Security 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.