dr. tonio fenech ll.m. (lond), ll.d.. aircraft finance: financing for the purchase and/or operation...

Ship & Aircraft Finance

Dr. Tonio Fenech LL.M. (Lond), LL.D.

1. The context


[email protected] www.fff-legal.com

Aircraft & ships: similar but different

Aircraft finance: financing for the purchase and/or operation of aircraft;

Complex aircraft finance often shares many characteristics with maritime finance: assets of great value which can themselves be a

significant aspect of the security to be provided; the intrinsically international nature of the

industries; The importance of anglo-saxon legal notions; Ships and aircraft, like land, but unlike most other

tangible moveable assets, require registration;


Lord Justice Roskill in The “Panglobal Friendship” [1978] 1 Lloyd’s Rep. 369 (CA):

For advancing funds to one or more ship owning companies, a bank will typically take:

a mortgage on the ship, and possibly also mortgages on other sister ships, by way of security for the loan

an assignment of any time charter an assignment of insurance policies and P&I

Club cover

Mainstream international practice in shipping


Permutations, refinements and variations of the mainstream theme:

Off-balance sheet financing (leasing) High yield bond issues (junk bonds, etc) Flotations and other capital markets

transactions Others

International practice “on steroids”


From Wikipedia:

The three most common schemes for financing commercial aircraft are secured lending, operating leases and finance leases;

However, there are other ways to finance aircraft acquisition: Operating leases and sale/leasebacks Export credit guaranteed loans Tax leases Manufacturer support Equipment Trust Certificates (ETCs) and Enhanced Equipment Trust Certificates (EETCs)

International practice in aviation


The usual security structure for a loan in the shipping/aviation field comprises a number of elements: A mortgage of the asset (ship or aircraft); An assignment of earnings, rights and

receivables; An assignment of insurances; Sometimes, a pledge on the shares of the

company, or of other receivables; Special privileges on the ship or aircraft as

applicable

Vanilla secured lending mechanisms


The letting or hiring of ships to merchants for the carriage of goods is historically described as a charterparty. The system was developed for operational objectives, not asset financing ones. At the basic level, when hired:

for a period of time, it is a time charter; For a point-to-point voyage, it is a voyage charter;

A Bareboat or demise charter is a time chareter where the charterer takes responsibility for the crewing and maintenance of the ship (he is treated as the “disponent owner”)

Charters & Leases: what’s in a name?


Wet Lease or ACMI - Aircraft, Crew, Maintenance & Insurance

Lessor provides ACMI, but lessee provides fuel, landing (etc) fees, crew HOTAC as well as local taxes. Otherwise rental is on block hours (choc off – choc on), sometimes with guaranteed minimum block hours paid per month

Damp lease (no crew) Crew normally must receive training from

Lessor

Leasing: wet leases overview


Normally adopted by leasing companies and banks: lessee puts aircraft on its AOC and provides aircraft registration, etc Operating lease: ▪ aircraft does not appear on the lessee’s balance sheet Finance lease:▪ Normally viewed as a purchase for accounting purposes▪ Purchase option at end of lease for agreed price▪ Lease payments are substantial percentage of market

value of aircraft▪ Lease term substantial percentage of aircraft’s usable

life

Leasing: dry leasing overview


….on to the balance sheet

Finance leasing represents a threshold that goes from off-balance sheet financing to debt financing, and vice versa

Once they get on to the balance sheet, expensive assets remain important elements to help secure finance


Of title and (security) interest

charge mortgage Finance lease

Security by title transfer

Operational

lease/charter


Financing and Security

A Credit economy implies the need for confidence that payment obligations will be fulfilled

Most systems have long developed specific methodologies and concepts, intended to give a creditor some “security interest” in property

A method which provides for differentiation and prioritization in ranking between competing rights

But the system of one country is not necessarily recognized or enforceable in other countries and legal systems


The challenge

The problem is not so much the classic conflict of law issues of applicable law, etc., but the widely differing approaches of legal systems to security and title reservation rights;

This traditionally created much uncertainty among financiers as to the efficacy of their rights;

The result was a general inhibition to extend finance in large parts of the world, and a general increase in borrowing costs


The 5 objectives according to Roy Goode: the creation of an international interest which will be

recognized in all Contracting States Providing the creditor with a range of basic default

remedies, and a means of speedy interim relief pending determination of a claim on the merits;

an electronic international register of interests to give notice, and preserve priority against unregistered interests and the debtors’ insolvency administrator;

Ensuring that the needs of the industry sector are met;

Enhance credit rating of equipment receivables, thus reducing borrowing costs

Game changer in the aviation field?The Cape Town Convention and Protocols


In ratifying the convention, Malta clearly sought to maximize confidence of secured creditors in our system

as a result of ratification, the Maltese domestic system is accompanied by the international system introduced by the Convention

Therefore to understand Maltese law in this area, one has to look at the “domestic” situation as well as the situation if the Convention mechanisms are harnessed

The problem of language: “security interest” as defined in the main text of the ARA, “international interest” as defined in the 1st Schedule, etc

The implications of Malta’s ratificationof the Convention in respect of aircraft

2. Ships & Aircraft as security for debts in Malta



What is a Security Interest?

An interest in or some right against property of a debtor that is granted to a creditor to secure payment, or the performance of some obligation owed to that creditor; it may be created:

By agreement, or Operation of law


The provisions of law in this area are broadly identical in both the Merchant Shipping Act as well as the Aircraft Registration Act.

