Security

Security document (mortgage) form and content

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

There is no statutory format with which the mortgage must comply. The mortgage itself need not be governed by Cayman Islands law. The original mortgage deed need not be provided to the CAACI (and, indeed, it is advisable that the original mortgage not be brought to the Cayman Islands in order to avoid the possibility of triggering a liability to Cayman Islands stamp duty (see question 16)).

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

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 Cayman Islands law, save that where the original mortgage is brought to the Cayman Islands, applicable Cayman Islands stamp duty may be payable (which may be up to US$610 at current rates).

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 Cayman Aircraft Register, it is possible to register such a mortgage on the Cayman Aircraft Mortgage Register. Such registration will go to priority (subject, where applicable, to the rules of priority under the Cape Town Convention) but not validity.

The procedure to effect registration of a mortgage is simple and straightforward, requiring an application by the mortgagee. The mortgagee must provide the CAACI with a short registration form summarising the principal points of the mortgage (ie, date, aircraft description, mortgagor contact details and confirmation of sum secured). An original of the registration form (although, in certain circumstances the CAACI may proceed on the basis of a PDF), signed by either the mortgagee or his or her agent or legal counsel, must be submitted to the CAACI together with a copy of the mortgage certified by the applicant to be a true and correct copy. The mortgage registration fee should also be submitted upon registration, which fee is calculated on an ad valorem basis depending on the sum secured, up to a maximum amount (at current rates) of approximately US$6,000.

Where the mortgage or other relevant security interest constitutes an international interest under the Cape Town Convention, then the international interest may also be registered at the International Registry pursuant to the Cape Town Convention.

Registration of security

How is registration of a security interest certified?

The CAACI will issue a notification of registration, which is generally available on the date of registration. The notification 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), or 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 9 October 1979 would have priority over a subsequently registered mortgage.

Registration of the mortgage cannot take effect until the aircraft is registered, but the mortgagee may secure its interest prior to registration of the aircraft by submitting a priority notice to the CAACI. Lodging of 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. Moreover, by law, the Cayman Islands government is required to indemnify a mortgagee for loss suffered owing to an error or omission in the Mortgage Register or any inaccuracy in any entry that is made.

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.

Additionally, under the Mortgaging of Aircraft Regulations, the effects of registration of international interests at the International Registry is now recognised from the date of coming into effect of the Cape Town Convention in the Cayman Islands. The priority of pre-existing aircraft mortgages on the Mortgage Register is preserved although from such date mortgages registered on the Mortgage Register and as international interests at the International Registry will have their priority determined in accordance with the priority rules set out in the Convention, subject, in all cases, to the priority of certain non-consensual rights or interests that will in any event take priority under Cayman law and under the Cape Town Convention as applicable to the Cayman Islands (eg, Cayman government liens for unpaid taxes or charges and repairers’ liens).

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 the Cayman Islands 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 Cayman) owner or borrower. These documents will usually not be governed by Cayman law but by, for example, English or New York law, save that a share mortgage over the shares of a Cayman 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.

Security over spare engines

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

A mortgage to be registered on the Cayman Aircraft Mortgage Register may cover any store of spare parts (including engines) for the aircraft, but may not include a mortgage created as a floating charge or a mortgage of spare parts on their own. Parts that in the future may become attached to the aircraft can be part of a registered mortgage provided they are sufficiently identifiable when acquired by the mortgagor and value is given. See also the comments above with respect to the registration of international interests over engines under the Cape Town Convention.