Security

Security document (mortgage) form and content

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

The typical form of a security over the aircraft is an aircraft mortgage. There are two types of aircraft mortgages: ordinary mortgages, which secure specified obligations, and revolving mortgages, which secure unspecified obligations falling under a certain agreed scope up to the agreed maximum secured amount. An ordinary mortgage secures the principal of the secured obligation together with interest and default interest accrued thereon during the two years prior to the commencement of its court sale (see question 23 regarding court sales in Japan), whereas a revolving mortgage secures the principal of the secured obligation together with interest and default interest accrued thereon up to the pre-agreed maximum secured amount. With respect to a revolving mortgage, crystallisation of the secured obligations is necessary before it can be enforced.

An aircraft mortgage may be created by an agreement between the mortgagor and the mortgagee. To create an effective aircraft mortgage, the mortgage agreement needs to specify the aircraft subject to the mortgage and (in the case of an ordinary mortgage) the secured obligations or (in the case of a revolving mortgage) the scope of the secured obligations. There is no language requirement for a Japanese mortgage, and there is no specified form for it. However, for the purpose of registering a mortgage, certain economic conditions of the secured obligations need to be specified (see question 17).

A mortgage can be registered in two ways. A full registration of an aircraft mortgage effectively perfects the mortgage as against third parties. A provisional registration will also be available and will confer priority over subsequently registered security interests, but will need to be converted into (typically by both the mortgagor and the mortgagee) a full registration before the mortgage can be enforced. Owing to the nominal amount of registration tax enforced to provisionally register an aircraft mortgage, it is common to keep the registration of an aircraft mortgage provisional until an actual credit risk involving the mortgagor occurs. To provisionally register an aircraft mortgage, in practice a mortgage option agreement is prepared for registration purposes in which an aircraft mortgage is created upon the mortgagee’s exercise of an option.

An aircraft registered in Japan cannot be the subject of a pledge (article 23 of the Aircraft Mortgage Act). Although it is possible to create a security interest in an aircraft by way of collateral assignment or provisional registration of a transfer of ownership interest, such alternative security interests are not common in Japan owing to the relatively high registration taxes and the ownership requirements for the transferees.

Security documentary requirements and costs

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

A mortgage does not need to be notarised, legalised or stamped to be enforceable. When registering a mortgage under a foreign language mortgage agreement, its Japanese translation needs to be filed with the Aeronautics Authority. Likewise, in order to commence court proceedings in connection with a mortgage agreement, its Japanese translation must be submitted to the court. For the matters covered by a mortgage agreement, see question 15. There are no documentary costs, such as stamp duties, imposed on aircraft mortgages. See question 17 regarding the registration tax on an aircraft mortgage.

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.

Registration of a mortgage is not a condition to its effective creation, but is required for its perfection as against third parties.

An application for registration of an ordinary mortgage with the aircraft registry must be made jointly by both the mortgagee and the mortgagor, and the application form needs to describe the amount to be secured, the interest rate (if relevant), any conditions to the secured obligations, and any special agreement on the scope of the coverage of the mortgage (if any part or engine of an aircraft is excluded from the coverage of the mortgage over the aircraft). In the case of a revolving mortgage, the application form needs to describe the scope of the secured obligations and the agreed maximum secured amount, any special agreement on the scope of the coverage of the mortgage (if any part or engine of an aircraft is excluded from the coverage of the mortgage over the aircraft) and any date of crystallisation, if agreed. If the obligor of the secured obligation is different from the mortgagor, the application also needs to describe the name and address of the obligor.

The supporting documents that need to be submitted to the Aeronautics Authority (in the case of registration by a corporate mortgagee and a corporate mortgagor) are as follows:

  • powers of attorney issued by the mortgagor and the mortgagee (if the application is made by an attorney);
  • seal certificates of the representatives of the mortgagor and the mortgagee (issued within the last three months) (or their equivalent for a foreign corporation);
  • commercial registration certificates of the mortgagor and the mortgagee (issued within the last three months) (or their equivalent for a foreign corporation);
  • an original and a copy of the mortgage agreement; and
  • an official payment slip of the registration tax (if the registration tax exceeds ¥30,000). (The Aeronautics Authority might require further documents for the registration.)

The registration tax will be in the amount of 0.3 per cent of the amount of the secured obligations (or, in the case of a revolving mortgage, the maximum secured amount). On the other hand, the registration tax for provisional registration is ¥2,000 per aircraft, which is the main reason that provisional registrations are often used when registering an aircraft mortgage. According to the Aeronautics Authority, it usually takes one week from the application date to obtain an official transcript of entry of the mortgage.