“[Ships and other vessels/aircraft] .......constitute a particular class of movables whereby they form separate and distinct assets within the estate of their owners for the security of actions and claims to which the [vessel/aircraft] is subject. In case of bankruptcy [of the owner of the ship][and, or insolvency of the owner of an aircraft], all actions and claims, to which the [ship/aircraft] may be subject, shall have preference, on the said [ship/aircraft], over all other debts of the estate”.

The general principle at lawArt.25 ARA

Art.37A MSA


Constitutive Elements

separation of estates

for the security of actions and claims

to which the ship/aircraft may be subject

Therefore bankruptcy of the owner will not affect claimants who have relied on the security of the asset, since these claims will have priority.

Droit de suite?

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What does the term “ship” include in this context?

S. 37A(2) MSA: a ship shall include together with the hull,

all equipment, machinery and other appurtenances or accessories belonging to the ship, which are on board or which have been temporarily removed therefrom;

S.37B(3) MSA: separate items upon a vessel may

themselves be subject to special privileges in accordance with the Civil Code


For the purposes of providing security an aircraft comprises All data, manuals and technical records, and The airframe, all equipment, machinery and other

appurtenances as accessories belonging to the aircraft, which are on board or which have been temporarily removed therefrom, and

Any engines owned by the owner of the aircraft whether attached to the aircraft or not, as well as any replacement engines (designated for use on the aircraft and owned by the owner of the aircraft) but temporarily not attached to the aircraft

What is an aircraft for this purpose?Art. 25(2) ARA


Aircraft EnginesARA, Art. 26(3),(4)

Any security given to a third party over an aircraft by an airframe owner shall not extend to any engine (owned by a third party) attached to the airframe, notwithstanding that the engines may be specifically referred to in the mortgage, the NAR or elsewhere

When an engine is attached to an aircraft owned by a different owner, there is no accession in terms of the Civil Code (Art. 573), and any security 0n separate items on or in an aircraft may themselves be subject to special privileges in accordance with the Civil Code


A charge on ships and aircraft can be established by means of a mortgage, or by a special privilege; For aircraft only, an “international interest” can also be created

Certain “privileged” rights are also given to the creditor in the context of security interests

A general hypothec under the Civil Code remains available, but this attaches to all the assets of a debtor, including any aircraft such debtor may own

Other mechanisms are specifically recognized which, while not constituting a charge, they greatly facilitate a creditor’s life:

Security by title transfer IDERA (in the case of aircraft only) Irrevocable powers of attorney Swift judicial relief pending final determination

In what manner is a security interestin aircraft expressed?


registered mortgages, special privileges, claims and actions to which a [vessel/aircraft] may be subject are not affected by the bankruptcy of the mortgagor or owner happening after the date of the mortgage or special privilege, or when the action or claim arose

ARA: Even if the owner had the aircraft in his possession, order or disposition, or was the reputed owner thereof, at the commencement of the bankruptcy

The secured claims will have priority on the ship/aircraft over all other debts claims or interests of any other creditors

ARA: However, secured claimant must contribute to costs of winding up (including liquidator costs) where he participates in the liquidation proceedings, and is ordered to do so by the court, determining the extent of his liability

Priority in the context of insolvency Art. 37C MSA, 27(1) ARA


Other related provisions Art. 37C MSA, 27(3) to (5) ARA

Judicial sales and other enforcement actions instituted by a registered mortgagee or privileged creditor cannot be interrupted or hindered by any liquidator or curator or trustee of the owner for any cause other than a cause which could be set up by the owner; [to take note of slight differences in drafting, in the marine/aviation legislation. Is this significant? Can the more refined drafting in the ARA guide judges when interpreting the earlier MSA?]

ARA: The same applies to action taken by a secured creditor against a conditional buyer or a lessee to terminate an agreement or take possession or control of an aircraft

The provisions of the Companies Act relating to insolvency do NOT apply insofar as inconsistent with the MSA/ARA


Inter-creditor agreements

Inter-creditor agreements specifically recognized

Art. 1996A, Civil Code: ▪ “it shall be lawful for a creditor to agree to subordinate, waive or

otherwise modify his rights of payment, enforcement, ranking and other similar rights to the rights of other creditors and any such agreement shall be binding on the parties to the contract, whether before or after the insolvency of any party to the contract”

This applies generally, but ARA expressly applies 1996A to inter-creditor agreements entered into by owners, lessors, lessees, creditors, mortgagees, holders of security interests and “any other persons having an interest in or in relation to an aircraft”


Rights under the Civil Code

Art. 28(6) ARA:

▪ “Any hypothec or privilege whether general or over particular movables to which an aircraft may be subject under the provisions of the Civil Code shall not continue to attach to it when the aircraft is transferred to third parties”

No droit de suite in such case;

3. The concept of the mortgage and Maltese law



Mortgages did not form part of our law prior to the incorporation of the Merchant Shipping Act in 1973;

Now part of Maltese law only for the purpose of putting up a ship or an aircraft as security for a loan or debt.

