Aviation Finance & Leasing 2019

Last Updated August 01, 2019

Israel

Law and Practice

Author



S. Friedman & Co Advocates is located at the heart of Tel-Aviv and Haifa, and with a team of over 70 partners and associates, is pre-eminent in aviation, transportation and maritime law in Israel, with a long and distinguished history of serving Israeli and international clients. With over 80 years of experience, the team provides legal counsel and handles a wide range of matters related to aviation, including cross-border and multi-jurisdictional leasing and financing transactions such as Japanese Operating Leases with Call Option (JOLCO) and syndicated financing and security agreements, and the implementation thereof; advising on tax issues related thereto; registration and deregistration; collaboration arrangements between operators (such as aircraft, crew, maintenance and insurance (ACMI) leasing; code share; and block-space arrangements); and insurance. The firm has unique expertise in all matters related to antitrust laws applicable to aviation and maritime joint ventures, collaboration, partnership and consortia agreements. Noteworthy clients include Ofer Aviation, MUFG Union Bank, Rolls-Royce and El Al.

Income tax in Israel is levied on a personal basis, according to which, Israeli residents are subject to taxation in Israel on their worldwide income while foreign residents are subject to taxation in Israel only on income from sources within Israel. Companies are subject to a corporate tax of 23% commencing on January 2018 on their income, including capital gains, and individuals are subject to progressive income tax rates of 10%-47% and an additional 3% for income exceeding ILS649,560 per year (effective as of January 2019) and 25% on capital gains (30% on capital gains from the sale of company shares by a shareholder holding at least 10% of the means of control of the company).

Accordingly, foreign residents are subject to tax on capital gains from the sale of aircrafts or engines located in Israel, including rights in Israeli entities or a foreign entity owning such aircrafts or engines. Nevertheless, foreign residents may be exempted from capital gains tax in Israel if they are residents of a state that has signed an agreement or a tax treaty with Israel providing an exemption from tax on such income.

The sale of an aircraft or engine is subject to value added tax (VAT) in Israel if the aircraft or engine was in Israel at the time of its delivery to the purchaser or if it was exported from Israel. VAT in Israel is imposed at the rate of 17%. Nevertheless, the Israeli VAT law prescribes for a zero rate VAT on the export of assets if an export entry or some other document approved for this purpose by the Income Tax Authorities (ITA) has been passed for them and for the sale of aircrafts to purchasers whose business is the rendering of regular aviation services on fixed routes for the transportation of passengers or cargo, or the importation of aircrafts by said purchasers.

There is no obligation to translate, certify, notarise or legalise an agreement; however, it is advisable that the agreement be in Hebrew or in English.

Although there is a form of bill of sale attached to the Aviation Regulations (Registration of Aircraft and their Markings), 1973 (the Registration Regulations), the Israeli Registrar of Aircraft (the Registrar) would normally accept any form of a bill of sale (or other document), in its original copy, that clearly demonstrates transfer of ownership of the aircraft. If the bill of sale is in a language other than Hebrew or English, the Registrar may require a notarised translation into Hebrew or English.

Title in an aircraft or engine is customarily transferred by a bill of sale, which also applies to all other installed parts, including an auxiliary power unit (APU).

As long as the direct owner of the aircraft has not changed, this does not constitute a transfer of ownership.

The transfer of title to an aircraft or engine physically delivered in Israel will be recognised if the bill of sale is governed by English or New York law.

There is a form of bill of sale attached to the Registration Regulations, but the Registrar would normally accept any form of a bill of sale (or other document) that clearly demonstrates transfer of ownership of the aircraft. There are certain registration fees for payment and forms for completion, which may also be required.

If the bill of sale is in a language other than Hebrew or English, the Registrar may require a notarised translation into Hebrew or English.

According to the Aviation Law, 2011 (the Aviation Law) and the Aircraft Regulations, a bill of sale must be filed with the Registrar by the purchaser to substantiate the transfer of ownership to the purchaser.

In order to register an aircraft, the owner must submit an original aircraft registration application in the form prescribed by the Registrar signed by the owner with the following attachments.

