Aviation Finance & Leasing 2019

Last Updated August 01, 2019

China

Law and Practice

Authors



Beijing Rui Bai Law Firm is an independent law firm and a member of the PwC global network of firms. Based in Beijing, the banking and finance team of six people provides one-stop services to our clients, as the PwC global network of law firms consists of over 3,500 lawyers in more than 100 countries, including over 20 offices across 15 countries in Asia Pacific. The firm works closely with the Shanghai Xin Bai Law firm (also a member of PwC’s global network of firms), and in particular with the banking and finance team at Tiang & Partners in Hong Kong (an independent Hong Kong law firm associated with PwC Legal International Pte Ltd (a licensed Foreign Law Practice) in Singapore)). In addition, the firm's aviation finance legal services are fully integrated into PwC’s Aviation Business Services, under which multiple disciplines work together to offer clients an all-inclusive solution covering advisory, risk management, assurance, taxation and legal.

Value-added tax (VAT) will be levied on the seller (incorporated in the People’s Republic of China, (PRC)) as a consequence of the execution of an aircraft or engine sale agreement to which it is a party if the asset is located or physically in the PRC when the transfer of title occurs.

It is not necessary or desirable for a sale agreement to be translated, certified, notarised or legalised to be enforceable against a domestic party except that:

  • when a lawsuit is filed against that domestic party with a court of the PRC and there is a need to present the sale agreement as evidence (the “Proposed Evidence”), if the Proposed Evidence has no Chinese version, it shall be translated into Chinese by a translator recognised by the court of the PRC for its admissibility as evidence in that legal proceeding; and
  • if the Proposed Evidence is formed (or created) outside the PRC, it shall be certified as to its authenticity and legality by a notary public in the country where it is formed (or created) and the certificate relating to the Proposed Evidence shall be further authenticated by an embassy or consulate of the PRC in that country (or otherwise pursuant to the relevant bilateral or multilateral treaty to which both the PRC and that country are parties) for the Proposed Evidence’s admissibility as evidence in the legal proceeding with the court of the PRC, provided that such certification and authentication may be made at any time after the execution of the sale agreement but prior to that Proposed Evidence being presented to the court of the PRC.

Under PRC law, the delivery of the aircraft or engine constitutes 'transferring title' of the same. The delivery can either be physical delivery or by way of a bill of sale. Unless otherwise agreed between seller and purchaser, the “transferring title” usually extend to include all installed parts.

Sale of ownership interest in an entity that owns an aircraft or engine would be recognised as a sale of the aircraft or engine itself.

If the transfer of title is between a domestic party and a foreign party or between two foreign parties, an English law-governed or a New York law-governed bill of sale is normally used to effect the title transfer. If the transfer of title is between two domestic parties, the bill of sale must be governed by PRC law.

The subject of the transfer of title must be clearly identified.

An English law or New York law (or such other foreign law) governed bill of sale does not need to be translated, certified, notarised or legalised to be enforceable against a domestic party except that:

  • when a lawsuit is filed against the domestic party with a court of the PRC and there is a need to present the sale agreement as evidence (the “Proposed Evidence”), if the Proposed Evidence has no Chinese version, it shall be translated into Chinese by a translator recognised by that court of the PRC for its admissibility as evidence in the legal proceeding; and
  • if that Proposed Evidence is formed (or created) outside the PRC, it shall be certified as to its authenticity and legality by a notary public in the country where it is formed (or created) and the certificate relating to the Proposed Evidence shall be further authenticated by an embassy or consulate of the PRC in that country (or otherwise pursuant to the relevant bilateral or multilateral treaty to which both the PRC and that country are parties) for the Proposed Evidence’s admissibility as evidence in the legal proceeding with the court of the PRC, provided that such certification and authentication may be made at any time after the execution of the sale agreement but prior to the Proposed Evidence being presented to the court of the PRC.

A bill of sale cannot be registered separately in the PRC. However, the purchaser may voluntarily register its ownership in the aircraft with the Civil Aircraft Administration of China (the “CAAC”). For this purpose, a copy of the bill of sale, as one of the supporting documents, will need to be submitted to the CAAC.

No government applications or consents are required as a pre-requisite to the execution and delivery of a bill of sale in relation to an aircraft or engine in the PRC.

No tax or duties are payable for executing and/or delivering a bill of sale or consummating the sale of the ownership interest in an entity that owns an aircraft or engine while the aircraft or engine is over international waters or in transit to/from China.

The operating/wet/finance leases or leases concerning only engines or parts are all permissible and recognised in the PRC.

Unless the lease is between two domestic parties, it can be governed by a foreign law.

Under PRC law, a Chinese lessee is required to have a qualification for engaging import and export trading in order to allow it to make US-dollar rental payments to a foreign lessor. Otherwise, the lessee will need to engage a qualified import and export agent to make the US-dollar rental payments on its behalf.

If the underlying transaction is a cross-border finance lease, that finance lease is subject to the registration with the State Administration of Foreign Exchange of the PRC (the “SAFE”) in respect of the foreign debt constituted. For cross-border operating leases there are no exchange controls in respect of rental payments for repatriation of realisation proceeds.