Successive and significant amendments were made to the MSA since 1988 with the aim of generally strengthening the mortgagee’s position;

The Aircraft Registration Act represents a significant milestone, not only in that aircraft mortgages are treated separately, but also because it introduces a number of innovations and changes in general approach;

The mortgage as an “imported” feature of Maltese law


Nature of the Mortgage

The term mortgage has not been substantively defined in our law

One must thus refer to foreign sources, in addition to the MSA and ARA, to understand the mortgage in terms of its effects, and the chain of rights and duties it establishes

As in many things, to understand the nature of something, one must start with how it developed. Hence the ship mortgage takes centre stage:

Bowtle & McGuiness (The Law of Ship Mortgages):

a ship mortgage is merely one species of various forms of a consensual “real” security

The modern UK ship mortgage is essentially statutory in nature, but it is a creation built upon the foundation both of the common law of mortgages as well as early statute law


Common Law

Bowtle & McGuiness: “At the elementary level, it may be stated that in essence a mortgage is a

transaction under which a debtor confers upon a creditor a proprietary interest in property of the debtor....it being intended that, by realisation or appropriation of that property interest the creditors will obtain the discharge of the debtor’s liability to the creditors. The property interest so conferred is redeemable or the obligation to create it is defeasible in the event that the debtor discharges the liability in question”

At common law, the mortgage was seen to be a transfer of property made by a debtor to a creditor as security for performance. The mortgagor would normally remain in possession of the ship for his own benefit, and subject to any contractual limitations (normally expressed in a “deed of covenants”) the ship can be employed freely.

Where default occurs in terms of the mortgage, the mortgagee may seize the ship and sell it.


Statutory Adaptation

Ever since the 17th Century, a statutory registration system for ships was introduced in the UK.

The English regime governing the creation of ship mortgages is essentially built upon this registration regime.

The instrument creating a mortgage must be in the prescribed form, as must a transfer or discharge of such a registered mortgage.

not necessary for the mortgagee to acquire possession of the ship for the mortgage to come into effect.

non-compliance with statutory requirements may prejudice enforcement, eg with respect to third parties.


1660 Navigation Act

The mortgage was created by a transfer of title to the mortgagee under a bill of sale, which was registered with an annotation that the transfer was not absolute but by way of mortgage.

The mortgage was also noted by endorsement on the certificate of registry of ship.

A statutory form of mortgage was only introduced in the Merchant Shipping Act of 1854.


M Shipping Act 1854

This modified and departed from the common law conception of mortgage as a security interest arising in the form of conditional conveyance of title, without specifying its precise legal nature

The form of mortgage set out in the schedule however stated clearly that the security which was conveyed created a right in rem by way of security

There was no longer a notional transfer of legal title to the ship, but the mortgage became a statutory from of charge

MSA 1894 did not change things, and the Malta MSA of 1973

was clearly modeled on this, and followed it very closely


Bowtle & McGuinness define the modern English ship mortgage as:

a form of security by or under a contract that confers an interest in the property subject to it…..that is annulled upon the performance of some agreed obligation – usually the payment of a debt with or without interest.

The terms “mortgage” and “charge” are used almost interchangeably. This practice is most clearly evident in the case of present-day ship mortgages, in which these two types of security have been fused into a single type of security interest.

For all practical purposes, there is little difference between the two classes of security, and while they are conceptually different in their origins, they have now become subsumed into a hybrid form of security.

Definition of the modern mortgage


Description in Australian case

The position of a mortgagee and mortgagor under the modern legislative framework was discussed in ex parte North Brisbane Finance & Insurance Pty Ltd [1983] 2Qd.R.684 at p.688 (re corresponding provisions of Australian Shipping Registration Act 1981):

“Section 40 confers on the mortgagee of a ship the status of holder of a statutory charge by way of security, not that of a legal owner of the ship as in the case of a mortgagee under the general law.”

“It is in that context that Section 41 confers on the ship’s mortgagee a power absolutely to dispose of the ship and to give effectual receipts in respect of the disposal. Without that power, a mortgagee of a ship would have to look elsewhere, and probably to the Court, for assistance in selling a ship of which he was not the owner”


Definition (2):

In “Maritime Law” 4th Ed. 1995: A mortgage could be said to be ‘any charge by

way of lien on any property for securing money or money’s worth.

It is the creation of a charge or encumbrance in favour of the lender of money by the person wishing to borrow.

It is the essence of a mortgage that it is something more than a mere personal covenant.


Definition (3)

Chorley & Giles, “Shipping Law” (8th ed. 1987): A mortgage is a charge or encumbrance which the

borrower of money, the mortgagor, creates in favour of the lender, the mortgagee.

The latter thereby obtains a hold on the property mortgaged, which prevents the general creditors of the owner from selling the ship in satisfaction of their claims.

It also enables the mortgagee to recoup himself for the mortgagor’s failure to repay the loan, or the interest on it, by selling the ship or taking possession of her


Definition (4):

Iain Goldrein, “Ship Sale & Purchase” 1993:

A mortgage is: a transfer of property, or an interest in property, as security for a debt, usually a loan.


A mortgage is a security transaction and is a form of “real” security. It is a transfer of property or an interest in property as security for a debt.

The essential feature of a mortgage is that it is only a security transaction; the property is redeemable by the mortgagor upon satisfaction of the debt which it secures, but on the other hand the property is realisable by the mortgagee if it is not.

The mortgagee acquires a right by a mortgage to the ownership of property in a certain event, namely on default of payment of principal and interest. From the standpoint of the mortgagor, whereas every mortgage implies a right of redemption so too does it imply a debt, and a personal obligation to repay it.

Meeson in “Ship and Aircraft Mortgages” (1989)


Meeson (cont.)

The difference betweeen mortgage and

Outright sale: mortgage takes place by way of security only

Pledge: pledgee’s security is dependant upon possession and an ancillary power of sale, while the mortgagee actually has title to the goods, subject to mortgagor’s right to redemption

Charge:property subject to a charge is appropriated to meet a debt or obligation, but its efficacy does not lie in possession, nor does property therein pass to the chargee. Enforcement of the security is by way of judicial process.

