Aviation Finance & Leasing 2019

Last Updated August 01, 2019

Papua New Guinea

Law and Practice

Authors



Leahy Lewin Lowing Sullivan Lawyers is an independent commercial law firm that advises the government and a wide range of investors and institutions in Papua New Guinea (PNG). The firm has its office in Port Moresby, and has agents and relationships with legal and accounting firms in various parts of the South Pacific and South East Asia, as well as in Australia and other parts of the world. Major areas of practice are aviation; banking and finance; competition and market regulation; construction and infrastructure projects; corporate and commercial advisory; employee relations; energy and resources; environment and planning; financial and commercial services, including superannuation; foreign investment in PNG; government law, including corporatisation and privatisation; insolvency and reconstruction; insurance, reinsurance and corporate risk; litigation and dispute resolution; property development, including hotels; shipping; taxation, including stamp duty and goods and services tax.

No taxes or duties are payable in Papua New Guinea (PNG) as a consequence of the execution of an aircraft or engine sale agreement (including for the sale of an ownership interest in an entity) where the asset is located physically in PNG (including, for example, where an original or copy of the agreement enters PNG physically or electronically) or the sale is by a domestic party. In exceptional circumstances, ad valorem stamp duty may be payable in PNG if the sale agreement contains a declaration of trust over an aircraft, engine or other chattels situated in PNG, or in any other dutiable transaction. The transfer of ownership of the aircraft or engine is not a dutiable transaction in PNG.

If the sale agreement is not in English it must be translated into English before it can be enforced in PNG against a PNG resident party. All copies of original documents should be certified to be true and correct copies of the original documents. The certification may be performed in PNG by a lawyer or Commissioner for Oaths in PNG, or in a foreign jurisdiction by someone authorised to do so under the laws of that jurisdiction.

A transfer of title occurs when legal title to the aircraft or engine is transferred from one person to another. A sale of shares (even a sale of all the shares) in the company that has legal title to the aircraft or engine does not transfer title to those items. A company is a separate legal entity from its shareholders, and a company’s assets do not become a shareholder’s assets irrespective of the percentage of the company’s issued share capital to which that shareholder is entitled.

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

There are no prescribed minimum substantive requirements that must be satisfied in order for a bill of sale to be recognised in PNG. As a practical matter, however, the bill of sale must identify the transferor and the transferee, specify the consideration for the transfer and describe the aircraft or engine if that instrument is to be enforced in PNG.

Where an outstanding amount secured by an aircraft lien is unpaid at the end of one month after the date on which the aircraft lien is registered, the claimant may sell the aircraft to recover the amount owing if the National Court grants leave to do so.

Where a bill of sale is written in a language other than English, it must be translated into English if it is to be enforced in PNG. All copies of original documents should be certified as true and correct copies of the original documents. The certification may be performed in PNG by a lawyer or Commissioner for Oaths, or in a foreign jurisdiction by someone authorised to do so under the laws of that jurisdiction.

Details of a change of ownership pursuant to a bill of sale should be notified to the Director of Civil Aviation, and the Director should be requested to enter the details of the new owner(s) in the Register of PNG Aircraft and issue a new certificate of registration showing the name of the new owner.

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

No taxes or duties are payable in PNG 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, including where title to such aircraft or engine is transferred while it is:

  • located in PNG;
  • over international waters; or
  • in transit to/from PNG.

Where the aircraft or engine is owned by a company and shares in the company are transferred on a share register situated in PNG, ad valorem stamp duty of 1% of the value of the shares transferred may be payable in PNG.

All types of leases of aircraft, engines and parts are recognised in PNG, including operating leases, wet leases and finance leases.

A lease involving either a PNG resident party or an asset situated in PNG may be governed by foreign law.

A PNG resident lessee may agree to make rent payments in US dollars to a non-resident lessor. Currently, the prior written approval of the Bank of PNG is required for a PNG resident to make payments in a foreign currency to another PNG resident. This restriction does not apply to payments by a PNG resident to a non-resident.

Remittance of monies from PNG is subject to foreign exchange control regulations, and requires a tax clearance certificate.

The remittance of funds from PNG does not require government approval as such. A lessee will be required to produce a tax clearance certificate to remit monies in excess of PGK500,000 (approximately USD205,000) to a country other than a designated tax haven. All remittances to designated tax havens (ie, Bahamas, Bermuda, British Channel Islands, British Virgin Islands, Cook Islands, Gibraltar, Grenada, Hong Kong, Isle of Man, Liberia, Liechtenstein, Luxembourg, Nauru, Netherlands Antilles, Norfolk Island, Panama, Switzerland, Tonga and Vanuatu) require a tax clearance certificate, irrespective of the amount involved.

PNG is currently experiencing a shortage of foreign exchange, and available foreign exchange is being rationed. This means that while there may be no legal restriction on the outward remittance of funds, the foreign currency required for a particular remittance may not be available, with the result that the remittance will be delayed until the foreign currency becomes available.

No taxes/duties are payable for executing a lease of an aircraft or an engine physically in PNG and/or by or to a domestic party, or as a consequence of an original or copy of a lease being brought into PNG, either physically or electronically.