Stamp duty at a rate of 0.1% (for operating leases) or 0.005% (for finance leases) of the total amount of the rent under the lease agreement is payable in connection with the lease agreement by each party thereto upon its execution or, if executed outside the PRC, upon its use in the PRC.

The withholding tax, value-added tax and applicable surcharge should be payable with respect to the rent payment, whether such payments be rent payment, interest, fee, penalties or otherwise, to be made by the domestic lessee pursuant to a lease.

A lessor does not need to be licensed or qualified in the PRC to do business with a domestic lessee.

No mandatory terms are required to be contained in the lease (or ancillary documents thereto) governed by either English or New York law that would not typically already be included under PRC law.

The tax and other withholding gross-up provisions are permissible and enforceable.

A lease can cover parts that are installed or replaced on an aircraft or engine after its execution, as long as the parties are agreed on such an arrangement.

There is no risk of title annexation in respect of aircraft engines installed on an airframe.

The concept of a trust is recognised by PRC trust law. However, there is no such concept as owner trust under PRC law. Nevertheless, we believe the concept of a trust and the role of an owner trustee under a lease governed by English or New York law will be recognised in China.

The owner of the aircraft can register its ownership right in respect of the aircraft in the Aircraft Rights Register of the CAAC. The aircraft ownership registration in favour of the owner (if different from the lessor) or the lessor (if it is the owner of the aircraft) can be effected in the PRC. If the lessor as owner does not register its ownership right in the aircraft, it cannot claim its ownership right against a third party.

As the Aircraft Register of the CAAC is an operator-based registry, the lessee as the actual operator can apply for the possession-right registration in the name of the aircraft operator and the owner can apply for the ownership-right registration in the name of the owner at the CAAC.

There is no specific register for leases concerning aircraft or engines.

There is no specific register for leases concerning aircraft or engines.

For the CAAC registration, a certified true copy of a lease agreement should be provided for the CAAC’s review. For making the lease rentals, the translated lease agreement should be provided for the account bank’s review. Apart from the above, a lease agreement does not need to be in a specific form or translated, served, notarised or legalised to be valid and registrable in the aircraft registry.

There are no taxes or duties payable for registering a lease.

It is not permissible under the Aviation Law of the People’s Republic of China (PRC Aviation Law) for a foreign-registered aircraft to be habitually based and operated in China. Such aircraft will need to be registered with the CAAC and obtain a Chinese nationality.

In respect of the ownership and mortgage-right registration, the application form, power of attorney and the incumbency certificate for the signatory of the power of attorney should be provided in original form, while other supporting documents can be in certified true copy form (eg, the incorporation certificate, bill of sale, certificate of acceptance, invoices, and relevant transaction documents).

Subject to any double taxation treaty between the PRC and the relevant country, withholding tax applies to lease payments and the payments of interest on a loan from the PRC. The lessor is responsible for the payment of withholding tax, although in practice the PRC airlines will invariably pay such taxes on behalf of the lessor (by way ofa tax gross-up or tax indemnity in the lease).

A foreign lessor is not or will not be deemed to be resident, domiciled or carrying on business in the PRC.

No liabilities in respect of aircraft or engine maintenance and operations will be imposed on a foreign lessor under a lease.

In the case of the tort liability toward a third party caused during the operation of the aircraft, the operator who is using the aircraft when the damages occur shall be held liable for that third-party liability. The registered owner of such an aircraft will be regarded as the operator and will be held liable in its capacity of the operator, unless the registered owner can prove, in the relevant legal proceedings, that it is not the operator of, or was not in control of, the aircraft when the damages occurred. It can, at those legal proceedings, request that the Chinese court add the lessee (as the actual operator of the aircraft) as a defendant in the case.

Under the Tort Law of the PRC, the aircraft operator shall assume tortuous liability unless it can be proven that the damage is caused by an intentional act (a concept similar to wilful misconduct under English law) of the claiming party. However, under the PRC Civil Aviation Law, it is slightly different. It is the aircraft operator who will assume a strict liability, but in the case of liability to a third party, the registered owner can be deemed as operator and accordingly assume that liability unless the owner can prove otherwise. Such liability can be regarded as strict liability. Accordingly, there is no strict liability on an aircraft owner if it is not the operator at the same time.

The creditors of a domestic lessee cannot enforce an aircraft leased from the owner.

No other third parties’ rights can take priority over a lessor’s rights under an aircraft or engine lease, whether or not that lease/lessor is registered in the national aircraft register.

It is mandatory under the PRC Insurance Law that domestic entities must procure insurance from Chinese insurers. In practice, operators in the PRC (other than Hainan Airlines and its affiliates) participate in CAAC-endorsed fleet policy with the Chinese insurers, through Air Union Insurance Brokers Ltd (Air Union). 

The Civil Aviation Law of the People's Republic of China requires that the operators must insured against third-person liability insurance on the ground but is silent on the insurance coverage requirements. With respect to the re-insurance, in practice, at least 66% of the insurances will be reinsured by Air Union through Marsh, Willis and JLT, in the London reinsurance market.