4. The Maltese Mortgage



Maltese Mortgage

The ARA follows the MSA which itself followed the British legislative model since 1854

No definition, but clear separation of estates

Must be in prescribed form

an interesting mixture of Continental and Anglo-Saxon notions, which in some sense anticipates the approach introduced by Cape Town for aircraft


Self-help and other remedies tend towards the view that the mortgage is a form of transfer of property by way of security

But mortgagee is considered owner only to the extent necessary for making security available for satisfaction of amounts owing to him, ie the remedies

mortgage can therefore also be seen as a charge on, not transfer of, property, with exceptional remedies given to mortgagee

Do the new provisions re security by title transfer in the Civil Code impinge on this discussion in any way?

The Maltese Mortgage (2)


Security by title transferCivil Code, Art. 2095F – 2095J

2095F(1): “Security by title transfer is a contract whereby the

debtor, or a third party for the debtor, transfers or assigns movable things.....so as to secure a present or future obligation” to:▪ the creditor(s) present or future; or▪ A security trustee in accordance with Art. 2095E

2095F(10): “For all intents and purposes, the creditor to whom

the property has been transferred shall be considered to be the absolute owner of the property......and such property shall not form part of the patrimony of the debtor”


No re-characterization possible

2095F(11): A transfer by way of security: Shall not be subject to re-

characterisation as any other contract and shall take effect in accordance with its terms; and

Shall be enforceable notwithstanding the bankruptcy or insolvency of the debtor or transferor


Creation and scope of a MortgageArt. 38 MSA, 29 ARA

A registered ship/aircraft or a share therein may be made a security for any debt or other obligation by means of:

an instrument creating a mortgage (in this Act called a “mortgage”) executed by the mortgagor in favour of the mortgagee in the presence of, and attested by, a witness or witnesses

a mortgage: is indivisible “notwithstanding the divisibility of the underlying debt

or other obligation which it may secure” Attaches to any proceeds from any indemnity arising from any

mishaps as well as any insurance proceeds; But in the case of Aircraft, the law specifically excludes

applicability of this provision to an indemnity payable under a liability policy; (International conventions impose particular liabilities on air carriers, principally in the context of carriage of passengers)


Mortgage probably not a transfer by way of security...

Legislator seems to have ignored the opportunity of taking the bull by the horns, possibly for continuity reasons;

Language of MSA does not seem to be strong enough to characterize mortgage as a transfer by way of security, but many elements are similar;

Many elements of security by title transfer should be applied to mortgages where the law on mortgages is silent;

A more comprehensive restatement of mortgage law will probably help for academic purposes, but the problem does not appear to be substantial


Attachment and extinguishmentArt. 37D MSA, 28 ARA

Mortgages attach to the asset until discharged.

Exceptions to this rule: where the asset is forfeited the interest of the mortgagee in the ship/aircraft

will terminate where the mortgagee has authorized, consented to, or conspired in the act or circumstances leading to forfeiture;

where the asset is sold pursuant to an order or with the approval of a competent court within whose jurisdiction the asset was at the time of the sale, the interest of the mortgagee as well as of any other creditor in the asset shall pass on to the proceeds of the sale;

Where the asset is sold by mortgagee in possession on “free from encumbrances” basis, Mortgage rights are no longer exercisable in relation to the asset;

ARA adds further considerations for aircraft, in such a circumstance: All rights ranking below the said mortgage no longer attach; All prior ranking rights are exercisable against proceeds of sale by

whosoever held, and no longer attach to the aircraft


Creation of a Mortgage Art. 38 MSA, 30 ARA

The Mortgage instrument must be in the prescribed form.

The detailed terms and stipulations concerning the mortgage are normally set out in a separate collateral document, which in the maritime field is called a deed of covenants.

In order to avoid complications of due notice, it is usually preferable to make express reference to the collateral document in the actual instrument of mortgage.


Collateral Deed of Covenants or security agreement

This is collateral to the mortgage instrument, normally

containing: the time for repayment of the principal sums; the interest payable on the capital sum loaned; the method of payment of such sum; the insurance requirements and responsibility for the same; any restrictions imposed by the mortgagee on the manner in

which the ship is operated; events of default, and resultant action that can be taken by

the mortgagee.


Security TrustsArt 38(4) MSA, 29(4) ARA

MSA/ARA recognize role of security trustees as mortgagees, being entitled to exercise all of the mortgagee’s rights.

Art. 2095E of the Civil Code applies to all situations involving security trustees, where Maltese law applies

Until the Recognition of Trusts Act 1994, whenever there were multiple financiers, practitioners often had to resort to naming each and every one of them on the mortgage.

Nowadays, one of the financiers can act as Trustee for the others for security purposes, which makes things much simpler in the context of a “work-out” or enforcement of mortgage rights.


A mortgage may be created to secure the payment of principal and interest, an account current, as well as the performance of any other obligation.

The monetary value of the indebtedness need not be actually put down in the mortgage.

The term “account current” here means “any indebtedness of a mortgagor in favour of a mortgagee arising and determinable in accordance with an underlying obligation”.

The normal meaning attributed to “account current” and the provisions of law governing such contracts in the Commercial Code do not apply to mortgages, except where specifically so agreed

Debtor obligations covered by a mortgage


The mortgage can also cover “future obligations”;

In such cases, however, a maximum sum by way of principal for which the mortgage is granted must be expressly stated in the mortgage and such sum shall be recorded in the register;

Such security can only be granted to credit institutions in an approved jurisdiction, or as indicated by Ministerial Notice;

A twist to the meaning of “obligations”

Art. 38(5) MSA, 29(5) ARA


Is mortgage registration required ad validitatem?

