some had. In technical terms, those realities

included satellites being launched to the space which allowed their operators to learn specific details existing in the territories overflown along their routes which are determined by the operators of those satellites. Institutional changes included the supra-nationality of

governmental and private entities and the globalization of economies, including the internationalization of the relevant service providers.

Multinational air carriers such as British Airways/Iberia, Air France/KLM/Alitalia, LAN/TAM, then burst into the international air transport industry.

ARGENTINA

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ARGENTINA

Those changes made it evident that airlines should be able to operate with the same freedom as any other business does, and that many of the barriers that limit their operations – such as that of nationality- have become anachronistic, particularly in view of the changes in technical and institutional areas and business practices that have taken place.

So was claimed by the signatories of the Multilateral Statement of Policy Principles regarding the Implementation of Bilateral Air Service Agreements hosted by IATA in Montebello, Canada, in November 2009. The Statement approved included among other recommendations:

I. To respect the policies of countries that seek to encourage foreign investment in their airlines;

II. To remove restrictions on ownership of airlines and open the possibility for airlines to access global capital markets; and

III. To consider the possibility of a multilateral agreement to waive ownership restrictions.

Said Statement was signed by USA, the EU and other countries representing some 60% of global aviation. This shows that the first two signatories mentioned have elected to waive restrictive

nationality covenants they had adopted in the past.

This Statement is, furthermore, in line with the Air Transport Agreement signed between the EU and the USA in 2007, and many other initiatives reviewed by ICAO, currently working on a draft for a Multilateral Convention on Foreign Investment in Airlines under which signatory countries would agree to remove nationality restrictions so as to improve airlines’ access to international capital markets and reflect global aviation realities.

Let us now focus on domestic events. Section 99 of the Aeronautical Code leads us back to 1990 when Aerolíneas Argentinas was privatized, and Iberia, the Spanish airline, acquired a majority share interest in our flagship airline.

That status of non-compliance with Section 99 persisted over four years until 1994, when Decree 52/94 was passed to correct such situation. Said decree was meant “to interpret” Section 99, making it clear that the word “Argentine” as a requirement to become a majority shareholder included both individuals and legal entities. In other words, a company organized and domiciled in Argentina could own a majority share interest in a local airline, even if the majority capital of the former were in hands of foreigners. So, a foreigner could control a local airline just by meeting the requirement of organizing an Argentine

company holding the majority capital of such airline. The recitals of Decree 52/94 set forth that the interpretation made by such decree was “consistent with article 2, 4, of the Foreign Investment Law and the provisions of the Business Company Law”.

However, Decree 204 dated March 2000 prohibited LAN to operate air services in Argentina through an Argentine subsidiary, by suspending the effects of Decree 52/94 over 180 days, then extended until 2006, and so, the opening of foreign capitals was established exclusively for the

“The general interest will be better served by an airline which... is duly organized and managed and ... offers the best service to users, without the need to resort to the costly and often uncontrolled contribution of public funds.”

ARGENTINA.indd 82 06/01/2016 10:54:47


ARGENTINA

benefit of Spanish investors. This notwithstanding, LAN Argentina implemented all necessary steps to meet the formalities established by the then current regulations, and commenced operations by mid 2005.

Finally, Decree 1012 dated August 2006 established measures to mitigate the emergency status then experienced by domestic air transport, including authorization to contract insurance abroad, fuel subsidies, tax exemption, rate increases and access to the simplified ticket purchase system for flyers. And section 10 of Decree 1012 set forth the most appropriate of all measures, by restoring the effects of Decree 52/94. Accordingly, from then on, foreign individuals and legal entities could own a majority capital in Argentine air carriers just by organizing a holding company in Argentina and maintaining domicile here.

Furthermore, one of the recitals of Decree 1012 established that the measure was purported to “promote the entry of new companies for the benefit of users”. Those “new companies” could be majority owned by foreign shareholders, as domestic capitals seem to be unwilling to take on major commitments in matters of air transport so that users may have their unsatisfied needs properly served. The system that over a number of years had only benefited Aerolíneas Argentinas Spanish shareholders, may

now be profited by any foreign investor searching for opportunities in the Argentine air transport market.

Decree 1012/06 also took into account the international trend above mentioned by making reference to ICAO recommendation at the Worldwide Air Transport Conference held in Montreal in March 2003, “on the liberalization of States’ regulations on air carrier ownership and effective control” by recognizing “that both legislation and regulations and the current economic reality substantially differ from those existing at the time of enactment of the Aviation Code”.

Thus, by restoring the effects of Decree 52/94, the Executive Branch had a clear objective in mind, as other of the recitals of Decree 1012/06 literally established the need to “remove the legal uncertainty arising from interpretation conflicts, thereby avoiding any form of discrimination that may prevent promoting risk investment policies in the country”.

It seems then that it is the right time to put legislation in order so that it does not become subject to the changing mood of different administrations, and amend section 99 of the Aeronautical Code straightforward, so that said Code–without the need to refer to interpretation decrees – provides that foreign individuals with permanent domicile and companies organized

and domiciled in Argentina may own a majority interest in Argentine air carriers. Of course, these companies, just like all other companies existing in Argentina, would be subject to government supervision through entities such as the Office of Corporations, the National Administration of Civil Aviation and the National Antitrust Committee, among others.

This is the policy adopted by Chile, a country having the biggest and most efficient airline in Latin America, which signed the 2009 Montebello Statement above referred. And such was also the express instruction given by the Executive Branch under article 9 of Decree 1012/06 which mandated the drafting of “... a bill for amending the Aeronautical Code, including the requirements to be met for the provision of air transport services in Argentina, following international trends in the field…”

Clearly, the general interest will be better served by an airline which, no matter the nationality of its shareholders, is duly organized and managed and which, just with the contribution of its shareholders, may offer the best service to users, without the need to resort to the costly and often uncontrolled contribution of public funds. The aviation authority may always have the chance to afford this type of companies the treatment as “flagship airline”.

ARGENTINA.indd 83 06/01/2016 10:54:53

Colombia and Cape TownDelhierro Abogados’ Daniela Ospina Marulanda and José Elías Del Hierro Hoyos examine how the Cape Town Convention has been implemented in Colombia.

COLOMBIA.indd 84 06/01/2016 10:54:51

COLOMBIA

In 2006, seeking to promote a more efficient and effective development of financing systems for purchase and leasing of aviation equipment,

Colombia’s Constitutional Court ratifies law 967 issued on July 13th, through the sentence C-276/06, reaffirming the participation of Colombia as a State party of the Cape Town Convention and recognizing that the principles of the agreement are consistent with Colombian´s law.

This situation arises for the need of a special legislation that takes over the regulation of financing issues of mobile equipment considering the large amounts of money involved in these kind of business. Colombia for its part accepted that as result of globalization affecting the world, it was necessary to count with clear and objective rules on the behavior of this big market, which is increasing considerably and having more relevance. For the country the agreement represents significant progress and new possibilities for both the development of the industry and the country’s integration into the international trading stage, and thus providing a unified guarantee for aircraft equipment financing which is a big step to provide confidence to other countries when making such business.

INTERNATIONAL GUARANTEESThe main innovation that brings the Convention to our domestic legislation is to create internationally recognized guarantees to facilitate purchase and leasing financing of mobile equipment.

This aims to create a mechanism whereby if the debtor defaults on its obligation, the creditor has the opportunity to pursue his assets in any of the signatory States jurisdictions, finding support not only in its territory but outside of it, so the creditor manages to enforce their rights and have support outside their jurisdictional borders to enforce the payment of the debt. For Colombia having international legislation that counts with methods to implement the guarantees in different countries where the business was signed, ensures uniform protection, giving greater security and confidence when any conflict arise in the business.


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COLOMBIA

The Convention for its part when creating this guarantee established its limitations, formal requirements and the objects on which such protection applies, as well a figure of assignment and subrogation of the same, with the aim to have full clarity on these guarantees.

INTERNATIONAL REGISTRY OF GUARANTEESOne of the elements that come with the creation of the international interest is the registration of the same, as one of the key points for accomplishing its primary function. This registration is supervised by the International Civil Aviation Organization (ICAO), and its objective is to allow member states to publicly know the guarantees granted. With it is aimed to seek security on the guarantees, because certainty is provided that the agreement is going to be respected and taken into account in case of any eventuality. This registration is easily accessible, is on the asset and not on the debtor, and states that the guarantee registered on him takes precedence over all the others that are not registered or were registered subsequently, and thus allowing the creditor to have the enforceability against third parties necessary to enforce its guarantee if necessary.

FAILURE TOThe whole system of international guarantees established by the Convention is given with the aim of providing some certainty and confidence to creditors. It

is for this reason that the Convention stipulates how these are protected and the various mechanisms they can use in case of debtor’s default. The parties may stipulate which constitutes infringement cases and those in which the creditor may take action against the debtor on account of the obligation due. Article 8 of the Convention sets out the various measures that the secured creditor may exercise if the result is not as expected, among the adopted measures is the possibility of implementing decisions taken against the debtor without court intervention.

Analyzing the Colombian legal system and the different interventions of the Constitutional Court, Colombia ratifying the Convention makes a statement authorized by this same Article 54, about the inapplicability that standard, because this course is against the law of the country. Article 29 and Article 229 of the Colombian Constitution expose the right to due process and the right of access to justice, rights that would be violated if the creditor acts against the debtor without judicial intervention. The statement by the Court seeks to safeguard the legal security of the country, and provide the necessary prevalence to the rights established in the Constitution.

INSOLVENCYColombian Law has two regimes in Insolvency matters related to aeronautical issues: (i) the Cape Town Convention, approved by Law 967, 2005 and (ii) Law 1116, 2006. The Cape Town

Convention doesn´t regulate procedural matters, like Law 1116 does, in the Cape Town Convention sets forth two choices regarding insolvency measures called “Option A” and “Option B”. In the moment of the approval of this Convention by the approving country, each country had to pick between “Option A” and “Option B”. Colombia picked “Option A” according to Decree No. 4734, 2007. This option gives the opportunity to the Lessor to repossess the aircraft in the event of a commencement of an insolvency proceeding by the Lessee, this will be done in a periods not longer than 60 days , unless the lessee in this term pays all defaults or establishes the way in which it is going to pay it. This statement is published in Decree No. 4734, 2007, but Law 1116 in Article 88 establishes that in an event of a contradiction between an international obligation legally binding on a Colombian person and Law 1116, the international obligation shall prevail. For this reason the repossession of the aircraft would take no longer than 60 days as Cape Town Convention defines, that is one of the reasons why for Colombia this Convention represents a special provision for insolvency matters in aeronautical issues. Additionally according to the Cape Town Convention, the Insolvency Administrator has power to reject or terminate the Agreement. If debtor and creditor do not reach agreement at the moment when the debtor is required to negotiate with the creditor regarding the past due amounts owed, he will be empowered to request the termination of the Agreement.

