To which major air law treaties is your state a party?
Hong Kong is a party to:
- the Chicago Convention (1944); and
- the New York Convention (1958) (with a reservation made by China that the New York Convention will only apply to disputes that are recognised as commercial under the national law of China).
Hong Kong has not ratified the following international treaties:
- Rome Convention (1933);
- Geneva Convention (1948); and
- Cape Town Convention (2001) - although China signed and ratified the Cape Town Convention in 2009, China did not extend it to Hong Kong.
What is the principal domestic legislation applicable to aviation finance and leasing?
The principal domestic legislation relating to aviation law applicable to aviation financing and leasing is the Civil Aviation Ordinance (Cap. 488) (the Civil Aviation Ordinance) and its main subsidiary legislation, the Air Navigation (Hong Kong) Order 1995 (Cap. 448C) (the Air Navigation Order), which deal with aircraft registration, licensing and operational matters.
The principal domestic legislation relating to security interests in aircraft that may be granted in the course of aviation financing and leasing is the Companies Ordinance (Cap. 622) (the Companies Ordinance), which deals with the validity and registration of security against companies incorporated in Hong Kong or registered non-Hong Kong companies under Part 16 of the Companies Ordinance.Governing law
Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?
Hong Kong courts will generally give effect to the choice of foreign law, provided that such choice has been made in good faith and is not against public policy.
Notwithstanding a valid choice of a foreign law to govern the contract having been made, Hong Kong conflict of laws principles will mandatorily apply to certain aspects of transactions including transfer of interests in or creation of security over aircraft, giving rise to the practical issues associated with determining the validity of title transfers and creation of mortgages by reference to the laws of the jurisdiction in which the aircraft is located at the time of such title transfer or creation of mortgage (ie, lex situs) without regard to that jurisdiction’s conflicts of laws principles.
Title transferTransfer of aircraft
How is title in an aircraft transferred?
Under Hong Kong law, title passes when parties intend title to pass. Title is usually transferred under a bill of sale or contract of sale.
It is advisable that a purchaser requests evidence of title in the form of back-to-birth bills of sale, so as to verify the chain of title back to the original equipment manufacturer.Transfer document requirements
What are the formalities for creating an enforceable transfer document for an aircraft?
There are no requirements for transfer documents to be notarised, legalised, stamped or translated, nor to comply with any other documentary formalities, in order to be enforceable from a Hong Kong law perspective.
Transfer documents are usually in writing and, particularly if they are created as deeds, parties must consider the proper manner of execution.
Registration of aircraft ownership and lease interestsAircraft registry
Identify and describe the aircraft registry.
The civil aircraft register (the Aircraft Register) is an owner and operator registry, administered by the Civil Aviation Department (CAD).
There is no specific engine register in Hong Kong and Hong Kong is not a party to any International Civil Aviation Organization 83-bis arrangements.
For an aircraft to be eligible to be registered in Hong Kong, either the owner, or the operator (as a ‘charterer’ under a ‘charter by demise’) (the Registered Owner), must generally be a ‘qualified person’, and otherwise (in summary):
- the aircraft is not registered outside Hong Kong, or if it is registered outside Hong Kong, such registration ceases by operation of law upon the aircraft being registered in Hong Kong;
- no unqualified person holds any legal or beneficial interest by way of ownership in the aircraft or any share therein; and
- the aircraft could not more suitably be registered in some other country or territory.
‘Qualified persons’ are:
- the Government of Hong Kong or the Central People’s Government;
- Chinese citizens;
- permanent residents of Hong Kong; and
- bodies incorporated under Hong Kong law or Chinese law and that have their principal place of business in Hong Kong or other parts of China.
Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?
It is not possible to register the interests of owners or lessors in an aircraft or engines and there is no other ownership or asset registry in Hong Kong, except that the CAD must record the interests of the registered owner(s) on the Aircraft Register and reflect the details of the registered owner(s) on the aircraft’s certificate of registration. See question 11.
The Registered owner must generally be a ‘qualified person’. See question 6.