Art 38 MSA, 29 ARA

A reading of Art. 38 MSA and 29 ARA could lead to a conclusion in the negative but, even if true, this is misleading;

The special remedies made available by the MSA/ARA make reference to registered mortgages, as do the provisions regarding ranking, etc

With Aircraft, a Maltese mortgage can be registered in the international registry as an international interest, without having it registered in the NAR


Importance of Registration and effects thereof

Art.47 MSA, 39 ARA

A transfer or mortgage of a registered ship/aircraft “shall have no effect” against any person other than the transferor or mortgagor, unless the transfer or mortgage has been registered in accordance with the law;

The effect of registration is therefore that it gives efficacy to the mortgage (or transfer of the asset) as against third parties;

The priority rights of the mortgagee are established and secured from the date and time of registration;


Importance of Registration, and effects thereof (AIRCRAFT)

Art. 4(4) ARA

Registration of any act or instrument (whether by record or notation) in the NAR shall have the following effects:

Publicity - information will be deemed within the knowledge of third parties;

Effectiveness - of acts against third parties; Where expressly conditional on registration, it shall create legal effects between the parties to certain transactions;

Priority - according to the provisions of ARA and applicable law, between different rights;

All other effects under applicable law But the notation of ownership or lessee rights pursuant

to Art.4 shall not imply any priority over those of a registered mortgage holder, except as stated in Art. 31 and the First Schedule


Further mortgages & unilateral transfer of mortgaged asset

Art 39 MSA, 30 ARA

Where it is stated in the mortgage instrument that the prior written consent of the mortgagee is required before any further mortgages can be registered (or transfer of ownership), the registrar shall make a note of this, and will not permit any further registrations.

Any registration in such circumstance will be null and void; The ARA further specifies:

when a further mortgage is executed in favour of an existing creditor, no consent is required from such creditor;

The registration of a special privilege is not hindered, where the Act requires registration for its continuing validity and effect

Similar rule where the mortgage prohibits any transfer of the aircraft without the consent of the mortgagee;

Exception here: Transfers made pursuant to court order in a sale by auction or

pursuant to any other court order


Ranking in order of date & time of registration, notwithstanding any express, implied or constructive notice

For aircraft, a mortgage registered in NAR on or after February 2011 will always rank after any international interest, prospective international interest and other right or interest which is registered in the International Registry, irrespective of the date and time of such latter registration

Priority and ranking of mortgagesArt. 41 MSA, 32 ARA


Priority of mortgages (SHIPS)Art. 40 MSA

In ships, the rights of the registered mortgagee remain unaffected by the following subsequent events:

the creation of any separate privilege or charge on any part, appurtenance or accessory of a ship which may attach in virtue of any law; or

the reservation of ownership rights by a seller of any part, appurtenance or accessory sold to the ship owner, provided that provisions, fuel and other consumable goods are not here considered to be appurtenances;

Where any creditors register any reservation of ownership rights or special privilege or charge over parts, appurtenances or accessories, prior to the registration of a mortgage, they will preserve their position as against any subsequent mortgagees.


Priority of mortgages (AIRCRAFT)

Art. 31 ARA

Similar provision as MSA, except: It is subjected to Art. 32, which states that

international security interests shall rank prior to mortgages registered on NAR after effective date

A lessee (even of any part, appurtenance or accessory) can register his interest prior to the regbistration of the mortgage;

Furthermore, subsequent privileges listed in Art. 42(1) are not affected;

the reservation of ownership rights by a seller can be:▪ Also on an aircraft as a whole:▪ Transfer can be a sale, hire purchase or similar contract; and▪ Proviso in MSA that provisions, fuel and other consumable

goods are not appurtenances is not repeated


a registered mortgage is an executive title for the purposes of Art.253 of the COCP:

where the obligation it secures is a debt certain liquidated and due; or where a maximum sum is expressly stated in the instrument, and such figure is recorded

in the register for public notice

These also apply to all registered mortgages securing debts resulting from an account current or overdraft or credit facility, but mortgages for future debts are only included in the ARA version;

For enforcement, the mortgagee shall specify the sum due at the time of enforcement by means of an affidavit served on the mortgagor, in order to determine the amount certain liquid and due, or the actual sum due when the mortgage secures a future debt within an expressly stated maximum.

NB: the MSA applies these provisions for enforcement by judicial sale of a ship, while ARA applies them for enforcement by any sale of aircraft;

ARA further specifies that Debtor and other interested persons cannot hinder the mortgagees rights in any manner, but the debtor can pay such sum in settlement of the amount due, and any interested party can otherwise contest such amount according to law, even after payment

MSA merely states that any interested party can contest such amount;

Mortgages considered executive titleArt.42 MSA, 33 ARA


Mortgagee remediesArt 42 MSA, 33 ARA

In the event of default of any term or condition of a registered mortgage or of any document or agreement referred to therein, the mortgagee shall, upon giving notice in writing to the mortgagor:

be entitled to take possession of the asset or relevant share therein;

have power absolutely to sell the asset or relevant share therein; have power to apply for any extensions, pay fees, receive

certificates, and generally do all such things in the name of the owner as may be required in order to maintain the status and validity of the registration of the asset;

ARA adds the following rights of aircraft mortgagees: Have power to lease the aircraft so as to generate income

therefrom; and Have power to receive any income generated from the

management of the aircraft


Is Operation of ship possible?(security by title transfer provisions of Civil Code )

S.2095F(11): the “fruits” of property transferred by way of security are deemed part of the property and are subject to the rights of the creditor as stated in the provisions re security by title transfer