Reinsurances of up to 100% coverage can be placed outside the PRC. However, in practice, at least 66% of the insurances will be reinsured by Air Union through Marsh, Willis and JLT, in the London reinsurance market.

Cut-through clauses in the insurance/reinsurance documents are not legally effective and enforceable.

Assignments of insurances/reinsurances are permitted.

There is no restriction on a lessor’s ability to (i) terminate an aircraft lease; (ii) re-export the aircraft and/or (iii) sell the aircraft following any such termination. The aircraft does not need to be physically located in the PRC at the time of any such actions mentioned above.

Without consent and co-operation from the lessee, a Chinese court order or judgment is required to enforce a lease for the repossession of the aircraft.

There are no special courts focused on aviation disputes in the PRC. However, in June 2014, Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Centre) (“SHIAC”) established the Shanghai International Aviation Court of Arbitration (in Chinese: 上海国际航空仲裁院), which is a working platform under SHIAC to offer international aviation arbitration services. We are not aware of any examples of such cases historically where the Shanghai International Aviation Court of Arbitration (SIACA) has adjudicated on such matters.

A lessor cannot obtain a summary judgment or equitable pending final resolution of judicial proceedings to enforce an aircraft lease. The lessor can, however, apply to a Chinese court for injunctive relief known as “Property Preservation Measure” (which is similar to the Mareva Injunction or Freezing Order under English law) to attach the aircraft before filing a case against the lessee or pending final resolution of judicial proceedings.

For an aircraft lease agreement between a foreign lessor and a Chinese lessee:

  • the choice of foreign law to govern an aircraft lease will be upheld as a valid choice of law in and binding in any action in the courts of the PRC, subject to consideration of public policy;
  • the submission to a foreign jurisdiction will be upheld as a valid choice by the PRC courts; and
  • the waiver of immunity by the parties of the lease will be upheld as a valid choice by the PRC courts.

Any judgment rendered by a foreign court will be enforceable in the courts of the PRC without re-trial or re-examination of the merits of the case if the following conditions are fulfilled:

  • the judgment to be enforced is final and conclusive;
  • the jurisdiction of the foreign court has not been precluded by any law, order or treaty;
  • service of process for any proceeding against a lessee in the foreign jurisdiction has been lawfully effected on a lessee other than by public notice, or the lessee has appeared in the relevant proceedings without receiving service of process in respect thereof;
  • the judgment is not contrary to public policy in the PRC or in violation of the basic constitutional principles of the laws of the PRC; and
  • judgments of the PRC courts receive reciprocal treatment in the foreign courts.

A foreign arbitral award given by the arbitration tribunal would be enforced in a court in the PRC, subject to the Convention on Recognition and Enforcement of Foreign Arbitral Awards of New York, 10 June 1958 and in accordance with the Law on Civil Procedure of the PRC.

The judgment could be given in a foreign currency if the lease so provides.

There is no limitation law in PRC, which may restrict a lessor’s ability to recover default interest or other payments following termination of the lease for default, including where the lessee fails to return the aircraft.

A lessor under an aircraft lease does not need to pay taxes or fees in a significant amount in connection with the enforcement of the lease except for the withholding tax, value-added tax and applicable surcharge with respect to the rental payments under the lease.

There is no mandatory requirements on the notice periods under PRC law.

A lessee is not entitled to claim sovereign or other immunity from suit in civil and commercial matters. If the lessee is entitled to claim sovereign or other immunity from suit, this can be waived.

The PRC has acceded to the New York Convention. As such, an arbitration award granted in a foreign jurisdiction may be enforced in a Chinese court pursuant to the New York Convention and the Law on Civil Procedures of the PRC.

There are no other relevant issues that a lessor should be aware of in relation to the enforcement of its rights.

There is no concepts similar to assignment and novation in PRC law. Nevertheless, the effect of any such assignment and novation will be recognised if:

  • the assignment and novation agreement is made in writing;
  • is legal, valid and binding in accordance with the law by which it is stated to be governed; and
  • such assignment and novation does not conflict with the laws and public policy of China.

Any such agreement or deed will be recognised by the courts of the PRC as legally valid if it has been validly created under the laws by which it is stated to be governed.

Under PRC law, a notice of assignment of the aircraft lease in favour of a new lessor/assignee shall be served on the PRC lessee, otherwise the assignment will not be effective on that lessee.

None of the lease assignment or assignment/novation needs to be translated, certified, notarised, legalised, apostilled or consularised as a condition to the legality, validity, filing, enforceability or admissibility in evidence thereof in the PRC, except when there is a need to present any of those documents as evidence to a court of the PRC (the “Proposed Evidence”).

Lease assignment and assumption/novation are not required to be registered with any government authority in the PRC.

No government applications or consents will be required as a pre-requisite to the execution and delivery of an aircraft and/or engine lease assignment and assumption/novation in relation to an aircraft registered in PRC.

No duties, taxes or fees are levied in order that assignment and assumption/novation agreement can be enforced or relied upon in the PRC. If a novation is to be stamped, each party is liable to pay a stamp duty of 0.1% of the total lease rental in the case of an operating lease, or 0.005% of the total lease rental in the case of a finance lease.

