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08 July 2015
Malta's standing as a leading maritime is well known. It has the largest ship registry in Europe by tonnage and the seventh largest globally, as well as extensive experience in shipping activities and related services (eg, ship finance and mortgages).
Over the last few years, the Maltese government has sought to emulate this success in the aviation sector through the development of legal and administrative infrastructure modelled on the common law system and international conventions. These developments include:
Collectively, these developments have created greater certainty for financiers regarding the modes of security available, with the ultimate aim of attracting international investors in order to promote the continued growth of the aviation sector.
A landmark development was the enactment of the Aircraft Registration Act in 2010. The act effectively rewrote Maltese law relating to aircraft registration and security over aircraft. It was drafted to establish a robust legal framework in order to aid the creation of a successful aviation register in Malta and consolidate the laws on registration and security over aircraft in a single piece of legislation. The act:
In terms of Maltese law, aircraft are a particular class of movable which constitute separate and distinct assets within the estate of their owners. Aircraft may constitute security for a debt by either agreement or operation of law. A mortgage over an aircraft is one of the more common forms of security agreements used to secure actions and claims to which an aircraft is subject. Under Maltese law, mortgages are recognised as a voluntary encumbrance created over an aircraft by means of a unilateral instrument (signed and registered by the mortgagor), and will rank according to the time and date of registration. Mortgages do not affect absolute transfers of property, although they do have a form of propriety interest in the aircraft.
Registration of mortgages
All mortgages and transactions in relation to mortgages over an aircraft are registerable under the Aircraft Registration Act. Security trustees appointed or acting under a trust for the benefit of persons to which the debt or other obligation is due can register and execute mortgages. Security trustees are recognised as mortgagees and can exercise all rights relating to the mortgage under Maltese law. However, a mortgage cannot be created where the mortgage instrument prohibits further mortgages, unless all mortgagees' provide their prior written consent.
Aircraft frequently constitute security for a debt through a mortgage or special privilege. While a mortgage arises by agreement, special privileges arise by operation of law. Mortgagees register mortgages in order to secure priority over other debts such as subsequent mortgages and certain privileged debts. Therefore, once registered, a mortgage will rank in accordance with the ranking allocated to other registered and privileged debts, if any. Special privileges accorded priority over a registered mortgage include:
Registered mortgages are not affected by bankruptcy or insolvency, provided that they were registered before the bankruptcy or insolvency.
Where more than one mortgage is registered over the same aircraft, mortgagees will have priority according to the date on which they registered their mortgage in the National Aircraft Register. On registration, the mortgagee's rights cannot be affected by the creation of any separate privilege or change (except in the case of special privileges set out in the act) of any part, appurtenance or accessory of an aircraft which may attach by virtue of Maltese law. From registration, a mortgage creates an executive title that attaches to aircraft until it is discharged, provided that the obligation secured by the debt:
Consequently, the mortgagee can unilaterally seek the automatic enforcement of the mortgage in case of default by the mortgagor.
Until a mortgage is discharged, it will attach to the aircraft. Cancellation requires a declaration by the mortgagee on the correct statutory form, asserting that the mortgage has been discharged. Where the aircraft is sold at auction by court order or private sale, the mortgagee can no longer exercise the rights arising from the registered mortgage, as the aircraft is deemed to be sold free and unencumbered. Nevertheless, the interests of all mortgagees in the aircraft pass to the proceeds of the sale. There may be instances where the purchaser of an aircraft is not qualified to own a Maltese registered aircraft under Maltese law. In this case, the aircraft registration cannot be cancelled or deemed void unless all mortgagees consent to deregistration.
Law governing validity of mortgages
Despite the absence of any significant Maltese case law on the matter, the formal validity of the mortgage deed is governed by Maltese law, as the law of the place of the registered aircraft. Conversely, the law governing the substantive rights of the parties that are collateral to the mortgage deed is likely to be governed by the proper law of the contract, but even this matter has not been decided definitively by the Maltese courts. However, reference has been made to generally accepted principles of English private international law which the Maltese courts have applied.
Rights and duties of mortgagees
In the event of a default on any term or condition under the mortgage, the mortgagee can take possession of the aircraft or its relevant share without judicial intervention. Maltese law provides for a number of remedies in this respect, which are immediately enforceable by the mortgagee after due notification to the mortgagor, including the right to:
The mortgagee is not considered to be the owner of the aircraft or any share in it by virtue of a mortgage. Any surplus proceeds resulting from sale must be deposited in court or held under trust for the benefit of other creditors. Therefore, the creditor selling the aircraft must act in a commercially reasonable manner and is bound by fiduciary duties towards the debtor and other creditors when effecting the sale. The mortgagor remains the owner of the aircraft and ceases to be so only to the extent required to make the aircraft available for security for the mortgaged debt. The mortgagee in possession can also apply for extensions, pay fees, receive certificates and generally act in the name of the owner to the extent required to maintain the status and validity of the registration of an aircraft.
Recognition of foreign mortgages
In accordance with the Aircraft Registration Act, a foreign mortgage will be recognised as a mortgage with all rights and status granted to a mortgage registered under the National Aircraft Register, provided that certain requirements are met – in particular, the following:
Where the requirements above are not met, a foreign mortgage will be recognised and enforced under Maltese law only if it is registered in the International Register in terms of the Cape Town Convention. In this instance, the creditor holding an international interest has the right to:
The concept of liens as understood in common law systems does not exist in Malta, with only minor reference made to liens in the Aircraft Registration Act. Under Maltese law, aircraft repairers, manufacturers or other creditors can retain possession of an aircraft entrusted in their care for the execution of works until the creditor receives any debts due to it for any building, repair or activity. Maltese law does not provide for the creation of any other form of aircraft lien. The Aircraft Registration Act grants debts due to possessory lienholders privileged status. Under the act – which implemented the Cape Town Convention – any debt due to a possessory lienholder in terms of the act is considered a priority non-consensual right or interest for the purposes of the Cape Town Convention. The priorities established in terms of the Cape Town Convention (insofar as registered international interests are concerned) do not affect the privileged status of debts due to possessory lienholders under Maltese law.
