Security

Security document (mortgage) form and content

What is the typical form of a security document over the aircraft and what must it contain?

Security usually takes the form of a mortgage. There is no statutory format with which the mortgage must comply. The mortgage itself need not be governed by Bermuda law and the original mortgage deed need not be provided to the BCAA.

If the relevant mortgage is to be registered as an international interest at the International Registry under the Cape Town Convention, then it must be in such a form as to constitute an international interest under the Cape Town Convention.

The following are also common in aviation finance structures:

  • assignments of any charter agreements, insurances, warranties or aircraft leases relating to the aircraft. In addition, the borrower will usually deliver a deregistration power of attorney to the lender, the terms of which prohibit the borrower from deregistering the aircraft without the lender’s consent;
  • charges over the shares of the company owning an aircraft; and
  • leasing or charter by demise arrangements, where the owner gives control and possession of the aircraft to the charterer. The charterer then becomes responsible for all responsibilities and liabilities associated with its operation.
Security documentary requirements and costs

What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?

There are no specific documentary formalities under Bermuda law. No stamp duty or other documentary costs should be payable.

Security registration requirements

Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.

With respect to a mortgage over an aircraft registered on the Bermuda Aircraft Register, it is possible to register the mortgage on the Bermuda Register of Aircraft Mortgages and the Register of Aircraft Engine Mortgages pursuant to the Act. Mortgages can be registered against Bermuda-registered aircraft and aircraft engines that are either owned by, or otherwise in the possession of, a Bermuda incorporated company. Such mortgages give the lender priority over unsecured creditors of the aircraft’s owner, permit the lender to take possession of the aircraft in the event of a default by the borrower and permit the lender to sell the aircraft to realise monies to pay the lender’s debt.

There are two specialised registers, one for the registration of aircraft mortgages and the other for the registration of aircraft engine mortgages. The Minister responsible for aviation is empowered to make regulations in respect of the administration of the two registers, as well as in respect of fees and charges in relation to the services provided under the Act, and in respect of making provision for the rights and liabilities of the mortgagors and mortgagees.

The procedure to effect registration of a mortgage is simple and straightforward, requiring an application by the mortgagee. The mortgagee must provide the BCAA with a short registration form summarising the principal points of the mortgage (ie, date, aircraft description, mortgagor contact details and confirmation of the sum secured). An original of the registration form (although, in certain circumstances the BCAA may proceed on the basis of a pdf copy), signed by either the mortgagee or his or her agent or legal counsel must be submitted to the BCAA, together with a copy of the mortgage certified by the applicant to be a true and correct copy and the necessary registration fee (calculated on an ad valorem basis).

If the aircraft mortgage grants a charge over assets that goes beyond the scope of an aircraft or aircraft engine, and the registrant is a Bermuda incorporated company, the document should be registered with the Registrar of Companies under the Companies Act 1981 to protect the priority over those assets. Charges for shares and other ancillary security documents are also generally filed with the Registrar of Companies to protect priority if the registrant is a Bermuda incorporated company. Similarly, in leasing transactions, leasing documents are filed with the BCAA and are also generally registered with the Registrar of Companies under the Companies Act 1981 if the registrant is a Bermuda incorporated company.

Under the Cape Town Convention, an electronic International Registry has been created that is open 24 hours a day, seven days a week. Creditors with an international interest in an aircraft object can register their interest on the International Registry provided that the debtor is located in or the aircraft is registered in a ‘contracting state’. A contracting state is a jurisdiction that has ratified the Cape Town Convention. It should be noted that as an overseas territory, Bermuda is not a contracting state but rather a ‘territorial unit’ of a contracting state, namely the United Kingdom.

To constitute an ‘international interest’ the agreement creating the interest must:

  • be in writing;
  • relate to an object of which the debtor has power to dispose;
  • enable the object to be identified for the purpose of the Convention; and
  • if a security agreement, enable the secured obligations to be determined.

The debtor is situated in a contracting state when it:

  • is incorporated or formed in a contracting state;
  • has its registered office or statutory seat in a contracting state; or
  • has its centre of administration in a contracting state.

If the debtor is a Bermuda company, international interests can now be registered against the Bermuda company on the International Registry.

Registration of security

How is registration of a security interest certified?

The BCAA will issue a certificate of registration, which is generally available on, or soon after, the date of registration. The certificate states the date and time of registration, whether it is the first or a subsequently registered mortgage with respect to the relevant aircraft, the principal details of the mortgage and acknowledges receipt of the relevant registration fee.

Effect of registration of a security interest

What is the effect of registration as to third parties?