Subject to any double taxation treaty between the PRC and the relevant country, withholding tax at the rate of 10% is payable by the foreign lessor in respect of lease payments. In addition, value-added tax (VAT) in respect of lease rentals shall be payable by the foreign lessor.

Any such transfer will be recognised by the courts of the PRC as legally valid if it has been validly completed under the laws by which it is stated to be governed.

As the aircraft is registered in the name of the operator, the consent of the lessee is required to deregister the aircraft by law. Accordingly, in an ordinary case, the assistance and co-operation of the lessee is essential for deregistration and export of the aircraft. If there is no co-operation by the lessee, then deregistration will have to be effected by judicial procedure, and to obtain a deregistration order/judgment may take a long time.

When effecting the deregistration procedure, the applicant (ie, the lessee) is required to fill out a de-registration application in the form prescribed by the CAAC, submit relevant supporting documents and surrender the original Certificate of Nationality Registration. Within seven days after receipt of the application letter, the CAAC will examine the application letter and the documents submitted. After examination, if the deregistration complies with the relevant regulation, the CAAC will deregister the nationality registration of the aircraft. For the purposes of exporting the aircraft, the applicant may apply to the CAAC for an evidence document indicating deregistration of its nationality. The process is a straightforward one if the lessee co-operates.

If there is no co-operation from the lessee, then deregistration will have to be effected by judicial procedure.

As the aircraft is registered in the name of the operator (ie, lessee), the consent of the lessee is required to deregister the aircraft by law. Accordingly, in an ordinary case, the assistance and co-operation of the lessee is essential for deregistration and export of the aircraft. If there is no co-operation by the lessee, then deregistration will have to be effected by judicial procedure, and to obtain a deregistration order/judgment may take a long time.

When effecting the deregistration procedure, the applicant (ie, the lessee) is required to fill out a de-registration application in the form prescribed by the CAAC, submit the relevant supporting documents and surrender the original Certificate of Nationality Registration. Within seven days after receipt of the application letter, the CAAC will examine the application letter and the documents submitted. After examination, if the deregistration complies with relevant regulation, the CAAC will deregister the nationality registration of the aircraft. For the purpose of exporting the aircraft, the applicant may apply to the CAAC for an evidence document indicating deregistration of its nationality. The process is a straightforward one if the lessee co-operates.

With the co-operation of the lessee by way of applying the typical deregistration procedure, it will normally take at least seven days for the CAAC after receipt of the application documents. If there is no co-operation by the lessee, then deregistration will have to be effected by judicial procedure, and to obtain a deregistration order/judgment may take a long time.

The CAAC would not provide advance assurances to an aircraft owner, mortgagee or lessor as to the prompt deregistration of the aircraft.

No fees are payable in relation to the deregistration of an aircraft.

Currently, the CAAC does not accept any such deregistration power of attorney in practice for deregistering the aircraft from the PRC directly. The consent and assistance of the lessee is required to deregister the aircraft from the PRC.

No additional documents are required to enforce deregistration power of attorney.

The deregistration power of attorney does not have to be governed by PRC law.

If the deregistration power of attorney is stated to be irrevocable, this would be enforceable against the grantor (ie, the lessee) and the grantor cannot revoke that deregistration power of attorney.

As the aircraft is registered in the name of the operator, the consent of the lessee is required to deregister the aircraft by law. Accordingly, in an ordinary case, the assistance and co-operation of the lessee is essential for the deregistration and export of the aircraft. If there is no co-operation by the lessee, then deregistration will have to be effected by judicial procedure, and to obtain a deregistration order/judgment may take a long time. The asset does not need to be located in the PRC at the time of deregistration and/or export.

Except for a deregistration confirmation letter in respect of the aircraft and an export certificate of airworthiness to be issued by the CAAC, no other governmental consents, approvals or licences are required for exporting the aircraft from the PRC.

For applying the export certificate of airworthiness, the following documents should be provided to the CAAC: (a) an export certificate of airworthiness application in the form prescribed by the CAAC; (b) the letter issued by the Iiporting country stated that it would accept the export certificate of airworthiness issued by the PRC and have no further requirements. 

It cannot be issued in advance by the CAAC.

The inspection fees will be charged by the CAAC in respect of conducting the inspection on the airworthiness of the aircraft.

If the ownership/mortgage/possession right has been registered at the CAAC, it shall be discharged before deregistration of the aircraft is granted.

The deregistration power of attorney or IDERA would survive the liquidation of the lessee.

As long as the lease agreement stipulates that the lessor is entitled to terminate the lease immediately in the case of insolvency of the lessee, the lessor may do so without any delay. According to our experience, it is quite common in lease agreements that the insolvency or bankruptcy of the lessee constitutes an event of default. If the lessor decides to terminate the lease, it shall serve a notice to the lessee. The lease is terminated upon receipt of such a notice by the lessee, unless the lessee raises any objection.

