Creating and Registering Security Interest Over Aircraft in The United Arab Emirates

A security interest is a formal claim on a property that was pledged as collateral to get a loan. The borrower makes available to the lender accompanied by a security interest on specific assets that are recoverable in the event the borrower fails to make loan payments.  For instance, if a lessee of aircraft defaults on the lease the owner of the aircraft may retake possession of the rented aeroplane or aircraft. There is no law in the United Arab Emirates (UAE) that specifies requirements as to the form of security documents entered into in relation to commercial transactions, aside from the general provisions of Federal Law Number 18 of 1993, as amended by Federal Decree-Law Number 9 of 2016 and Federal Decree-Law Number 14 of 2020, regarding mortgages over movable assets and, if applicable, Federal Law Number 4 of 2020 (FL4). According to the requirements of the Commercial Code that apply to commercial mortgages over mobile property, ownership of the movable property must be transferred to the mortgagee, whether entirely or partially, under a joint occupancy between the mortgagor and the mortgagee. In this situation, nameplates that state that the airframe and engines are financed in favour of a mortgagee would partially satisfy this criterion.

 

Documentation Requirements and Expenditures for Security

What Legal Requirements Must Be Met in Order to Create an Enforceable Security Interest in An Aircraft? How Much Does a Documentary Cost?

There are no particular requirements that apply to security documents pertaining to aircraft, subject to the provisions of FL4, Cabinet Decision Number 29/2021 on the Implementing Regulation of FL4 regarding the guarantee of rights related to movables, which apply to the Emirates Movable Collateral Registry. Commercial mortgages must adhere to general guidelines outlined in the Commercial Code. The Commercial Code outlines the general guidelines and requirements that apply to movable asset mortgages following a change in possession. The commercial mortgage must be notarized in front of a UAE notary and include the amount of the secured loan as part of the stipulated requirements. Although the GCAA does not mandate the notarization of Arabic translations of foreign law security documents, it is advisable to arrange for non-UAE law mortgages to have their Arabic translations notarized by well-known legal experts in UAE in order to prevent any potential challenges to the legality of such documents.

 

Requirements For Security Registration

Prior to the security document's preparation or perfection against the debtor and third parties, must it be registered with the aviation authority or another registry? Explain the steps involved in registering a mortgagee interest.

A specific registry for the registration or security documents is not mentioned in the GCAA. The GCAA will enter the identity of the mortgagee in its records in the event that a mortgage is issued over a registered aircraft. A certified copy of the mortgage document and any other supporting documentation attesting to the existence and authority of the mortgagee must be submitted together with a request in this respect. The GCAA may consider creating a special aircraft register in the future that would be subject to a unique regime tailored to it in light of the provisions of article 4(a) of FL4.

Currently, the filing or recording of a mortgage by the GCAA in accordance with UAE legislation is not a requirement for its legality or enforceability. Other than interested parties, no other parties have access to the information kept on file by the GCAA that is not represented on the aircraft's certificate of registration. It is advised that this mortgage be recorded with the International Registry as an international interest to the greatest extent possible because if the mortgage is noted on the certificate of registration, this information will be available to third parties but does not create, on this sole basis, any specific rights or priority. Except for the GCAA fees associated with International Registry registration for the purpose of assigning an authorizing entry point number, there are no registration fees that particularly pertain to a mortgage registration.

To safeguard the legality of such an interest, security interests in connection with finance leases must be registered or included in the register maintained by the GCAA.

 

Security Registration

The GCAA and mortgages over aircraft registered in the UAE are both registered under the Civil Aviation Law. In actuality, it authorizes the registration of mortgages governed by foreign law under its registry and, to the extent requested by the mortgagee, the writing of the mortgagee's name on the certificate of registration issued by it. The mortgagee would be protected against the owner's effort to sell or deregister the aircraft without first getting the mortgagee's prior written approval by having the mortgage registered under the certificate of registration, which would not identify the rank of the mortgage.

The Cape Town Convention on International Interests in Mobile Equipment (2001) (the Cape Town Convention) provisions would apply to the rights of the secured creditors, with the exception that the effect of such provisions may be affected in the event of insolvency. The Commercial Code does not contain any specific provisions in respect of the rank and priority of security interests created by the commercial mortgage.

 

Effects of a Security Interest's Registration

What Impact Does Registration Have on Outside Parties?

Other than interested parties, no other parties have access to the information submitted to the GCAA or listed on the aircraft's certificate of registration. It is unlikely that the information and documentation registered with the GCAA but not explicitly represented in the aircraft certificate would be acknowledged as enforceable with respect to third parties. However, the UAE courts would recognize a certificate of registration issued by the GCAA as admissible evidence of a security interest created by a transaction based on the provisions of Federal Law Number 10 of 1992 regarding evidence in civil and commercial transactions, as amended by Federal Law Number 36 of 2006 and Federal Decree-Law Number 27 of 2020.

How Are Security Over Leases and Aircraft Normally Set Up? What Effects Will Modifications Have on The Security or Its Beneficiaries?