S.2095H(1): creditor not permitted to make use of property unless expressly permitted by the agreement, and shall be liable for loss or deterioration of property from his negligence

S.2095H(3): fiduciary obligations owed (see articulation of provision)

S.2095H(4): absolute ownership, but with limitations. Unauthorized use of property is a breach of fiduciary obligations


S.33(1): Notice requirement satisfied if by electronic communication or in such other manner agreed between the parties, or if served at registered address in Malta, or on a curator appointed by the Court;

S.33(2): Remedies may be exercised by the mortgagee

without the need of the leave of any court; To the extent that such leave is indeed sought due to the hindrance of any person, the court shall render full support to the mortgagee as expeditiously as possible

S.33(8): the debtor and person in possession of the aircraft (except for the possessory lien holder) must cooperate fully with the mortgagee enforcing his rights, including but not limited to surrendering all data, manuals, technical records, parts, accessories and appurtenances belonging to the aircraft

Further advantages for aircraft security interest holders

S.33 ARA

67

Is position of Mortgagee akin to ownership?

Art.42 MSA, 33 ARA

POSSESSION: except so far as may be necessary for making a [secured asset].... available as a security for a mortgage debt, the mortgagee shall not by reason of the mortgage be deemed to be the owner of the [asset], nor shall the mortgagor be deemed to have ceased to be the owner thereof’

POWER TO SELL: but where there are several mortgagees, a subsequent mortgagee can only do so with the concurrence of prior mortgagees, unless under the order of a court of competent jurisdiction;

Are these limitations solely for the protection of the mortgagor?


When selling the asset to enforce a mortgage, and proceeds of sale show a surplus, mortgagee is further bound: Under MSA, to deposit the same for the benefit of other

creditors and the mortgagor; Under ARA:▪ to hold under trust or deposit any surplus proceeds; ▪ to act in a commercially reasonable manner▪ by fiduciary duties to debtor and other creditors, and shall:▪ Pay from proceeds received any prior ranking creditor “as he may

determine or as may be determined by the court in case of disagreement”; and

▪ Provide information to lower ranking creditors and to the debtor re conditions of sale, expenses incurred, the prior rights settled and any other deductions from the price received

Does the secured creditor have any obligations?

Art.42 MSA, 28(5), Art.33(1) ARA


… continues

Intervention of Merita Bank in Newcastle P&I Association vs Dr Dingli noe (26.3.1999 per Arrigo J.)

refers with approval to a number of English cases

the Mortgagee owes a number of duties to the mortgagor as well as to other creditors when exercising its right of sale of the vessel


Can Security by Title Transfer provisions be of help in this context?

S.2095H(6), Civil Code: creditor can sell property: In the manner agreed, or in the absence of

agreement, in the manner the creditor considers most appropriate and commercially reasonable;▪ For a price established in agreement (with transferor),

or in the absence thereof, ▪ at the market value, or if there is no such value▪ At a price established by an independent competent

person; AND▪ When through judicial sale by auction, at a price and

in accordance with applicable law;


Operation of vessel(security by title transfer)

S.2095F(11): the “fruits” of property transferred by way of security are deemed part of the property and are subject to the rights of the creditor as stated in the provisions re security by title transfer

S.2095H(1): creditor not permitted to make use of property unless expressly permitted by the agreement, and shall be liable for loss or deterioration of property from his negligence

S.2095H(3): fiduciary obligations owed (see articulation of provision)

S.2095H(4): absolute ownership, but with limitations. Unauthorized use of property is a breach of fiduciary obligations


A foreign mortgage shall be recognized as a mortgage with the status and all rights and powers specified in the MSA/ARA notwithstanding the fact that it is not entered over a registered [asset], if

the mortgage has been validly recorded in the foreign registry of ships/aircrraft concerned;

such registry is a public registry; the mortgage appears upon a search of the registry;

and under the foreign laws concerned, the mortgage is

granted a preferential and generally equivalent status as a mortgage under the MSA/ARA.

Recognition of Foreign MortgagesArt.49 MSA, 41 ARA

5. Special privileges, Ranking of claims & the Possessory Lien



Civil Code subservient

Art. 1997(2) (Civil Code): the provisions of the Title dealing with Privileges and Hypothecs “shall not apply to ships or aircraft, or to debts to which ships or aircraft may be subject except so far as they are consistent with the provisions of the Merchant Shipping Act or the Aircraft Registration Act, as the case may be.”


Special privileges arise in virtue of law and no debt or other obligation other than those specified at law shall be secured by a special privilege.

Art. 1999 (Civil code): Privilege is a right of preference which the nature of a debt confers upon a creditor over other creditors, including hypothecary creditors.

Art. 1997(2) (Civil Code): the provisions of the Title dealing with Privileges and Hypothecs “shall not apply to ships or to debts to which ships may be subject except so far as they are consistent with the provisions of the Merchant Shipping Act, 1973.”