In the event that the lease is not terminated by the lessor in the case of insolvency (by enforcing its right following an event of default), the receiver/liquidator is entitled to decide whether to terminate or continue the lease. If the receiver/liquidator decides to continue, the lessor should also perform the lease. However, the lessor may request additional security from the receiver/liquidator under such a circumstance. If the receiver/liquidator fails to provide such additional security, the lease is deemed terminated. The lease itself is not by any means changed or modified as a result of the insolvency of lessee. The receiver/liquidator is obliged to pay rent as provided in the lease.

The aircraft will not be deemed as part of the lessee’s property, therefore it will not be subject to the insolvency proceedings.

Firstly, under PRC law, certain claims are mandatorily preferred over the secured creditors. Secondly, secured creditors of the insolvent/bankrupt lessee will have priority over the lessor. Apart from the aforesaid preference, the liquidator/administrator cannot impose the rights of any other creditors in priority to those of the lessor.

Under such a circumstance, assuming the aircraft has been mortgaged in favour of the lender, then any shortfall between the secured obligations and the enforcement proceeds from the sale of the aircraft will rank pari passu, among all unsecured creditors of the borrower, the guarantor or other security-provider.

There is no “moratorium period” under PRC insolvency proceedings, as long as the relevant lease provides the termination rights if the lessor has the contractual rights to terminate the lease immediately. Once the bankruptcy petition is accepted by the Chinese courts, any payment by the lessee to the lessor is null and void; any pending proceedings against the lessee shall be suspended until the receiver or administrator takes over all the assets of the lessee; and any proceedings to be initiated against the lessee must be filed to the Chinese court which accepted the bankruptcy petition. The receiver or administrator (after it has taken over all the assets of the lessee) shall deal with all the claims against the lessee under the supervision of the Chinese court. This protection period is similar to a moratorium period. During the protection period, only the claims for due payments are protected, and the lessor still has the right to terminate the lease.

There are two kind of liquidation in the PRC: voluntary liquidation and compulsory liquidation. When a company goes into liquidation, there will be a liquidator/administrator chosen by the company itself or designated by the court to handle all the company assets and relevant interests.

Ipso facto defaults or performance defaults are not required to repossess an aircraft during a lessee insolvency proceeding, as long as the lease stipulates that the lessor is entitled to take back the aircraft if the lessee is wound up.

The aircraft is not the asset of the insolvent lessee, therefore it will not be subject to the insolvency proceedings. Following the commencement of insolvency proceedings, the secured party/lessor may repossess the aircraft by notice to the receiver/liquidator. If the receiver/liquidator refuses to return the aircraft, the secured party/lessor may file a lawsuit against the receiver/liquidator. In the event that a lease is not terminated by lessor in the case of insolvency (by enforcing its right following an event of default), the receiver/liquidator is entitled to decide whether to terminate or continue the lease. If the receiver/liquidator decides to continue, the lessor should also perform the lease. However, the lessor may request additional security from the receiver/liquidator under such a circumstance. If the receiver/liquidator fails to provide that additional security, the lease is deemed terminated. The lease itself is not by any means changed or modified as a result of the insolvency of the lessee. The receiver/liquidator is obliged to pay rent as provided in the lease.

The PRC has ratified the Convention on International Interest in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment.

It is necessary to obtain 'authorised entry point' (AEP) codes for registering international interests and, usually, five business days may be needed for obtaining the AEP codes after all the documents mentioned above have been submitted successfully to the CAAC.

There are no mandatory requirements for the entities that are applying for AEP codes and making the Cape Town filings.

The PRC has ratified the Cape Town Convention and the associated Protocol on Matters Specific to Aircraft Equipment and certain declarations have been made in respect of thereof.

According to the Decision of the Standing Committee of the National People’s Congress on Ratifying the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Adopted at the fifth Session of the Standing Committee of the Eleventh National People’s Congress on 28 October 2008), the PRC has announced the following declarations with respect to the future application of the Cape Town Convention and the associated Protocol on Matters Specific to Aircraft Equipment:

  • Declaration to Article 39(1)(a) of the Cape Town Convention: all the non-consensual rights or interests which under the laws of the PRC have priority over an interest of a secured creditor shall have priority over a registered international interest, including but without limitation, the right of demanding for insolvency expenses and community liabilities, wages of staff, taxes imposed before the creation of mortgage, pledge or lien over the civil aircraft, the right of demanding reward for rescuing the civil aircraft, the right of demanding necessary expenses for maintaining the civil aircraft and so forth. (The non-consensual rights here-referred normally cover the tax authorities' rights, ie, the outstanding taxes of a mortgagor shall be paid in priority over the liabilities secured by the aircraft mortgage that is created after the occurrence of the outstanding taxes. Under such a circumstance, the aircraft can be transferred to a third party through auction or private sale, but the proceeds shall be applied to the unpaid taxes of the mortgagor first. Notwithstanding the foregoing, if the lessee does not pay the withholding income tax, value-added tax, or stamp duty as it is supposed to do in accordance with the transaction documents, the PRC tax authorities shall have no lien or other rights/power in respect of the aircraft.)

Declaration to Article 39(1)(b) of the Cape Town Convention: nothing in the Cape Town Convention shall affect the right of a State or State entity, intergovernmental organisation or other private provider of public services to arrest or detain an object under the laws of the PRC for payment of amounts owed to any such entity, organisation or provider directly relating to those services in respect of that object or another object.