Subject to exceptions, ad valorem stamp duty is payable in PNG of between 0.4% and 1% (depending on the term of the lease) of the rent payable under the lease by a resident PNG lessee to a resident or non-resident lessor of an aircraft, engine or parts situated in PNG.

No stamp duty is payable where the Collector of Stamp Duties is satisfied that the aircraft, engine or other goods is for use in connection with mining or petroleum operations or exploration carried on in PNG pursuant to a licence granted under the Mining Act 1992 or the Oil & Gas Act 1998.

No stamp duty is payable for an arrangement comprising a “wet hire” (defined as being an arrangement under which an operator is provided by or at the direction of the person leasing out the goods to operate the goods for the lessee). 

Where the aircraft, engine or parts are situated in PNG, stamp duty cannot be avoided by executing the lease outside PNG or by retaining the lease documents outside PNG.

Stamp duty is payable on the first execution of the relevant documents, wherever that occurs (ie, inside or outside PNG).

Provided that the negotiations for the lease take place outside PNG, a lessor does not need to be licensed or otherwise qualified in PNG to do business with a PNG resident lessee. If a foreign lessor maintains a branch office in PNG or establishes a PNG subsidiary, then the foreign lessor or, as the case may be, the PNG subsidiary will need to be certified under the Investment Promotion Act 1992 before it commences carrying on business in PNG.

There are no mandatory terms required for a lease (or ancillary documents) governed by English or New York law that would not typically already be included in a lease of an aircraft, engine or parts.

Tax and other withholding gross-up provisions are permissible and enforceable in PNG, provided that they are not a penalty.

A lease may cover parts that are installed or replaced on an aircraft or engine after its execution, provided the lease allows this. There are no particular steps that should be taken to ensure that such parts are captured under the lease.

It is technically possible for an aircraft engine that is installed on an airframe to be separately annexed by a person who can establish good title to the engine, although it is unlikely.

Trusts and the role of an owner trustee are recognised under PNG law.

Generally, however, trusts are not a popular transaction structure because a trust is usually an inefficient tax structure under PNG law.

The interests of the owner (legal or beneficial) or a lessor of an aircraft may be noted on the PNG Register of Aircraft established under Section 65 of the Civil Aviation Act. Entry is a record of ownership based on materials submitted to the Director of Civil Aviation, but it is not proof of title. The Director does not carry out any independent investigation of materials submitted to him concerning the ownership of an aircraft.

An aircraft may be registered in PNG in the name of the operator if the operator is not also the owner. Where the owner is not also the operator, details of the owner may also be recorded in the PNG Register of Aircraft.

There is no separate register for leases concerning aircraft or engines. With the approval of the Director of Civil Aviation, details of such leases may be included in the PNG Register of Aircraft.

Details of a lease may be recorded in the PNG Register of Aircraft, but this is not mandatory. Leases are not subject to any consent from any PNG government authority.

No PNG government applications or consents are required in order to execute and deliver an aircraft and/or engine lease in relation to an aircraft registered in PNG.

A lease does not need to be in a specific form or translated, served, certified, notarised or legalised in order to be valid and for details of the lease to be recorded in PNG Register of Aircraft. Where the lease is not in English, it should be translated into English if details of the lease are to be recorded in the PNG Register of Aircraft.

No taxes or duties are payable for registering a lease in PNG.

A person lawfully entitled to the possession for a period of 28 days or longer of an aircraft that flies to, from, within or over PNG territory must register that aircraft and hold a valid certificate of registration for that aircraft from:

  • PNG’s Director of Civil Aviation;
  • the appropriate aeronautical authorities of a Contracting State (ie, a country that has ratified the Chicago Convention); or
  • the appropriate aeronautical authorities of another State that is party to an agreement with the Government of PNG or the Civil Aviation Safety Authority (CASA) that provides for the acceptance of each other's registrations.

No aircraft may be or remain registered in PNG if it is registered in any other country.

Neither the Director of Civil Aviation nor CASA require any document to be in original form before it will accept and process the registration of an aircraft. Copies of documents are accepted, provided the copies are certified to be true and copies of the original documents. The certification may be performed in PNG by a lawyer or Commissioner for Oaths in PNG, or in a foreign jurisdiction by someone authorised to do so under the laws of that jurisdiction. Where a document required for registration is not written in English, it should be translated into English and the translation should be authenticated by someone who is qualified to do so (generally a consular officer located in the jurisdiction where the foreign language document is prepared who is familiar with both the language of the document and English).

Foreign Contractor Withholding Tax at 12% will apply on lease payments made by a PNG resident lessee or operator of an aircraft to a non-resident lessor, in accordance with PNG’s Income Tax Act 1959 (Tax Act).

The Tax Act contains specific provisions dealing with the taxation of non-resident corporations who carry out certain contract activities for "prescribed purposes" in PNG. The "prescribed purposes" are those for or in connection with, amongst other things, the use of or right to use, in PNG, any industrial, commercial or scientific equipment, including any machinery or apparatus or appliance, whether fixed or not, and any vehicle, shipping vessel or aircraft.

Generally, wherever a contract with a non-resident company is to provide services in whole or in part in PNG, such a contract is usually a prescribed contract.

