Aviation Finance & Leasing 2020

Last Updated July 30, 2020

Ireland

Law and Practice

Authors



Walkers is a leading international law firm that provides legal, corporate, fiduciary and compliance services to global corporations, financial institutions, capital markets participants and investment fund managers. Walkers has 118 partners and 918 staff, providing 24/7 service to its clients, which include Fortune 100 and FTSE 100 companies, as well as many of the most innovative firms and institutions across the financial markets. Walkers is experienced in all types of international and cross-border transactions covering a broad range of sectors, with a particular focus on both contentious and non-contentious corporate and finance law, investment funds, private equity, structured products, capital markets, private capital and trusts. The firm delivers clear, practical advice based on an in-depth knowledge of the legal, regulatory and commercial environments in Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Ireland from ten global offices.

VAT

Whether there will be any VAT payable on the sale of an aircraft is determined by the physical location of the aircraft at the point of sale. If the aircraft is physically located in Ireland at the time of sale, the place of supply for Irish VAT purposes will be Ireland. As a result, the seller will be liable for any Irish VAT chargeable on the supply, at 23%. However, if the aircraft will be used outside the EU or by a transport undertaking operating for reward chiefly on international routes, Irish VAT will apply at 0%. The seller will be obliged to be registered for VAT in Ireland regardless of whether the 0% or 23% rate applies.

Stamp Duty

Irish stamp duty legislation provides an exemption in respect of the lease, transfer and sale of an aircraft, regardless of where the aircraft is located at the time of sale.

Customs Duties

No customs duty will be charged on the transfer of title of the aircraft where the aircraft is on the ground in Ireland and in free circulation in the EU.

Customs duties will only apply on the importation of an aircraft into Ireland from outside the EU, or on the release of an aircraft in Ireland in circumstances where the aircraft is coming off a duty-suspended procedure such as transit or inward processing.

As a matter of Irish law, translation, certification, notarisation or legalisation is not required for the enforceability of a sale agreement against an Irish party.

Transfer of title is legally effected upon delivery of the bill of sale, which will usually include engines installed on the airframe and installed parts on its face but does not set out the entire commercial agreement between the parties, which is usually set out in the aircraft sale and purchase agreement. 

If an aircraft registered in Ireland has a new owner, a change of ownership form should be filled in and lodged with the Irish Aviation Authority (IAA) – a new Registration Certificate will be issued to the new owner upon filing the form. The aircraft may not be flown until the Registration Certificate is issued by the IAA in the new entity's name and the certificate is placed on board the aircraft.

The sale of the ownership interest in an entity that owns an aircraft or engine is effectively recognised as the sale of such aircraft or engine itself, to the extent that the entity to whom the ownership interest is being transferred holds title to the aircraft or engine.

There is no formal legal requirement under Irish law that a bill of sale needs to be governed by Irish law. See 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

Generally, the transaction documents used in aircraft sale transactions (including bills of sale) are well-established forms and do not present a difficulty from an Irish legal perspective. 

As a matter of Irish law, translation, certification, notarisation or legalisation is not required for the enforceability of a bill of sale against an Irish party.

A bill of sale cannot be registered with the IAA or any Irish government entity. 

It should be noted that if an aircraft registered in Ireland has a new owner, a change of ownership form should be filled in and lodged with the IAA – a new Registration Certificate will be issued to the new owner upon filing the form. The aircraft may not be flown until the Registration Certificate is issued by the IAA in the new entity's name and the certificate is placed on board the aircraft. The IAA anticipates that it will take at least 20 working days from the receipt of all required items for the process to be completed.

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

VAT

Whether there will be any VAT payable on the sale of an aircraft will depend on the physical location of the aircraft at the point of sale. If the aircraft is physically located in Ireland at the time of sale, the place of supply for Irish VAT purposes will be Ireland. As a result, the seller will be liable for any Irish VAT chargeable on the supply, at 23%. However, if the aircraft will be used outside the EU or by a transport undertaking operating for reward chiefly on international routes, Irish VAT will apply at 0%. The seller will be obliged to be registered for VAT in Ireland regardless of whether the 0% or 23% rate applies.