Where the eligibility for registration arises due to the owner being a ‘qualified person’, the Aircraft Register will happen to reflect the legal owner’s interest.
Even where the registered owner is the operator, it is common market practice for owners, lessors and financiers to submit to the CAD information regarding their respective interests in the aircraft. However, as such information is voluntarily submitted, it is not formally recorded.
Members of the public may apply to access information on the Aircraft Register. However, as any information voluntarily submitted to the CAD is concerned, this would not be freely accessible unless consented to by the registered owner.
A prospective registered owner must first complete a Form DCA 99. Where such a person is a company, the form usually needs to be signed by the company’s managing director, company secretary or duly authorised officer.
The CAD could also request a statutory declaration as to the accuracy of the application.Registration of ownership interests
Summarise the process to register an ownership interest.
Not applicable. See questions 6 and 7.Title and third parties
What is the effect of registration of an ownership interest as to proof of title and third parties?
Not applicable. See questions 6 and 7.Registration of lease interests
Summarise the process to register a lease interest.
Not applicable. See questions 6 and 7.Certificate of registration
What is the regime for certification of registered aviation interests in your jurisdiction?
Pursuant to article 4(7)-(9) of the Air Navigation Order, a certificate of registration must show:
- the number of the certificate;
- the nationality mark of the aircraft;
- the registration mark assigned to the aircraft;
- the name of the manufacturer of the aircraft and its designation;
- the serial number of the aircraft;
- the name and address of each registered owner; and
- the date of its issuance.
The registration certificate will not indicate any other parties’ interests. There is no separate engine certificate of registration.Deregistration and export
Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?
If the registered owner is the owner of the aircraft, the owner may submit a deregistration application without the cooperation of the operator, although from a contractual perspective, the owner should ensure that it is not breaching its quiet enjoyment obligations by doing so. Similarly, a mortgagee having authority to deregister the aircraft on behalf of such a registered owner, pursuant to a deregistration power of attorney, would be able to do so provided it is entitled to deregister as between it and the owner. From a contractual perspective, the mortgagee should ensure that the deregistration does not amount to a breach of any quiet enjoyment covenant to which the mortgagee is subject either directly to the operator or by virtue of the mortgagee being required to exercise those rights by ‘stepping into the shoes’ of the owner.
Where the registered owner is the operator of the aircraft, the aircraft may be deregistered from the Aircraft Register once the leasing of the aircraft has been terminated such that there is no demise charter in existence to support the eligibility for registration. See questions 6 and 7.
The registered owner must forthwith return the certificate of registration following the termination of leasing of the aircraft if the owner is or becomes an unqualified person (or otherwise within reasonable time after the chief executive requests the return of it after the cancellation of the certificate of registration).
An application must be made for deregistration forthwith the termination of the demise charter. The CAD would normally expect the Hong Kong operator to liaise with it in relation to such an application; therefore, the cooperation of the Hong Kong operator may be expected at a practical level for the deregistration to take place smoothly. That said, it would be customary for the owner or mortgagee to hold a deregistration power of attorney and there should be no legal reason why the CAD would not deal with the owner or mortgagee acting in the name of the Hong Kong operator pursuant to a valid deregistration power of attorney.
As there is no precedent of any Hong Kong commercial aircraft operator being enforced against, it is not possible to conclusively state whether there would be any other practical hurdles in exercising rights under a valid deregistration power of attorney in this manner.Powers of attorney
What are the principal characteristics of deregistration and export powers of attorney?
A power of attorney must be created in accordance with the Powers of Attorney Ordinance (Cap. 31) (the Powers of Attorney Ordinance), which (among other things) requires that an instrument creating a power of attorney shall be signed and sealed by, or by direction and in the presence of, the donor of the power. A power of attorney may be grantable to more than one attorney.