Where a foreign contractor has derived income from a prescribed contract, the foreign contractor is deemed to have derived taxable income of an amount equal to 25% of the gross income, whether paid or payable in or out of PNG. This deeming rule assumes that the foreign contractor has incurred allowable deductions equal to 75% of the gross income under the contract. Subject to the provisions of any applicable Double Tax Agreement, this profit is subject to tax at a non-resident rate of 48%, giving an effective PNG tax rate of 12% on the gross contract payments.

As an alternative to this, the foreign contractor may choose to be assessed on the actual profit or loss derived, which is clearly advantageous where the actual taxable income from the prescribed contract is less than 25% of the gross income. However, the Internal Revenue Commission (IRC) of PNG must be satisfied that the actual profit or loss from the prescribed contract has been calculated by reference to actual receipts and expenditure.

Goods and services tax of 10% is payable on any lease payments made by a resident PNG lessee or operator under a lease of an aircraft operating in PNG.

There is no capital gains tax in PNG.

A lessor who is not ordinarily resident in PNG will not be deemed to be resident, domiciled, carrying on business or subject to any taxes by reason only of being a party to a lease, or the enforcement thereof.

Except as provided in the lease or sublease, no liabilities in respect of aircraft or engine maintenance and operations will be imposed on a non-resident lessor under a lease as a result of it being a lease party.

A foreign aircraft or engine owner could, in certain circumstances, be liable for damage or loss caused by the aircraft in PNG – eg, where the lease requires the owner to maintain the aircraft and the owner fails to do so, or where the owner is aware of a defect in the aircraft or engine which causes loss or damage and the owner fails to rectify the defect or alert the operator to the risk.

A financier will not be liable for such loss or damage unless they have some special knowledge concerning a particular defect.

Creditors of a PNG resident lessee may not attach an aircraft leased to the lessee but owned by a different entity. Where an outstanding amount secured by an aircraft lien is unpaid at the end of one month after the date on which the aircraft lien was registered, the claimant may sell the aircraft at any time, with the leave of the National Court.

An aviation service provider’s right to be paid for services may take priority over a lessor’s rights under an aircraft or engine lease. Similarly, the rights of a mortgagee or chargee may take priority over the lessor’s rights under an aircraft or engine lease.

All risks situated in PNG for which insurance, including reinsurance, is required must be insured with a licensed insurer (being an insurer licensed under Part III of the Insurance Act 1995 (Insurance Act)), unless exemption is granted.

Where PNG’s Insurance Commissioner is satisfied that the insurance is not available locally, he may grant an exemption from the requirement to insure locally.

There are no mandatory insurance coverage requirements in PNG.

However, before granting or renewing a licence to operate an aircraft in PNG, or at any other time while such a licence is in force, the Minister or the Head of the Department of Civil Aviation may require the applicant or licensee to furnish proof that any liability of the applicant or the licensee or in connection with the death of or bodily injury to any person using the aircraft for damage to any property is covered by insurance.

Where an aircraft is detained under Section 109 (Claimant May Claim Lien on Aircraft) of the CA Act, the claimant must insure the aircraft, and keep it insured, against the loss of, or any damage to, the aircraft during its detention or while it is in the custody, possession or control of the claimant.

Reinsurance may only be placed outside PNG if the local PNG reinsurance facilities are fully utilised or not otherwise available for any reason. Reinsurance facilities in PNG are extremely limited and, accordingly, exemption from the obligation to insure locally is often granted.

“Cut-through” clauses in the insurance/reinsurance documents are enforceable in PNG.

PNG law does not prohibit assignments of insurances and reinsurances. The policy document states whether or not assignment is permitted.

There are no particular restrictions on a lessor’s ability to:

  • terminate an aircraft lease;
  • re-export the aircraft; and/or
  • sell the aircraft following such termination.

The aircraft does not need to be physically located in PNG at the time of any such action.

The aircraft lease must be terminated and re-exported in accordance with the relevant provisions (if any) of that lease.

Notwithstanding termination of the lease agreement, the owner or lessor will not be able to re-export or sell the aircraft until any liens attaching to the aircraft are discharged.

An aircraft may not be exported from PNG without an export permit.

A lessor may not take physical possession of the aircraft without the lessee’s consent to enforce the lease, and a court order to do so will be required.

In PNG, there are no specific courts designated to deal with aviation disputes.

PNG’s National Court has general jurisdiction to hear all criminal and civil matters, and this includes aviation disputes.

A secured party may obtain interim relief in PNG pending the determination of proceedings to enforce an aircraft lease, provided that the parties agree to submit to the jurisdiction of the courts in PNG. A party that asks the PNG courts for interim relief must provide a written undertaking as to damages.

Where the parties have not agreed to submit to the jurisdiction of the PNG courts, orders may be obtained in a foreign jurisdiction enjoining the lessee/operator from using the aircraft in PNG. The PNG courts may enforce such orders.

All matters are dealt with by the PNG courts on a case-by-case basis. The time it takes to litigate a matter depends on the nature of the matter, whether it is contentious or not, the issues for determination, and the willingness of both parties to pursue the matter.

PNG courts will uphold:

  • a foreign law as the governing law of an aircraft lease;
  • the submission to a foreign jurisdiction; and
  • a waiver of immunity by the parties of such lease.