Stamp Duty

Irish stamp duty legislation provides an exemption in respect of the transfer and sale of an aircraft, regardless of where the aircraft is located at the time of sale.

Historically, the Irish Revenue Commissioners (Irish Revenue) had extended by concession the stamp duty exemption in respect of the lease, transfer or sale of an aircraft to also apply to the sale or transfer of shares in an aircraft-owning entity. However, the current position regarding the transfer of shares in an aircraft-owning entity is that this concessionary treatment does not apply and stamp duty on the sale of shares in an Irish aircraft-owning company is therefore payable at a rate of 1% (subject to any available reliefs). The duty applies on the market value of the shares or the consideration paid, whichever is higher. Irish stamp duty does not apply to the transfer of shares where the consideration payable for such shares is EUR1,000 or less.

Customs Duties

No customs duty will be charged on the transfer of title of an aircraft where the aircraft is on the ground in Ireland and in free circulation in the EU.

Customs duties will only apply on the importation of an aircraft into Ireland from outside the EU, or on the release of an aircraft in Ireland in circumstances where the aircraft is coming off a duty-suspended procedure such as transit or inward processing.

Subject to the general legal principles of contract law, there are no types of operating/wet/finance leases or leases concerning only engines or parts that are not permissible or recognised in Ireland, as far as is known.

A lease involving either a domestic party or an asset situated in Ireland can be governed by a foreign law – see 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

No material restrictions are imposed on domestic lessees making rent payments to foreign lessors in US dollars.

Since 1 January 1993, there have been no foreign exchange controls in Ireland. With the removal of exchange controls, the Financial Transfers Act, 1992 has given the minister for finance reserve powers to introduce restrictions on financial transfers between the state and other countries in the form of regulations and prohibition orders.

No taxes/duties are payable for executing a lease physically in Ireland, or as a consequence of an original or copy of a lease being brought into Ireland either physically or electronically.

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

English or New York law-governed lease agreements (and ancillary documents thereto) generally follow well-established forms and do not present a difficulty from an Irish legal perspective.

Such provisions are generally permissible from an Irish law perspective. However, such provisions would need to be reviewed on a case-by-case basis, the enforceability of which will depend on the governing law of the lease.

The leasing of spare engines and other parts (including such parts as may become attached to the aircraft in the future) may be made a part of the aircraft lease. Spare parts may also be the subject of a separate lease. No special formalities are required.

This will be a matter for the governing law of the lease. Under Irish law, legal and practical risk can arise when engines become attached to other aircraft in accordance with pooling agreements or if they become subject to encumbrances. As a result, the lease will usually provide for such eventualities and may provide for a separate recognition of rights agreement to be entered into in favour of the lessor/owner/security trustee.

The concept of a trust and the role of an owner trustee under a lease are recognised in Ireland.

The purpose of registration is solely to establish the aircraft's nationality, thereby determining which jurisdiction's regulations will apply to the aircraft, and the person who will be responsible for the airworthiness and maintenance of the aircraft. The registration of an aircraft does not establish title to the aircraft, and does not constitute actual notice or constructive notice of ownership.

An aircraft can be registered domestically in the name of the aircraft operator if the operator is not also the owner, or in the name of the owner if the owner is not also the operator.

There is no specific register for leases concerning aircraft or engines. However, if the lease is registrable under the Convention on International Interests in Mobile Equipment and the related Protocol on Matters specific to Aircraft Equipment (together the “Cape Town Convention”), it can be registered on the International Registry (IR) as an international interest.

A lease (and a lessor’s interest therein) cannot be registered or filed in the domestic aircraft registry, and leases are not subject to consent from any government entity.

As a matter of Irish law, translation, certification, notarisation or legalisation is not required for the enforceability of a bill of sale against an Irish party.

This is not applicable in Ireland.

There are no particular alternative countries in which aircraft habitually based in Ireland are typically registered.

In order to register an aircraft, a registration form, as found on the IAA website, must be filed along with supporting evidence as set out in the form. As part of the supporting evidence, an Export Certificate of Airworthiness or EASA Form 52 or an original Certificate of Airworthiness and a valid ARC must be submitted.

