1. Does UAE law recognise aircraft mortgages?
According to Article 5(1) of the Aviation Law1:
“Under the State’s applied laws, rules and regulations an aircraft is movable property.”
Therefore under UAE Federal Law it is clear that an aircraft is treated as a moveable asset. Further, Article 164(1) of the Commercial Code2 states that:
“A commercial pledge is one contracted on a movable property in security of a commercial debt.”
From this it is clear that the Commercial Code (and therefore UAE Federal Law) recognises the concept of commercial pledges in respect of moveable assets. However, under the Commercial Code a pledge over a movable asset is effective against third parties only where the pledged asset is in possession of the pledgee. Article 165(1) of the Commercial Code states that:
“A commercial mortgage shall not be effective against the debtor or a third party, unless possession of the mortgaged article passes to the mortgagee or to such other person as is appointed by both contracting parties and remains in the possession of either such party receiving it until the lapse of the mortgage; or unless it is placed under joint possession in such manner as to prevent the mortgagor to dispose thereof without the knowledge of the mortgagee.”
According to Article 165(2) of the Commercial Code, deemed possession of the asset will arise where the asset is at the pledgee’s disposal or where the pledgee receives a deed giving him the right to take possession of the asset. Thus:
“The mortgagee or the person appointed by the contracting parties shall be deemed as having possession of the mortgaged article if it is placed at his disposal in such manner as will lead others to believe that the article has come into his custody; or if he receives a deed representing the mortgaged article vesting unto its holder the sole right to take delivery of such article.”
Accordingly, assuming the mortgage gives (would normally be the case) the mortgagee the exclusive right to take possession of the aircraft, the requirements of Article 165(2) of the Commercial Code will be satisfied, although it is worth pointing out that if there were two mortgages over the aircraft both granting a similar rights, the position might be more difficult. It would therefore seem that, while the concept of an aircraft mortgage (as this term is understood in other jurisdictions) is not specifically contemplated by UAE law, it is probable that a commercial pledge of an aircraft would be recognised by UAE Federal Law.
2. Is there a requirement that the entity taking the benefit of a UAE law aircraft mortgage be a bank licensed by the UAE Central Bank?
This issue is obviously of concern where a foreign bank has the benefit of an aircraft mortgage, but where such bank is not licensed by the UAE Central Bank – a common scenario with many aircraft financings where the aircraft is owned by an off-shore special purpose company and foreign banks are providing the financing.
Article 4 of the 1996 Central Bank Resolution Regarding the Regulation of Finance Companies3 (the “Central Bank Resolution”) states that:
“No juridical person is allowed to conduct finance business in the country unless licensed to do so by the Central Bank as per a resolution from the Board of Directors”
From this there are two key terms that need to be understood; those of “juridical person” and “finance business”.
- The term “juridical person” is defined by the Central Bank Resolution as being any company incorporated in accordance with the provisions of Union Law No. 8 of 1984. This law regulates the incorporation of commercial banks, investment banks, financial institutions, monetary and financial intermediaries and representation offices.
- The term “finance business” is not specifically defined in Union Law No. 8 of 1984. However, Article 2 of such law states that:
“A) Finance companies may conduct one or more of the following principal business activities:
A.1) Extending advances and/or personal loans for personal or other consuming purposes.
A.2) Financing small trade and small businesses, as well as opening letters of credit and issuing guarantees on behalf of customers.
A.3) Participating in the capital of projects and/or in the issuance of shares or bonds and/or Certificates of Deposit. Such participation, however, should not exceed 7% of the finance company capital.”
On this basis it would be possible to construct an argument that, since a foreign bank is a “juridical person” within the scope of Union Law No. 8 of 1984 and since “finance business” could conceivably include taking the benefit of an aircraft mortgage, the provisions of the Central Bank Resolution will apply and as such the mortgagee should be licensed by the UAE Central Bank.
Given the uncertainty of this wording, it is worth considering other provisions of UAE law which could influence the decision of UAE judges even though they do not specifically refer to security in respect of aircraft. The most relevant are:
- Article 49(1) of the Commercial Code (a UAE Federal law), which states that a:
“commercial house may not be mortgaged other than to banks or financial institutions”
Although appearing to only refer to real property, the term “commercial house” is actually defined in Article 39 of the Commercial Code as being:
“the collection of material and abstract property pertaining to the pursuit of commercial activity”
Accordingly, this definition would include all assets relating to a commercial activity whether movable, immovable, tangible or intangible assets.
A key factor here is what is meant by the term “banks and financial institutions”. Although Article 49(1) does not specify whether the restriction only applies to UAE licensed banks and financial institutions or to banks and financial institutions generally (i.e. non-UAE banks and financial institutions), it is possible that a UAE court (whether Federal or Emirate) may construe this wording to refer to banks and financial institutions licensed by the Central Bank.
- Article 4 of the Dubai Mortgage Law4 (an Emirate of Dubai law only) states that for mortgages over Dubai real estate:
“The Mortgagee must be a bank, a company or a financing institution duly licensed and registered at the Central Bank of UAE to practice real estate financing activity in the State.”