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The civil aviation industry in Kenya is a vibrant environment offering attractive investment opportunities. The sector

has benefitted from an improving regulatory climate, low budget airlines (including Fly540 and Kenya Airways’ (KQ) Jambo Jet) offering attractive local and regional travel opportunities and an increase in various modernisation and expansion projects. There are, however, various factors (such as the Ebola outbreak in West Africa in 2014 which limited flights to affected

regions and terrorist-related activities in North-Eastern Kenya, Nairobi and Mombasa,which have dismally affected Kenya’s tourism sector) that have negatively affected the performance of aircraft operators in general, including the national flag carrier KQ.

KQ’s financial woes and other liquidity challenges (it recorded tax losses of Kenya Shillings 10.45 billion in the half year ending September, 2014) have culminated in discussions with key government officials for a bail-out of around United States Dollars 40,000,000. However, at the time of

writing, such plans are yet to be finalised. Nonetheless, KQ’s management remains committed to KQ’s long term growth strategy including increasing its network of destinations. Their initiative may result in a quick turnaround for the ailing flag carrier. It is worth noting that in June 2014 and recently in March 2015, KQ launched flights to Abuja, Nigeria and Hanoi, Vietnam (respectively). Further, by the close of the first half year ended 30th September, 2014 it had launched the low cost operator Jambo Jet, which assisted in a 42% growth in capacity of its domestic market. KQ also

Kenyan aviationSonal Sejpal, Tabitha Joy Raore and Saahil Patel from Anjarwalla & Khanna provide extensive insights in the Kenyan aviation legal system.

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recently added 3 more Boeing B787-8 Dreamliners to its current fleet. Due to KQ’s dismal financial circumstances, the acquisitions were not in the form of traditional purchasing arrangements, but finance lease arrangements with Irish firm AWAS Aviation Trading Limited, as the lessor of the aircraft and KQ as the lessee. It is hoped that the Dreamliners will provide the opportunity for new long range routes to be created since they can cover between 7650-8500 nautical miles, can carry between 210-290 passengers and have more capacity for air cargo.

Another highlight for the civil aviation sector this year has been the July, 2015 visit to Kenya by United States President Barrack Obama. President Obama’s comment, that real progress had been made by Kenyan and American security officials, created much excitement within the sector with respect to the realisation of direct flights between Kenya and the US. Further, the Presidential visit and a recent endorsement of Kenya as a safe country by the United Nations Tourism Agency on 20th August, 2015 are expected to have a positive effect on the economy and boost international arrivals as Kenya consolidates its position as the pioneer of development in East Africa.

KEY INFRASTRUCTURE DEVELOPMENTS WORTH WATCHINGSome of the expansion and modernisation proposals planned and being implemented at various airports across the country are flagship projects under Kenya’s Vision 2030 (being the country’s development programme planned to turn Kenya into a middle income economy by 2030). Key projects worth noting include: the refurbishment of the Kisumu International Airport, the construction of a passenger terminal building (with the capacity to handle 600,000 passengers annually), a passenger terminal car park and a 1.4-kilometre runway at Isiolo Airport and the expansion of the cargo parking apron and construction of a new terminal (the Greenfield Terminal/Terminal 3) at the Jomo Kenyatta International Airport (JKIA) in Nairobi. On completion of the Greenfield Terminal (scheduled for 2018), JKIA is expected to have 50 international and 10 domestic check-in positions, 32 contact and eight remote gates and the capacity to handle 20 million passengers annually. The renovation of JKIA’s Terminal 2, which officially opened in May 2015, has also proven to be a step in the right direction as it is reported, by the Kenya Airports Authority (KAA) management, to have increased JKIA’s capacity by an estimated 1 million passengers annually and eased congestion at JKIA. In addition, Terminal 2 which caters for both international and domestic arrivals and departures has added 24 check-in counters, 6 gates, passenger lounges,

a VIP lounge, shops and restaurants. The Isiolo Airport project will be an integral part of the other developments taking place in the North Eastern Region including the Isiolo Resort City, livestock and food processing plants, an export processing zone, the Isiolo–Marsabit–Moyale highway and future oil production in Lake Turkana which is north-west of Isiolo.

PROGRESS OF AN OPEN SKIES POLICY Unfortunately, there has not been as much progress in implementing an Open Skies policy across Africa as there has been in infrastructural development. Notwithstanding the fact that the Yamoussoukro Decision Concerning the Liberalisation of Access to Air Transport Markets in Africa (YD) was signed by 44 African states, including Kenya, over a decade ago, only a few have been lauded as having embraced their commitment to liberalisation of the African air space. It ought to be recalled that the overall objective of the YD was the gradual liberalisation of intra-African air transport services with a specific focus on free and fair competition, liberalised market access and the removal of limitations on traffic volume, frequencies and capacity. Although regional economic entities (RECs) are expected to spearhead this process, a study published by the World Bank, and reported in the Africa Wings Magazine No 21: May – July 2013, indicated that the RECs that have received the highest implementation scores are the Central African Economic and Monetary Community, the West African Economic and Monetary Union and the Banjul Accord Group. The East African Community and the Common Market for Eastern and Southern Africa were not mentioned. It appears that the lack of consistency in the implementation of such principles is the lack of reciprocity, discriminative practices and protectionist measures adopted by some African countries (such as the giving of favourable treatment to national carriers than foreign carriers, the denial of landing rights (as has been the experience of Fast Jet Tanzania in Kenya)) and some countries opening up their skies to non-African carriers more than African carriers. It has been

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encouraging to the industry to see this issue revived at the African Aviation Summit in May, 2015 and the African Union Ministers of Transport meeting in Ethiopia, April, 2015. These meetings highlighted the benefits of an Open Skies policy across the continent including: the ability for an African carrier to freely travel to any African state and between the cities of that state, an increase in traffic for African carriers, affordable flights to passengers with shorter air travel routes and a growth in a states’ GDP. The hope is that such positive dialogue will hasten the implementation of an Open Skies policy.

RECENT LEGAL DEVELOPMENTSThere have been a number of significant legal developments within the civil aviation sector. The reintroduction of the capital gains tax (CGT) on 1st January, 2015 through an amendment to Section 3(2)(f ) of the Income Tax Act is a prime example. As a result, CGT is chargeable at 5% on the gain on a transfer of any property (including business assets and shares) situated in Kenya accruing to an individual or to a company. Another development worth noting is that under the Value Added Tax Act, 2013 (VATA), which came into force in September 2013, aviation spirit and jet fuel, which were previously exempt supplies, will be chargeable to VAT at the standard rate of 16% from September 2016, following a three-year transition period from the date of commencement of the VATA. Some of the provisions of the VATA were amended under the Value Added Tax (Amendment) Act, 2014 (the VATA Amendment), which came into force on 29th May, 2014. For example, pursuant to the VATA Amendment, the exemption from VAT will only apply to the supply of aeroplanes and other aircraft that do not exceed 2,000 kilograms. This amendment is expected to increase aircraft leasing transactions since the hiring and leasing of aircraft remains exempt from VAT. Indeed, the shift to increased leasing has been pioneered by KQ’s aircraft leasing arrangements. Further, under the VATA, while international air transportation is zero-rated, local air transportation is exempt from VAT. Consequently, while international air operators will

be entitled to recover input VAT on their purchases related to the services offered, the same will not apply to local air operators. The exemption of air ticketing services from VAT may lead to an increase in the cost of air ticketing services as travel agents will be unable to recover their input VAT. Another issue worth noting is the circular issued by the Kenya Civil Aviation Authority (KCAA) in March, 2014 requiring holders of Air Services Licenses (ASL) to comply with the shareholding requirements (i.e. 51% of the voting rights in licensees to be held by the State, Kenya citizens or both), in accordance with the Civil Aviation (Licensing of Air Services) Regulations 2009 (theLicensing of Air Services Regulations) (which served as a reminder of the existing legal position), by January 2016. Following the publication of the circular, a number of air service providers are undertaking a restructuring of their shareholding. This is due to the fact that KCAA has the right to deny air service licenses and renewals of the same to applicants who fail to comply with local shareholding requirements where an exemption has not been issued by the KCAA. Such is the case for Fast Jet Kenya, the subsidiary of Fast Jet Plc, a low cost airline operator based in Tanzania which plans to set up a low budget airline in Kenya and offer both domestic and international services essentially competing with local operators such as Jambo Jet and Fly540. Fast Jet Kenya is alleged to have fallen foul of the KCAA’s local shareholding requirements and according to media reports, this has led to the KCAA deferring its decision to make a determination on its ASL application. As of March 2015, Fast Jet Plc’s investor report stated that Fast Jet Kenya was yet to obtain its ASL. At the time of writing, we were not aware of the KCAA having approved Fast Jet Kenya’s application.

KEY COMMERCIAL AND REGULATORY ASPECTSThe KCAA is the regulatory body of the civil aviation market and deals with the licensing of aircraft service providers and operators, registration of aircraft in Kenya, certificationof aircrafts as airworthy and enforcing the penalties and fines arising as a result of breaches

of various statutory provisions. The KCAA also has the statutory power to seize and detain an aircraft for the purposes of securing any unpaid charges or fees for any services performed by the KCAA such as air navigation services or as a penalty for the contravention of a specific statutory provision. The KCAA’s decisions may be subject to review by the National Civil Aviation Administrative Review Tribunal, established under the CAA, which has the jurisdiction to hear and determine disputes relating to licences issued by the KCAA, any order or direction imposed by the KCAA and consumer protection compliance in the aviation sector.