Before enforcing a choice of foreign law, the PNG courts will need to be satisfied that there is a logical connection between the particular transaction and the foreign jurisdiction.

Under the Reciprocal Enforcement of Judgements Act (Chapter 50) (the REJ Act), certain judgments of certain foreign courts are recognised and will be enforced in PNG by a process of registration. The REJ Act establishes a system of reciprocity of recognition and enforcement of foreign judgments of designated courts within prescribed countries, including Australia, Bahama Islands, Bermuda, Borneo, British Honduras, Cayman Islands, Cook Islands, Ellice Islands, Falkland Islands, Fiji, Gilbert Island, Grenada, India, Kenya, Malaysia, Manitoba, New Zealand, Niue, Pakistan, Sierra Leone, Singapore, St Lucia, Tobago, Tonga, Trinidad, United Kingdom, United States of America, Virgin Islands and Western Pacific High Court of Western Samoa.

Where a foreign money judgment is not from a designated court, it may still be recognised and enforced in PNG by commencing a separate action in the National Court.

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

A lessor may recover default interest (or the compounding thereof) or charge additional rent following termination of the lease for default, including where the lessee fails to return the aircraft, provided that the aircraft lease permits this.

Where the default interest or additional rent is deemed to be a penalty, the PNG courts will not enforce it.

A lessor under an aircraft lease is not required to pay taxes or fees (other than counsel’s fees) in connection with the enforcement of such lease in PNG.

A lessor must comply with all notice periods specified in the lease if it terminates an aircraft lease. There are no other mandatory notice periods.

A lessee is entitled to claim sovereign or other immunity from suit, provided that the lease is part of an ordinary commercial transaction. Where sovereign or other immunity would otherwise apply, this immunity may be waived by the party entitled to it.

PNG has not ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

An aircraft owner generally has the greatest “right” to the aircraft as against third parties. This right is not unqualified.

Salvage Lien

If the aircraft has been salvaged, the person performing the salvage operation (ie, the salvager) has a right to claim its salvage expenses against the owner. The salvager’s right is not dependent on its possession of the aircraft.

Possessory or Contractual Lien

The aircraft may be subject to a possessory lien, even though the owner may have expressly prohibited the operator of the aircraft from creating such a lien.

Seller’s Lien

The aircraft may be subject to a seller’s lien to the extent the owner failed to pay in full for the aircraft.

Airport Charges Lien

Where a default is made by an owner or operator of an aircraft in the payment to the claimant of any charge pursuant to CA Act Part VII (Service Policies, Charges, Levies, Fees and Liens), a lien (Aircraft Charges Lien) arises in respect of the aircraft and the claimant may take such steps as are necessary to detain, pending payment, either the aircraft or any other aircraft of which the person in default is the owner or operator at the time when the detention begins.

Where details of an Aircraft Charges Lien are entered in the PNG Register of Aircraft, the lien is vested in the claimant and the claimant may keep possession of the aircraft until all outstanding amounts are paid.

Where an outstanding amount secured by an Airport Charges Lien is unpaid at the end of one month after the date on which the details of the particular lien are registered, the claimant may sell the aircraft, with the leave of the National Court.

PNG law recognises the concepts of contractual assignment and novation. An obligation may only be transferred by way of novation, which is usually effected by a tripartite agreement between the outgoing obligor, the incoming obligor and the obligee.

Absent extraordinary circumstances, a PNG court can be expected to give effect to an assignment and assumption agreement or a novation agreement governed by New York law or English law pursuant to which a lessor transfers its rights under an aircraft lease to a new lessor. The consent of the lessee is not required, unless it is stipulated in the terms of the lease. PNG law does not require any particular terms to be included in such an agreement. However, in order to be effective, the assignment should be absolute, and notice of the assignment must be given to the lessee.

Where an aircraft and/or engine lease assignment and assumption/novation is not in English, the document should be translated into English if a PNG court is asked to enforce it, and the translation should be authenticated by someone qualified to do so. Copies of documents are accepted if they are certified to be true copies of the original documents. The certification may be performed in PNG by a lawyer or Commissioner for Oaths, or in a foreign jurisdiction by someone authorised to do so under the laws of that jurisdiction.

Although this is not mandatory, it would be advisable for the transferee to request the Director of Civil Aviation to record those details in the Register of PNG Aircraft or in the separate administration file that CASA maintains for each aircraft registered in PNG. There is no prescribed form for such a request.

No taxes or duties are payable in PNG in connection with the transfer of an aircraft lease or engine lease.

PNG law will not treat the transfer of the ownership interest of the entity owning the aircraft as a transfer of the aircraft itself if legal title to the aircraft remains with the transferring entity.

An aircraft remains registered until the Director of Civil revokes the certificate of registration, which he may do for the following reasons, among others:

  • upon the request of the holder of a certificate of registration; or
  • if the Director is satisfied that:
    1. the aircraft is destroyed, lost or stolen;
    2. the aircraft is permanently withdrawn from use;
    3. a person lawfully entitled to possession of the aircraft for 28 days or longer has applied to register the aircraft in another State; or
    4. the aircraft is registered in any State (other than PNG).

