Taking Security over Aircraft Registered in Cayman and Owned by BVI Companies
The Cayman Islands Register of Aircraft (the "Cayman Register") has seen a significant increase in activity and interest over the last 12 months, with particular interest arising from Asia. The registry has now passed the 200 aircraft mark and continues to grow in a controlled and selective manner, in particular in the private jet space.
Approximately one in every three aircraft on the Cayman Register have mortgages registered against them and approximately 17% of the aircraft on the Cayman Register are registered to British Virgin Islands ("BVI") owners. BVI entities are the single largest group of owners after Cayman Islands entities.
Maples and Calder, qualified in both Cayman Islands and BVI law, has advised on many of the issues which arise with respect to transactions involving mortgages over Cayman Islands registered aircraft with BVI owners. Highlighted below are the main points to consider.
Priority of Mortgages
The Civil Aviation Authority of the Cayman Islands ("CAACI") maintains a register of mortgages ("Mortgages Register") pursuant to the Mortgaging of Aircraft Regulations 1979 (the "Regulations"). Registration of a mortgage provides priority for a security interest in an aircraft and protection from deregistration of an aircraft without the registered mortgagee's consent. The Regulations state that where two or more mortgages of an aircraft are entered on the Mortgages Register, those mortgages have priority according to the times at which they were respectively entered on the Mortgages Register.
The Regulations also provide for a lender notifying the CAACI of its intention to make an application to enter a mortgage in the Mortgages Register by filing a priority notice. Where such a notice has been entered in the Mortgages Register and the contemplated mortgage is then made and registered within 14 days after entry of the priority notice, the mortgage will be deemed to have priority from the date that the priority notice was registered. Therefore another mortgage registered during the period in which a priority notice is current will not take priority over the mortgage subject to the priority notice. If the mortgage is not registered within the 14 day timeframe, then the priority notice will have expired and a new notice will have to be filed. It should be noted that registration of the mortgage over an aircraft cannot take effect until the aircraft is registered on the Cayman Register, but a mortgagee may register a priority notice prior to the registration of the aircraft.
The CAACI will typically require the original priority notice to be filed, however they will process a copy with the original to follow shortly thereafter under certain circumstances. The filing fee for a priority notice is CI$250 (US$305).
A mortgage can only be registered on the Mortgages Register after it is effective.
In order to register a mortgage over an aircraft on the Cayman Register, the CAACI will require an original mortgage registration application in the prescribed form. As with a priority notice, under certain circumstances, the CAACI will process an electronic copy with the original to follow shortly thereafter.
There is no specific form of the mortgage which is required but the CAACI will require an original certified true copy of the mortgage to be provided and accompanied by the mortgage registration fee. It is advisable for the certified copy to be sent to the Cayman Islands rather than the original mortgage because the original mortgage will attract stamp duty up to the maximum amount of US$610. This is one of the benefits of having the priority notice in place. It allows time for the certified copy of the mortgage to arrive in Cayman. No stamp duty would be payable on a certified copy provided for the purposes of registration. It is also common practice for a separate certification page to be sent to the Cayman Islands and the signed and dated mortgage sent by email. Once the mortgage is ready to be registered, the certificate is attached to a copy of the mortgage.
The CAACI will also require a notarised copy of the power of attorney or other document providing signing authority to the signatory on behalf of the mortgagor and the mortgagee on the mortgage and mortgage registration application.
Mortgage registration fees are capped at CI$5,000 (US$6,097.56) and depend on the value of the mortgage as follows:
(a) Mortgage value less than $5 million - CI$1,250 (US$1,524.39)
(b) Mortgage value $5 million to $10 million - CI$2,500 (US$3,048.78)
(c) Mortgage value $10 million to $20 million - CI$3,750 (US$4,573.17)
(d) Mortgage value exceeds $20 million - CI$5,000 (US$6,097.56)
Powers of attorney
Any powers of attorney used for the execution of documents to be filed with the CAACI are required to be notarised and presented for filing with the CAACI.
Air Navigation (Overseas Territory) Order 2013
As a result of the amendments to the Air Navigation (Overseas Territory) Order 2013 ("AN(OT)O"), as of 1 January 2014 the list of persons who are qualified to hold a legal or beneficial interest by way of ownership in an aircraft registered in the Cayman Islands or a share therein ("Qualified Person") was amended and now comprises:
(a) The Crown in right of Her Majesty's Government in the United Kingdom or in right of the Government of the Territory (in this case being the Cayman Islands).
(b) British Nationals, British Overseas Territories Citizens and British protected persons.