  • An original duly executed bill of sale or other evidence of ownership together with a copy thereof (once presented to the Registrar, the original is returned to the applicant).
  • If the application is made by a corporation, corporate authorisation from the relevant organ of the relevant corporation duly empowering the individual(s) executing the application to do so, approved and certified by such corporation’s authorised signatory for such purpose. In the case of an Israeli corporation, the applicant must also submit sufficient proof of such corporation’s registration with the Israeli Companies’ Registrar.
  • If the application is executed by an agent or representative of the owner of the aircraft, the application shall expressly state the name of the owner and include details of the agent or representative, and state that he or she is acting in such capacity, enclosing a notarised power of attorney from the owner (or a certified copy thereof) presented not later than three years from its issuance, unless it expressly provides that it shall be in effect for more than three years. If the power of attorney is executed outside Israel, it must be attested by an Israeli diplomatic or consular representative, or by a public notary and bear an apostile in compliance with the Registrar’s requirements.
  • If previously registered in a foreign country, sufficient proof that such registration has been cancelled or is no longer valid, namely (i) a declaration by the authorised public authority in the foreign country where the aircraft was previously registered whereby the registration was cancelled or is no longer valid, including the details of the person declaring the same on behalf of the relevant authority and details of the aircraft; or (ii) a final order or ruling by a court or authorised tribunal in the applicable country stating that the registration is no longer in effect.
  • If not previously registered in a foreign country, an affidavit or other sufficient proof that the aircraft has never been registered in a foreign country to the satisfaction of the Registrar.
  • A receipt for the payment of the applicable registration fees in respect of the certificate of registration and issuance of the applicable registration marks.
  • In the event of a change of ownership, any previous certificates of registration for the aircraft, as well as sufficient proof regarding the change in ownership.
  • In respect of an aircraft not previously registered in Israel, proof of payment of the applicable customs payment (or exemption therefrom). The Registrar will accept a customs certificate (reshimon) on the importation of goods executed by the customs authorities as sufficient proof (with the option to delay the presentation of such a certificate for 30 days if the aircraft is to be registered prior to its arrival in Israel).

There are no government applications or consents required as a prerequisite to the execution and delivery of a bill of sale in relation to an aircraft or engine registered in Israel.

See Taxes or Duties Payable Upon Execution of Sale Agreement.

All types of leases are permissible and recognised in Israel.

It is customary that the governing law is stated in the lease. Foreign choice of law should be upheld if it is not immoral, illegal or against public policy, pursuant to Section 30 of the Contracts Law, 1973. If there is a foreign choice of law, the relevant foreign law needs to be proven to the court by an expert witness.

Generally, there are no exchange controls in Israel and payments in US dollar (as well as in any other foreign currency) are acceptable.

There are no exchange controls in Israel.

Income from the lease of an aircraft is deemed to be income from an Israeli source if the use of the aircraft was in Israel, or it is regarded as business income if the business activity takes place in Israel. In those circumstances the income is taxable in Israel whether produced by an Israeli resident or a foreign resident. It should be noted that the financial lease of an aircraft that is deemed to be a sale for tax purposes is taxed in Israel in accordance with the principles mentioned in Taxes or Duties Payable Upon Execution of Sale Agreement.

Income tax regulations in Israel offer tax exemption on interest paid on a financing obtained for the purchase or construction of an aircraft operating in international traffic for the transportation of passengers or cargo and on the lease payments of such aircraft.

Some of the double taxation treaties signed between Israel and other countries provide exclusive arrangements for the taxation of revenues from the operation of aircrafts in international traffic, including income deriving from the lease payments of such aircrafts. The basic arrangement in those treaties provides that these revenues be taxed by the state in which the place of effective management of the enterprise operating the aircrafts is situated.

A lessor does not have to be licensed or otherwise qualified in Israel to do business with a domestic lessee.

Generally, an aircraft lease may contain all provisions as are agreed upon by the parties thereto, excluding matters that are illegal, immoral or contrary to public policy.

However, according to the Aviation Regulations (Operation of Aircraft and Aviation Rules), 1981 (the Operation Regulation), leases of Israeli aircraft must include, as part of the last clause of the lease, in printed letters that are large and easily readable, the following details regarding the aircraft.

  • Statutory provisions and directives of the Civil Aviation Authority (CAA) that were applied in connection with the maintenance and inspection of the aircraft during a period of twelve months immediately prior to the execution of the lease and a declaration made by the parties to the lease agreement stating that they have complied with the rules contained in the Seventh Chapter of the Operation Regulations (Aircraft Maintenance) in relation to the operation of the aircraft in the framework of the objectives of the lease.
  • The identity of the person (or legal entity) that the parties regard as responsible for the operational control of the aircraft in accordance with the terms of the lease and a declaration by the same person stating that it understands the scope of its responsibility in fulfilling the appropriate rules and regulations relating to the aircraft.
  • A declaration by the contracting parties that they are aware of the information and explanations in relation to the statutes and other directives referred to in the first bullet point above.

Gross-up provisions are customary, permissible and enforceable.

It is customary that a lease agreement covers all the parts that are installed or replaced on an aircraft or engine from time to time, provided that there is a specific arrangement covering such future replacements or additions in the lease agreement.

The Israeli Movable Law, 1971 (the Movable Law) recognises the concept of annexation. However, pursuant to the Supreme Court judgment in the Maof case, there is no title annexation whereby ownership or security interest in a single engine is at risk of automatic annexation or other prejudice when installed on the wing of an aircraft owned by another party. However, since engines may not be registered independently with the Registrar and can only be registered along with the aircraft itself, the practical solution is to include appropriate language in the lease agreement according to which the lessor, lessee and the financing entities recognise the separate ownership of the engine and waive the rights to claim any title of the engine.

The concept of trust and the role of owner trustee is recognised in Israel.