Declaration to Article 39(4) of the Cape Town Convention: a right or interest of a category covered by a declaration made under sub-paragraph (a) of paragraph 1 of Article 39 shall have priority over an international interest registered prior to the date of ratification of the Protocol.

  • Declaration to Article 40 of the Cape Town Convention: the interest subordinated to the debtor’s equipment acquired for purpose of enforcing judgment debt shall be a registrable non-consensual right or interest.
  • Declaration to Article 43 of the Cape Town Convention: the PRC will apply Article 43 of the Cape Town Convention. The pre-condition for applying the paragraph 1 and the sub-paragraph 2(a) thereof is that the court of a Contracting State chosen by the parties shall be the one locating in the place that has genuine connections with disputes relating to the agreement.
  • Declaration to Article 50(1) of the Cape Town Convention: the Cape Town Convention will not apply to internal transactions in relating to the PRC.
  • Declaration to Article 53 of the Cape Town Convention: the Intermediate People’s Court where the headquarter of each of the PRC airlines is situated shall have jurisdiction to disputes on the lease of aircraft equipment in relation to the Protocol.
  • Declaration to Article 54(1) of the Cape Town Convention: while the charged object is situated within the territory of the PRC, the chargee shall not grant a lease of the object in the territory of the PRC.

Declaration to Article 54(2) of the Cape Town Convention: any remedy available to the creditor under any provision of the Cape Town Convention which is not there expressed to require application to the court may be exercised only with leave of the court of the PRC.

  • The PRC will apply Article 8, Article 12 and Article 13 of the Protocol.
  • The PRC will apply Article 10(1), (2), (3), (4), (6) and (7) of the Protocol. The court of the PRC shall, upon receipt of an application, make its decision and thus immediately execute it within ten days in relation to remedies provided in Article 13(1)(a), (b) and (c); and make its decision and thus immediately execute it within 30 days in relation to remedies provided in Article 13(1)(d) and (e).
  • The PRC will apply Alternative A under Article 11 of the Protocol to all the insolvency procedures defined by the Protocol. The waiting period shall be 60 days.
  • According to Article 19 of the Protocol, the PRC designates the entity in charge of right registration of Civil Aviation Administration of China as the entry point.
  • Until further notice by the PRC, the Hong Kong Special Administrative Region and the Macao Special Administration Region of the PRC will not apply the Cape Town Convention and the Protocol.

The PRC has made a declaration that, pursuant to Article XIII of the Protocol, the IDERA can be recorded with the CAAC under the IDERA Filing Procedures. An IDERA should be submitted in the name of the lessee in an original form, together with other supporting documents, with the CAAC for recordation.

We are not aware of any such relevant case law or statutory interpretation in the PRC.

The PRC has ratified the 1948 Geneva Convention on the International Recognition of Rights in Aircraft.

The PRC has not ratified the 1933 Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft.

There are no special restrictions on foreign lenders financing an aircraft locally, or on borrowers, as long as the borrower has completed the relevant SAFE registration, filing and recording formalities.

Relevant SAFE registrations shall be effected in respect of cross-border debt financing for an aircraft operated by a Chinese lessee.

The borrowers are permitted to grant security to foreign lenders.

Downstream, upstream and/or cross-stream guarantees in favour of lenders are permitted under PRC law. Please note that such guarantees may be required to be registered with SAFE, according to PRC foreign exchange regulations.

It is common for a lender to take share security over a domestic special-purpose vehicle which owns the financed aircraft.The pledge of shares is recognised by the PRC law.

There is no similar concept for negative pledge in PRC law, but such an arrangement in the contract is recognised by the PRC law assuming it is legally valid and binding under English/New York law by which it is stated to be governed.

There is no material restriction or requirement imposed on intercreditor arrangements.

The concept of agency and the role of an agent (such as the facility agent) under a syndicated loan are recognised by PRC law.

There are no express provisions under PRC law in respect of debt subordination. However, PRC law permits and recognises contractual arrangements amongst lenders of a debtor as to the order of priority of the debt.

The transfer or assignment of all or part of an outstanding debt with lenders’ consent under an English or New York law-governed loan is permissible and recognised.

Usury is illegal in the PRC and, pursuant to the relevant PRC laws, if the interest agreed by both the lender and the borrower exceed the annual interest rate of 36%, the part of interest that exceeds 36% is void.

The typical forms of security and recourse granted in an aviation finance transaction in the PRC normally include:

  • a PRC law-governed aircraft mortgage ;
  • a pledge of equity interest in favour of the lender (if a Chinese intermediary lessor is involved in certain lease in lease out structures); 
  • a pledge of lease receivables in favour of the lender;
  • a guarantee in favour of the lender; and
  • an account control agreement among, inter alios, the lender, the onshore account bank (which holds lease rentals paid by the lessee) and the lessor.

There are no types of security which cannot be taken over an aircraft or related collateral such as engines, warranties or insurances.

The concept of a trust is recognised by PRC trust law. However, there is no such concept as security trustee under PRC law. Nevertheless, we believe the concept of a trust and the role of a security trustee under a security agreement governed by English or New York law will be recognised in China.