A foreign lessor is not required to pay any income or capital gains or other taxes upon leasing an aircraft or engine to a domestic lessee if the foreign lessor and domestic lessee are unconnected third parties. Irish legislation does, however, contain secondary liability provisions that may need to be considered in certain group situations.

A foreign lessor cannot be deemed to be resident, domiciled or subject to any taxes as a result of its being a party to or its enforcement of the lease, provided that it is not otherwise resident in Ireland or does not have a permanent establishment or other taxable presence in Ireland, or, if the lessor is so established in Ireland, that it does not act through a branch or agency in Ireland, or other taxable presence in Ireland, in respect of its acts.

Aircraft or engine maintenance and operations are governed by the contractual provisions of the lease agreement, responsibility for which typically resides with the lessee. 

See 2.4.4 Damage or Loss Caused by an Asset and 2.4.6 Priority of Third Parties' Rights.

Under Irish law, the lessor/owner is primarily liable for loss and damage caused by an aircraft to third persons and property, though liability can be passed on to the lessee. However, as per Section 21(1) of the Air Navigation and Transport Act, 1936, the lessor/owner would be liable as if they were at fault for any material damage or loss caused to any persons or property by an aircraft while in flight, taking off or landing. 

Both lessor and lessee are independently responsible for their own negligence in relation to the aircraft, both through their acts and through their omissions. Liability for this can be restricted or excluded via contract, but such terms will be subject to reasonableness and it is not possible to restrict or exclude liability for death or personal injury due to negligence. 

The lessee may have allowed certain liens to accrue against an aircraft (eg, a possessory lien arising from a third party having worked on the aircraft to improve its condition). See 2.4.6 Priority of Third Parties' Rights.

Under the Irish Air Navigation and Transport Acts, certain third parties are granted a right to detain and, in some cases, to sell aircraft (or cause them to be forfeited) in certain circumstances, whether the aircraft is registered in Ireland or not. These include, for example, airport charges, air navigation charges, customs duties and unpaid tax.

Other Liens

Other common liens include those that arise in the context of storage, repair, maintenance or other services to aircraft, tax liens and judgment liens. The lessee, usually in breach of the terms of the lease, may have allowed certain liens to accrue against the aircraft – for example, a possessory lien arising from a third party having worked on the aircraft so as to improve its condition. A lien for the salvage of an aircraft may also arise. 

Since liens cannot be registered at the Irish Companies Registration Office (CRO), and since there is no Irish aircraft mortgage register, liens may often arise without the lessor's knowledge. 

Laws Governing Detention, Restricted Use and Sale of an Aircraft

Pursuant to the Irish Aviation Authority (Nationality and Registration of Aircraft) Order 2015 and the Air Navigation and Transport Acts, 1936–2005 (as amended), the IAA and Dublin Airport Authority can detain or restrict the use of an aircraft and, if necessary, sell it in certain circumstances – eg, where the aircraft is not in compliance with safety standards, where airport charges have not been paid or if the IAA considers it necessary to secure compliance with statutes and statutory instruments.

Customs officers may detain an aircraft in respect of imported uncleared cargo remaining on board after a stipulated period until certain expenses for the safeguarding and removal of the goods have been paid. Furthermore, in the case of an item liable to forfeiture, any aircraft carrying it may also be liable to forfeiture, and the owner and commander of the aircraft may also be liable to a penalty. The Air Navigation and Transport Act, 1988 makes provision for enforcing the detention of such aircraft by authorised persons. A party who ignores such a detention order will be guilty of a summary offence. 

Revenue may seize and sell the aircraft for unpaid taxes owed by the owner.

Pursuant to Section 5 of the Criminal Assets Bureau Act, 1996 (as amended), the Criminal Assets Bureau may confiscate assets identified or suspected as deriving directly or indirectly from criminal conduct.

Pursuant to Section 4 of the Proceeds of Crime Act, 1996 as amended, the Irish High Court may (on application) make a disposal order in respect of property that constitutes directly or indirectly the proceeds of crime. 

In an emergency, the IAA can give directions as to the use or possession of an aircraft.

It is not mandatory for all or part of the insurances to be placed with domestic insurance companies.

The EU regulation setting out minimum levels of insurance requires that insurance cover exists for each and every flight, in compliance with the regulations.