In practice, a lessor or mortgagee seeking to deregister an aircraft will need:

  • the registered operator (if the operator holds the certificate of registration) to apply for deregistration; or
  • to provide evidence to the Director of Civil Aviation that the entity indicated as the operator of the aircraft on the PNG Register of Aircraft is no longer lawfully entitled to possession of the aircraft; or
  • a valid deregistration power of attorney conferring power on the donee to apply for deregistration of the aircraft in PNG. 

The Director may amend the PNG Register of Aircraft whenever it appears necessary or appropriate, in order to bring it up to date or to correct the registered particulars.

The holder of a certificate of registration is obliged to notify the Director of Civil Aviation, in writing, within 14 days of becoming aware that the aircraft is destroyed, lost or stolen or permanently withdrawn from use. Likewise, where there is a change of ownership, or the holder of a certificate of registration ceases to have lawful entitlement to possession of the registered aircraft for a period of 28 days or longer, the certificate of registration will expire and the holder is obliged to ensure the completion of the form printed on the reverse side of the certificate of registration, or Form CAA 47/01, within 14 days of the date of such expiry, and to submit the relevant form to the Director with payment of the appropriate fee prescribed by the Regulations.

If registration is disputed, or where there is a change in possession of the aircraft, the party seeking to dispute the registration particulars or deregister the aircraft must provide evidence to the Director or CASA that the entity noted as the owner/operator in the PNG Register of Aircraft is no longer lawfully entitled to possession of the registered aircraft. The Director is entitled to revoke the certificate of registration at his discretion.

An aircraft owner, mortgagee or lessor may apply for deregistration of the aircraft without the lessee’s or operator’s consent. However, if the applicant for deregistration is not the holder of the certificate of registration, the Director of Civil Aviation will require evidence of the authority of the applicant to do so.

Unless they hold the certificate of registration, an owner, mortgagee or lessor must provide the Director of Civil Aviation with evidence of their authority to apply for deregistration. This may take the form of a deregistration power of attorney. Without such a power of attorney, the applicant will need to satisfy the Director that the operator of the aircraft is no longer entitled to operate the aircraft and that, in these circumstances, the applicant should be allowed to deregister the aircraft.

There is no prescribed period within which the Director of Civil Aviation must complete the deregistration process.

In PNG, neither the Director of Civil Aviation nor CASA will provide advance assurances to an aircraft owner, mortgagee or lessor as to the prompt deregistration of the aircraft.

A cancellation of registration fee of PGK500 is payable in PNG.

A deregistration power of attorney is not expressly recognised in the aviation law of PNG. CASA, however, has previously accepted a deregistration power of attorney authorising a lessor on behalf of a lessee to deregister an aircraft and export it from PNG.

Depending on the circumstances, additional documents (sometimes supporting corporate documentation such as copies of minutes or signing authorities) may be required to enforce a deregistration power of attorney.

A deregistration power of attorney does not need to be governed by PNG law.

Even though a power of attorney is expressed to be irrevocable, the grantor may still revoke the power of attorney.

So long as the lessee retains possession of the aircraft, it will be very difficult for an owner, mortgagee or lessor to export the aircraft without the lessee’s consent. Once possession is obtained, however, the owner, mortgagee or lessor may export the aircraft without the lessee’s consent, subject to satisfying the permitting and other requirements. At the time of negotiating the lease or mortgage, the owner, lessor or mortgagor should insist on including in both the lease and the security documents a consent and acknowledgement by the lessee that the owner, lessor or mortgagor may at any time following the occurrence of an event of default take any action in the name of the lessee or otherwise to export the aircraft.

The export of an aircraft from PNG requires an export permit, which is obtained by making written application to the Department of Customs. Generally, it takes three to four weeks to obtain an export permit. On occasion, export permits have been issued in advance of any act.

Under the Customs Act 1951 (Ch.101) (the Customs Act), the exporting party will need to:

  • have the Customs Authority inspect the aircraft and any goods proposed to be exported on the aircraft; and
  • obtain a certificate of clearance from the Collector of Customs (Collector).

Before a Certificate of Clearance is granted to an aircraft, the pilot must:

  • deliver an outward manifest in duplicate to the Collector;
  • answer any questions asked by the Collector relating to the aircraft and its cargo, crew, passengers, stores and flight plan; and
  • produce all documents relating to the aircraft and its cargo.

A Certificate of Clearance will not be granted for an aircraft unless all inward cargo and stores have been accounted for to the satisfaction of the Collector.

Export duties are payable at the rate in force when the aircraft is actually exported, but in the first instance payment must be made by the owner to the Collector of Customs at the rate of duty in force when the permit to export the aircraft is applied for.

There are no significant practical issues that an aircraft owner or mortgagee or lessor should be aware of in respect of the deregistration of aircraft in PNG. On occasion, the Director of Civil Aviation may require proof of removal of all registration marks from the aircraft before deregistration is granted.

Where a lessee has granted a deregistration power of attorney, the liquidation of the lessee will have the effect of terminating the power of attorney. 

Where a lessee has possession of the aircraft and is put into liquidation, the lease may be set aside in certain circumstances. In particular, a liquidator may disclaim onerous property or void an uncommercial transaction.

A liquidator may disclaim “onerous property” even though the liquidator may have taken possession of it, tried to sell it, or otherwise exercised rights of ownership in relation to it.