The principal statues relevant to this sector are the 2010 Constitution, the Civil Aviation Act No. 21 of 2013 (CAA) and the regulations promulgated thereunder (the Regulations). There are still regulations in force that were passed under the old CAAthat are yet to be repealed and replaced by regulations enacted under the CAA. The Regulations set out provisions for, inter alia, airworthiness certification, personnel licensing, aerodromes, instruments and equipment, registration of aircraft, operation of aircraft, aviation security, approved training organisations and navigation of aircraft. In addition, in accordance with Article 2(5) of the Constitution, treaties or conventions ratified by Kenya (whether before or after the promulgation of the Constitution in August 2010) automatically form part of Kenyan law. This means that international aviation treaties and conventions including the Convention on International Interests in Mobile Equipment (the Cape Town Convention) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Cape Town Protocol), the Warsaw Convention (1929) On Rules Relating To International Carriage By Air, Warsaw Convention (1929) as amended By The Hague Protocol (1955) and the Chicago Convention (1944) on International Civil Aviation and its Protocols are also part of Kenyan law. There are a number of key regulatory aspects worth noting. We set out in brief some of these aspects below:

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i. Aircraft registration and operation Registration of aircrafts is provided for in the Civil Aviation (Aircraft Nationality and Registration Marks) Regulations, 2013 (the ANRM Regulations). According to the ANRM Regulations, an aircraft will not be registered where: (a) it has been registered in another State, (b) an unqualified person is entitled as owner to any legal, or beneficial, interest in the aircraft or any share therein, (c) it would be inexpedient in the public interest for the aircraft to be, or to continue to be, registered in Kenya and (d) the aircraft does not qualify to be issued with a certificate of airworthiness as specified in the Civil Aviation (Airworthiness) Regulations, 2013 (Airworthiness Regulations). To register an aircraft, the applicant will submit an application form to the KCAA accompanied by the prescribed fee and attach the relevant supporting documents. Upon successful registration, the KCAA will issue a Certificate of Registration to the person(s) in whose name the aircraft is to be registered. Rules and requirements concerning the operation of aircrafts are contained in the ANRM Regulations, theLicensing of Air Services

Regulations, the Airworthiness Regulations, the Civil Aviation (Instruments and Equipment)Regulations, 2013 (the Instruments and Equipment Regulations), the Civil Aviation (Operation of Aircraft) Regulations, 2013 (the Operation of Aircraft Regulations) and the Civil Aviation (Commercial Air Transport Operations ByForeign Air Operator In And Out Of Kenya) Regulations, 2007 (the Commercial Air Transport Regulations). According to these regulations, there are a number of requirements which must be complied with before an aircraft is operated in Kenya. These include the following: a valid certificate of registration in place for the aircraft, the aircraft bearing the nationality and registration marks of the State ofregistration and the marks duly affixed on the aircraft in the manner required by that State, a Certificate of Airworthiness for the aircraft or restricted certificate of airworthiness or a special flight permit duly issued or rendered valid under the law of the State of Registry for the aircraft , the operator having obtained an air service license and an air operators’ certificate, the aircraft being equipped with instruments and equipment appropriate to the type of flight operation conducted

and the route being flown and in any case in compliance with the requirements of the Instruments and Equipment Regulations and a certificate of clearance issued by the customs authorities being obtained in respect of an aircraft being imported into Kenya as well as an air navigation services fee clearance and landing and parking fee clearance. Foreign operators are permitted to operate foreign registered aircraft in and out of Kenya provided they comply with the Commercial Air Transport Regulations.

ii. Licensing

According to the Licensing of Air Services Regulations, the use of aircraft within Kenya by any person for the provision of any service without an air service license is prohibited. An air service is defined as any service performed by means of an aircraft for hire or reward and includes air transport service, aerial work and flight training. The different categories of air services for which a license may be issued are: scheduled air services (i.e. the international air transport of passengers, cargo and mail or a combination thereof), domestic air transport of passengers, cargo and mail or a combination thereof, non-scheduled air services (both international and domestic), aerial work services and recreational flying. An applicant for an air service licence must demonstrate the ability to meet the requirements for an air operator’s certificate for the category of air service and aircraft, as well as meet local integrity requirements and comply with the relevant statutory requirements such as meeting fixed and operational costs. As stated above, the applicant should be a citizen of Kenya or in the case of corporate entities or partnerships, 51% of their voting rights should be held by the State, Kenyan citizens or both. The KCAA has the power to exempt any person from the shareholding requirement after having regard to

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the special nature of the air service being provided. The KCAA may also exempt foreign registered aircraft from the requirement that the aircraft operating the air service should be a Kenyan registered aircraft provided that the aircraft is able to meet its operational and maintenance standards. In this regard, the KCAA may accept the production of documents issued by competent authorities in the State of origin confirming that the operator meets the KCAA’s competence, technical and financial fitness requirements. In addition, the KCAA may exempt foreign carriers providing international scheduled air transport services and operating under and in accordance with any bilateral or multilateral agreement concluded between the Government of the Republic of Kenya and such other State from the requirement to obtain an air service license. Foreign-registered airlines wishing to operate as a franchise within Kenya, must obtain approval from the KCAA and the prospective franchisee or franchisor must hold an operating authorisation issued in accordance with the Licensing of Air Services Regulations. Licenses are issued for a term not exceeding 5 years and are not be capable of being transferred or assigned.

iii. Insurance

Insurance obligations in respect of passengers, cargo and third parties arelargely imposed on aircraft operators. For example, air services licensees are required at all times to be insured for a minimum amount equivalent to 100,000 special drawing rights (SDR) per seat in respect of passengers and their baggage and an equivalent of (17 SDR per kilogram in respect of air cargo liability for the total number of seats or cargo weight authorised by the certificate of airworthiness applicable to the aircraft operated by them. Pursuant to the Insurance Act (Chapter 487, Laws of Kenya) (the Insurance Act), insurances for aircrafts registered in Kenya are to

be taken with a locally registered insurer unless prior approval from the Commissioner of Insurance has been obtained. A local insurer is, however, permitted to reinsure the liability with insurers that are not registered under the Insurance Act. This is common practice since local insurers do not have the financial capacity to meet the size of claims associated with aircraft insurances. Compliance with the insurance requirements extends to aircraft on foreign registers as well as national registers. Foreign-registered aircraft flying over Kenyan airspace or making a technical stopover in Kenya (e.g. to refuel) are required to provide the KCAA with a copy of their insurance policy, which must comply with Kenyan insurance requirements.

iv. Safety

No aircraft will be registered in Kenya until it has been certified as airworthy by the KCAA in accordance with the Airworthiness Regulations. The KCAA has its own standards relating to safety and has a technical team that undertakes airworthiness tests and checks before providing airworthiness certification According to the Operation of Aircraft Regulations, aircraft operators are required to prepare a safety management system with reference to their size and the complexity of their operations. In this regard, air operators are required to submit to the KCAA all materials which form part of their safety management system, including details on the safety policy and objectives, key safety personnel, documentation control procedures, coordination of emergency response planning and hazards identification and safety risk management schemes. There are also additional requirements to ensure air safety during the flight and a number of notification requirements imposed on the pilot-in-command.

v. Liability for death or injury of

passengers and damage to cargo

The liability of carriers for the death or injury of passengers, damage to cargo and damage occasioned by delay that occurs during both international and non-international carriage by air is regulated by the Carriage by Air Act No. 2 of 1993 (CBAA) which gives effect to the Warsaw Convention. Subject to the two (2) year limitation period set out under the CBAA, an action for damages can be instituted against a carrier in the High Court by the executor or administrator of the deceased for the benefit of the deceased’s wife, husband, parent or child in accordance with the Fatal Accidents Act (Chapter 32 Laws of Kenya). Further, the Law Reform Act (Chapter 26 Laws of Kenya) will also apply as it confers rights for the benefit of the estate of the deceased. The damages payable will however not exceed the limitations of liability of the carrier per passenger as set out under the CBAA’s Currency Equivalent Order 1993 (the Order). The Order provides that the equivalent of 250,000 gold francs, being the carrier’s limited liability for each passenger under Article 22 of the Warsaw Convention, is Kenya Shillings 1,306,286 or United States Dollars 20,000, whichever is higher.With respect to third party liability, provisions in the CAA make the owner and not the operator liable for material loss or damage caused to any person or property on land or water by: (1) an aircraft, (2) a person in an aircraft or an article, or (3) an article or person falling from an aircraft while in flight, take-off or landing. The liability on the owner is strict liability provided that the loss or damage was not caused or contributed to by the negligence of the person who suffered the loss or damage. However, where an aircraft has been let or hired by the owner for a period exceeding 14 days and during that period of lease or hire, no pilot, commander, navigator oroperative member of the aircraft is in the employment of the owner, the liability shall fall onthe person

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to whom the aircraft had been let or hired out. Further, both owners and pilots can be liable where the aircraft is flown in such a manner as to cause unnecessary danger to any person or property on land or water. However, the owner may be exempt from liability where they are ableto prove that the aircraft was flown in a dangerous manner without their knowledge or consent.

vi. De-registration and export of an aircraft as a default remedy

Under the Cape Town Convention and the Cape Town Protocol, creditors (which include a chargee, a conditional seller or a lessor) have greater certainty with respect to enforcing their rights in aircraft. Previously, debtors would provide an Irrevocable Power of Attorney (POA) which would give the creditor concerned powers to: execute any documents, make the applications required to obtain de-registration of the aircraft from the KCAA’s register, apply for any permits necessary to export the aircraft from Kenya and take possession of the aircraft. The POA would be stamped for the purposes of ensuring its admissibility as evidence in a Kenyan courtand thereafter registered with the Registry of Documents. It was possible for the creditor to peacefully take possession of the aircraft without Court intervention. Often, however, there were good practical reasons for the creditor to proceed by way of court order where the debtor resisted re-possession. From our previous experience, it was possible to obtain to an interim order from the High Court for the attachment of the aircraft through a certificate of urgency. That notwithstanding, Kenyan courts had limited experience in issuing orders relating to the re-possession of aircraft. Under the International Interests in Aircraft Equipment Act (No. 27 of 2013) Laws of Kenya (the International Instruments Act) and Cape Town Convention, it is not necessary for the leave of court to be obtained prior to the creditor

enforcing its rights against a debtor. Further, under the International Instruments Act and Cape Town Convention, a POA is not required. It suffices for the creditor, as the authorised party, to present the Irrevocable Deregistration and Export Request Authorisation (IDERA) provided for under the Cape Town Protocol to the KCAA. The KCAA will, in compliance with its obligations as the registry of a Contracting State as set out under Article XIII of the Protocol (together with Article IX (5) of the Protocol), subject to there being no outstanding liens or charges with respect to the air navigation and parking charges, proceed to de-register the aircraft and issue the export authorisation without requiring a court order. However, Article 13 of the Cape Town Convention does permit for various interim reliefs to be obtained from the court of the Contracting State which permit the possession, control or custody of the aircraft by the creditor. During this process, the KCAA would give notice to the debtor that the creditor intends to de-register and export the aircraft, seek to establish the whereabouts of aircraft and communicate with the airport control tower to ensure that the aircraft remains grounded. For

this purpose, prior to the completion of a mortgage or leasing transaction the IDERA will be duly executed by the debtor and thereafter submitted for registration with the KCAA at which point it will be acknowledged by the KCAA. The debtor will then keep a stamped copy of the IDERA which it will provide to the creditor. In this regard, the delivery of a duly executed and stamped IDERA in the form set out under the Cape Town Convention typically features as a condition precedent to the entry of transaction documents.

vii. Consumer Rights

Passenger rights are provided for in the Constitution and the Consumer Protection Act, 2012 (CPA). While Article 46 of the Constitution provides that consumers are, inter alia, entitled to the right to goods and services of reasonable quality, the CPA sets out the rights and obligations of consumers generally and under specific consumer agreements, provides the means for seeking legal redress for breach of certain consumer rights, prohibits and imposes sanctions for unfair consumer practices and provides for compensation. For consumers of aviation services, the CPA requires air carriers to

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provide overnight accommodation or meals to passengers whose flights have been cancelled or are subject to long delays. Regulations dealing with customer complaints, notification of delays, cancellations, overbooking, baggage concerns and compensation for passengers are expected to be promulgated under the CPA. However, at the time of writing, no such regulations have been effected. In the interim, passengers with complaints may approach the Consumer Protection Department of the KCAA, which is responsible for the enforcement of consumer rights and facilitates informal settlement schemes with airlines on an ad hoc basis.