Pursuant to section 4 of the Powers of Attorney Ordinance, where a power of attorney is expressed to be irrevocable and is given to secure (i) a proprietary interest or (ii) the performance of an obligation owed to the donee of power, then, so long as the donee has that interest or the obligation remains undischarged, the power shall not be revoked by the donor without the consent of the donee; or by the death, incapacity or bankruptcy of the donor or, if the donor is a corporation, by its winding up or dissolution.
There are no statutory provisions that require registration of a power of attorney.
See question 12 in relation to the effectiveness of the use of a deregistration power of attorney in the course of an enforcement.Cape Town Convention and IDERA
If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.
SecuritySecurity document (mortgage) form and content
What is the typical form of a security document over the aircraft and what must it contain?
Security over an aircraft can be taken by way of a mortgage or a charge. A mortgage is the typical form of security over the aircraft.
Mortgages can be legal or equitable. They are usually effected as a fixed charge.
There are no requirements for the mortgage document to be in a specified form, but it should be distinguished from the other forms of security available under Hong Kong law. It is not necessary to record the economic terms of the deal in the mortgage itself, but the relevant secured liabilities need to be ascertainable from the transaction documentation.
The security document does not need to state a maximum secured amount. There can be a mortgage securing all monies owed by the mortgagor to the mortgagee under Hong Kong law.
There are no requirements for the mortgage instrument to be written in English. It is common to have mortgages granted in English or in Simplified Chinese text.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 requirements for the mortgage instrument to be notarised, legalised or translated. There are no stamping requirements or other documentary costs.
Particularly where mortgages are created as deeds, parties must consider the proper manner of execution.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.
Aircraft mortgages or charges cannot be registered on the Aircraft Register.
However, it is customary in the Hong Kong market for a financier to informally notify the CAD of a mortgage or charge.
If a mortgage or charge over an aircraft is granted by (i) a company incorporated in Hong Kong or (ii) a registered non-Hong Kong company under Part 16 of the Companies Ordinance, then the aircraft mortgage or charge must be registered with the Companies Registry within one month of the date of its creation.
Any registration made after this time will not be accepted, unless there is an order of the court to extend the deadline for registration.
One of the consequences of failing to register an aircraft mortgage or charge with the Companies Registry within the deadline for registration is that any security interest created by the mortgage will be void as against any liquidators as well as other creditors of the mortgagor.
To register a mortgage with the Companies Registry, a completed NM1 Form and a certified copy of the instrument must be delivered to the Companies Registry. The registration fee is currently HK$340.Registration of security
How is registration of a security interest certified?
The Companies Registry issues a certificate of registration of charge as conclusive evidence that the requirements under the Companies Ordinance have been fulfilled, and the Companies Registry thereafter updates the register accordingly. This is usually completed by the Companies Registry within two weeks of submitting the documentation for registration.
However, the certificate of registration of charge issued by the Companies Registry does not state the rank or priority of the security interest.Effect of registration of a security interest
What is the effect of registration as to third parties?
As mentioned above, there is no register of aircraft mortgages. Therefore, registration is only possible in respect of mortgagors and chargors who are Hong Kong incorporated companies or registered non-Hong Kong companies under Part 16 of the Companies Ordinance.
Generally, priority between two or more secured parties is determined by common law priority rules, which could turn on whether the mortgage or charge was legal or equitable.
For example, a subsequent mortgagee will have priority over an earlier equitable mortgagee if it was acquiring a bona fide security interest for value under a legal mortgage and without notice of the previous equitable interest.
When determining priority between competing interests for registrable charges, pursuant to the Company Ordinance, a party will be held to have constructive notice of the existence of a fixed charge on the basis of whether it could reasonably have been expected to search the register.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?
Under Hong Kong law, it is common to have mortgages granted to a security trustee who is appointed to act under a trust (the rights in the trust being rights in rem) in favour of the lenders to whom a debt or other obligations are owed by the mortgagor (or the borrower). The security trustee will be entitled to exercise all the rights in relation to the mortgages.
Generally, mortgages do not have reference to the underlying lenders, but only refer to and recognise the security trustee as the mortgagee. Therefore, even if there is a change in the underlying lenders, it is not necessary to amend the mortgage and no new security registrations will need to be effected.