(c) Persons ordinarily resident or domiciled in the Territory.
(d) Bodies incorporated and having a registered office in the Territory or in the United Kingdom.
The changes to the definition of Qualified Person are significant because "bodies incorporated in some part of the Commonwealth and having their principal place of business in any part of the Commonwealth" were previously included in the list of Qualified Persons.
In order to provide guidance and clarification and for the avoidance of any doubt in relation to these amendments, the CAACI working together with Air Safety Support International ("ASSI") (a wholly-owned, subsidiary company of the United Kingdom Civil Aviation Authority, established under directions from the United Kingdom's Department for Transport) has issued a notice confirming that aircraft registered on the Cayman Register prior to 1 January 2014 to bodies incorporated in some part of the Commonwealth (including the BVI) and having their principal place of business in any part of the Commonwealth were validly registered and continue to be validly registered.
The CAACI has also indicated that with respect to aircraft registered after 1 January 2014 to entities incorporated in jurisdictions other than the Cayman Islands or the United Kingdom, the Director General proposes to issue specific exemptions as allowed by AN(OT)O to confirm that any such aircraft registration is validly registered. We would recommend that this be done with respect to BVI owners pending further amendment to AN(OT)O, which we expect to be completed shortly based on representations made to ASSI. These amendments are expected to specifically confirm the position of BVI owners within the definition of Qualified Person.
There is currently no income tax, withholding tax, sales tax, capital gains tax, profit tax, use tax or tax on lease or mortgage payments imposed by or in the Cayman Islands and based on the provisions of the Regulations, the provisions of the Bills of Sale Law (2000 Revision) do not apply to any mortgage of an aircraft registered on the Cayman Register.
Customs duty may apply to an aircraft which is brought into the Cayman Islands from any other jurisdiction unless the Collector (as defined in the Customs Law (2012 Revision) (the "Customs Law")) has exercised his discretion pursuant to section 21(1) of the Customs Law to permit the import of such aircraft free of duty, for retention in the Cayman Islands on a temporary basis with a view to its subsequent exportation, for a period not exceeding six months or such extended period as the Collector may authorise.
Registration of parked aircraft
Although the Cayman Islands typically accepts only aircraft operated in the 'private category', it is possible to register any type of parked (or grounded) aircraft on the Cayman Register (e.g. during the period of fit out) thereby allowing a financier the benefit of registration of a Cayman Islands registered mortgage, after which the aircraft may be registered on another register when it is ready for commercial operation.
Inspection for airworthiness can be completed wherever the aircraft is located and a certificate of airworthiness is then issued once the aircraft satisfies the necessary requirements. There is no requirement for an aircraft registered on the Cayman Register to be brought into the Cayman Islands at any time.
BVI Security Considerations and Registrations
A typical aircraft financing transaction would not only contemplate a BVIBC's loan obligations under a facility agreement being supported by an aircraft mortgage, but would also usually include the granting of other security interests such as assignments in respect of aircraft and engine maintenance support agreements, insurances and warranties.
It is also usual for the lender to take an equitable share mortgage over the shares in the BVIBC as part of its security package.
Whilst there are no perfection requirements necessary under BVI law to recognise the validity or enforceability of security created over the assets of a BVIBC, or in respect of such BVIBC's secured shares, the following are steps which can be taken to protect a lender's security interests and to ensure the lender is conferred with priority against unsecured creditors and subsequent secured creditors:
(a) Where a BVIBC creates a "relevant charge", under section 163 of the BVI Business Companies Act, 2004 - e.g. an aircraft mortgage or assignment of insurances by way of security - particulars of the charge may be filed with the Registrar of Corporate Affairs for a fee of US$100. The particulars of the charge will then be placed on the BVIBC's searchable public records putting third parties on constructive notice of its existence. The filing also acts as a priority determinant vis-à-vis subsequently filed security in respect of the secured asset and the claims of unsecured creditors.
(b) Where a lender has taken security over the issued shares of the BVIBC, it is advisable for a notation to be placed on the BVIBC's register of members which evidences the existence of the security interest. This acts as a method of giving notice to third parties of the existence of such security if they review the register of members. It is also possible for the annotated register of members to be filed publicly with the Registrar of Corporate Affairs and therefore available on the BVIBC's searchable public records.
Transactions of this nature jointly involving the BVI and the Cayman Islands are commonplace and it will be important for owners and lenders to understand the registration and security regimes in both jurisdictions to ensure that their respective obligations are capable of being fulfilled and that their respective interests are protected.