As the concept of a trust is recognised by PRC trust law, no alternative structures are required.

A borrower can assign its rights to the aircraft to a security trustee, pursuant to a security assignment or a mortgage or under an aircraft lease (including in relation to insurances).

PRC law permits the assignment of the rights and benefits, only without also assigning the attendant obligations of the lessor under an aircraft lease, unless such assignment is prohibited by the provisions of the underlying lease, unable to be effected due to the nature of rights and benefits to be assigned and prohibited by relevant PRC law (we are not aware of any such prohibition under PRC law in relation to an aircraft lease).

A security assignment or a guarantee can be governed by English or New York law. They do not have to be governed by domestic law to be fully enforceable.

Under PRC law, a notice of assignment shall be served on the PRC lessee, otherwise the assignment will not be effective on that lessee.

The security assignment shall be made in writing. Chinese law does not provide for specific requirements on the documentary formalities (such as notarisation, legalisation, stamping, or translation) for the creation of a valid security assignment over an aircraft.

However, in the event that the security is enforced through judicial proceedings in China and it is signed in a foreign language, then the Chinese court will require a certified Chinese translation of the security document provided by a qualified translator in the PRC to be presented to the court. In addition, if the security document is formed (or created) outside the PRC, Hong Kong S.A.R., Macau S.A.R. and Taiwan region, in order for that document to be admitted as evidence in the legal proceeding with the Chinese court it shall be certified as to its authenticity and legality by a notary public in the country where it was formed (or created) and such certification shall be further authenticated by an embassy or consulate of the PRC in that country (or otherwise pursuant to the relevant bilateral or multilateral treaty to which both the PRC and that country are party).

We are not aware of any domestic law security instrument that a financier should take in addition to an English or New York law-governed security assignment. For the purpose of making Cape Town filings with the international registry, the Administrative Measures regarding the Application for AEP Codes for the Registration of International Interests in Civil Aircraft issued by the CAAC shall be complied with. No administrative fee/charge is required for executing a domestic law security instrument and completing the local law filings.

An English or New York law-governed security assignment cannot be registered in the PRC.

The transfer of security interests over an aircraft and/or engines is recognised.

The security interests are not jeopardised if the identity of the secured parties under a security assignment changes after execution.

'Parallel debt' structure is not recognised under PRC law.

A secured party under a security assignment would not be deemed to be resident, domiciled, carrying on business or subject to any taxes in the PRC as a result of its being a party to, or its enforcement of, that security assignment.

A PRC law-governed mortgage over an aircraft can be perfected by registering the mortgage with the CAAC. In theory, a Chinese law-governed mortgage over an engine can be registered at a company registration authority of the domicile of the mortgagor.

There is no substantial difference between the form of security taken over an aircraft and that taken over spare engines.

As there is no such concept of account charge under PRC law, an account-control agreement among, inter alios, the lenders, the onshore account bank (which holds lease rentals paid by the lessee), and the lessor is normally used as the typical security form to take security over a bank account as there is no equivalent concept of account charge under the PRC law (and is thus not recognised).

The Civil Aviation Law of the PRC (the Civil Aviation Law) specifically provides two types of claims that would give rise to a lien over a civil aircraft:

  • remuneration for the rescue or salvage of a civil aircraft; and
  • necessary expenses incurred for the custody and maintenance of a civil aircraft (possessory lien).

In addition, the Property Law of the PRC recognises the concept of a possessory lien entitling a third party which has bestowed labour on an aircraft to detain it, such as a maintenance shop. However, the application of any such possessory lien may be precluded in the relevant maintenance agreement.

A fleet lien is not recognised if any third parties may detain the aircraft.

Civil Aviation Law permits liens to be created over the aircraft to remunerate a person for rescuing and salvaging the aircraft and for necessary expenses for the custody and maintenance of the aircraft. Under PRC law, it would entitle the creditor to convert the aircraft into value or have priority in getting paid from the proceeds of the sale or auction of the aircraft.

PRC law requires that the CAAC review and complete the discharge registration within seven working days. In practice, however, it normally takes the CAAC at least 15 working days to complete the discharge procedure.

The CAAC maintains a registry for aircraft mortgages and liens. Only the Mortgage governed by the PRC law can be registered at the CAAC. The interests of an aircraft mortgagee can be noted on the aircraft register to its perfection against bona fide third parties.

Statutory rights of detention or non-consensual preferential liens can arise over an aircraft, but not on a 'fleet-wide' basis.

A potential purchaser could make the verifications on an aircraft’s encumbrances by performing an online search at the CAAC’s registry.

There are no relevant differences in enforcing a security assignment as opposed to a loan or a guarantee.

Under a security assignment where security is granted to a security trustee by a lessor in respect of its rights under an aircraft lease, that security trustee can enforce its rights under the security assignment pursuant to a notice and acknowledgement executed by that lessor and the relevant lessee, respectively, in connection with that security assignment. The security trustee may enforce the rights and obligations of the lessor as against the lessee acting as the named lessor, both as a matter of law and in practice.