Professional underwriters' insurance can be placed outside of Ireland up to 100% coverage.

The general view is that “cut-through” clauses (under which a reinsurer undertakes a direct relationship of indemnity with the original insured under a reinsured policy) are not thought to be effective under Irish law on account of the doctrine of privity and under insolvency law. 

Assignments of insurances/reinsurances are permitted.

The Irish courts recognise self-help remedies, and typically recognise and enforce contractual arrangements between parties. 

In addition to the self-help remedy under Irish law, the owner will have the remedies available to it under the Cape Town Convention, including taking possession of the aircraft without a court order and deregistering and exporting an aircraft by exercising its rights under an irrevocable deregistration and export request authorisation (IDERA).

However, it should be noted that, in the majority of cases, the aircraft will not be located in Ireland and the lease is likely to be governed by English or New York law. The effectiveness of these actions will therefore be determined by general principles of enforceability under the governing law of the lease and in the jurisdiction in which the aircraft is located.

The termination of a lease should entitle the lessor to seek repossession of the aircraft as a matter of contract without a court order. It is important that the lessor strictly complies with such procedure, as may be set out in the lease, in order to take valid possession of the aircraft. If the lessee resists repossession, the lessor can apply to the court for an order of delivery and possession of the aircraft. 

The Irish Commercial Court is the forum for the determination of substantial commercial disputes in Ireland, and it has jurisdiction in respect of a claim or counterclaim relating to any business document, contract and dispute where the claim involved is greater than EUR1 million.

For example, the Irish Commercial Court has previously accepted jurisdiction of substantive causes of action in disputes relating to registrations originating entirely outside Ireland under the provisions of the Cape Town Convention. This was given effect in Ireland pursuant to the International Interests in Mobile Equipment (Cape Town Convention) Act, 2005 as in PNC Equipment Finance LLC v Aviareto Limited and Link Aviation LCC (unreported, High Court 17 December, 2012) and, more recently, Unicredit Global Leasing Export gmbh v Business Aviation Ltd & anor (2019) IEHC 139.

If the lessor wishes to sue the lessee for the debt, this may be done by way of summary summons. However, possession cannot be effected by way of summary judgment.

An injunction may be sought from the courts and in an extreme emergency, for example, the aircraft may be taken outside the jurisdiction; this can be done without notice to the other party to the proceedings.

The purpose of the injunction is to require a party to perform (mandatory) or refrain from doing (prohibitory) some act. Injunctive relief is equitable in nature and is a remedy rather than a cause of action. Injunctions are generally sought to protect one's rights where those rights have been breached or where an imminent breach of those rights can be identified.

If an interim injunction is granted, it will be served on the other party along with the summons, the notice of motion and any affidavits submitted. The notice of motion will fix a date for the hearing of an interlocutory injunction at which both sides will be heard. If it declines to grant an interim injunction, then it could grant leave to the applicant to serve notice on the other party of its intention to apply for an interlocutory injunction, and the court may allow a shorter notice of that application than is usual. 

The court must be satisfied of a number of elements prior to granting an injunction: 

  • there must be a bona fide/genuine question to be determined;
  • damages must not be an adequate remedy; and
  • the balance of convenience must lie in favour of granting the injunction. 

The lessor, like any applicant for injunctive relief, will be required to provide an undertaking and/or security for damages to the court against a wrongful claim.

For disputes within the EU, a choice of law clauses is recognised pursuant to Regulation (EC) 593/2008 (the Rome I Regulation).

For non-EU disputes, the courts will generally recognise and respect choice-of-law clauses under common law rules.

Limited exceptions to the above general position arise where the courts may refuse to recognise choice-of-law clauses for public policy reasons, or where there are mandatory Irish law considerations – eg, with respect to consumer law matters.

For disputes within the EU, choice of jurisdiction clauses are recognised under the Brussels I Regulations as transposed into Irish law under the Civil and Commercial Judgments Regulations 2002 and, for disputes in proceedings commenced on or after 10 January 2015, Regulation (EU) 1215/2012 (the Recast Brussels I Regulation) as transposed into Irish law by the Civil and Commercial Judgments Regulations 2015. 