A lease interest in an aircraft may not be recorded in the Registry. Eligibility for registration of an aircraft in the Registry is limited to citizens and permanent residents of Israel, or Israeli corporations in which two thirds of its directors are Israeli citizens or permanent residents. Otherwise the registration of aircrafts owned by foreign entities is subject to the discretion of the Minister of Transportation (the Minister), who may approve such registration if the Minister is convinced that there is sufficient affiliation to Israel.

An aircraft may be registered in the name of the owner even if it is not the operator thereof.

There is no specific register for leases.

Pursuant to the Operation Regulations, the lessee must submit to the CAA a copy of the lease agreement that includes the mandatory provisions discussed above within 72 hours of the execution thereof, which copy shall remain confidential. If the lessee fails to file the lease agreement in a timely fashion, the leased aircraft may not be operated. There are specific procedures for filing of a 'wet' lease agreement of commercial aircrafts that are intended to balance the commercial and economic needs of the Israeli lessee and the flight rights that are granted to Israel under international agreements. In certain cases the CAA may not grant an operation permit to the leased aircraft.

There are no government applications or consents required as a prerequisite to the execution and delivery of an aircraft and/or engine lease in relation to an aircraft registered in Israel

The Registrar would normally accept any form of a lease (or other document), solely in its original copy, that clearly demonstrates transfer of ownership of the aircraft. If the lease is in a language other than Hebrew or English, the Registrar may require a notarised translation into Hebrew or English. There are certain registration fees for payment and forms for completion which may also be required.

Usually tax shelters such as the British Virgin Islands and the Channel Islands.

The following original documents are required to be submitted to the Registrar:

  • an original Aircraft Registration Application, in the form set out in the Registration Regulations, duly executed by the applicant;
  • an original bill of sale duly signed by the seller or other evidence of ownership of the purchaser/applicant; however, if the bill of sale is not in Hebrew or English, the Registrar may ask for a notarised translation thereof;
  • a receipt for the payment of the applicable registration fees; and
  • if the aircraft was previously registered in a foreign registry, a deletion certificate duly signed by the competent authority in the state where the aircraft was registered, or by a judgment by a court of competent jurisdiction in the foreign state, declaring that such registration is no longer valid.

Income tax regulations in Israel provide tax exemption on lease payments paid to a foreign lessor in connection with a lease of an aircraft operating in international traffic for the transportation of passengers or cargo.

Generally, a foreign lessor is not deemed to be resident, domiciled, carrying on business or subject to any taxes solely as a result of its being a party to, or its enforcement of, the lease. An individual is deemed an Israeli resident for tax purposes if its centre of life is in Israel. An individual is assumed to be an Israeli resident if he is present in Israel for a period of 183 days or more during the relevant tax year, or for 30 days or more during the relevant tax year and for 425 days or more during the relevant tax year and the preceding two years. Corporate entities are considered to be Israeli residents for tax purposes if they were incorporated in Israel or if the management and control of their business is operated in Israel.

Liabilities in respect of aircraft or engine maintenance and operations may not be imposed on a foreign lessor under a lease as a result of its being a party to such lease but the owner of an asset or its financier may be liable based on torts or on other legal grounds in Israel for damages caused in connection with the operation of the aircraft or the activities of the operator if sufficient linkage is established between the damage caused and the acts or omissions of the relevant entity under general principles of tort laws.

Israel has not adopted a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft.

The rights of the lessee under the lease agreement may be attached by the creditors of the lessee even if the aircraft is owned by a different entity.

If the ownership rights of the lessor are subject to a fixed or floating charge then the rights of such secured creditors will take priority over the rights of the lessor.

In addition, a variety of civil laws grant possessory liens to creditors in a range of scenarios. A possessory lien is a right under law to detain an asset as security for an obligation until such obligation is discharged. The Movable Property Law regulates the statutory possessory rights and provides also that such right may be created by agreement and shall remain in effect until the creditor voluntarily relinquishes control of the detained property. Statutory possessory liens are granted in certain prescribed circumstances such as mechanics’ lien.

Furthermore, Section 33 of the Airports Authority Law, 1977 provides that the Israeli Airport Authority (IAA) has a lien over all movable properties that are in its control for all fees and other payments due to it in connection therewith. Such lien provides the IAA with a priority to collect its debt from the consideration payable in connection with the sale of such movable properties over all other creditors.

Insurance may be placed with Israeli insurance companies or with international insurers that are duly authorised to operate in the country in which they operate. Local practice for aircraft used in international transport is to place insurance in the international markets.

The Aviation Regulations (Mandatory Insurance in Commercial Operations of Aircrafts), 2017 (the Insurance Regulations), which became effective on 6 June 2018, impose a mandatory liability insurance on the operator of commercial flights in Israel with respect to the passengers, the passengers’ luggage and other cargo carried by the aircraft. The Insurance Regulations provide for a minimal amount of insurance calculated based on the number of passengers and the weight of the passenger luggage/other cargo multiplied by the applicable amount of Special Drawing Rights as detailed therein. In addition, the Insurance Regulations impose on commercial operators a mandatory third-party liability insurance (with minimum amounts based on the aircraft’s maximum authorised take-off weight (MTOM), which must also include insurance for damages caused by act of war, terror, civil mutiny and the like. The mandatory insurance requirements are required for any commercial flight operated by such operator whether such operator is the owner or lessee of the aircraft or pursuant to a special lease arrangement such as a 'wet' lease, joint ticketing arrangements or other similar commercial arrangement among aircraft operators.