Under PRC law, the choice of a foreign law as the governing law of a finance or security document in which a foreign element is involved will be upheld as a valid choice by domestic courts, subject to the considerations of public policy.

The PRC courts will uphold the submission to a foreign jurisdiction as a valid choice.

Foreign judgments are not automatically recognised and enforced in the PRC. However, a judgment of a foreign court against the PRC airlines may be enforced in a PRC court without further consideration of the merits of the case if the following conditions are fulfilled:

  • the foreign judgment to be enforced is final and conclusive;
  • the jurisdiction of the foreign court has not been precluded by any law, order or treaty;
  • the foreign judgment is not contrary to public policy in China or in violation of the basic principles of the law of China; and
  • judgments of Chinese courts would receive reciprocal treatment in the jurisdiction of the foreign court or the judgment is sought to be enforced pursuant to the terms of a treaty between China and the country whose courts have issued the judgment.

An award given by a foreign arbitration tribunal against the PRC entities may be enforced in a court in the PRC, subject to the Convention on Recognition and Enforcement of Foreign Arbitral Awards of New York, 10 June 1958, and in accordance with the Law on Civil Procedures of the PRC.

A secured party cannot take physical possession of the aircraft to enforce a security agreement/aircraft mortgage without the lessee’s or operator’s consent. Under PRC law, in the event of the enforcement of a security agreement/aircraft mortgage, self-help remedies are not available and a court order must be obtained for the enforcement.

A court in the location of the domicile of the lessee or the location where the lease is performed (that location is not clear, the Supreme People’s Court (SPC) has construed it as where the leased property (such as an aircraft) is used under a lease agreement) would have jurisdiction to hear the case. According to an interpretation of the SPC, not all the courts but only the following courts have jurisdiction over cases involving foreign elements (ie, a party to the legal proceeding is a foreign person, or the subject matter under dispute relates to a foreign person or the property owned by a foreign person, etc):

  • the lowest level court located in an economic and technology development zone established by the order of the State Council;
  • the intermediate level court located in the capital of each provincial level city or a special economic zone or a city with a separate budget or appointed by the SPC, each having its geographic jurisdiction as set out by the relevant Superior People’s Court; and
  • the Superior People’s Court in each province.

A secured party to the dispute is entitled to apply to the competent court for injunctive measures such as property preservation and specific performance before commencing litigation or during the course of litigation. A bond or guarantee will be required in connection with the application of any such injunctive measures.

A secured party under a security agreement/aircraft mortgage can obtain a judgment in a foreign currency.

For a court charge for enforcement of a judgment in favour of the secured party from a PRC court, according to Measures on the Payment of Litigation Fees, the secured party, as applicant, shall pay an application fee for the enforcement of such a judgment.

If the amount or value to be enforced is less than RMB10,000, RMB50 shall be paid as an application fee;

  • for an amount in excess of RMB10,000 to RMB500,000, an application fee shall be paid at the rate of 1.5%;
  • for an amount in excess of RMB500,000 to RMB5,000,000, an application fee shall be paid at the rate of 1%;
  • for an amount in excess of RMB5,000,000 to RMB10,000,000, an application fee shall be paid at the rate of 0.5%;
  • for an amount in excess of RMB10,000,000, an application fee shall be paid at the rate of 0.1%.

After the enforcement of the judgment, the application fee shall be borne by the guarantor/mortgagor against whom the enforcement measure is taken; if a settlement agreement can be reached during the process of the enforcement between the secured party and the guarantor/mortgagor, payment of the application fee may be settled through negotiation of the two parties; if no agreement can be reached accordingly, the court will decide who should assume the application fee.

There are no other known special issues that a lender should be aware of in relation to the enforcement of its rights.

We are not aware of any other material issues or any material court judgments that are relevant to the purchase, sale, lease or debt finance of an aircraft registered domestically and/or involving a domestic party.

We are not aware there are any current proposals before the legislative relating to the foregoing items which would change them or which would be worth noting.

Beijing Rui Bai Law Firm

Unit 01, 6/F Fortune Financial Center
5 Dongsanhuan Zhong Road
Chaoyang District
Beijing
100020, PRC

+86 10 8540 4688

+ 86 (10) 8540 4600

yi.liu@ruibailaw.com http://www.ruibailaw.com

Law and Practice

Authors



Beijing Rui Bai Law Firm is an independent law firm and a member of the PwC global network of firms. Based in Beijing, the banking and finance team of six people provides one-stop services to our clients, as the PwC global network of law firms consists of over 3,500 lawyers in more than 100 countries, including over 20 offices across 15 countries in Asia Pacific. The firm works closely with the Shanghai Xin Bai Law firm (also a member of PwC’s global network of firms), and in particular with the banking and finance team at Tiang & Partners in Hong Kong (an independent Hong Kong law firm associated with PwC Legal International Pte Ltd (a licensed Foreign Law Practice) in Singapore)). In addition, the firm's aviation finance legal services are fully integrated into PwC’s Aviation Business Services, under which multiple disciplines work together to offer clients an all-inclusive solution covering advisory, risk management, assurance, taxation and legal.

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