A security trustee or agent holds the security over the aircraft on behalf of financiers, which is the normal way that security over aircraft is constituted. In the appropriate financial framework, special-purpose corporations (SPCs) own the majority of aircraft. The SPC is often a private limited company established in nations with advantageous tax laws, such as the Cayman Islands, Ireland, the Abu Dhabi Global Market, and the Dubai International Financial Centre. The GCAA would give effect to the registration of a security (usually a mortgage) and register it in the name of the security trustee or agent against the SPC as owner in accordance with the Civil Aviation Regulations. In addition to the mortgage, the owner would grant a security assignment of its rights under the lease, its rights under the hull and war insurances with regard to the operation of the aircraft, and a pledge over the owner's bank account to which the lease rentals are paid in favor of the financiers. The Federal Decree Law Number 16 of 2021, enacted on August 29, 2021, concerning factoring and civil accounts receivables, will be applicable in the case of the assignment of the receivables. Deposits maintained in banks and other financial institutions and pledges over credit accounts fall under the purview of article 3 of FL4 and are therefore eligible for registration with the Emirates Movable Collateral Registry. The Cape Town Convention and its Protocol on Matters Specific to Aircraft Equipment (2001) would be acknowledged in relation to a mortgage interest as an enforceable piece of collateral in the UAE as the state of registration under the Civil Aviation Regulations. According to FL4's sections 1 and 3, a lessor's rights over a piece of property that is leased for at least a year or is the subject of a finance lease are registrable in relation to lease interests.

At this point, it is questionable whether the rights created by lessors or mortgagees over aircraft would be registrable.

A straightforward financing lease structure would involve the SPC leasing the aircraft to the operator. In general, the rent that the operator would pay to the SPC under the finance lease would be equal to the principal and interest that the SPC must pay to the financiers in respect of the financing documentation. The operator would operate the aircraft with a UAE registration and pay the lease rentals to the SPC under the finance lease. The interested parties should submit originals or certified copies of the pertinent transaction documents that accurately reflect the transaction's structure to the GCAA before the lease and financing documentation are registered.

The loan's term and the financing lease's term would be the same. As a result, the SPC will have fully repaid the loan at the end of the lease term, provided that the airline has made all payments required under the finance lease. At that moment, the financiers would ask the GCAA to release the mortgage as well as any other security documents recorded in its file, such as an export request authorization and an irreversible deregistration. If the UAE's registration cannot be maintained under the terms outlined by the GCAA, the operator would typically be able to purchase the aircraft for a nominal amount, and changes would be made with the GCAA to indicate the transfer of ownership of the aircraft and its deregistration.

It should be noted that financial institutions are normally prohibited from holding assets and engaging in commercial activity. There are no specific regulations in the UAE that govern aircraft lease financings. The conventional lease financing arrangements can give way to shariah-compliant structures like ejari leases and murabaha financing structures.

 

Security Regarding Backup Engines

What Is the Standard Format and Workings of Security Over Spare Engines - A pledge or a mortgage can be used as a security over spare engines or spare parts. According to Law Number 5 of 1985 about the Law of Civil Transactions (the Civil Code), as revised by Federal Law Number 1 of 1987 and Federal Decree-Law Number 30 of 2020, the pledge is a type of security. Similar to a commercial mortgage, the possession of the pledged asset must be physically transferred to the pledgee or its agent for the pledge to be considered complete. As a result, movable assets such as installed engines or parts that will still be employed by the borrower or a third party, such as the operator of the aircraft, are not covered by this type of security as defined by the Civil Code. In addition to the lease interests covered by article 1 of FL4, article 3(i) states that any other movable asset that qualifies as collateral under current UAE legislation may be registered with the Emirates Movable Collateral Registry. Under UAE law, it could be conceivable to create a specific security over installed engines and parts in this regard, provided that the security granted over the installed engines is viewed as adhering to the same rules as airplanes.

 

Blue Sky One Limited & Others v. Mahan Air & Another [2010] EWHC 631

In this case, it was decided that the local law, should be applied at closing to establish if an aircraft mortgage under English law is legitimate. The facts of this case clearly show how important the ruling is. Over a number of aircraft, the debtor granted an English law mortgage. At the time the mortgage was approved, one of the airplanes was situated in The Netherlands. According to the court, the mortgage was not valid under Dutch law, and as a result, the lender was not permitted to use the aircraft as collateral for the enforcement of its claim. In the era of smartphones and free flight monitoring apps, this might never be the case. The best practice is to confirm that the mortgage is legitimate under the law of the jurisdiction of registration because, in light of Blue Sky One, it is unclear whether English law or the law of the jurisdiction of registration applies.

The potential issue is being addressed by statutes in other states besides New York. Delaware, the top domestic rival of New York, created Delaware UCC Article 9-111, which offers very pertinent The creation, attachment, validity, and enforcement of the security interest are all subject to the laws of the state of Delaware if a security agreement is controlled by its laws. If the aircraft's position cannot be ascertained, most likely because it is over international waters, the legislation of the country of registration alone applies. Although it is unclear why Irish law would be preferred to New York law, the parties currently use Irish law mortgages in some English law transactions.

 

Conclusion

Under Federal Law Number 20 of 1991 (the Civil Aviation Law), a mortgage may be recorded over an aircraft that is registered in the United Arab Emirates. In reality, the General Civil Aviation Authority (GCAA) registers mortgages subject to foreign law and, upon request, updates the mortgagee's name on the certificate of registration. The mortgagee's rights may be recorded and protected by this registration, which also prevents the mortgagor from deregistering the aircraft or changing the aircraft's ownership without the mortgagee's permission. In this situation, the secured party should, to the degree possible, register the international interest generated by the mortgage or any other pertinent security document with the international registry.