Reinsurances may be placed outside Israel for up to 100% coverage.

As a matter of general contract law, a cut-through clause should be enforceable if properly drafted in a manner clearly establishing privity.

If the assignment of reinsurance is properly drafted and proper notice is provided, an assignment of reinsurance should typically be recognised by the courts.

There is no restriction provided by law on a lessor’s ability to (i) terminate an aircraft lease, (ii) re-export the aircraft and/or (iii) sell the aircraft following such termination, and the aircraft need not be located in Israel at the time of any such actions.

The Israeli law applicable to possession (and repossession) of aircrafts is the Movable Law, which incorporates by way of reference the applicable provisions of the Real Estate Law, 1969 (the RE Law).

The RE Law provides that if the possession was taken unlawfully then the lawful possessor may, within 30 days of such invasion, use reasonable force to regain possession of the property. This provision is sometimes referred to as the 'self-help’ provision. However, pursuant to the judicature (although there is no precedent of the Supreme Court) and pursuant to the Israeli judicial literature, once the possession was lawfully taken (for example, pursuant to a lease agreement) then the owner/lessor may not use 'self-help’ since originally the possession was not taken unlawfully. A lessee that breached the lease agreement or became bankrupt is not necessarily deemed, under Israeli law, as an 'unlawful possessor' for the purposes of the self-help provision.

Additionally, while it is not illegal to include specific repossession provisions in the lease agreement (and it is recommended to include such provisions), the common opinion is that such provisions are not valid in so far as they deviate from the repossession (self-help) provisions provided by the RE Law.

There are no specific courts in Israel that are competent to decide aviation disputes.

Generally, a lessor may not obtain injunctive relief pending final resolution of judicial proceedings to enforce an aircraft lease. The lessor may, however, file summary proceedings against the lessee for the lease payments and liquidated damages (if provided for in the lease agreement), and impose an attachment over the lessee’s properties to secure the payment of the debt. Usually the imposition of an attachment is conditioned upon the submission of a security (usually a bank guarantee) to secure the damages that may be caused to the lessee as a result of the attachment should the court determine that such attachment is not justified. The amount of the security is prescribed by the court. It takes a few days to receive such attachment.

Generally, domestic courts will uphold (i) a foreign law as the governing law of an aircraft lease, (ii) the submission to a foreign jurisdiction and (iii) a waiver of immunity by the parties of such lease.

Pursuant to the Law for Enforcement of Foreign Judgment, 1958, any foreign judgment against the lessee obtained after due process before a court of competent jurisdiction will be recognised and enforceable in Israel, provided that:

  • the judgment is enforceable in the country where it was given;
  • adequate service of process has been effected and the lessee has had a reasonable opportunity to present its arguments and evidence;
  • the judgment and the enforcement thereof are not contrary to the law, public policy, security or sovereignty of the State of Israel;
  • the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
  • an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the foreign court and the judgment is no longer appealable; and
  • the judgment is executory in the country in which it was given;

Another requirement is reciprocity; namely that Israeli judgement may be enforced in the applicable foreign country.

A lessor under an aircraft lease can obtain a judgment in a foreign currency.

While there is no legal limitation on the rate of default interest imposed in the event of late payments of amounts due under the lease agreement and the compounding thereof, the court may determine that a very high interest rate is against the public policy. It should be noted that pursuant to the Israeli Interest Law, 1958 (the Interest Law) and the regulations promulgated pursuant thereto that set a maximum default interest for credit transactions, the maximum default interest rates for credit that is linked to the Consumer Price Index or to any other index or foreign currency is 17% per annum. Additional rent fees are also legal in Israel. However, the court may determine that such additional rent is deemed a fine and therefore may reduce the payment.

There are court fees of 2.5% (paid in two instalments) of the claim amount.

There are no mandatory notice periods under Israeli law.

Only the government may claim sovereign immunity, and only with respect to its actions as a governing body and not in the private market. Such immunity may be waived.

Israel adopted the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and the Israeli courts will recognise and enforce an arbitral decision.

Under Israeli law, the enforcement remedy is not equitable but rather a statutory one. Under the Contract Law (Remedies for breach of a Contract), 1971, a court should enforce agreements other than in very limited circumstances. In addition, pursuant to the Israeli Contract Law, 1973, no consideration is required for a contract to be valid and enforceable.

Israeli law recognises assignments or novations. Unless otherwise provided in the agreement, rights may be freely assigned (without the prior consent of the other parties), while delegation of liabilities requires the prior consent of the creditor.

A New York or English law-governed assignment and assumption agreement or novation agreement (or deed) will be recognised by Israeli courts and unless the agreement provides otherwise, the consent of the lessee is required only to the assignment of the liabilities of the lessor. While there are no mandatory provisions that are required, it is recommended to include provisions allowing the lessor to assign the agreement to third parties freely.