Where the dispute involves parties domiciled in countries that are not signatories to the Recast Brussels I Regulation, its predecessor or the Lugano Convention, the common law rules of "most appropriate forum" apply.

Limited exceptions to the above general position arise where the courts may refuse to recognise choice-of-jurisdiction clauses where there are mandatory Irish law considerations – eg, with respect to consumer law matters or for public policy reasons. 

The means of enforcing a foreign court judgment depend mainly on the country or state that has handed down the judgment, and the nature of the judgment or order.

Judgments of EU Member States

The process of enforcing judgments of EU member states is governed by one of the following:

  • Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters;
  • Regulation (EC) 805/2004 creating a European Enforcement Order for uncontested claims; or 
  • Regulation (EC) 805/2004 on creating a European Enforcement Order for uncontested claims.

Depending on the applicable rules, an application must be made to the master of the High Court. Once the foreign judgment is recognised, it is considered by the Irish court as if it had been delivered by a court in Ireland, and the usual methods of enforcement can be used.

Other Foreign Judgments

For foreign judgments that fall outside the above rules, the lessor/mortgagor must issue fresh proceedings in Ireland to enforce the judgment. However, the plaintiff will be able to obtain summary judgment in a new action in Ireland on the grounds the defendant has no defence to the claim if the relevant judgment satisfies the following conditions:

  • it is for a debt for a definite sum of money;
  • it is final and conclusive; and 
  • it is given by a court of competent jurisdiction.

Refusal to Recognise and Enforce a Foreign Judgment

The Irish courts retain discretion to refuse to recognise and enforce a foreign judgment in the following circumstances:

  • it is impeachable on the grounds of jurisdiction, fraud, public policy or natural or constitutional justice, or the judgment has been obtained or is alleged to have been obtained by the commission of a fraud, trick or deliberately misleading circumstances;
  • the procedures and rules of the court giving the judgment have not been observed;
  • it is inconsistent with a judgment of the courts of Ireland in relation to the same matter; 
  • it is contrary to public policy or the natural or constitutional justice of Ireland; 
  • the Irish courts have no jurisdiction over the matter;
  • the jurisdiction of the court giving such judgment has not been exercised in circumstances an Irish court (as a matter of Irish law) will recognise as justifying enforcement of the judgment; and
  • enforcement proceedings are not instituted in Ireland within six years of the date of the judgment.

The enforcement of foreign arbitral awards in Ireland is governed by the Arbitration Act, 2010.

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

There are common law limitations on lessors' actions following termination. For example, a contractual provision conferring or imposing a remedy or an obligation following default may not be enforceable if it was construed by an Irish court as being a penalty, particularly if it involved enforcing an additional pecuniary remedy (such as default or overdue interest) referable to such default; furthermore, recovery may be limited by laws requiring mitigation of loss suffered.

On the occurrence of an event of default by the lessee under the lease, the lessor will generally retake possession of the aircraft in accordance with the express terms of the lease. If damages are additionally claimed by the lessor, a summons may also be served.

Where the lessee is not prepared to hand over the aircraft willingly, the lessor will usually seek an injunction in which the Irish court will order the aircraft to be returned to its owner. It is unlikely that such an order will be made at the interlocutory stage; normally, the court would only be prepared to make an order detaining the aircraft pending the trial of the action.

While the actual cost payable to the state for the filing of injunctive papers is not great, the legal costs of the issue of injunctive proceedings can be significant, as the proceedings will most likely be time-sensitive and require a great amount of detail to be set out in the grounding papers. 

The procedure for the termination of a lease will be determined by the terms agreed between the parties to such lease.

Whether the lessee is entitled to claim any immunity from suit, execution, attachment or other legal process will depend on its actual identity. If the lessee is a sovereign body or other government organ (whether autonomous or quasi-autonomous), it may be able to claim sovereign immunity. 

The New York Convention has force of law in Ireland by virtue of the Arbitration Act, 2010. Assuming the arbitration award of an arbitrator comes within the scope of the New York Convention, subject to the 2010 Act and the terms of the New York Convention, an Irish court would recognise and enforce an arbitral decision without any retrial or examination of the merits of such award, subject to certain exceptions.

There are no other relevant issues.