The term "onerous property" includes an unprofitable contract.

A disclaimer by a liquidator brings to an end the rights, interests and liabilities of the company in relation to the property disclaimed, but does not – except so far as necessary to release the company from a liability – affect the rights or liabilities of any other person.

Within one month of the disclaimer, a liquidator who disclaims onerous property must give notice in writing of the disclaimer to every person whose rights are, to the knowledge of the liquidator, affected by the disclaimer.

A person suffering loss or damage as a result of a disclaimer under this section may:

  • claim as a creditor of the company for the amount of the loss or damage; or
  • apply to the Court for an order that the disclaimed property be given to or vested in that person.

In addition to the above, a lease or other transaction entered into by a company is voidable on the application of the liquidator where:

  • the transaction took place within the “specified period”;
  • the transaction was an “uncommercial transaction”; and
  • the company at the time the transaction took place:
    1. was unable to pay its debts as they became due in the ordinary course of business; or
    2. was engaged, or about to engage, in business for which its financial resources were unreasonably small; or
    3. incurred an obligation knowing that the company would not be able to perform the obligation when required to do so.

A transaction is deemed an “uncommercial transaction” only when a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

  • the benefits (if any) to the company of entering into the transaction;
  • the detriment to the company of entering into the transaction;
  • the respective benefits to other parties to the transaction of entering into the transaction; and
  • any other relevant matters.

A "specified period" means:

  • the period of a year before the commencement of the liquidation; and
  • in the case of a company that was put into liquidation by the court, the period of a year before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which the order of the court was made.

Where the lessee is put into liquidation, the lessor is not likely to be prevented or delayed from repossessing the aircraft on termination of the lease, nor will the aircraft be deemed to be part of the lessee’s property. If rental and other payments under the lease are unsecured, the lessor will rank with the lessee’s other unsecured creditors behind the secured creditors and certain preferred creditors, including the Internal Revenue Commission, for the lessee’s unpaid taxes and the lessee’s employees for certain prescribed employee benefits.

The main risk is obviously that the lender will not be repaid either because the borrower or guarantor cannot repay the debt or because the realisable value of the security is less than the amount of the outstanding debt. The aircraft itself is usually the main security, and the chief risk is that the aircraft has become encumbered by unpaid airport charges or other liabilities, with the result that the aircraft cannot be exported from PNG until the charges are paid or the other liabilities are satisfied.

In PNG a moratorium (or similar stay) – being a period during which proceedings may not be brought or action taken against the company in liquidation – is not imposed in connection with insolvency proceedings.

A company is put into liquidation by the appointment of a named person as liquidator.

The liquidation of a company commences on the date on which the liquidator is appointed.

The lessor’s right to take possession of an aircraft while a lessee is insolvent or otherwise depends on the terms of the lease and any relevant security.

The winding up of a PNG incorporated lessee may have the following effects:

  • as regards the aircraft – no effect if the aircraft is not owned by the lessee;
  • as regards lease rentals – rental payments will cease and the lessor will need to take possession of the aircraft and enforce any security it may have;
  • as regards the lease security deposit – subject to the terms of the lease and applicable security documents, the lessor may be entitled to take and apply the security deposit to its own purposes; and
  • as regards the maintenance reserves (whether classified as reserves or supplemental rent) – subject to the terms of the lease and applicable security documents, the lessor may be entitled to take and apply the maintenance reserves to its own purposes.

The Convention on International Interests in Mobile Equipment (ie, the Cape Town Convention) and the related Protocol on Matters specific to Aircraft Equipment (Cape Town Protocols) are not in force in PNG.

PNG has made no declarations under the Cape Town Convention or the Cape Town Protocols.

Article XIII of the Cape Town Protocol does not apply in PNG.

As neither the Cape Town Convention nor the Cape Town Protocol are in force, PNG courts have little experience enforcing either of those arrangements.

PNG is not a party to the 1948 Geneva Convention on the International Recognition of Rights in Aircraft or the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft.

There are no restrictions on foreign lenders financing an aircraft situated in PNG, nor on borrowers in PNG using the loan proceeds.

The prior approval of the Bank of Papua New Guinea (PNG’s central bank) is required before a PNG resident borrower borrows foreign currency inside or outside of PNG.

Remittance of monies from PNG is subject to foreign exchange control regulations, and requires a tax clearance certificate.

Moreover, PNG is currently experiencing a shortage of foreign exchange, and available foreign exchange is being rationed.

PNG resident borrowers are permitted to grant security to foreign lenders. However, where a PNG resident proposes to grant security or provide a guarantee to a non-resident, the PNG resident must first obtain the prior written approval of PNG’s central bank, the Bank of Papua New Guinea, if the security or guarantee is not for the direct benefit of a business carried on in PNG.

Subject to the foreign exchange control issues noted above, downstream, upstream and/or cross-stream guarantees may be granted in favour of lenders. Unless the relevant guarantee is executed in the form of a deed, the guarantee may be unenforceable unless consideration was provided to the guarantor. There are no registration requirements for guarantees.

A lender should take share security over a domestic special purpose vehicle that owns the financed aircraft. Pledges of shares are recognised in PNG.