For an aircraft mortgage registered with the Companies Registry, any change in particulars of the mortgagee must be notified to the Companies Registry by filing the NM7 Form, together with any documents evidencing these changes.Security over spare engines
What form does security over spare engines typically take and how does it operate?
Engines and other spare parts, including parts that may become attached to the aircraft, can form part of the subject matter of an aircraft mortgage under Hong Kong law.
Enforcement measuresRepossession following lease termination
Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?
Self-help remedies are recognised under the laws of Hong Kong, subject to the terms of the lease and provided it does not amount to a breach of the peace.
However, if the lessee considers that the lessor’s repossession of the aircraft is not justified or is not in compliance with the express provisions in the lease agreement, the lessee may seek an injunction order from the court to restrain the lessor’s repossession of the aircraft. The court may allow the lessee to seek damages from the lessor if the lessor’s repossession of the aircraft is found to be unjustifiable.
In this case, judicial intervention is required and the lessor will need to commence proceedings in court to seek repossession of the aircraft.Enforcement of security
Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?
As mentioned above, self-help remedies are recognised under the laws of Hong Kong.
There are usually provisions in an aircraft mortgage that set out the specific repossession procedures following an event of default.
These express provisions in the mortgage will allow the mortgagee to take possession of the aircraft and subsequently re-market (that is, re-lease or sell) the aircraft without a court order, provided the repossession is not contested by the mortgagor (for example where the mortgagor’s non-compliance is being disputed).
Although an automatic stay applies in certain insolvency proceedings, a secured creditor will be able to freely appoint a receiver over the relevant secured assets, and the court would be expected to grant leave for such a receiver to take possession of and deal with those assets.Priority liens and rights
Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?
The following liens and detention rights could give rise to priority claims over aircraft owners or secured parties:
- common law liens: such liens will give the creditor a right to detain the aircraft until outstanding debt has been repaid. Common law liens are usually possessory in nature, for example, repairer’s or mechanic’s liens;
- airport charges: pursuant to the Airport Authority Ordinance (Cap. 483), the Hong Kong Airport Authority is entitled to detain any aircraft in respect of unpaid and outstanding charges, and may apply to the court for leave to sell the aircraft if the charges are not paid within 60 days of detention of the aircraft;
- profit taxes: under the Inland Revenue Ordinance (Cap. 112), the Commissioner of Inland Revenue may commence court proceedings to recover any unpaid profits tax of the aircraft owner or charterer as civil debts. The Commissioner of Inland Revenue may apply to the court to seize and sell the aircraft to satisfy the judgment debt; and
- air passenger departure tax: under the Air Passenger Departure Tax Ordinance (Cap. 140), the Director General of Civil Aviation has a lien over any aircraft of the relevant operator, for the amount of the tax assessed. The Director General of Civil Aviation may take possession of, remove, sell or otherwise dispose of the aircraft to recover the amount of tax.
How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?
The Hong Kong courts will generally enforce a final and conclusive foreign judgment without re-examination of the merits absent fraud and circumstances where it would be contrary to public policy.
Yes. Hong Kong is a party to the New York Convention (1958), with a reservation made by China that the Convention will only apply to disputes that are recognised as commercial under the national law of China.
In respect of Mainland China and Hong Kong, there are six mutual judicial assistance arrangements over civil and criminal matters, the most influential of these associated with putting in place a consent jurisdiction between concerned parties (Consent Jurisdiction Arrangement). In January 2019, the Supreme People’s Court (China) and the Department of Justice of the Hong Kong Special Administrative Region executed the Arrangement on Reciprocal and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region (2019 Arrangement), which will provide, once in effect, that recognition and enforcement is no longer preconditioned on written agreements to jurisdiction. The Consent Jurisdiction Arrangement will be annulled on the effective date of the 2019 Arrangement. The effective date will be announced once relevant procedural formalities have been complied with.
Taxes and payment restrictionsTaxes
What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?