Ireland recognises the concepts of contractual assignment and novation.

Assuming that a lessor transferring its rights under an aircraft lease is assigning or novating its rights under such lease to a new lessor pursuant to a New York or English-law governed assignment and assumption agreement or novation agreement (or deed), either agreement (or deed) will be held valid by a domestic court, assuming the assignment and assumption agreement or novation agreements constitute in all respects legal, valid and binding obligations of each party thereto enforceable under all the laws of New York and England. See 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

The lessee's consent is not required under domestic law, but it may be required as a matter of contract.

Generally, the transaction documents used in aircraft finance are well-established forms and do not present a difficulty from an Irish legal perspective.

There are no mandatory terms that Irish law requires to be included in such agreement/deed.

Translation might be advisable if the contract was drafted in a language other than English; however, the absence of translation, certification, notarisation or legalisation will not affect the enforceability of the contract under Irish law.

This is not applicable in Ireland.

No taxes/duties are payable in respect of such assignment and assumption/novation agreement, or as a consequence of an original or copy of it being brought into Ireland either physically or electronically.

See 1.2.4 Registration, Filing and/or Consent from Government Entities.

The registered owner can apply for the deregistration of the aircraft. Where an IDERA has been lodged with the IAA, the "authorised party" specified in the IDERA can procure the deregistration of the aircraft.

To deregister (and export) an aircraft the following are required:

  • a formal request in writing, including the complete description of the aircraft, registration marks, make, model and serial number. This letter must be signed by the following:
    1. if the registered owner is an individual, the individual signs the request; 
    2. if the registered owner is more than one individual, all individuals must sign (or send separate letters); and
    3. if the registered owner is a company, the letter must be signed by a current director of the company or the current company secretary (as per the current CRO print-out);
  • proof that the aircraft's nameplate/fireproof plate has been removed;
  • proof that the registration marks have been removed from the aircraft;
  • proof that the aircraft's Irish Mode S code has been negated (if applicable);
  • proof that the aircraft's Irish emergency locator transmitter (ELT) code has been negated (if applicable);
  • if the aircraft is on an Irish Air Operator Certificate (AOC), it must be removed from the AOC prior to deregistration;
  • all fees outstanding must be paid in full for the aircraft; and
  • if the aircraft has an IDERA lodged against it, the IDERA must first be removed.

An aircraft owner, mortgagee or lessor can apply for the deregistration of the aircraft without the lessee’s or operator’s consent.

See 2.8.1 Deregistering Aircraft in this Jurisdiction

Assuming the tasks in 2.8.1 Deregistering Aircraft in this Jurisdiction have been completed to the satisfaction of the IAA, deregistration can be completed by the IAA in a matter of days. If the co-operation of the lessee is not forthcoming, this will result in the deregistration of the aircraft being delayed until such point as the lessor has possession and has completed the required deregistration tasks. Where an IDERA is invoked by an "authorised party" with respect to the deregistration and export of an aircraft, the IAA may not make the deregistration conditional on actions within the control of the lessee, such as returning the original certificate of registration or airworthiness, or changing the aircraft’s transponder codes, etc, as this would frustrate the provisions of the Cape Town Convention.

Interactions with the IAA usually occur prior to the deregistration of the aircraft, and documentation can be pre-positioned with the IAA to the fullest extent possible. See 2.8.1 Deregistering Aircraft in this Jurisdiction.

Where an Export Certificate of Airworthiness is required, the applicant should submit the prescribed fee, which is governed by Irish legislation (Irish Aviation Authority (Fees) Order, 2015) and calculated by reference to the weight of the aircraft. The rates charged can be found under the registration fees section of the IAA website at https://www.iaa.ie/commercial-aviation/registration-fees-1.

The IAA will not record a deregistration power of attorney (DPOA). The filing and recording of an IDERA has largely replaced transaction-specific deregistration powers of attorney (the efficacy of which was questionable in Ireland) where the aircraft is registered in Ireland. A DPOA does not need to be translated, certified, notarised, legalised or lodged in advance.

See 2.8.7 Deregistration Power of Attorney.

A DPOA does not have to be governed by the laws of Ireland.