Registration of security

How is registration of a security interest certified?

When the procedure for registration or provisional registration of a mortgage is completed, the entry will be made in the aircraft registry. An official transcript of entry of such updated aircraft registry will be available approximately one week after the application date.

Effect of registration of a security interest

What is the effect of registration as to third parties?

A full registration of an aircraft mortgage will perfect the creation of the aircraft mortgage as against third parties (such as competing transferees, mortgagees and bankruptcy trustees) and confer priority over subsequently registered security interests. A provisional registration also confers priority over subsequently registered security interests but needs to be converted into a full registration before the aircraft mortgage can be enforced.

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?

While Japanese law recognises the concept of a trust, the security trustee structure is not typically used to grant security over aircraft in favour of a group of lenders (especially for domestic transactions). It is a general principle under Japanese law that the creditor of a secured obligation and the security holder need to be the same. However, the Trust Act (Act No. 108 of 2006) introduced a security trust scheme, under which a trustee holds the security interest on behalf of lenders. In order to engage in the security trustee business in Japan, certain licences under the Trust Business Act (Act No. 154 of 2004) or the Act on Provision, etc of Trust Business by Financial Institutions (Act No. 43 of 1943) are required. In addition, another point to be noted is that there remains uncertainty in the enforcement procedure for a security held by a security trustee. If an aircraft mortgage is held by a security trustee, no change in the registration with the aircraft registry or assignment of the aircraft mortgage is necessary with respect to loan transfers.

It is common in Japan (especially for domestic transactions) for the owner of an aircraft to create an aircraft mortgage on the aircraft in favour of the respective lenders. In this case, a loan transfer would trigger assignment of the mortgage. The registration of the assigned mortgage needs to be updated to perfect such assignment.

Security over spare engines

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

Effect of aircraft mortgage on engines installed thereon

Movable assets (including aircraft engines and spare parts) constituting an integral part of an aircraft are subject to an aircraft mortgage created over that aircraft unless the mortgage agreement otherwise provides (and is registered with the aircraft registry) or the mortgagor’s addition of such movable assets constitutes a fraudulent act against creditors and as such is rescinded. If an engine is not installed on the aircraft at the time of creation of an aircraft mortgage, such engine would not be covered by such aircraft mortgage, but once it is installed on the mortgaged aircraft, the engine will be subject to the then-existing mortgage if that engine is owned by the owner or mortgagor of the aircraft and unless otherwise agreed in the mortgage agreement or the installation of that engine is rescinded. On the other hand, it is not clear, because of the lack of judicial precedents, if an engine installed on a mortgaged aircraft qualifies as being subject to the aircraft mortgage even after it is removed from the mortgaged aircraft, or even if in the affirmative, how the mortgage can be foreclosed upon with respect to such removed engine.

Security over spare engines not installed on a host aircraft

Spare engines could be subject to a pledge but, as a pledgee may not allow the pledgor to possess the pledged property under article 345 of the Civil Code, pledges are not typically used for creating security interests in spare engines not installed on a host aircraft. Alternatively, a collateral assignment of a spare engine can be made by its owner in favour of a creditor. In creating a collateral assignment over a spare engine, the owner will transfer title to the engine to its creditor only for the purpose of securing its obligations. A collateral assignment can be perfected as against third parties by transferring the possession of the engine to the creditor, but such delivery can be made fictionally with the owner continuing to possess the engine and can also be made by way of registration under the Act on Special Provisions, etc of the Civil Code Concerning the Perfection Requirements for the Assignment of Movables and Claims (Act No. 104 of 1998). A holder of a collateral assignment can enforce its rights by selling the spare engine to a third party or by retaining the spare engine, but the holder is required to pay to the owner the difference between the sale proceeds or the fair value of the spare engine and the secured obligations. The spare engine could cease to be subject to the collateral assignment if a bona fide purchaser purchases the engine without knowledge of the existence of the collateral assignment on such engine without fault.

Security over spare engines installed on a host aircraft

It is theoretically possible to create a collateral assignment over a spare engine installed on a host aircraft. If the aircraft and the spare engine are owned by the same person (such as an airline) and the aircraft is subject to an aircraft mortgage, the fact that the spare engine is not subject to the aircraft mortgage should be recorded on the aircraft registry. In addition, such spare engine could cease to be subject to the collateral assignment if a bona fide purchaser purchases the aircraft (including the engines installed thereon) or the spare engine only without knowledge of the existence of the collateral assignment on that spare engine without fault.