Security

Security document (mortgage) form and content

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

A mortgage is the typical form of security over an aircraft. Mortgages over an aircraft may be either legal or equitable mortgages.

In practice, aircraft mortgages are prepared based on the freedom of the parties to contract on the terms to be included. It is not required for a mortgage to state the maximum secured amount; however, for stamp duty purposes it is necessary to identify an amount secured. To comply with the International Interests Act, the aircraft mortgage is required to be in writing and relate to an identifiable aircraft object, and should enable the secured obligations to be determined.

The official language of Kenya is English and mortgage documents will typically be drafted in this language. Under the Companies Act 2015, the Registrar of Companies is permitted to refuse to accept any document lodged or submitted to it for registration in a language other than English.

Security documentary requirements and costs

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

Stamp duty is payable on a security instrument within 30 days of execution of the document if executed in Kenya. If executed outside Kenya, the duty is payable within 30 days of the document subsequently being brought into the country. Failure to stamp a document renders the document inadmissible as evidence in a court of law. The rate of stamp duty depends on the particular instrument. For instance, stamp duty payable on a mortgage or an assignment by way of security is 0.1 per cent of the amount secured by the instrument.

Certified translations of security documents may be provided; however, most documents will typically be drawn in English.

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.

The KCAA does not maintain an aircraft mortgages registry. Kenya ratified the Geneva Convention in 1997, but a registry has not been established.

Pursuant to the Companies Act, the Registrar of Companies maintains a register of certain types of charges (including mortgages) created by a company, including a charge on an aircraft owned by the company or in which it has a proprietorial interest. The registry enables parties to conduct searches and in so doing, identify any registered encumbrances on a company incorporated in Kenya and certain of its assets.

Subject to the following paragraphs, in order to perfect a security under the Companies Act, the stamped security document is presented for registration together with a completed form CR25. It is required that this is done within 30 days from the day of creation of the security interest. If created outside Kenya, the charge must be presented for registration within 21 days of the day on which a copy of it could have been received in Kenya, if dispatched with due diligence. If not registered within the prescribed period, the charge will be void as against an administrator, liquidator or creditor upon insolvency. However, this does not affect the operation of the contract or obligation for repayment of the money secured, which once the charge is void, immediately becomes payable.

The registration fee will vary depending on the amount secured by the charge.

Notwithstanding the provisions of the Companies Act, the International Interests Act provides that the requirement for registration of charges under the Companies Act shall not apply to a charge created after the commencement of the International Interests Act, on any aircraft objects falling within the scope of the Convention and the Protocol. Registration of a security interest in an aircraft under the Companies Act where the aircraft falls within the scope of the Convention and Protocol is therefore not mandatory for its enforcement against any liquidator, administrator or creditor, but can nonetheless be effected at the option of the secured creditor.

If the security creates an international interest then registration is completed online at the International Registry following the International Registry regulations and procedures.

Registration of security

How is registration of a security interest certified?

A certificate of the registration of a Mortgage is issued by the Registrar of Companies. The certificate does not indicate the rank or priority of the security interest and this will be determined by the date of registration.

Effect of registration of a security interest

What is the effect of registration as to third parties?

A charge registered at the Companies Registry will take priority over all other unregistered charges or charges subsequently registered.

A search may be conducted over the specific company file at the Companies Registry to identify any registrable security interests registered against the company. In addition, a company is required to keep a register of charges and its creditors have the right to inspect the register.

Common law and statutory rights of lien or detention rights may take priority over a registered security interest (eg, a common law lien may be exercised by a repairer or maintenance facility that has not been paid and has possession of the aircraft or by the KCAA in respect of unpaid navigation charges).

Where there is a registration of a security interest at the International Registry, the security will take priority in accordance with the Cape Town Convention provisions.

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?

Security over an aircraft is either by way of a mortgage or, in the case of an aircraft lease, a grant of assignment over the rent proceeds. In both instances, a financier will typically require the mortgagor or lessee to also grant an assignment over the insurance proceeds. Under Kenyan law the concept of a security trustee is recognised and a mortgage may be granted in favour of and made in the name of a security trustee acting on behalf of the beneficiaries.

A security trustee can hold a security in its name for a changing group of beneficiaries without affecting the security, as the security would have been registered in its name without reference to the underlying beneficiaries. The security trustee will exercise all rights available to a mortgagee under a mortgage.

A new financier’s interest should be included in the register with KCAA and noted on the aircraft certificate of registration.

Security over spare engines

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

A mortgage may be created over a spare engine in the same way it is created over an aircraft. See question 17 regarding the registration of security interests pursuant to the Companies Act and the Cape Town Convention.

Kenya adopts the English common law principle of accession that if any property receives an accession by natural or artificial means, the original owner is entitled, by his or her right of possession, to the property in its improved state.

It is common practice in security documents to define the aircraft as including all engines installed periodically. To avoid a dispute, it is advised that the owner of an aircraft or other security holder expressly recognise third-party ownership or legal interests in an engine, and undertake that it will not claim an interest in an engine.