If the DPOA is expressed to be irrevocable and granted to secure an obligation, the grantor in practice should not be able to revoke it until the secured obligations have been discharged.

See 2.8.1 Deregistering Aircraft in this Jurisdiction, noting that the lessee's consent is not required.

Where the owner is not the registered owner of the aircraft or where there is a mortgagee, at the time of negotiating the lease a requirement should be included in the lease that an IDERA should be executed by the entity listed as registered owner with the IAA. As long as the IDERA is in effect, the “authorised party” can make a request to the IAA to deregister the aircraft, pursuant to the provisions of Article 15 of the Consolidated Text. Provision should also be made for the payment of a "security deposit" by the lessee to cover any fees, costs or expenses associated with a breach of the lease agreement by the lessee.

The aircraft does not need to be located in Ireland at the time of deregistration and/or export. In order to take an aircraft outside Ireland, an Export Certificate of Airworthiness in respect of Aircraft may be required from the IAA. 

See 2.8.1 Deregistering Aircraft in this Jurisdiction and 2.8.6 Costs, Fees and Taxes Relating to Deregistration, noting that an export permit/licence is not issued by the IAA. 

See 2.8.6 Costs, Fees and Taxes Relating to Deregistration. The 0% rate of VAT applies to the supply of an aircraft transported directly by or on behalf of the seller to a destination outside the EU, and to the supply of an aircraft that is dispatched or transported directly outside the EU by or on behalf of the purchaser where that purchaser is established outside Ireland.

See 2.8.1 Deregistering Aircraft in this Jurisdiction.

The liquidation of an Irish incorporated lessee would not void or terminate the IDERA, and would usually lead to an event of default under the relevant lease agreement, pursuant to which the lessor/mortgagee could enforce its rights.

An Irish law-governed power of attorney may, in limited circumstances, be revoked by the winding-up of the donor company. However, under Section 20 of the Powers of Attorney Act, 1996, a power of attorney will not be revoked by the winding-up or dissolution of the donor (except with the consent of the donee) if it is expressed to be irrevocable and given to secure either a proprietary interest of the donee or the performance of an obligation owed to the donee, as long as the donee has that interest or the obligation remains undischarged. 

The following transactions by a company that subsequently becomes insolvent are capable of being set aside.

Unfair Preference

Section 604 of the Companies Act, 2014 (the Act) seeks to prevent companies from granting a preference to one creditor over another. A preference arises where a company enters into a transaction that puts a creditor in a better position than that creditor would have been in if the transaction had not taken place. Preferences that took place within six months before the company's liquidation can be set aside. This time limit is extended to two years where the disposal was in favour of a connected party. A connected party is any person who, at the time of the transaction was:

  • a director or shadow director of the company;
  • a director's spouse, parent, sibling or child;
  • a related company (this is very widely defined); or
  • any trustee of, or surety or guarantor for, the debt due to any person referred to above.

Improper Transfer

If a disposition by a company has the effect of perpetrating a fraud on the company, its creditors or members, the High Court can order the return of the property to the liquidator, examiner or receiver on any terms or conditions it deems fit (Section 608 of the Act). In determining whether this order should be made, the court does the following:

  • considers whether it is just and equitable to do so;
  • looks at the effect of the transaction rather than the motives behind it; and
  • in exercising its just and equitable discretion, has regard to the rights of persons who have acquired an interest in the property that is the subject matter of the application, in good faith and for value. This is not limited to persons who take from creditors, and extends to those who are the direct recipients of the disposition.

Examinership

The effect of the appointment of an examiner is that the rights of the creditors, including secured creditors, are frozen for the period of the examinership, which is up to 70 days, extendable to 100 days, and also subject to the possibility of a further extension where the court requires further time to consider the examiner's final report, which is usually only relevant where the examinership is complex. During this period, the lessor would not be able to recover the aircraft without the consent of the examiner.

Disclaimer of Onerous Contracts by the Liquidator

Regarding whether the aircraft can be deemed part of the lessee’s property in a liquidation of the lessee, the general position in Ireland is that a liquidator of a company cannot obtain better title to an asset than that of the company prior to liquidation. Thus, if the aircraft is held as a lease, the liquidator will not be able to treat the aircraft as being owned by the lessee company.