There are various other laws which touch on aviation matters and form part of the regulatory spectrum of the Kenyan civil aviation sector. These include labour laws, competition laws, environmental laws, laws on anti-corruption and bribery, companies laws, insolvency laws and laws on taxation. With respect to the companies and insolvency laws, it is worth noting that new bills have been passed by the National Assembly and assented to by the President however they are yet to come into force. These new acts are expected to materially change the way companies conduct their business.

AIRCRAFT FINANCING

Secured aircraft financing transactions tend to typically be in the form of aircraft mortgages, conditional sale agreements, aircraft sale and lease-back or aircraft leases (with or without an option to purchase at the end of the lease term). We set out below the key aspects of the two most common transactions aircraft mortgages and leases.

i. Aircraft Mortgages

There are two types of aircraft mortgage which can be created over an aircraft; a legal mortgage and an equitable mortgage. A legal mortgage takes effect as an

assignment to the mortgagee of the mortgagor’s title and interest in the aircraft. The assignment is conditional since the mortgagor retains the right to redeem the aircraft on payment of the mortgage debt (i.e. the equity of redemption). Any provision that purports to exclude this right of redemption is void. The obligation of the mortgagor is to transfer, or cause the legal title to be transferred to the mortgagee. Provided that the transfer of the legal title (and not merely an agreement to transfer) is effected, and, in the case of a Kenyan mortgagor, the particulars of the mortgage are filed at the Companies Registry of Kenya (Companies Registry) no further formality is required.

An equitable mortgage is an executory agreement to transfer legal title only. Thus, there is no actual transfer of legal title although Kenyan courts (exercising their equitable jurisdiction) are empowered, on the mortgagee’s application, to order such a transfer in certain circumstances. The mortgagor (as in the case of a legal mortgage) has an inalienable right to redeem the aircraft on payment of the mortgage debt. The more usual occurrences of equitable mortgages

are where an agreement has been made to effect a legal mortgage or where a prior legal mortgage has already been created over the aircraft. Indeed, any mortgage effected subsequent to a legal mortgage over the same property will necessarily be equitable since legal title to chattels is indivisible. Whenever possible, mortgagees of aircraft tend to insist on a legal mortgage.

One of the key aspects of mortgages is the fact that the law which governs the parties’ contractual rights (i.e. the proper law of the contract) will be distinct from the law which determines the proprietary aspects of the mortgage (i.e. the passing of valid title to the mortgagee). As explained below, the governing law of the contract will be that which has been designated by the parties or the law which the transaction has its closest and most real connection. On the other hand, the law governing the passing of title typically tends to be the law of the place where the aircraft is situated at the time of the transfer or when the mortgage becomes effective (i.e. the lex situs).

However, as recently demonstrated in the Blue Sky litigation, the lex

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situs rule proves to be inappropriate in an aviation context since the whereabouts of aircrafts is often unknown at the time the mortgage is entered into, whether because the aircraft is flying in international airspace or because its precise flight timetable is unconfirmed. Accordingly, it is, often considered to be a sensible precaution for the mortgagor to require that the aircraft is, at the time of the creation of the mortgage, located in the same place as that stipulated as being the proper law of the transfer.That notwithstanding, under the Cape Town Convention, whether a mortgagee has enforceable rights in the aircraft will be dependent on whether the requirements specified in the Cape Town Convention have been satisfied. It is important to note however that this is a complex area of the conflict of laws yet to be fully and conclusively resolved and to the best of our knowledge has not been concluded by Kenyan courts.

In practice, once the KCAA has received the original Certificate of Registration, a copy of the mortgage and a request from the mortgagee that its interests be recorded, it will issue a new Certificate of Registration with the mortgagee’s interest noted thereon. An aircraft mortgage created by a Kenyan company is registrable at the Companies Registry pursuant to the Companies Act (Chapter 486, Laws of Kenya) (Companies Act) . Specifically, such registration is required to comply with Section 96 of the Companies Act which provides that any mortgage (or charge) on a company’s property will be void against the liquidator and any creditor of the company, unless the prescribed particulars of the mortgage (or charge), together with the instrument, if any, by which the mortgage (or charge) is created or evidenced are delivered to or received by the Registrar of Companies for registration within 42 days after the date of its creation. Although there is no similar requirement in the Cape Town

Convention and the International Instruments Act and even though section 5 of the International Instruments Act provides that the International Instruments Act shall prevail in case of any inconsistency between the International Instruments Act and any other law with respect to international interests in aircraft objects. A charge or mortgage created on an aircraft or aircraft object should be registered in accordance with Section 96 of the Companies Act. In light of the fact that the Companies Registry maintains a register of the encumbrances on a company and its assets, for the purposes of notification to the world of the existence of an interest. It therefore follows that if the party granting the interest over an aircraft is incorporated in Kenya, the interest should be registered with the Companies Registry.

It is important to note that spare engines and other parts, including such parts as may in the future become attached to the aircraft, can be made subject to the mortgage. The mortgage should include an indication of their character, their approximate number and location. Practical and legal difficulties can occur when the spare parts are, or become, attached to other aircraft in accordance with pooling arrangements or if they become encumbered in other jurisdictions. Further, mortgages often provide that such engines and parts as may in the future become attached to the aircraft will also automatically become mortgaged in favour of the mortgagee. At common law such a disposition would be ineffective if the goods were not presently owned by the mortgagee (whether because they were owned by a third party or because they had not come into existence on such a date) unless there was some ‘‘new act’’ which had the effect of transferring these parts (when acquired by the mortgagor) to the mortgagee. Given this uncertain situation the mortgage sometimes makes provision for indemnification

by the mortgagor, should any future parts as may become attached to the aircraft, be subject to any adverse interest of a third party.

When it comes to enforcing the mortgage, it is important to note that Kenya has no specific law governing the priority of mortgages. However, since Kenya has ratified the Cape Town Convention and Cape Town Protocol, the provisions contained therein will apply. Specifically, Article 29(1) of the Cape Town Convention provides that a registered interest has priority over any other interest subsequently registered and over an unregistered interest. Kenya has however made the declaration pursuant Article 39(1)(a) of the Cape Town Convention that the following categories of non-consensual right or interests will have priority a registered international interest, whether in or outside insolvency proceedings: liens of workers for payments due arising out of employment relations, liens created by repairmen on goods in their possession, liens created by bailees on goods in their possession, and taxes, duties and or levies due to the Government of Kenya.

ii. Aircraft Leases

Currently, aircraft leases are reviewed and approved by the KCAA for the purpose of ensuring that operators have operational control of the aircraft. Leases are also included as an interest in mobile equipment under the Cape Town Convention and would be registrable at the International Registry.Unlike a mortgage, there is no requirement to register the lease at the Companies Registry. However, the lessor’s interest would be registrable at the KCAA where it will be noted on the Certificate of Registration of the aircraft.Aircraft leases, like leases in general, take effect as contracts under Kenyan law. As a result, in order to be valid there must be at least two contracting parties, an offer and acceptance

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and consideration. An aircraft lease may be either an operating lease or a finance lease. Further, an aircraft lease may be a dry lease (with no crew) or a wet lease (with crew). Finance leases are defined in the Income Tax (Leasing Rules), 2002 (the Leasing Rules) as a contract pursuant to which the lessor agrees to lease assets to the lessee for a specified period of time where the risks and rewards associated with ownership of the assets are substantially transferred from the lessor and to the lessee, but with the title to the assets always remaining with the lessor. However, under the International Accounting Standards (specifically IAS 17) which are applicable in Kenya, a finance lease is one that transfers to the lessee substantially all the risks and rewards incident to the ownership of an asset. IAS 17, however, does not provide a quantitative test. The Leasing Rules define an operating lease as a contract under which the lessor agrees to lease the assets to the lessee for specified periodical payments where the title to the assets and the risks and rewards associated with ownership substantially remain with the lessor. However, under IAS 17, an operating lease ‘‘is a lease other than a finance lease’’.

The law that will govern a lease, including the interpretation and performance of its terms and its validity, will be that chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the lease or the circumstances of the lease. If not so chosen the governing law will be the law of the country with which the lease is most closely connected.Spare engines and other parts—including such parts as may in the future become attached to the aircraft—may be made subject to the lease. Details supplied must include a description of the parts, with sufficient particulars for identification, their number and location. In addition to benefitting

from the exemption of withholding tax on aircraft rentals, a lessor is also entitled to claim a deduction for the wear and tear of the leased assets andin respect of all other expenditure incurred wholly and exclusively in the production of the income in accordance with the Income Tax Act (Chapter 470, Laws of Kenya) (Income Tax Act).However, whereas rental payments will not be subject to withholding tax, interest payments on the rental amounts will be subject to withholding tax. The lessee will also beentitled to claim the full amount of the payments made to the lessor as a deduction. Where a lessee in Kenya has entered into a cross-border lease, the gross lease payments made by such lessee shall be deemed to be income derived from Kenya and subject to withholding tax. The current withholding tax rate is 15%. It should also be noted that the supply of financial services including the hiring, leasing and chartering of aircrafts are exempt from VAT.

Further, the lessor as creditor will be subject to the rights and interests which have priority over registered interests as is the case with mortgages in accordance with the Cape Town Convention.

WHAT YOU NEED TO KNOW ABOUT DISPUTE RESOLUTION IN KENYA Parties to a contract have the freedom to choose the forum for the resolution of their disputes and the law that will govern their contractual rights (i.e. the proper law of the contract). The Kenyan courts generally uphold the common law principle that parties have the freedom to contract. Accordingly, where the parties provide for a foreign law such choice of law would be valid and binding on the parties provided it was made in good faith and not for extraneous purposes or to perpetuate fraud or some other illegal purpose policy (The Nina (1867-8) L.R. 2 P.C. 38) and further that none of the terms of the contract entered into, nor the application of any provision of that law applicable thereto is contrary to Kenyan public policy.