Although this provision is applicable only to mortgages of real estate located in the Emirate of Dubai, it is further evidence of a possible preference for UAE and Emirate authorities to require that security be given in favour of a UAE licensed bank.
3. Are there any other points of note related to UAE law aircraft mortgages?
Registration of commercial pledges
Local government authorities in each Emirate have created their own commercial registries where pledges over movable property can be registered. However, unlike mortgages over real estate property5, registration in any of such commercial registries is not legally required for a commercial pledge to be effective. In this sense Article 165(2) of the Commercial Code states that:
“with the exception of the restrictions appearing in this or other law, a commercial pledge may be proved in respect of the contracting parties or third parties by all means of proof.”
However, we have been advised by the relevant registries that, even though aircraft are generally considered movable assets, registration of mortgages over aircraft in any such commercial registries does not accord with usual practices and will be refused.
Enforcement and Priority
If the debt secured by the pledged asset is not satisfied when due, the pledgee may, seven days after notice has been served on the debtor demanding payment, request court permission to sell the pledged asset and satisfy his debt in full and with priority. Article 172 of the Commercial Code states that:
“(1) If the debtor does not pay the debt secured by the pledge on the due date the creditor may, seven days after the date of giving notice to the debtor to pay, request from the court permission to sell the pledged object. The request shall be examined promptly and the court shall determine the manner of the sale.
(2) The loan holder shall receive in full, with priority, the debt owed to him including principal, interest, and costs incurred in claiming it, from the price resulting from sale.”
The ranking of rights over moveable property is provided for in the Civil Code6. The Civil Code ranks creditors’ rights as provided below, without referring specifically to bankruptcy. This priority of rights would normally apply in any “distribution” situation, whether as a result of bankruptcy, winding-up, or otherwise. The priority of rights is as follows:
- Judicial costs “expended for the common benefit of creditors” which in this case would mean the legal costs of the bankruptcy proceedings.
- Government fees and taxes.
- Costs expended in preserving or repairing the movable property.
- Creditors with priority rights over other moveable property of the debtor.
- Unsecured creditors.
Article 1505(2) of the Civil Code states that where rights rank equally, they must be satisfied in proportion to one another, unless the law requires otherwise.
In respect of competing mortgages, if the pledge or mortgage can be registered, then priorities between them will be determined by the time of registration. Otherwise the time of creation of the pledge or mortgage would determine priority.
Enforcement in case of insolvency
The Commercial Code regulates bankruptcy proceedings in the UAE7. Under the Commercial Code, upon issuance of a ruling for declaration of the bankruptcy of a debtor, all procedures and individual claims made by ordinary creditors shall be suspended and ordinary creditors shall not be permitted to take any enforcement procedures against the property of the bankrupt. However, holders of loans guaranteed by a pledge or specific lien are not included in the group of ordinary creditors and creditors holding pledges over movable assets of the debtor and holders of specific liens, such as a mortgage over an aircraft, may make or continue claims against the bankruptcy trustee in order to seize and enforce against the property securing their claims.
With regard to interest on the bankrupt’s debts, the declaration of bankruptcy suspends the application of interest to ordinary debts. However, a creditor will be permitted to claim interest on all debts secured by a pledge or lien provided that the amount claimed is no greater than the sums which would be obtained following the sale of the pledged asset by the court as part of the bankruptcy proceedings. In this case, the principal of the debt shall be deducted first, then the interest due prior to the declaration of bankruptcy and last, any interest accrued after the declaration of bankruptcy.
As for priority of claims, their ranking will still be subject to the Civil Code provisions discussed in the point about enforcement and priority. However, Article 713(1) of the Commercial Code does establish a “super privilege” for:
“…the wages and salaries due to workers and employees for a period of 30 days prior to the issue of declaration of bankruptcy”.
- While UAE law does not specifically provide for aircraft mortgages, it is generally accepted that UAE Federal law recognises the concept of an aircraft mortgage.
- We cannot state with any certainty that the UAE Courts (whether Federal or Emirate) will require that a UAE law aircraft mortgage should be given in favour of a UAE licensed bank; however the prudent approach must be to ensure that such security is given in favour of a UAE licensed bank.
- Commercial pledges over movable property are generally registrable in the commercial registries held by the governmental authorities of each Emirate. However, we understand that aircraft mortgages may not be registered in any such registries. As for priority of claims on a secured movable asset, the Civil Code provides a list of various types of priority rights, including costs for the maintenance and preservation of moveable property, which would rank over the rights of a mortgagee.
Note: We have not considered the impact of the Cape Convention on International Interests in Mobile Equipment 2001 and the Protocol to the Cape Town Convention on International Interests in Mobile Equipment 2001 (which came into effect in the United Arab Emirates on 1 August 2008) on the issues raised in this note; this will be the subject of a future note as we understand that the United Arab Emirates government is in the process of introducing further legislation in this regard.