Extinguishment of possessory liens
Possessory liens are extinguished by the creditor's voluntary release of the aircraft, if the aircraft is released pursuant to a court order or following a judicial sale of the aircraft. Lienholders have no general right to sell an aircraft in their possession, except with the authority of the court. In the latter case, creditors enjoy a privilege over the proceeds of sale of an aircraft which rank before mortgages but after special privileges. Lienholders are obliged to release aircraft only if they receive the sums due or if adequate security is deposited in the First Hall of the Civil Court of Malta in satisfaction of the claim.
Recognition of foreign liens
Unlike foreign mortgages, the recognition of foreign liens or other foreign privileged rights on aircraft is not explicitly provided for under the Aircraft Registration Act. To the extent that a foreign lien is registered in the International Register, the security interest may be recognised under the act and enforceable in terms of Maltese law. In general, the law of the place in which the aircraft was when the right was created (lex situs) determines whether a valid and enforceable security right over the aircraft has been created. While there is no hard and fast rule in this respect, if a Maltese court has jurisdiction, it may recognise foreign liens and allow their enforcement in Malta. Ranking is usually treated as a matter of procedure and consequently falls under the domain of the Maltese courts, which will apply Maltese law to determine how debts will be ranked.
Obtaining possession through judicial intervention
Since the amendments to the Aircraft Registration Act, Maltese law now allows creditors holding a mortgage or international interest to take possession of an aircraft without judicial intervention. However, judicial intervention is offered as an additional form of redress for creditors that prefer the additional certainty and inherent authority associated with a court decision ordering the judicial sale of the aircraft in satisfaction of the creditors' claims. Creditors can resort to an arrest warrant for the aircraft. This concept was introduced in 2010 concurrently with the Aircraft Registration Act.
Characteristics of arrest warrants
Precautionary arrest warrants will detain aircraft in Malta. This remedy can be used to secure a debt or claim – whether in personam or in rem – that could otherwise be frustrated by the departure of the aircraft. For the purpose of the law on arrest warrants under the Code of Organisation and Civil Procedure (Chapter 12 of the Laws of Malta), the term 'aircraft' is defined as including all data, manuals, technical records, parts, airframe and other accessories and appurtenances that are on board belonging to the aircraft and any engines owned by the owner of the aircraft, regardless of whether they are attached to the aircraft, provided that they are in Malta.
Arrest warrants must be applied for in the appropriate form and involve seizing the aircraft from the debtor and transferring it to the Authority for Transport's custody. Warrants provide that the Authority for Transport must not release the aircraft or allow the debtor to divest itself in whole or in part of the aircraft or any rights in the aircraft. Warrants are lawful when notice is served on the executive officer of the Authority for Transport in whose possession or under whose power or control the aircraft is placed.
For the purposes of Maltese law, aircraft are deemed to be in the Authority for Transport's power or control as soon as they enter Maltese airspace. Following the arrest of an aircraft in any airport or aerodrome or over Maltese airspace, a court can order the sale of the arrested aircraft, pending litigation, if it believes that that the debtor is insolvent or otherwise unlikely to continue trading or maintaining the aircraft.
De minimis rule
Unless an arrest warrant relates to a mortgage that has been duly registered in the National Aircraft Register or a registered international interest, it can be demanded and obtained before the courts of Malta and Gozo only as security for a debt or other claim, provided that the sums due are above the statutory minimum. The statutory minimum sums differs for private and public aircraft. Any claim in respect of:
Where, despite the issue and execution of a precautionary arrest warrant, an aircraft is removed from Malta, the owner, lessee or other person in possession or control of the aircraft will be in breach of the warrant. These individuals will be held jointly and severally liable for a penalty of €120,000, payable to the party that has been granted the warrant. This penalty is in addition to any other penalties applied under Maltese law for contempt of court.
Although rooted in continental civil law, the Maltese judicial system is heavily influenced by the common law, particularly in the field of commercial law. The introduction of the Aircraft Registration Act has resulted in a particularly protective framework for the interests of the mortgagee and holders of other security interests. In addition, the rules and procedures concerning judicial and private sale of assets in Malta are swift and flexible, allowing Malta to offer an attractive forum for the purposes of security and other financial arrangements.
Malta's adoption of the Cape Town Convention has proved to be the keystone in this progressive movement to facilitate all aspects of aviation business conducted in Malta through:
Collectively, these innovations have increased certainty for the payment of debts following default, broadening the appeal of Malta as an aviation finance centre. The emergence of Malta as a hub for international financial and trading services has further enhanced interest in Malta – in particular, in the field of asset-based financing and as a jurisdiction for establishing special purpose vehicles by lenders in financed lease structures.
For further information on this topic please contact Nicolai Vella Falzon or Peter Grima at Fenech & Fenech Advocates by telephone (+356 2124 1232) or email (firstname.lastname@example.org or email@example.com). The Fenech & Fenech website can be accessed at www.fenechlaw.com.
An earlier version of this article was first published on global.practicallaw.com.
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