Although there is limited case law from the Kenyan courts, in relation to the application of foreign law, the following principles emerge: the law of a contract has been interpreted by Kenyan courts as relating to the substantive law of the state by which the contract is governed and not to its procedural or conflict of law rules, provisions on foreign choice of law are typically part and parcel of an exclusive jurisdiction clause and the courts have applied the substantive law of another jurisdiction where the interpretation of such law has been proved by expert evidence. In relation to the forum for dispute resolution, parties are free to choose mediation, arbitration, a combination of both mediation and arbitration, resolution through the courts of Kenya or foreign courts with exclusive jurisdiction.

Arbitral awards obtained under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Convention on the Settlement of Investment Disputes between States and Nationals of other States are recognized and enforced upon registration with the High Court in Kenya. Any arbitral award made will be legal, valid and binding in Kenya and will be recognized and enforced in the courts of Kenya without further review of the merits (unless such award falls within the provisions of Section 37 of the Arbitration Act (Act No. 4 of 1995) (Arbitration Act). However, whereas the Kenyan courts would recognise the jurisdiction of a foreign court or arbitration tribunal, they may reserve the right to exercise jurisdiction over “peripheral matters” such as interlocutory remedies (Tononoka Steels Ltd. v The East & Southern Africa Trade and Development Bank, Civil Appeal No.255 of 1998) and the right to exercise an inherent residual jurisdiction when the subject matter is situated in Kenya. Pursuant to section 7 of the Arbitration Act it is not incompatible with an arbitration agreement for a party to request from the High Court, before or during arbitral proceedings, an interim measure of protection and for the High Court of Kenya to grant that measure. Such ancillary relief would be granted where it has been proved to the court that the asset in dispute is in danger of being wasted, damaged, or alienated

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by any party to the dispute or that the defendant party threatens or intends to remove or dispose of the asset resulting in a reasonable probability that the applicantparty will or may be obstructed or delayed in the execution of any decree in relation to the asset and that may be passed against the defendant party, the applicant party cannot be adequately compensated in damages and the balance of convenience necessitate such ancillary relief. An applicant party may be ordered to provide security for any damages that any party may suffer as a result of the interim measure.

Unfortunately, Kenyan courts have limited experience in issuing temporary relief to a debtor in relation to his rights over an aircraft and there are limited examples for us to draw on. Further, the significance and precedent-setting role of the courts in light of the provisions on interim relief in the Cape Town Convention and Cape Town Protocol is yet to be tested in Kenya.

Where the parties to a contract are looking to opt for dispute resolution in a foreign court, they should ensure that the foreign court is in one of the countries which has reciprocal arrangements with Kenya. This will ensure that a judgement obtained in a court of that country is enforceable in Kenya without fresh proceedings having to be instituted in Kenya. Under the Foreign Judgments (Reciprocal Enforcement) (Extension of Act) Order, 1984 (the Order) only a handful of countries have been designated as reciprocating countries.

Enforcement of foreign judgments can take between 1 to 2 years depending on whether or not the enforcement is challenged. The cost of enforcement will depend on the value of the subject matter (in the aviation context this will either be the amount of the debt owed or the value of the aircraft sought to be repossessed), the time taken by the repossessor and by the repossession proceedings. The applicable enforcement procedure is set out in the FJA and the Foreign Judgments (Reciprocal Enforcement) Rules, 1984. The application to enforce the foreign judgment ought to be done within 6 years from the date of judgement. In the case where the judgement is the subject of an appeal, the 6 year limitation period will run from the date of the

determination of the appeal. However, not every type of foreign judgment is enforceable in Kenya. In the specific circumstances highlighted in section 3(3) of the FJA, fresh proceedings would have to be instituted.

Current litigation cases which have dominated the Kenyan civil aviation sector have involved: (i) the KCAA and the KAA in relation to disputes concerning land, (ii) KQ in relation to employment disputes and (iii) KCAA in relation to disputes of fines imposed by the regulatory authority and withdrawal of licences.

In the case of Republic v Kenya Civil Aviation Authority, the ex-parte applicant disputed a refusal to grant him development consent for his parcel of land. The KCAA referred the application for consent to the KAA who in turn rejected the application. The applicant argued that the KCAA and KAA were only entitled to provide height specifications for a development. The High Court directed the KCAA and KAA to move to court to question the ownership of the land, failing which they would have 30 days to acquire the land through applicable legal processes. If the KCAA and KAA failed to exercise their rights, then the court would issue an order of mandamus directing the respondents to give the applicant the height specifications for his development.

In the landmark case of Kenya Airways Limited v Aviation & Allied Workers Union Kenya & 3 others, the national carrier appealed against a High Court judgement against its decision to make a number of its employees redundant and requiring them to be reinstated. In the Court of Appeal, it was held that the applicant had been diligent in consulting with the union and that it had complied with the applicable legal procedures. Since the redundancy was found justifiable noting KQ’s poor state of affairs, KQ was ordered to pay the terminal dues to the employees pursuant to the terms of a brokered collective bargaining agreement.

In the case The Kenya Civil Aviation Authority v African Commuter Services, the KCAA made an application to appeal the judgement and orders of the Court of Appeal in a case concerning unlawful withdrawal by KCAA of the Respondent’s Air Operator’s Certificate (the AOC) and unlawful grounding of the Respondent’s entire fleet. At the High Court, the Respondent had been awarded special damages amounting to an extraordinary sum of Kenya Shillings 608,533,224 as well as Kenya Shillings 10,000,000 in exemplary and punitive damages. The Court of Appeal reduced the award to Kenya Shillings 50,000,000 (approximately US$ 500,000) finding that the withdrawal of the AOC had been unlawful.

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Nepal being a mountainous country, air transportation is the most reliable mode of transportation. The

aviation industry has a great potential

for domestic, regional and international tourism in Nepal. There is a significant demand for small and medium sized aircraft in domestic aviation market in Nepal and jet aircraft in the international aviation market.

This article summarizes a number of principle issues to consider for foreign lessors and financers of aircraft to lease their aircraft to operators in Nepal. This publication covers legal issues relating to operation and finance leasing of aircraft

Aircraft leasing and financing in NepalWrites Devendra Pradhan, Managing Partner, Pradhan, Ghimire & Associates.

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to operators in Nepal.

OWNERSHIP

RegistrationAn aircraft is required to be registered either in Nepal or in any other jurisdiction in order to be able to fly in Nepalese airspace. An aircraft which is not registered in any other jurisdiction must be registered in Nepal in order for it to be able to fly in Nepalese airspace. An aircraft with a valid Certification of Airworthiness may be registered in Nepal. Civil Aviation Authority of Nepal (“CAAN”), a statutory agency which regulates civil aviation activities in Nepal, maintains the Aircraft Register. The ownership interest in the aircraft must be recorded at the Aircraft Register with CAAN. The Aircraft Register may be amended when there has been a transfer of the aircraft whether by way of sale or lease or any other means. The ownership interest will be reflected in the Certificate of Registration issued by CAAN. Registration of the aircraft with CAAN will result in the aircraft being deemed to be a Nepalese aircraft. A Certificate of Registration is not subject to renewal and shall remain valid until transfer of ownership of the aircraft.

Registration FeesAircraft registration fees depend on the weight of the aircraft. For the first 5,700 kilograms, the registration fee is US$300 and for each additional 10,000 kilograms, there is additional registration fee of US$125. Official fee for the recordal of change of ownership interest by way of transfer of title in the aircraft is half of the registration fees.

CAAN ApprovalApproval from CAAN is required for any transaction concerning registration and/or transfer of ownership interest in the aircraft. CAAN will carry out inspection of the aircraft by its own technicians and conduct a test flight prior to granting its approval. Usually, they will have to fly to the location where the aircraft is located at no cost to CAAN.

Registration of an aircraft in the aircraft register requires the making of an application to the Director General of the CAAN, accompanied by various

documents, such as, copy of Nepalese Type Certificate for the aircraft, copy of Bill of Sale or Aircraft Sale Agreement, proof of cancellation of prior foreign registration of the aircraft, copy of insurance policy, proof of Nepalese customs clearance for the aircraft, regarding airworthiness, proof of payment of aircraft registration fee, etc.

Title TransferOwnership interest registered with CAAN will not be deemed to be a conclusive evidence of certificate of title of aircraft. Ownership of aircraft can be transferred either through a Deed signed by both parties in accordance to the Country Code or through Bill of Sale. A Deed under the Country Code, known as, Muluki Ain (‘‘Country Code’’) must be registered with the local registration office. It is common and practical to have the title of the aircraft be transferred though Bill of Sale instead of a Deed under the Country Code as the later shall result in paying registration fees. The transfer of title to an aircraft does not necessarily affect the nationality and registration marks of the aircraft unless this has been otherwise requested by the new owner.

Taxes and VATSale of aircraft is exempt from VAT. For the fiscal year 2072-73 (2015-16 A.D.), there shall be 1% customs duties upon the import of aircraft (by sale or by lease) and its components including gear boxes, engines, tires, batteries, nuts, bolts and rivets.

LEASE INTEREST

RegistrationAll aircraft operational leases require the approval of CAAN. In operating leases, Nepalese laws and the regulations formulated by CAAN will govern to the validity of the lease when the aircraft is operated by a Nepalese operator. Different types of leases, i.e., wet lease, dry lease or damp lease can be registered in the Aircraft Register.

A. Wet Lease: In wet lease of a foreign registered aircraft to a Nepalese operator, the foreign lessor assumes operational control of the aircraft’s operations, and such operations comply with the requirements in the lessor’s Air Operator Certificate (“AOC”) for the duration of the lease. The duration of the wet lease shall not exceed 6 months subject to a one-time extension of additional 6 months.

B. Dry Lease: In dry lease of foreign registered aircraft to a Nepalese operator, the lessee (Nepalese operator) assumes operational control of the aircraft and the aircraft is operated pursuant to the lessee’s AOC for the duration of the lease. Dry lease may occur for any length of time.

C. Damp Lease: In damp lease, the lessor provides an aircraft with partial crew to the lessee. In damp lease of a foreign registered aircraft to a Nepalese operator, the foreign lessor assumes operational control of the aircraft’s operations, and such operations comply with the requirements in the lessor’s AOC for the duration of the lease. Damp lease may occur for any length of time.

CAAN ApprovalApproval of CAAN is required for any types of operating leases. Operating lease of an aircraft requires the making of an application to the Director General of CAAN, accompanied by various documents, such as, make, model and serial number of the aircraft, State of Registry and registration marks,

“There is a significant demand for small and medium sized aircraft in domestic aviation market in Nepal and jet aircraft in the international aviation market.”