Negative pledges are recognised in PNG.

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

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

There is no restriction on debt subordination in PNG.

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 in PNG.

In certain exceptional circumstances (in particular where the transaction is not genuinely mutual or is manifestly unfair to one party), interest charged may be avoided (see Fairness of Transactions Act Section 4 and 6). As a general rule, however, there is no limitation on the interest that may be charged by one commercial party to another commercial party.

The typical forms of security and recourse granted in an aviation finance transaction in PNG include:

  • a mortgage over the aircraft;
  • a mortgage over the shares in the company that leases or operates the aircraft;
  • a deregistration power of attorney; and
  • an undertaking to pay all airport charges that arise in respect of the aircraft.

All types of security may be taken over an aircraft or related collateral such as engines, warranties or insurances.

Trusts and the role of a security trustee are recognised under PNG law.

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

An assignment of a debt or other chose in action must be absolute. This is usually interpreted as meaning that, where rights and benefits are assigned, the attendant obligations must also be assigned.

A security assignment or a guarantee governed by English or New York law is enforceable in PNG.

To be effective under PNG law, the security assignment must be in writing and absolute, and express written notice of the assignment must be given to the debtor, trustee or other person from whom the assignor would have been entitled to claim the debt or thing in action (see Mercantile Act Section 3).

There are no additional PNG law security documents that a financier should also take where an English or New York law governed security assignment is taken in respect of an aircraft registered in PNG.

A notice of the creation of a security interest under an English law or New York law governed security assignment or PNG law governed security instrument may be recorded in the Personal Property Security Register established under the Personal Property Security Act 2011.

In his absolute discretion and without any responsibility or liability to the State, CASA or the Director, the Director of Civil Aviation may, for any reason, place on the PNG Register of Aircraft at the request of any person a note of any security or other such financial interest held by that person in an aircraft.

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

Where the identity of the secured party changes after the security assignment is executed, the security interests will not be jeopardised, provided that the assignor complies with Section 3 (Assignment of Debts and Things in Action) of the Mercantile Act and with the terms of the particular security instrument the rights or obligations of which are being assigned.

“Parallel debt" structures have been used in PNG so that the security trustee has an independent right to the secured debt, but this is not common.

A secured party under a security assignment is not deemed to be resident, domiciled, carrying on business in PNG or subject to any PNG taxes solely as a result of its being a party to or its enforcement of such security assignment.

A PNG law mortgage over an aircraft or engine is perfected by any of the methods or circumstances prescribed by Part V of the Personal Property Security Act 2011 (PPS Act). This enables the secured party to enforce the security interest against third parties, such as certain buyers of collateral and certain other creditors.

A security interest is perfected when it has attached and a method of perfection authorised under the PPS Act has been completed, regardless of the order of occurrence.

The methods of perfection include the following:

  • perfection by registration of a notice;
  • perfection by taking possession of collateral; and
  • perfection by control of deposit accounts and investment property.

There is no material difference between the form of security (or perfection) taken over an aircraft and that taken over spare engines.

The forms of security typically used to take security over a bank account (such as a lease receivables account) include the following:

  • a fixed and floating charge over the balance of the account from time to time;
  • an irrevocable direction to the bank or other account holder to transfer the balance of the account (or the balance of the account above a particular amount) from time to time to a designated person; and
  • an assignment of the balance of the account on the occurrence of certain prescribed events or once the balance of the account reaches a certain level.

Under the PPS Act, a security interest in a deposit account is perfected by taking control of that account.

PNG law provides for liens over an aircraft or engine. The liens arise under both statute and common law.

The CA Act provides for liens and rights of detention in favour of third parties where certain charges are not paid.

Where an outstanding amount secured by an aircraft lien is unpaid at the end of one month after the date on which the aircraft lien was registered, the claimant may sell the aircraft at any time, with the leave of the National Court.

Although not specifically tested in the PNG courts, it is likely that the following common law aircraft liens also exist under PNG law:

  • seller’s lien;
  • salvage lien;
  • possessory lien; and
  • contractual lien (including a pledge).

In the case of repairers’ costs and similar liens, the lien is likely to cover only work done on the actual secured asset for the value of the work actually done (as opposed to the contract price). The lien would not cover the value of work done on other assets.

Fleet liens are recognised in PNG.

Where an unpaid seller has exercised its right of lien (or stoppage in transit) in respect of an aircraft, it may resell the aircraft, in which case the new buyer will acquire good title as against the original buyer. Usually the aircraft sale contract will, in any case, specify a right of resale in the event of buyer default. Where the seller resells the aircraft, the original sale contract will be rescinded without prejudice to any claim the unpaid seller may have for damages. The unpaid seller will also have a right of resale if it has given notice to the buyer that it intends to resell the aircraft and the buyer does not pay (or tender) the outstanding purchase price within a reasonable time thereafter.

A party with the benefit of a possessory lien must either claim it for a definite amount or give the owner particulars from which the amount can be calculated. A contractual lien (for example, a pledge) usually carries with it an express or implied right to sell the property pledged in default of payment. Thus, recourse to the PNG courts will not be necessary.

The timeframe to discharge a lien or mortgage over an aircraft will depend on the particular circumstances of the lien or mortgage.