There is no withholding tax, value added tax or sales tax in Hong Kong in relation to the sale of or transfer of title to, or taking security over, aircraft. There may be tax liability in relation to the sale of or transfer of title to aircraft-owning vehicles, so care must be taken when transacting in this way.Exchange control
Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?
There are no foreign exchange controls in Hong Kong.Default interest
Are there any limitations on the amount of default interest that can be charged on lease or loan payments?
There are generally no such limitations in the context of aviation finance and leasing, although two exceptions are the potential application of the doctrine of penalties and the potential application of the Money Lender’s Ordinance (Cap. 163). Many leasing companies in Hong Kong hold a money lender’s licence.Customs, import and export
Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?
There are no import or export duties imposed on aircraft.
There is a nominal fee for registering an aircraft. There are no fees for deregistering an aircraft.
Insurance and reinsuranceCaptive insurance
Summarise any captive insurance regime in your jurisdiction as applicable to aviation.
There are no requirements that insurances must be placed with Hong Kong insurers.Cut-through clauses
Are cut-through clauses under the insurance and reinsurance documentation legally effective?
Cut-through clauses in respect of an insurer located in Hong Kong are generally regarded as being effective.Reinsurance
Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?
Assignments of reinsurance can effectively be granted under Hong Kong law. They will generally be registrable with the Companies Registry. See question 17.
Insurances are often placed directly in the London market. Therefore, it is not typical to see assignments of reinsurance granted in Hong Kong-based transactions, although customarily it would be sought by financiers where the insurers are located in a jurisdiction where the validity of a cut-through clause is not free from doubt.Liability
Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?
Generally, no. See question 34.Strict liability
Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?
While there is expressed to be strict liability for an owner for material loss and damage caused to any person or property on land or water by the aircraft (except to the extent of any relevant contributory negligence), the Civil Aviation Ordinance provides that, in lieu of the owner, the operator becomes strictly liable if at the time the material loss or damage is caused (i) the aircraft is being operated by the operator under a lease or other arrangement for a period of more than 14 days; (ii) the operator is responsible for ensuring the airworthiness of the aircraft; and (iii) no member of the crew of the aircraft is employed by the owner.Third-party liability insurance
Are there minimum requirements for the amount of third-party liability cover that must be in place?
Pursuant to section 6 of the Civil Aviation (Insurance) Order (Cap. 448F) (Civil Aviation Insurance Order), the policy of insurance of an aircraft must insure the operator of its liability in respect of:
- third party risks;
- the death of or bodily injury to any passenger in the aircraft;
- any destruction or loss of or damage to baggage carried on board the aircraft;
- any destruction or loss of or damage to cargo carried on board the aircraft; and
- any destruction or loss of or damage to mail carried on board the aircraft.
The policy of insurance must have a combined single limit cover of not less than the applicable amount specified in the Civil Aviation Insurance Order.
Update and trendsRecent developments
Are there any emerging trends or hot topics in aviation finance and leasing in your jurisdiction?
In July 2017, the Hong Kong government established a dedicated tax regime for qualifying lessors and qualifying lease managers, providing qualifying lessors a profits-based tax regime with a headline tax rate of 1.65 per cent (by virtue of only 20 per cent of the tax base (gross lease rentals less qualifying expenses) being subject to income tax, and, furthermore, applying a 50 per cent discount on the already low corporate tax rate in Hong Kong of 16.5 per cent (ie, 20 per cent x 0.5 x 16.5 per cent).
After taking into account the unavailability in Hong Kong of capital allowances for depreciation, the effective tax rate would normally be within the range of 3 per cent to 8 per cent.
As of March 2019, several organisations have taken advantage of the dedicated tax regime, including those that have newly established a leasing company in Hong Kong.
There has been further work done to improve the tax and legal infrastructure in Hong Kong to help support the growth of aviation industry participants around the dedicated tax regime for qualifying lessors and qualifying lease managers, including considerations around the tax laws on the funding side and the implementation of the Cape Town Convention and its Aircraft Protocol in Hong Kong.