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details of the registered owner of the aircraft, copy of the Certificate of Airworthiness, proof of the maintenance program approval from the relevant foreign Authority, copy of the lease agreement, etc.

Various documents, i.e., particulars and technical details of the aircraft need to be submitted to CAAN. If the parties wish, financial consideration in the lease agreement may be blanked out. CAAN also may change or add clauses in lease agreement.

Inspection of the AircraftBefore registering the aircraft in the Aircraft Register, CAAN will inspect the aircraft by its own technicians. Usually, they will have to fly to the location where the aircraft is situated at no cost to CAAN and at the cost to lessee. Such technicians will make a fair valuation of the aircraft. Customs duties will be assessed based on such evaluation.

Registration FeesFollowing fees payable by the operator/lessee in respect of the operation, and transfer, of leased aircraft: aircraft on lease - US$1,250 transfer in the ownership of leased aircraft - US$300

Customs Duties and DepositsFor the fiscal year 2072-73 (2015-16 A.D.), customs duties of 1% is applicable

to the import of airplane or helicopter or engine. However, such custom duties will be refunded to the operator in the event the airplane or helicopter or engine is returned back from Nepal within 3 years of import.

Withholding TaxesWithholding tax at the rate of 10% is applicable on the payment made against the lease of an aircraft.

Withholding tax at the rate of 5% is applicable on the payment made by a resident to a non-resident against the maintenance or other contracts pertaining to aircraft.

Withholding tax at the rate of 15% is applicable on the payment of interest payment to the lender. There are no taxes upon the repayment of the principle.

CAPE TOWN CONVENTION

Nepal is not a party to the Cape Town Convention on International Interests on Mobile Equipment and Aircraft Protocol. This is a major concern for aircraft lessors in leasing their aircraft to operators in Nepal.

COMPETING INTERESTS

The supremacy of lessors’ or owners’ interest can be threatened by various reasons. That include:

• If an operator fails to pay any charges payable to the Government of Nepal (“GON”) and/or CAAN, the GON and/or CAAN reserves the right to deny a transfer of ownership of such aircraft or deny the cancelation of the registration of such aircraft or refuse to issue an Export Certificate of Airworthiness.

• An authorized officer of the GON may detain an aircraft for the safety of its passengers or any other person or if an aircraft is operated in a restricted zone.

It will also be important for lessor and/or financier to be able to agree appropriate monitoring provisions with the lessee. These might include arranging tax and duties clearance letters/certificates from the respective authorities or CAAN or arranging a regular certificate from the operator’s auditor confirming that all relevant dues have been paid.

EXCHANGE CONTROLS

Payments against the operating lease or loan may be remitted abroad in foreign currency after obtaining approval from the central bank, Nepal Rastra Bank (“NRB”) upon recommendation of CAAN. A lessor or financer will need to

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make sure that the lessee or borrower takes effective responsibility for exchange controls approvals required from NRB in relation to the lease agreement or financing agreement.

SECURITY INTEREST

The security package is taken to include security over the aircraft, the lease agreement, and insurance and reinsurances and also a guarantee and deregistration power of attorney.

AIRCRAFT MORTGAGE

Courts in Nepal may not recognize the effectiveness of aircraft mortgage granted in other jurisdiction. There is no specific register for the registration of aircraft mortgages under the aviation laws of Nepal. It is advisable that charge over the aircraft can be filed with CAAN to facilitate the granting of possession and export certificate of airworthiness. CAAN recognizes charge over the aircraft for information purposes only. Such registration will not have the effect of granting the mortgagee a lien on the aircraft.

Nepalese laws recognize security interests over movable assets under the Secured Transactions Act 2006 (“STA”). STA provides for the registration

of secured transactions, such as the mortgage of movable property at the Secured Transaction Registry Office which is intended to come into effect by September 18, 2015.

INSURANCE SECURITY ASSIGNMENT

It is recommended to include the lessor or financier’s rights in relation to the insurance and/or reinsurance of the aircraft.

GUARANTEE

The lessee’s obligation under the lease documents or borrower’s obligation under the financing documents may be supported by a third party payment or payment guarantee, i.e., bank guarantee.

REPOSSESSION, DEREGISTRATION AND ENFORCEMENT

No self-help remedies

Nepalese laws do not recognize self-help remedies. An aircraft can only be repossessed through mutual consent of the parties or through the judgment of the court in the absence of mutual consent.

DeregistrationDeregistration of an aircraft from the

Aircraft Register is effected by means of an application to the CAAN by the owner. CAAN deregisters the aircraft when requested by a foreign State of Registry or by the aircraft owner. A Deregistration Certificate cannot be obtained on registration of the aircraft. The operator may execute a deregistration power of attorney in favor of the lessor or financier. Although not mandatory, the deregistration power of attorney may also be registered at CAAN.

RepossessionFollowing consent or approval is required to enable the export of aircraft following the termination of the operating lease.

• An Export Certificate of Airworthiness from CAAN;

• An export permit from CAAN;

• Proof of payment of all fees, charges and dues to the GON and CAAN associated with the aircraft; and

• Permission from the tax and customs authorities for the export of the aircraft.

Relevant authorities may refuse permission if the taxes and duties are not paid.

Enforcement of Foreign JudgmentNepalese courts will not enforce judgments rendered by courts of foreign countries in the absence of any bilateral agreement between the foreign country and Nepal to that effect. Nepal has not concluded a bilateral agreement with any foreign country for the recognition, or enforcement, of foreign judgments. Nepal is not a signatory to the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters 1971. Except for arbitral awards made in a foreign country, Nepalese laws do not accept the recognition, and enforcement, of a foreign judgment in any manner. Foreign arbitral awards can be enforced in Nepal as Nepal has ratified the New York Convention.

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MEXICO

It has been estimated by Goldman Sachs that Mexico will be the 5th largest economy by 2050.

Mexico’s free trade agreements give privileged

access to 2/3 of the world’s GDP. Mexico is part of the world’s largest economic block (NAFTA = 18 trillion USD) and, with 12 trade agreements, it has access to 44 countries (1.2 billion people).

The so called MIST economies (Mexico, Indonesia, South Korea and Turkey) more than doubled in size in the past decade. In Mexico, Latin America’s second largest economy, record auto exports are helping growth outpace Brazil’s for a second year amid waning Chinese demand for the South American nation’s commodities. These

four countries are all members of the prestigious G-20 group of the world’s top economies. Each of them represents more than 1% of global GDP.

The aeronautic industry is not an alien to the foregoing. In fact, the aeronautic sector has become a strategic and dynamic one in Mexico with anticipated investments of US1,300 Million, the creation of more than 33,000 jobs and exports in excess of US12,000 Million in 2021 (with an annual export growth above 14%).

Government agencies continue working to expand the creation of industry clusters offering different incentives and support for companies coming to Mexico and willing to form or expand the creation of supply chains.

There are more than 300 registered companies operating in Mexico located throughout 17 different States. Most of them (287) hold NADCAP certifications (National Aerospace and Defense Contractors Accreditation Programs).

According to KPMG, Mexico recently had an average cost advantage of 21% (over 19 industries), compared to the US. The Index of Technological Sophistication of Mexican export products (3.25) is the highest in Latin America and above India and Brazil (OECD). KPMG’s study of Competitive Alternatives 2014 ratified Mexico as one of the most competitive countries in terms of fees in aerospace manufacturing (13.3% below the US, 14.2% below Germany, 13.8% below Australia and

Mexican promiseBy Juan Carlos Machorro, Santamarina Steta

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12.8% below Japan).Boeing and Airbus manufacture

350 new aircraft a year. Aeroméxico announced that it will invest US11,000 Million to acquire 100 new Boeing aircraft in the coming 10 years. It will replace existing 767 with new 787 aircraft and acquire a large number of 737s to attend domestic routes.

A new segment of people has started to fly in Mexico and commercial airline players (both domestic and international) are certainly taking advantage of these opportunities.

With a current commercial fleet of over 220 aircraft, it has been estimated that Mexico has potential to operate 500 commercial aircraft to attend domestic and international routes.

Calculations show transportation of 290 to 315 Million passengers per year for the year 2040 in Mexico, with some dependency on the operation of a new airport in Mexico City the next decade.

Mexico operates more than 80 airports, of which only 12 are highly profitable and concentrate 95% of commercial aircraft operation.

Mexico City International Airport (AICM) has experienced a considerable increase in passenger traffic (with a capacity exceeding 30 million annually), making it the largest in Latin America. Still, a new airport will be required for Mexico City, as the AICM has been officially declared saturated.

During 2014, AICM registered 410,000 operations and transported

34 Million passengers (a 42% increase from 2010).

A new airport has been officially announced by the Mexican Government, as one of the main infrastructure projects worldwide, competing with Heathrow, Dubai, Istanbul, Beijing and Berlin. It will have an initial cost (initial phase) of US10,000 Million with an initial phase of one terminal building, three runways, and a capacity for 50 Million passengers and 550,000 operations per year, and a subsequent phase of two terminal buildings, six runways, and a capacity for 120 Million passengers and one million operations per year.

Names such as Norman Foster, Parsons, ARUP, NACO, TADCO, ALG, and others are already associated with the project.

It has been reported that the International Civil Aviation Organization (ICAO) will work closely with the Mexican civil aviation authority (DGAC) on matters such as the implementation of new aeronautical regulations regarding slots, airport surveillance, fees and technical personnel and on the codification of operating security provisions.

The aforesaid agency (DGAC) is also working on an action plan against climate change and a new system of satellite navigation, which may be ready for publication sometime during 2016. The action plan intends to cover climate change and will seek the modernization of aircraft fleet, operational improvements for air transport and biofuels. A satellite navigation system is also being reviewed along with the traffic control agency (SENEAM) that could eventually increase the number of operations in Mexico City’s airport.

The promotion of open skies and whether or not to revisit bilateral agreements and freedoms of the air are a recurrent topic and recent times have not been the exception. Several discussions related to the negotiation of the US-Mexico Bilateral Air Transport Agreement have been taking place, situation that has created noise among local organizations rejecting a revision of the fifth freedom of the air. An exhaustive debate is expected in the coming months, both in the media and in official channels.

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India is one of the fastest growing aviation markets and currently the 9th largest civil aviation market in the world. It is projected to become the

3rd largest aviation market by 2020 preceded only by US and China . The Indian aviation sector is likely to see investments totalling USD 12.1 Billion during 2012-17 of which USD 9.3 Billion is expected to come from the private sector. More than 80 international airlines and 5 Indian airlines currently operate in India. With traffic at all Indian airports (aircraft movements, passengers and freight) estimated to grow above 4 percent for the next five years and a market size of around US$ 16 billion, the business potential of the aviation sector in India is not lost on the global players.