While it is not required by law, it is advisable for an aircraft and/or engine lease assignment and assumption/novation that are not in Hebrew or English to be translated into Hebrew or English and notarised to be enforceable against a domestic party.

The lease assignment must be filed with the CAA, otherwise the aircraft cannot be operated.

The same filing requirements that apply to the original lease agreement and described above apply also to the filing of assignment and assumption agreements/novation.

Generally, there are no specific taxes that apply to assignment. However, the ITO may deem such assignment to a sale of the lessor rights under the lease agreement and as such it may be subject to capital gains tax and VAT as further detailed in Taxes or Duties Payable Upon Execution of Sale Agreement.

If the transferor is an Israeli resident then capital gains tax and VAT may apply. Otherwise there are no consequences to such transfer.

The Registrar is permitted to cancel the certificate of registration upon the written request of the owner of the aircraft in a form prescribed by the Registration Regulations. If the Registry indicates that the aircraft is subject to charges or attachments then, pursuant to the Registration Regulations, the deregistration of such aircraft shall not be made without (i) the consent of the financing party or the creditor, or (ii) a court order or an order issued by the execution bureau expressly cancelling such charge or attachment.

The lessee’s or operator’s consent is not required for the deregistration of an aircraft made pursuant to an application of its owner.

An application for the deregistration of an aircraft may be submitted only by the owner of the aircraft. In addition to an application for deregistration in the form prescribed by the Registration Regulations, the following documents should be submitted.

  • The certificate of registration.
  • An original duly executed bill of sale or other evidence of ownership.
  • If the application is made by a corporation, corporate authorisation from the relevant organ of the relevant corporation duly empowering the individual(s) executing the application to do so, approved and certified by such corporation’s authorised signatory for such purpose. In the case of an Israeli corporation, the applicant must also submit sufficient proof of such corporation’s registration with the Israeli Companies’ Registrar.
  • If the application is executed by an agent or representative of the owner of the aircraft, the application shall expressly state the name of the owner and include details of the agent or representative and state that he or she is acting in such capacity, enclosing a notarised power of attorney from the owner (or a certified copy thereof) presented not later than three years from its issuance, unless it expressly provides that it shall be in effect for more than three years. If the power of attorney is executed outside Israel, it must be attested by an Israeli diplomatic or consular representative or by a public notary and bear an apostille in compliance with the Registrar’s requirements.
  • If the deregistration is requested in special circumstances such as death or liquidation of its owner, the application must be accompanied by specific documents and court orders as prescribed in the Registration Regulations.

If all the required documents and information is properly submitted, the deregistration is prompt.

The CAA does not provide formal advance assurances to an aircraft owner, mortgagee or lessor as to the prompt deregistration of the aircraft.

There are no significant costs/fees/taxes chargeable in respect of the deregistration of an aircraft by itself.

A deregistration power of attorney is recognised by the Registrar provided that it is notarised or certified. A power of attorney expires on the third anniversary thereof unless it expressly provides that it is granted for a longer period. If such power of attorney is not in Hebrew or English, it is advisable to provide notarised translation thereof to English or Hebrew.

As the power of attorney is notarised, no additional documents are required to enforce it.

The power of attorney may be governed by foreign law.

The grantor may not revoke an irrevocable power of attorney; however, pursuant to the Registration Regulations, any power of attorney is valid for a three-year term, unless it expressly provides for a longer period.

From a formal point of view, the owner or lessor can export the aircraft without the lessee’s consent. However, taking into account the law applicable to repossession as well as the Israeli insolvency laws and the Pledge Law, which limit the ‘self-help’ possibility to certain institutional financiers only, practically, the approval of the competent court or the Head of the Execution Bureau will be required upon insolvency. It should be noted that if the Registry includes indications of mortgages or attachments then, pursuant to the Registration Regulations, the Registrar may not deregister the aircraft without the consent of the mortgagee/creditor (as applicable) or order of the competent court or the Head of the Execution Bureau for vacating the mortgage or the attachment, or expressly permitting the transfer of ownership.

In order to increase the likelihood of exportation of the aircraft, it is recommended to receive a deregistration power of attorney and to include specific provisions to that effect in the lease agreement or the financing documents (as applicable). As explained above, due to the insolvency provisions of the Israeli law, it is not certain whether such power of attorney will survive the insolvency of the debtor and in most cases the owner/lessor/mortgagee will request a court order to gain repossession of the aircraft and the ability to deregister and export the aircraft freely.

The exportation of civil aircraft by itself does not require an export licence. However, certain parts (eg, parts that include certain encryption modules) may require an export licence and the time to issue such licence depends on the specific part and the circumstances of the export. Under the Registration Regulations, an export of aircraft requires the deregistration thereof. In addition, a Type Certificate issued by the CAA is required for the exportation of certain aircraft and aircraft parts.