A registered mortgage is given statutory priority over subsequently registered mortgages and unregistered mortgages. The priority of the registered mortgage will not be affected by the bankruptcy of the mortgagor, and the security interest will rank in preference to any right, claim or interest of other creditors. It should be noted, however, that possessory liens for work done on the aircraft (whether before or after the mortgage was created), over persons lawfully entitled to possession of the aircraft or with a right to detain the aircraft, will have priority over a registered mortgage. In addition, a previously registered mortgage or a mortgage created prior to the coming into force of the Act would have priority over a subsequently registered mortgage.

Registration of the mortgage cannot take effect until the aircraft is registered, but a lender can apply to file a priority notice with the BCAA in advance of the execution and delivery of an aircraft mortgage or aircraft engine mortgage. This provides notice of the lender’s intention to file a mortgage. If a mortgage is entered on the Aircraft Register or Aircraft Engine Register within 14 days of the priority notice being filed, the mortgage is deemed to have priority from the time the notice was registered. Lodging a priority notice will prevent any other security interests over the aircraft being registered in advance of registration of the mortgage that is the subject of the priority notice.

The priority notice is a simple form, along the same lines as the mortgage registration form, and must be accompanied by the applicable nominal priority registration fee.

All registered mortgagees must provide their consent to removal of the aircraft in question from the Aircraft Register before the removal can take place, and a registered mortgage will continue to exist despite removal of the aircraft from the Aircraft Register.

Although registration of a mortgage does not constitute evidence of its validity, it does constitute express notice of all facts appearing on the Mortgage Register.

International interests registered on the International Registry take priority over subsequently registered interests and also have priority over non-registered interests over the same assets. It is possible to vary such priority by registering subordination agreements on the International Registry. In addition to ease of registration, the International Registry provides greater transparency, as potential creditors can easily search the Register to identify prior security interests already granted. Although most of the security documents in relation to an aircraft financing will constitute an international interest, which can be registered on the International Registry, it is expected that most parties will elect a dual registration procedure and register on both the International Registry and the local Bermuda Register of Aircraft Mortgages.

This will be beneficial in circumstances where:

  • the aircraft may need to be repossessed in a non-contracting state that does not recognise the Cape Town Convention;
  • the debtor does not consent to registration on the International Register (no consent is needed to register on the Bermuda domestic register); or
  • it turns out the security did not actually constitute an international interest or should not have been registered under the Cape Town Convention.

Practically speaking, until such time as there is case law supporting the application of the Cape Town Convention, most creditors will adopt the more cautious route of dual registrations.

Security structure and alteration

How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?

A typical security package for a financing involving Bermuda will consist of an aircraft mortgage, a security assignment of the borrowing party’s contractual rights (eg, under the relevant lease arrangements, the lease rentals or insurances) and a deregistration power of attorney or IDERA. It is often the case that the lenders will take security over the shares of the (often Bermuda) owner or borrower. These documents will usually not be governed by Bermuda law but by, for example, English or New York law, save that a share mortgage over the shares of a Bermuda company is often governed by local law.

The secured party is often a security trustee or collateral agent for the financing parties from time to time.

The concept of a security trustee is recognised in Bermuda and may be applied in granting of security over aircraft. A mortgage may be granted in favour of the beneficiary or a security trustee appointed or acting under a trust for the benefit of persons to whom a debt or other obligation is due.

The security trustee would be recognised as the mortgagee and will be entitled to exercise all the rights in relation to the mortgage accorded to mortgagees. Accordingly, the mortgage will only refer to and recognise the security trustee as the person in whose favour the mortgage is registered, without any reference to the underlying lenders. The lender syndicate may therefore vary without any necessity to amend the mortgage.

A right in rem enables a party to bring an action against property as opposed to an action against a person (which is called a right in personam). A right in rem developed under maritime law. Its basic purpose was to enable parties to obtain redress when a vessel was in the jurisdiction of the English courts even though its owner was abroad.

There is no right in rem against aircraft, with the very limited exceptions of:

  • salvage;
  • towage (waterborne aircraft only); and
  • pilotage (waterborne aircraft only).

Proceedings in rem in the case of these exceptions are expressly provided for in Bermuda legislation.

Security over spare engines

What form does security over spare engines typically take and how does it operate?

The statutory definition of ‘aircraft engine’ in the Act includes all parts, equipment and data, and manuals and records relating to them. A registered mortgage may cover any store or spare parts for the aircraft, but does not include a mortgage created as a floating charge or a mortgage of spare parts on their own. It is possible to register a mortgage over an aircraft engine on the Bermuda Register of Aircraft Engine Mortgages pursuant to the Act (see question 17).