FOREIGN DIRECT INVESTMENT IN AVIATION SECTORFrom opening up Foreign Direct Investment (FDI) in civil aviation up to 40% foreign equity participation with myriad restrictions in 1997-98, the sector has been opened up gradually in sync with the liberalisation measures

adopted by the Government of India. Currently, FDI in the aviation sector

is permitted with specific sector caps under the automatic or approval route as set out in the table below. Investment through the ‘automatic’ route refers to foreign investment without prior approval from the Foreign Investment Promotion Board (“FIPB”). ‘Approval’ route refers to foreign investment with prior approval from the FIPB.

SECTORAL HIGHLIGHTSThe civil aviation sector in India has experienced a turbulent phase over the last couple of years with a domestic airline (Kingfisher) going defunct, another low-cost carrier (SpiceJet) going through a near-shutdown and the downgrade of India’s safety ranking by the US Federal Aviation Administration (which was recently restored). Notwithstanding these setbacks, the sector is also in the midst of an exciting phase since 2013-14 with Air India, India’s national carrier, joining the 27-member global airlines grouping Star Alliance, new players like the low-cost carrier AirAsia and the full-service carrier Vistara entering the Indian market.

In another significant development, the Government of India has rolled out the “Make in India” program, which is a major national initiative to transform India into a global manufacturing hub. Aviation is one of the 25 key sectors identified by the “Make in India” program.

NEW CIVIL AVIATION POLICY IN THE PIPELINE• The Ministry of Civil Aviation of the

Government of India has unveiled a draft civil aviation policy in October 2015. This policy proposes a set of reforms for the civil aviation sector specifically focussed on holistic development of the sector ranging from development of airports, cargo sector and helicopter aviation to the modernisation of air navigation services in India.

• Taking forward the Government’s objective to encourage Indian carriers to enhance regional connectivity through deployment of small aircrafts and code sharing arrangements, the Route Dispersal Guidelines are proposed to be reviewed. The Regional

Challenges and opportunities in Indian aviationRamesh K. Vaidyanathan, Partner, Advaya Legal, India

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Connectivity Scheme (RCS) will be implemented from 1st April, 2016, which will offer exemption from service tax on tickets, waiver of airport charges on Scheduled Commuter Airlines (SCAs) for operations under RCS. ATF drawn by SCA from RCS airports will be exempt from excise duty and such other benefits to promote the Scheme. The RCS is also proposed to be made operational only in those states that reduce VAT on ATF at these airports to 1% or less. The government is also looking at improving regional connectivity by promoting the growth of SCAs.

• The draft policy proposes a review (and a phase-out) of the ‘5/20’ guidelines to encourage the entry of new Indian carriers. The present ‘5/20’ rule in force states that a domestic carrier has to be operation for at least 5 years and have a fleet of a minimum 20 aircrafts to be eligible to fly on international routes. The proposed ‘domestic flying credits’ (DFCs) rule, to replace the ‘5/20’ norms, seeks to reward airlines with clearances to fly abroad based on their experience and fleet size.

AIRPORTS• The growth in airlines catering to

the ever-growing ‘flying’ population has led to a surge in demand from airports in Tier-II and Tier-III cities in India. In fact government estimates indicate around 500 airports would be required by 2020. This throws up interesting investment opportunities in the development and operation of airports in partnership with the government as a Public-Private Partnership (PPP) venture. New Delhi and Mumbai, India’s biggest airports (both in terms of footfall and revenue) were developed in the PPP model. While these were brownfield airport development projects, new airports at Hyderabad and Bangalore have been developed as green-field PPP airports. These four airports are estimated to involve about private sector investment of about INR 300 billion. Although these projects had their fair

share of challenges working with government agencies and the bureaucracy, they have nonetheless been successful ventures for all the stakeholders involved, including the operators and passengers. The Government of India has also approved the construction of ‘no-frills’ budget airports to improve regional connectivity across India.

• In addition to promoting PPP ventures in constructing future airports, the latest draft policy provides that the Ministry of Civil Aviation (MoCA) and AERA (Airports Economic Regulatory Authority) will encourage airports operators to take advantage of the RBI’s recent facility of refinancing existing long term project loans every 5-7 years, in order to reduce airport tariffs. The draft also lays down that airports operators, airlines and other stakeholders work together to create a road map to identify ways to bring down airport charges and simultaneously comply with existing concession agreements and contracts.

CHALLENGESDespite this buoyancy, the Indian aviation industry continues to remain a study in contrast, with infrastructural bottlenecks posing a big challenge to its steady growth.

• The lack of state of the art airports and the crumbling infrastructure of some of the existing airports, air traffic control systems and shortage

of qualified manpower are some of the biggest challenges facing the sector today.

• High airport charges and interference by the regulatory authorities in pricing and other commercial decisions of the airlines prevent the airlines from generating additional revenue. A recent example of this interference is the diktat of the Directorate General of Civil Aviation (functioning under the aegis of the Ministry) prohibiting AirAsia India from offering zero baggage allowance.

• Excessive pricing and taxation of Aviation Turbine Fuel (ATF) is another concern area for the industry. Approximately 40% to 50% of the total operating costs of an airline are attributable to ATF price and in India this is about 55% to 60% costlier than in the Middle East and ASEAN region.

The regulatory reform in the aviation sector in India has been identified as one of the key factors shaping air travel in 2015 globally as brought out in a recent report analysing the global aviation sector. This emphasises the importance of the aviation sector in India and the immense opportunities it holds for investors and entrepreneurs alike. While the fine print on the reforms to address the infrastructural bottlenecks and other challenges plaguing the sector is awaited, there is no doubt that the aviation sector in India is gradually coming of age as a key contributor to India’s economic growth.

#####

Nature of business Investment entry route FDI cap (% of foreign equity permitted)Airports

Greenfield (existing) airport projects Automatic 100%

Brownfield (new) airport projectsAutomatic 74%

Approval Beyond 74%

Air Transport Services

Scheduled air transport service/ domestic scheduled passenger airline.

Automatic 49%

Non-scheduled air transport service Automatic 49%

Approval beyond 49% and permitted only up to 74%

Helicopter/seaplane services Automatic 100%

Other services

Ground handling servicesAutomatic 49%

Approval beyond 49% and permitted only up to 74%

MROs; Flying/technical training institutes Automatic 100%

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In the context of commercial aircraft financing, expanding foreign investment from Asia has seen a rapid emergence of new power houses in the

leasing company space, particularly in the People’s Republic of China (PRC). The PRC’s financial leasing industry as a whole has continued to expand in the past 18 months with total turnover reaching around RMB 3,420bn ($500 million) as of the end of March 2015, up about RMB 220bn ($340 million)

compared to the end of 2014, and it is the aviation segment in particular that has witnessed continuous growth.

In 2007, the PRC permitted state banks to have leasing units, resulting in all five state banks and one of the major policy banks forming new aircraft lessors in a space of less than 18 months. In December 2013 the central government again stated its desire for PRC lessors to become some of the biggest in the world by 2030. There were reportedly only 20 domestic lessors in the PRC in 2013 and

whilst the current number is not entirely clear, the major players in the field are going from strength to strength with the civil aircraft leasing market expected to reach $130bn by 2025. At the end of September 2014, China’s civil aviation industry had nearly 2,200 passenger planes in service, of which 1,500 planes were leased (40% via finance leases).

The rapid domestic growth forecast in China is not the sole driver and the rising number and activity of PRC lessors follows express government

Chinese lessors expand their reachDebra Erni, Partner, Pillsbury Law explores the growing influence of China and Hong Kong in the aircraft leasing market

LESSORS AND ASIAN EQUALITY.indd 106 06/01/2016 10:55:55


APAC LEASING

encouragement to grow and diversify internationally. While the historical trend was always for PRC based leasing companies to focus on inter-state leasing, reflecting previous regulatory limitations and the availability of the free trade zones (Tianjin, Shanghai, Fujian and Guangdong), Chinese lessors have now become conspicuous in their aggressive pursuit of assets with leases attached to foreign airlines as a means to expand their portfolios and enhance bargaining power and influence in

the industry. Coupled with this, their acquisition of, and investment into, established foreign leasing companies has provided immediate access to management experience and a wider customer base.

CDB Leasing is arguably the best known of the PRC lessors, leasing to 43 airlines (including all the main airlines in the PRC as well as lessees in another 23 countries). The lessor used a Japanese operating lease with call option (Jolco) in 2012 to finance aircraft for Japan Airlines and it has been looking at using ECA financing from Natixis to expand its portfolio. Reports throughout 2015 highlighted that it was also exploring the option of listing on the HKSE. In addition to its three domestic platforms in the PRC, it also operates out of Dublin.

ICBC Financial Leasing has the largest asset base of the PRC lessors (including ships) and currently owns and manages just over 300 aircraft. In March, it signed a purchase order with the Chinese manufacturer COMAC for 30 ARJ21-700 aircraft (following an order for four C919s in 2011), and it has also recently completed the first ever cross border lease into Nepal of

an Airbus A320-200 to Himalaya Airlines, adopting a novel structure with the use of a Chinese special purpose vehicle (SPV).

A now established name in the industry, Minsheng Financial Leasing, is looking to move into the Hong Kong market. The lessor has also been active in the US market, signing up to a $300 million financing of eight Gulfstream aircraft, using a US Ex-Im Bank guarantee and a memorandum of understanding with Boeing for 30 737s, a number which would more than double its current portfolio. In 2014, the lessor counted full-service carriers, such as China Eastern and China Airlines, and low-cost carriers, such as Ryanair and Norwegian Air, among its customers.

The PRC top ten is completed by CMB Financial Leasing, Bank of Communications Financial Leasing, CCB Financial Leasing, ABC Financial Leasing, Changjiang Leasing (its parent company, HNA Capital, also has a share in Hong Kong Aviation Capital) and AVIC Leasing, all of whom have been involved in a range of transactions in the past 18 months, and finally Bohai Leasing, one of the main shareholders of Hong Kong Aviation Capital (HKAC) and the successful bidder of a 20% stake in Irish lessor Avolon in September 2015. It is currently the only listed leasing company in the PRC.