The fees payable to the Registrar are calculated based on the aircraft weight but in any case they are nominal. In the event of a sale transaction, a VAT may be imposed (see above).

The original registration certificate must be attached to the deregistration application. As explained above, practically, deregistration by a owner/mortgagee upon insolvency of the lessee/mortgagor requires a court order or an order by the Head of the Execution Bureau, and the use of self-help provisions is very limited and not recommended.

Generally, a simple power of attorney expires upon the insolvency of the lessee and an irrevocable power of attorney that was given to secure the rights of a third party (namely the owner/lessor/mortgagee) will survive such proceedings. However, as described above, it is doubtful whether ‘self-help’ provisions are applicable under Israeli law and due to provisions of the insolvency laws as well as the Pledge Law, which generally does not provide for ‘self-help’ in an exercise of the mortgage, the validity of the power of attorney is left to the discretion of the court.

The lease may be set aside by the competent court upon request of the liquidator/administrator if the court finds that the lease is ‘onerous property’ since it is not profitable for the lessee.

As to repossession, see the discussion in Taking Physical Possession of the Aircraft.

The rights of the lessee to possess the aircraft under the lease agreement as apart from the aircraft itself will be deemed part of the lessee’s property.

Holders of a possessory lien and right of set-off, as well as secured creditors and ‘preferred creditors’ under the Israeli bankruptcy laws may get priority over the lessor.

Unpaid lease fees due for the twelve-month period immediately prior to liquidation have priority over the debts to other unsecured creditors. Otherwise, if the lender is not a secured lender then upon bankruptcy of the borrower, the lender will have to share the balance of the properties of the borrower with other unsecured creditors after the secured creditors and the preferred creditors have fully collected their debts and rights.

If reorganisation proceedings are commenced by, or against, the lessee then the court may order that lease payment under a lease agreement be stayed for up to nine months.

A domestic lessee may be liquidated by a competent court at its own initiative or upon the request of a competent court. Similarly, reorganisation proceedings entailing the appointment by the competent court of a trustee and a ‘stay of proceedings’ can be initiated by a creditor or the debtor itself, with the latter being more popular. A receiver may be appointed by the competent court or by the Head of the Execution Bureau upon the request of a secured creditor.

According to current judicature, ipso facto defaults are recognised. However, this approach has not been approved by the Supreme Court.

Generally, if the lease is not a financing transaction then the owner will maintain ownership of the aircraft and all the rights relating thereto.

If the lease is qualified by the court as a ‘financing lease’ then the lease rentals will be paid together and pro rata to all other debts of the lessee. If the lease is qualified by the court as a genuine lease then, to the extent that the liquidator/administrator operates/uses the aircraft, the lease rentals will be deemed as ‘liquidation expenses’ that have first priority over all other secured, preferred and unsecured debts of the lessee (other than debts secured by a specific charge).

Liquidation has no impact on the lease security deposit.

See the discussion above regarding lease payments. However, lease maintenance reserves or supplemental rent are not entitled to any preference in the priority of creditors.

Israel is not party to the Convention.

Israel is not party to the Geneva Convention on the International Recognition of Rights in Aircraft. Israel did sign the Rome Convention (1933), but to this date has not ratified it.

There are no restrictions on foreign lenders financing an aircraft locally or on borrowers using the loan proceeds. However, pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016, lenders may be required in certain cases to apply for a licence in Israel unless expressly exempted under such law or by the Commissioner of the Capital Markets, Insurance and Saving Authority.

There are no exchange controls or government consents that would be material to any financing or repatriation of realisation proceeds under a loan, guarantee or security document.

Generally, borrowers are permitted to grant security to foreign lenders.

Downstream, upstream and/or cross-stream guarantees in favour of lenders are permitted.

A pledge of shares is recognised in Israel. It is advisable to pledge the shares of the domestic SPV that owns the aircraft provided that the SPV creates also a specific charge over the aircraft and all its existing parts and equipment (including identifiable spare engine(s) and spare parts), and a separate floating charge over the aircraft, its parts, equipment, spare parts (existing and future) and fuel.

Negative pledges are recognised but they have only a contractual effect.

There are no material restrictions or requirements imposed on intercreditor arrangements.

Generally, the concept of agency and the role of a security agent under syndicated loans is recognised by Israeli law. In such transactions the security interest is granted to the agent on behalf of all the financing parties. The security interest may be registered in the name of the agent alone or together with the names of the financing parties. If the security is granted to the security agent, the agent is considered the holder of the security interest and may exercise any rights derived therefrom. It is customary to register the security interest in the name of the security agent without naming the beneficial financing parties and in such event the variation of the financing parties would not normally require amendment of the actual charge or the registration thereof.

Israeli law recognises debt subordination that is created through the grant of different degrees and types of charges (specific or floating charges) as well as contractual subordination provisions.

Generally, the transfer or assignment of all or part of an outstanding debt under an English or New York law-governed loan is permissible and recognised, provided that it is valid under the governing law.