A notice of the creation of a security interest in an aircraft or engine created under a mortgage or charge may be recorded in the Personal Property Security Register established under the PPS Act.

In PNG, statutory rights of detention and non-consensual preferential liens can arise over an aircraft or aircraft engine.

A potential purchaser of an aircraft should search both the PNG Register of Aircraft and the Personal Property Security Register to verify that said aircraft is free of encumbrances.

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

How the security assignment is enforced will depend on the terms of the security assignment documentation and the underlying security. Assuming that this documentation does not restrict it from doing so, the Security Trustee may commence proceedings in PNG and enforce its rights against the lessee directly.

PNG courts will uphold:

  • a foreign law as the governing law of a finance or security document;
  • the submission to a foreign jurisdiction; and
  • a waiver of immunity by the parties to a finance or security document.

Before enforcing a choice of foreign law, the PNG courts will need to be satisfied that there is a logical connection between the particular transaction and the foreign law that is chosen as the governing law of the relevant finance or security document.

Under the REJ Act, certain judgments of certain foreign courts are recognised and will be enforced in PNG by a process of registration. Even if a foreign money judgment is not from a designated court, it may still be recognised and enforced in PNG by commencing a separate action in the National Court to sue on the judgment under the local rules of private international law.

Most security agreements/aircraft mortgages permit a secured party to take physical possession of the aircraft without the lessee or operator’s consent where a default has occurred. However, the secured party will need an order of the National Court granting the secured party possession of the aircraft if the lessee or operator refuses to give up possession.

PNG’s National Court is competent to decide enforcement actions under a security agreement/aircraft mortgage.

A secured party may obtain interim relief in PNG pending the determination of proceedings to enforce a security agreement/aircraft mortgage, provided that the parties agree to submit to the jurisdiction of the courts in PNG. In those circumstances, the party that asks the PNG courts for interim relief will be required to provide a written undertaking as to damages in support of the injunctive relief sought.

Where the parties have not agreed to submit to the jurisdiction of the PNG courts, orders may be obtained in a foreign jurisdiction enjoining the lessee/operator from dealing with or otherwise using the aircraft in PNG. The PNG courts may then be asked to enforce those orders.

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

Security agreements/aircraft mortgages are not subject to stamp duty, unless they contain other dutiable provisions such as declarations of trust. The secured party is under no obligation to pay any other taxes or fees (other than the fees of its own legal counsel and possibly the fees of the other party’s legal counsel if the enforcement action is not successful) in connection with the enforcement of a security agreement/aircraft mortgage.

A security interest in an aircraft created by a mortgage of that aircraft (being a security interest which has attached to the aircraft) may be perfected by registering a notice in respect of that security interest under the Personal Property Security Act (PPS Act).

Under the PPS Act, a perfected security interest has priority over an unperfected security interest. Priority between conflicting unperfected security interests is determined by the order of attachment of the security interests. It is important to note that, while filing in respect of both new and pre-existing security interests is voluntary, the consequences of not filing a security notice may be dire. The main consequence of not filing is that security interests that are registered take priority over other interests. The responsibility to file is with the secured party, which may elect to do this through an agent.

A security interest in an aircraft notified under the PPS Act, whether perfected or not, is subordinate to a mortgage, charge lien or other interest registered with respect to that aircraft under the CA Act. The PPS Act specifically provides that where a person in the ordinary course of business furnishes materials or services with respect to goods (which term would include an aircraft) that are subject to a security interest (which term includes a charge or mortgage over an aircraft), a lien that a person has with respect to those materials or services has priority over a perfected security interest while the goods are in the person's possession, unless the lien is given by an act that provides that the lien does not have the priority.

Although the mortgage may prohibit the owner (and any user) of the aircraft from creating such a lien, a lien can still arise in practice and take precedence over the mortgagee’s interest. A mortgagee of an aircraft that is subject to an Airport Charges Lien must pay the charges and any penalties in relation to those charges secured by the lien to repossess the aircraft.

There are no other material issues and/or any material court judgments that are relevant to the purchase, sale, lease or debt finance of an aircraft registered in PNG and/or involving a PNG resident party.

There are no current proposals before the National Parliament relating to the foregoing items that alter the same or are worth noting.

Leahy Lewin Lowing Sullivan Lawyers

P.O. Box 1173
Port Moresby NCD
Papua New Guinea

+675 320 3333

+675 321 3631

Sullivan@llls.com.pg www.llls.com
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Law and Practice

Authors



Leahy Lewin Lowing Sullivan Lawyers is an independent commercial law firm that advises the government and a wide range of investors and institutions in Papua New Guinea (PNG). The firm has its office in Port Moresby, and has agents and relationships with legal and accounting firms in various parts of the South Pacific and South East Asia, as well as in Australia and other parts of the world. Major areas of practice are aviation; banking and finance; competition and market regulation; construction and infrastructure projects; corporate and commercial advisory; employee relations; energy and resources; environment and planning; financial and commercial services, including superannuation; foreign investment in PNG; government law, including corporatisation and privatisation; insolvency and reconstruction; insurance, reinsurance and corporate risk; litigation and dispute resolution; property development, including hotels; shipping; taxation, including stamp duty and goods and services tax.

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