ARA: Where a special privilege is subject to registration in the international registry, such registration shall be an additional requirement for the continuing existence of such special privilege

Special PrivilegesArt. 37B MSA, 26 ARA


Special Privileges over ShipsS.50 MSA

The debts which are held by s.50, MSA to be secured by a special privilege on the vessel concerned are the following:

judicial costs incurred in respect of the sale of the ship and the distribution of the proceeds thereof;

fees and other charges due to the registrar of Maltese ships arising under the Act;

tonnage dues;

wages and expenses for assistance, recovery or salvage, and for pilotage;

77

… continues the wages of watchmen, and the expenses of watching the ship from

the time of her entry into port up to the time of sale;

rent of the warehouses in which the ship’s tackle and apparel are stored;

the expenses incurred for the preservation of the ship and her tackle including supplies and provisions to her crew incurred after her last entry into port;

wages and other sums due to the master, officers, the crew including repatriation costs and social insurance contributions payable on their behalf;

damages and interest due to any seaman for death or personal injury and expenses attendant on the illness, hurt or injury of any seaman;

moneys due to creditors for labour, work and repairs previously to the departure of the ship on her last voyage

78

… continues ship agency fees due for the ship after her last entry into port, in accordance

with port tariffs, and any disbursements incurred during such period not enjoying a privilege in paragraphs (a) to (I) of this section, though in any case for a sum in the aggregate not in excess of four thousand liri;

moneys lent to the master for the necessary expenses of the vessel during her last voyage, and the reimbursement of the price of goods sold by him for the same purpose;

moneys due to creditors for provisions, victuals, outfit and apparel, previously to the departure of the ship on her last voyage;

damages and interest due to freighters for non-delivery of the goods shipped, and for injuries sustained by such goods through the fault of the master or the crew;

damages and interest due to another vessel or to her cargo in cases of collisions of vessels;

the debt specified in paragraph (d) of section 2009 of the Civil Code for the balance of the price from the sale of a ship.


Privileges on ship of seller to be registered

Art. 52 MSA

The privilege granted to the seller for the price of the thing sold under the provisions of article 2009 (d) of the Civil Code is only effective regarding vessels, if the claim for such price is registered in the register of the said ship, within two days from the date of the sale.

Such privilege is registered by delivery to the registrar on the prescribed form duly completed and signed by the seller.


… continues

Where debts of a nature similar to the ones mentioned are contracted in different ports, or in several forced returns to the same port, the priority established by art.50 shall be established on each arrival or return.

Privileged debts established on subsequent arrivals or returns have preference over those contracted on the occasion of a former arrival or return.


The following debts, as well as any proceeds from any indemnity arising from any mishaps as well as any insurance proceeds (other than from a liability policy:

judicial costs incurred in respect of the sale of the aircraft and the distribution of the proceeds thereof;

fees and other charges due to the DG arising under the Act; Wages due to crew in respect of their employment on the

aircraft; Any debt due to a possessory lien holder for the repair,

preservation of the aircraft to the extent of the service performed and value added to the aircraft;

The expenses incurred for the repair, preservation of the aircraft to the extent of the service performed and value added to the aircraft; and

Wages and expenses for salvage in respect of the aircraft

Special Privileges over AircraftArt.42, ARA


Some debts require registration in the IR to be recognized as secured by a special privilege. They also must be created by the owner of the aircraft or a person authorized by him. These are: Taxes, duties and, or levies due to the Government of

Malta in respect of the aircraft; Wages and expenses for assistance or recovery in

respect of the aircraft

Art.42(5): This rule (and consequent ranking) prevails over any other law, which is an interesting concession by the Government not normally readily given

Special privileges requiring registration in international Registry

Art.42(2)


Particular issues meriting further examination re ARA

Art.42(3): With reference to the privileges requiring registration, it is stated that where the debt is created by an operator (or a lessee):

“it shall not affect the aircraft or the owner thereof, and shall only operate in relation to the said debtor and upon the termination of his temporary title and reversion of the aircraft to the owner, the said claim shall be dissolved with regard to the aircraft which shall revert unencumbered to the owner”

This seems to indicate that there could be charge on the aircraft during the relevant temporary tenure, and therefore wording here could be happier!


Cont.

Art.42(4) can also be improved.

It seems to refer to the registration of the privileges covered by Art. 42(2) on the NAR which would trigger notification to interested parties.

These can presumably find themselves on the NAR only through the facultative “noting” possibility under Art. 4(2)(b)

Some clarification possibly needed here


Ranking of maritime claimsArt. 54A, MSA

The debts specified in article 50 shall rank in the order therein set out and in preference to other hypothecary and privileged claims, notwithstanding that the ship is still in the possession of the debtor, and the debts specified in article 50(a) and (b) shall under all circumstances rank in preference to any claim.


… continues

Debts secured by possessory liens, rank after some of the privileged debts, but not all.

Examples: such a lien holder ranks after the ship repairers who did

work on the direct order of the ship owner, but ranks prior to ship agency fees as well as the rest of the privileged debts listed thereafter, as well as any other hypothecary and privileged claims.

Debts secured by a mortgage rank after the debts of possessory lien holders, as well as ship agency fees; however they rank prior to debts for necessary expenses, etc...


Ranking of claims(Aircraft)

Art.44 ARA

1. The debts specified in art.42(1) ARA shall rank in the order therein set out, but the possessory lien holder will be entitled not to release possession of the asset until paid or otherwise secured to his satisfaction;

2. A mortgage registered in the NAR or a charge in the international registry or secured by a foreign mortgage recognized by ARA shall rank after lien and debts covered by special privilege pursuant to Art. 42(1), but prior to other hypothecary and privileged claims;

3. The privileges requiring registration in the IR (taxes, assistance or recovery costs and wages) shall rank after the debts specified in Art. 42(1) as well as debts secured by mortgages and charges in the IR which will have already been registered;

4. The debts specified in art.42(2), as well as where covered by a special privilege


Possessory Lien Art.54 MSA, 43 ARA

Any ship/aircraft repairer, shipbuilder/aircraft manufacturer, or other creditor into whose care and authority an [asset] has been placed for the execution of works or other purposes shall have a possessory lien over the [asset];

the lien entitles the creditor to retain possession of the asset until such he is paid for his work

The lien is extinguished by the voluntary release of the asset from the lien holder’s custody, but not if released pursuant to a court order or judicial sale. In the latter case, the lien holder will enjoy priority over the sale proceeds.