The Interest Law and the regulations promulgated pursuant thereto set a maximum default interest for credit transaction. The maximum default interest rate for credit that is linked to the Consumer Price Index or to any other index or foreign currency is currently 17% per annum.

It is customary and advisable to create a specific charge over the aircraft and all its existing parts and equipment (including identifiable spare engine(s) and spare parts), and a separate floating charge over the aircraft, its parts, equipment, spare parts (existing and future) and fuel to eliminate the risk that parts that have been added to or replaced on the aircraft following the date of the creation of the specific charge or pledge are not included therein.

Specific charges may be taken only over existing and identifiable assets that are fixed, such as the aircraft, the engine and spare parts. However, any future assets or rights that may be purchased, replaced or added in the future, as well as inventory and fuel, may be subject only to a floating charge.

Generally, the concept of agency and the role of a security agent or trustee under syndicated loans is recognised by Israeli law. In such transactions the security interest is granted to the agent/trustee on behalf of all the financing parties. The security interest may be registered in the name of the agent/trustee alone or together with the names of the financing parties. If the security is granted to the security agent/trustee, the agent/trustee is considered the holder of the security interest and may exercise any rights derived therefrom. It is customary to register the security interest in the name of the security agent/trustee only without naming the beneficial financing parties since in such event the variation of the financing parties would not normally require amendment of the actual charge or the registration thereof.

A borrower may assign to a security trustee pursuant to a security assignment or a mortgage its rights to the aircraft or under an aircraft lease (including in relation to insurances), provided that the aircraft lease permits such assignment or that such assignment was properly approved. Israeli law recognises the creation of an assignment by way of charge according to which the assignment becomes effective when the charge is being exercised.

It is possible to assign the rights and benefits only without also assigning the attendant obligations of the lessor under an aircraft lease.

Security or a guarantee assignment may be governed by English or New York law.

Security assignment must be perfected in the same manner as the original security. If, for example, the security is a specific charge (mortgage) and the domestic debtor is a company then the assignment must be registered with the Companies Registrar and the Registrar. If such formalities are not met then the assignee will not be deemed as the security holder. If the security assignment is not in Hebrew or English, it is advisable to provide a notarised translation thereof. Additionally, the Companies Registrar requires a certified translation into Hebrew of English-drafted documents.

Assuming that the security that is the subject matter of the English/New York law assignment is registered in Israel then it should be filed with the Registrar of Companies and the Registrar together with an application (in a form prescribed by the applicable law) to amend the registration accordingly. The Companies Registrar may require a certified translation of the assignment into Hebrew. Israel is not a party to the Cape Town Convention. The average costs of executing a domestic law security instrument are nominal.

An English or New York law-governed security assignment or a domestic law security instrument may and should be registered domestically with the applicable pledge registry and with the Registrar.

If properly perfected then the transfer of security interests over an aircraft and/or engines is recognised.

If the security is registered in the name of the secured parties (and not in the name of a security agent or trustee) then changes of the identity of the secured parties without making corresponding changes in the registration itself jeopardise the security interests.

As trust arrangements are recognised in Israel, there is no reason to use parallel debt structures.

A foreign lessor would not be considered to be an Israeli resident solely as a result of a lease of the aircraft; however, its income from the lease of the aircraft may be subject to tax in Israel in accordance with the explanation above. Nevertheless, foreign residents may be exempted from tax in Israel in accordance with the provisions of a double taxation treaty between Israel and the other state. In addition, income tax regulations provide tax exemption on lease payments paid to a foreign lessor in connection with a lease of an aircraft operating in international traffic for the transportation of passengers or cargo.

If the mortgage is made by a company or co-operative society then it will be required to register the mortgage in the Charges Register maintained by the Companies Registrar or Registrar of Co-operative Societies, as applicable. Details of the particulars of the mortgage (as required by a specific form prescribed by the Companies Law) and the original document that creates it must be received by the Companies Registrar within 21 days of the creation of the mortgage. The form must be made in the Hebrew language; however, if the original security document is not in Hebrew then an original English document may be submitted together with a certified translation thereof into Hebrew. If the original security document is not in Hebrew or English then a notarised translation thereof into Hebrew must be submitted. The applicable Registrar issues a certificate of registration of a charge/pledge that constitutes conclusive evidence that the registration requirements have been satisfied.

If the mortgage is made by an individual or a partnership then it must be registered with the Pledges Registry in the district court of the debtor’s residence or his main place of business. Individuals or partnerships cannot create floating charges.

In order to perfect a mortgage over an aircraft, it is required also to register such mortgage with the Registrar. While the law does not expressly condition perfection on such registration, it is widely accepted by practitioners as a requirement.

The typical security over a bank account is a fixed charge (over amounts that are deposited in the bank account) or (if the pledger is a company or co-operative association) floating charge (on all future amounts that will be deposited therein from time to time).

Pursuant to Israeli law, a mechanics’ lien expires whenever the applicable asset (aircraft or engine) is released. Therefore the lien covers only work done on the actual secured asset for the value of the work actually done.

Fleet lien is not recognised in Israel.