Reports have also highlighted that a new start-up Rongzhong International Financial Leasing commenced trading in February 2015 and another name to watch in 2016 will be the Shanghai-based aviation division of Ping An International Financial Leasing, a wholly owned subsidiary of Ping An Insurance Group – the largest non-state company in China. In addition to a sizeable order of COMAC aircraft made in June 2016, this new entrant is due to expand its portfolio in the first part of 2016 with the arrival of reportedly 30 Boeing and Airbus aircraft via sale and lease back transactions. It also established an Irish subsidiary in September 2015 and is currently building up a Dublin based team

Despite the fact that most of the Chinese entities are connected to the state through their parent corporation being a state owned bank or corporation, they

“A new start-up Rongzhong International Financial Leasing commenced trading in February 2015 and another name to watch in 2016 will be the Shanghai-based aviation division of Ping An International Financial Leasing, a wholly owned subsidiary of Ping An Insurance Group – the largest non-state company in China.”

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APAC LEASING

have resorted to using traditional means for funding their aircraft purchases; as mentioned above Minsheng Financial Leasing has used US Ex-Im guarantees for purchase orders having previously had a bridge facility with DVB Bank, in August 2015 CMB Financial Leasing refinanced three aircraft using DVB Bank and Morgan Stanley debt and CDB Leasing is in talks with Natixis regarding ECA financing for Airbus and Boeing deliveries.

The Hong Kong lessor base continues to develop with BOC Aviation and China Aircraft Leasing (CALC) very active in the market. BOC Aviation owns/manages more than 250 aircraft with 200 currently on order and it recently extended its $2bn revolving credit facility which matures in 2022 with Bank of China. It has 60 airlines on its books.

CALC is Hong Kong based and listed with offices in four PRC cities and is marketed as “the largest aircraft operating lessor in China, in terms of new aircraft import under lease each year”. It completed a $224 million ECA backed facility in April 2015 that will cover 5 A320s and it has a further 100 A320s on order after signing a new purchase order with Airbus in Paris in 2015.

Hong Kong Aviation Capital (HKAC) has been very public in its intention to expand over the next two years saying

it aims to boost its portfolio by about $2bn to $5bn by the end of 2016. It signed a purchase order for 70 A320s in 2014 and in 2015 delivered both Airbus and Boeing aircraft to a range of airlines including Volaris, SriLankan and Jetstar. Financing has come through ECA support and it has PDP financings (with Natixis) listed on its website. It also secured $300 million in funding from shareholder Bohai Leasing in July 2015.

Two new lessors entered the market in 2015, Hong Kong financial group Bridge Partners opened up an aviation division in July and Astro Aircraft Leasing also launched, although neither have any deals in the public domain as of yet.

Hong Kong has been very open about its intention to become more of a rival to Singapore and Ireland and it has recently introduced withholding tax reductions aimed at establishing the city as an aircraft leasing and financial hub. Designed to make the city more desirable and competitive, tax on Hong Kong-PRC transactions has been reduced from 7% to 5% meaning the Hong Kong based lessors can now offer more attractive rates to PRC airlines.

Last and certainly not least, we must make mention of the fairly recent entry of two very high profile individuals into the aircraft leasing market. Cheung Kong Holdings’ owner, Li Ka-shing, (Asia’s richest man) has courted much press

attention through significant expansion of his holdings within the aircraft leasing business in the past 18 months and a number of articles have suggested that his involvement in the market could spur others into seeking out targets as aviation is seen as a more stable and possibly profitable investment than real estate. Cheng Yu-Tung is such a case in point. Hong Kong’s fourth richest man has, via Chow Tai Fook and NWS Holdings invested in start-up Goshawk Aviation, a JV formed in late 2013 with Investec Bank. Having secured a $605 million non-recourse secured loan facility in July 2015 the Dublin based lessor has recently ramped up staff numbers and will be a name to watch in 2016. Cheung Kong, through its Dublin-headquarted Accipiter Holdings, bought 18 planes from units of GE Capital Aviation Services for around $714.8 million in 2014 and reportedly struck a deal to buy 60 aircraft from AWAS before being outbid by Macquarie for the portfolio. Cheung Kong also entered into a JV with MCAP in March 2015 (50% Cheung Kong, 10% Li Ka Shing Foundation and 40% MCAP), creating Vermillion Aviation. Vermillion purchased 15 vintage aircraft from MCAP in February 2015 with its Irish entity (Vermillion Aviation Holdings Ireland Limited) and concluded a purchase and leaseback arrangement with Avianca Brasil for new Airbus A320-200 in August 2015.

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Following the highly anticipated ruling of Europe’s highest court in Ryanair v PR Aviation on 15 January 2015, airline

and travel operators that own databases which are not protected under the European Database Directive can instead rely on contractual terms as an effective and enforceable means of preventing and taking action against screen scrapers, provided that those terms are drawn to the user’s attention and subject to compliance with any applicable national laws.

BACKGROUNDThe case concerns the legal protection of databases against screen scrapers.

“Screen scraping” conjures an image of scraping frost from car windows on a cold winter morning however in the online world it involves using software to automatically copy, extract and/or re-utilise information from websites without the permission of the

website owner. Screen scrapers include research and reporting organisations, price comparison websites and news monitoring agencies amongst others.

This is relevant to airline and travel operators who expend significant time and resource into creating databases of information, for example flight information, only for it to be systematically accessed and used by third parties such as price comparison websites, without the permission of the owner or payment of any form of remuneration.

In Europe, Directive 96/9/EC (the Database Directive) provides for two forms of legal protection for databases (references to ‘Articles’ below are to Articles of the Database Directive:

1. Database copyright. This right subsists in a database where the selection or arrangement of the contents of the database constitutes the author’s own intellectual creation (Article 3(1)); and

2. Sui generis database right. This right subsists in a database where there has been substantial investment in obtaining, verifying or presenting the contents of that database (Article 7(1)).

Certain rights are reserved to the owners of these rights. The owner of a database in which database copyright subsists has the exclusive right to reproduce, adapt, distribute and communicate the database (Article 5(1)). The owner of a database in which the sui generis database right subsists has the right to prevent the extraction and/or re-utilisation of the whole or of a substantial part of the contents of that database (Article 7(1)).

Note that the Database Directive sets certain limitations to these monopoly rights, so a lawful user of a database protected by database copyright can do any of the reserved acts if those acts are necessary for the purpose of accessing the contents and normal use

Screen scrapers bewareEurope’s highest court empowers data owners, writes Farah Mukaddam

TECHNOLOGY

SCREEN SCAPERS.indd 110 06/01/2016 10:55:59


of the database (Article 6(1) and a lawful user of a database protected by the sui generis database right can extract and/or reutilise insubstantial parts of the contents of a database (amongst other lawful uses) (Article 8).

The Database Directive also keeps database owners in check by providing at Article 15:

“Any contractual provision contrary to Article 6(1) and 8 shall be null and void.”

The dispute in this case focussed specifically on the application of Article 15 and whether contractual terms prohibiting screen scraping could be relied upon by database owners.

FACTS OF RYANAIR V PR AVIATIONRyanair offered low-cost flights to consumers via its website. PR Aviation operated a website which could search the flight data of various low cost airline companies such as Ryanair, compare prices and allow consumers to book a flight in return for the payment of a commission. PR Aviation obtained the flight data by automated means from Ryanair’s website i.e. by screen scraping.

Use of Ryanair’s website required that the customer accepted the website’s terms and conditions by ticking a box to that effect. The relevant terms were:

• Ryanair was the exclusive seller of Ryanair flights;

• use of Ryanair’s website was permitted only for certain defined private and non-commercial purposes; and

• use of automated systems or software to extract data from the Ryanair website for commercial purposes was prohibited.

Ryanair commenced legal proceedings against PR Aviation in the Netherlands for infringement of its database copyright and sui generis right in the flight data under the Database Directive (implemented into the national laws of the Netherlands) and acting contrary to the terms and conditions of use of its website.

There were a number of appeals and cross-appeals by the parties. In the Dutch Supreme Court, the Court upheld the decision of the Dutch Court

of Appeal that the flight data available on Ryanair’s website was not protected by database copyright or the sui generis right as the requisite criteria outlined above had not been satisfied.

However, the Dutch Supreme Court referred a question to the Court of Justice of the European Union (CJEU), Europe’s highest court, on whether the limits on contractual freedoms set out in Article 15 of the Database Directive apply to databases which are not protected by database copyright or the sui generis right (a European national court is obliged to refer questions of EU law to the CJEU if the answer under European law is unclear).

CJEU DECISIONThe CJEU handed down its decision on 15 January 2015.

In its ruling, the CJEU recalled that the Database Directive set out to achieve a balance between the rights of the owner of a database and the rights of lawful users of a database. In that context, Articles 6(1), 8 and 15 set out certain rights of lawful users and, in effect, certain limitations to the rights of owners of databases that were protected by database copyright and/or the sui generis right.

With this background in mind, the CJEU held that where a data set fell within the general definition of a ‘database’ under Article 1(2) of the Database Directive, but the database did not qualify for protection as database copyright and/or the sui generis right, the provisions governing database copyright and the sui generis right would not apply to that database.

It followed that the provisions on lawful use set out in Articles 6(1) and 8 and the limits to contractual freedoms set out in Article 15 which expressly referred to Articles 6(1) and 8 would not apply to such databases.

Accordingly the author of such a database was free to lay down contractual provisions on use of the database of its choosing, subject to compliance with any applicable national laws.

IMPLICATIONS OF THE DECISIONThis is a helpful decision for airline and travel operators who spend significant time and money in providing data on

their websites. As Ryanair found in this case, it

is often difficult to prove that the requirements for protection by database copyright and the sui generis right are satisfied. Following this decision, airline and travel operators who own databases which are not protected under the Database Directive, can instead rely on contractual terms prohibiting screen scraping as an effective and enforceable means of preventing and/or taking action against users who copy, extract or re-utilise their data without a licence. This is provided that the terms and conditions are properly brought to a user’s attention (and ideally accepted, for example by ticking a box to that effect) and subject to compliance with any applicable national laws.

Airline and travel operators that own databases should carefully review their terms and conditions of use and consider including provisions that expressly prohibit screen scraping activities. This would potentially enable these operators to bring a legal action for breach of contract against screen scrapers in the event that database copyright and/or the sui generis database right do not subsist in their databases or at least use this point as leverage in any settlement discussions.

Users of databases on the other hand, for example price comparison websites, will need to take extra care before harnessing the data available from databases to avoid being in breach of contract. The terms and conditions of use of databases must be carefully reviewed and licences sought where appropriate.

More interestingly, the decision appears to suggest that an owner of a database which is not protected under the Database Directive will potentially be in a stronger position than an owner whose database is protected under the Database Directive.

It remains to be seen how the decision will be interpreted and applied by the European Member State national courts.

Decision: Case C-30/14, Ryanair Ltd v PR Aviation BV

Farah Mukaddam is an associate in the London office at global legal practice, Norton Rose Fulbright

TECHNOLOGY

SCREEN SCAPERS.indd 111 06/01/2016 10:55:59

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