The lien holder is obliged to declare the amount of his claim if called upon to do so by judicial letter

6. Other security interests and mechanisms brought in by ARA

(more relevant for aircraft)



ARA: “security interest” means an interest granted in terms of a security

agreement drawn up to secure the rights of:a) A person who is a conditional seller under a title reservation agreement; orb) The rights of a person who is a lessor under a lease; and which is

recognized and regulated in terms of Art.41

But neither a lease nor sale with title reservation are normally considered a “security agreement” in the traditional sense;

The definition therefore refers to a security agreement that provides an interest to the lessor and conditional seller;

Moreover, Art.41 confers certain “privileges” to these, but only when registered in the International Registry, as opposed to any registration in Malta;

Furthermore the lease or conditional sale must apparently be part of a “security agreement”;

The problem of languageSecurity interests as defined in ARA


Both contracts are recognized in the 1st Schedule as international interests directly, separately from rights given under a security agreement

1st Schedule:

“security agreement” means an agreement by which a chargor grants or agrees to grant to a chargee an interest (including an ownership interest) in or over an aircraft object to secure the performance of any existing or future obligation of the chargor or a third person

“Leasing agreement” means an agreement by which one person (the lessor) grants a right to possession or control of an aircraft object (with or without an option to purchase) to another person (the lessee) in return for a rental or other payment”

Security interest as defined in the ARA


International Interests1st Schedule, Art. 2

An interest in airframes, aircraft engines or helicopters: Granted by the chargor under a

security agreement; Vested in a person who is a

conditional seller under a title reservation agreement; or

Vested in lessor under a leasing agreement


“Domestic” rights for holders of a security interest as defined

We have already seen how a security interest creditor enforcing his rights is given privileged status by Art. 27(4), in that the relevant procedure cannot be interrupted or hindered by any curator in bankruptcy, liquidator, etc., for any cause other than a cause that could be set up by the owner of the aircraft

However, it is not clear where else in the Act, apart from the Convention dimension, security interests per se have any significance, except where a security interest is also an international interest

There is however the curious case of Art. 31


Other creditors and rankingArt.31 ARA

The law specifies other creditors who can have their interest on an aircraft or part, accessory or appurtenance, noted or registered in the register, subject to Article 32, prior to the registration of a mortgage. These include:

Any creditor having a separate privilege or charge;

A seller reserving ownership rights, or enjoying the benefit of any conditions affecting title thereto;

A lessee having rights to an aircraft or any part, appurtenance or accessory of an aircraft;


Other creditors (cont.)

The person in favour of whom such rights are registered prior to the registration of a mortgage, shall be protected from and rank prior to any subsequent mortgage

Further provisions provide for the cancellation from the register of lessee interests and reservation of ownership rights, as and when the relevant circumstance changes

But why does Art.31(4) refer to the lessee and not the lessor?


Registration of interests

Art. 4 ARA provides for the registration of a number of interests and documents beyond what was traditionally understood as natural. eg:

Details of any Irrevocable De-registration and Export Request Authorization (IDERA) and other powers of attorney granted to an owner or a lessor or to a mortgagee, or to any third party, granting rights relating to the aircraft or to closure of registry;

Any act to be registered under the provisions of Art. 31 or of any other law;

Lessor rights relating to the aircraft or an engine; Lessee rights in relation to an aircraft or an engine and all

matters relating thereto in terms of Article 31; Information on international interests registered in the

international registry and the debtor thereof


“Non-Domestic” rights of security interest holders as defined

Art.41 ARA

As long as their interest is registered in the International Registry, in addition to the de-fault remedies allowed by the 1st Schedule, a security interest holder has various self-help remedies under Art. 41: Upon simple notice to defaulting debtor, he has:

▪ Power to terminate the agreement and take possession or control of the aircraft;

▪ Apply to the court to authorize or direct either of these acts

▪ Security interest is an executive title▪ No court intervention is necessary, etc.

Registration in the IR in effect elevates a security interest holder under Maltese law to quasi-mortgagee status


The 1st schedule does not seem to provide for registration in the IR as essential for an interest to constitute an “International Interest” as defined

However, Art.41(2) makes registration of an international interest in the international registry a pre-condition for recognition, enforceability and entitlement to all the rights and powers specified in the 1st Schedule

Art. 41(8) further recognizes foreign security interests, provided that these shall be subject and subordinate to the rights of any registered mortgagee or holder of an international interest registered in the IR

International interests and ARAArt.41 ARA; Art. 2, 10, 1st Schedule


International interests and Maltese law

Part VII (Art.50 – 55 ARA)

Maltese law allows a creditor the possibility, if desired, to have various security interests recorded in the IR, either in replacement of registration in the NAR, or together with such “domestic” registration

If such international registration is opted for, the relevant international interest will be fully enforceable in Malta, subject to rights having priority under Art.42

An international interest will not be subordinate to a “domestically registered” mortgage, irrespective of time of registration (other than registrations preceding February 2011)


Questions?

Dr. Tonio Fenech LL.M. (Lond), LL.D.Fenech Farrugia Fiott Legal

[email protected]

www.fff-legal.com

mailto:[email protected]

http://www.fff-legal.com/

dr. tonio fenech ll.m. (lond), ll.d.. aircraft finance: financing for the purchase and/or operation...

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