The third party may not release the aircraft/engine until its full debt is repaid in priority to all other creditors (secured and unsecured). In practice, third parties usually reach an agreement with the liquidator according to which the asset is released and their lien is attached to the consideration received from the sale of the applicable asset.

It takes between five and seven business days to release a mortgage.

There is a Charges Registry that is maintained by the Companies Registrar (if the mortgagor is a company) or the Co-operative Association Registrar (if the mortgagor is a co-operative association). The Pledge Registry applies to mortgages created by individuals, partnerships and other foreign entities. The Registrar also notates the mortgage and the effect of such notation is declaratory only (although in practice it is considered as a perfection requirement).

A mechanics' lien arises only on an aircraft basis. Statutory rights of detention or non-consensual preferential liens such as those granted to the IAA or the tax authorities arise over a 'fleet-wide basis'.

A potential purchaser of an aircraft could search the Aircraft Registry, and, depending on the type of legal entity that is the focus of the search, the Companies Registrar, the Co-operative Association Registrar and the Pledges Registrar to verify that an aircraft is free of encumbrances.

A security may be enforced by the Head of the Execution Bureau or the court in summary proceedings, which usually takes a few days, while a loan or guarantee may only be enforced by court, which may take over a year.

If the assignment is not properly registered then it will not be effective against the liquidator and other creditors of the lessee.

A domestic court will usually uphold foreign law and foreign jurisdiction clauses based upon freedom of choice between the contractual parties and provided that the election is made in good faith and is not contrary to Israeli public policy. However, if, upon enforcement of the mortgage, the pledged aircraft/engine is located in Israel, the enforcement of the mortgage itself will be subject to Israeli law (Lex Situs). In addition, unless the mortgage is perfected in Israel as explained above, such mortgage will most probably not be granted priority and thus the underlying debt will not be subject to the priority granted to secured parties.

See The Recognition and Enforcement of Final Judgments of Foreign Courts and The New York Convention.

See Taking Physical Possession of the Aircraft.

The liquidation departments of the District Courts as well the Heads of the Execution Bureaus (that are annexed to the Magistrate Courts) are competent to decide enforcement actions under a security agreement/aircraft mortgage.

Generally, enforcement of a mortgage is effectuated through the appointment of a receiver over the pledged aircraft/engine. Such appointment takes place in summary proceedings and usually the appointed receiver is required to post personal bond of an amount to be prescribed by the court/execution bureau to secure any unjustified damage that may be caused to the debtor. It is also possible to issue an injunction against the IAA to prevent the take-off of the pledged aircraft/airport or to place an attachment on such pledged aircraft/engine. The issuance of an injunction or the placement of an attachment is usually subject to the deposit of a bond in the form of a bank guarantee of an amount prescribed by the court.

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

There are no taxes that are applicable to enforcement of a mortgage by itself. However, the sale of an aircraft/engine in the framework of enforcement proceedings is a taxable transaction in Israel that may be subject to capital gains tax and VAT (see Taxes or Duties Payable Upon Execution of Sale Agreement). It should be noted that the receiver appointed to enforce the mortgage is deemed the ‘long hand’ of the debtor and therefore (if a proper provision is included in the mortgage) may use any tax benefit or tax credits, deductions and set-offs available to the debtor to minimise or completely vacate such capital gains tax.

In March 2018 the Israeli Parliament enacted a new Insolvency and Financial Rehabilitation Law, 2018 that is expected to come into effect in September 2019, which will introduce substantial changes to various important matters, including creditors’ rights and the liquidation proceedings of companies.

In addition, in July 2015 the Israeli government introduced a proposed new Pledge Law that is still being discussed by the Israeli Parliament. The new Pledge Law aims to introduce numerous and material changes to the Israeli securities law. Among others, the proposed new Pledge Law vacates the possibility to create a floating charge but on the other hand allows corporate entities as well as individuals to pledge future assets and determines the order of priority between creditors.

S. Friedman & Co

Beit Amot Investments
2 Weizman Street
Tel Aviv 6133101
Israel

+972 3 693 1931

+972 3 693 1930

Sarit@friedman.co.il www.friedman.co.il
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S. Friedman & Co Advocates is located at the heart of Tel-Aviv and Haifa, and with a team of over 70 partners and associates, is pre-eminent in aviation, transportation and maritime law in Israel, with a long and distinguished history of serving Israeli and international clients. With over 80 years of experience, the team provides legal counsel and handles a wide range of matters related to aviation, including cross-border and multi-jurisdictional leasing and financing transactions such as Japanese Operating Leases with Call Option (JOLCO) and syndicated financing and security agreements, and the implementation thereof; advising on tax issues related thereto; registration and deregistration; collaboration arrangements between operators (such as aircraft, crew, maintenance and insurance (ACMI) leasing; code share; and block-space arrangements); and insurance. The firm has unique expertise in all matters related to antitrust laws applicable to aviation and maritime joint ventures, collaboration, partnership and consortia agreements. Noteworthy clients include Ofer Aviation, MUFG Union Bank, Rolls-Royce and El Al.

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