However, Section 615 of the Act confers power on a liquidator, with leave of the court, at any time within 12 months of the commencement of the liquidation, to disclaim any property of the company being wound up which consists of, among other things, unprofitable contracts or any property that is unsellable or not readily saleable because it binds the possessor to the performance of any onerous act or to the payment of money.

Repudiation of Certain Contracts by the Company in Examinership

Under Section 537 of the Act, where proposals for a compromise or scheme of arrangement are to be formulated in relation to a company, the company may, subject to the approval of the relevant court, affirm or repudiate any contract under which some element of performance other than payment remains to be rendered both by the company and by the other contracting party or parties. While the Irish courts have not specifically held that an aircraft lease would constitute a contract under which some element of performance other than payment remains to be rendered both by the company and by the other contracting party or parties, the Irish courts have held that an occupational lease of real property does constitute such a contract and have made repudiation orders in respect of leases. 

Any person who suffers loss or damage as a result of such repudiation order stands as an unsecured creditor for the amount of such loss or damage. Where the relevant court approves the affirmation or repudiation of a contract under this section, in giving such approval it may make such orders as it deems fit for the purposes of giving full effect to its approval, including orders as to notice to, or declaring the rights of, any party affected by such affirmation or repudiation.

Priority of claims

As to whether the liquidator would/could impose the rights of any other creditors in priority to the lessor, to the extent that the lessor is due any outstanding payments under the lease, the lessor will rank as an unsecured creditor in the liquidation. Irish corporate insolvency law operates a waterfall of payments, with certain classes of preferential creditors ranking ahead of the unsecured creditor class. As such, the likelihood of the unsecured creditor classes receiving full payment or a substantial payment in respect of the outstanding amount due and owing to each unsecured creditor varies on a case-by-case basis, and is dependent upon the assets in the company and the liquidator's ability to realise said assets. 

See 2.9.2 Other Effects of a Lessee's Insolvency.

See 2.9.2 Other Effects of a Lessee's Insolvency in respect of the moratorium in examinership.

There is a moratorium on the commencement or continuation of legal proceedings against a company in liquidation, without first obtaining the consent of the Irish High Court to such proceedings. 

Examinership

This is a procedure for the rescue of a company in financial difficulty and protection against its creditors. Where a company is, or is likely to become, insolvent and has not been wound up, a petition may be presented to the High Court (by the company, its directors, any creditor, or shareholders with a minimum 10% shareholding) seeking the protection of the court and the appointment of an examiner. If the court considers that the company has a reasonable prospect of survival as a going concern, it may appoint an examiner. For a period of 70 days from the date of the petition (which the court can extend to 100 days), the creditors of the company are prevented from taking action to enforce any security or other rights they hold against the company. Furthermore, no winding-up proceedings against the company can be commenced, and no receiver can be appointed. The examiner will prepare a report for the court on the viability of the company. The proposals developed for a scheme of arrangement by the examiner may involve a combination of new investment, a write-down of creditors’ claims and payment of a dividend to creditors over a period of time. The company will continue to trade during the period of examinership. The court will either confirm or reject the proposals made by the examiner. If the court decides to confirm the proposals, it will fix a date for their implementation, no later than 21 days from the date of confirmation, which is the date the company comes out of court protection and the role of the examiner ceases. If the proposals are not confirmed by the court, it can then make such an order as it deems fit, which is most likely to be an order for the winding-up of the company.

Liquidation

There are three types of winding-up:

Members’ voluntary winding-up

For a members’ voluntary winding-up, the company must be solvent (so it is not strictly an insolvency procedure). The members of the company must resolve by 75% majority to have the company wound up. The directors of the company must make a statutory declaration that they have made a full investigation into the affairs of the company and, having done so, are of the opinion that the company can pay its debts in full within a period of 12 months from the commencement of the winding-up. Failure to do so may leave the directors open to personal liability in respect of the debts owed.

Creditors’ voluntary winding-up

Where a company is insolvent, the directors may convene a meeting of the members with a view to the members passing a resolution to wind up the company and appoint a liquidator. A meeting must also be convened of all creditors of the company, to inform the creditors of the winding-up resolution passed by the shareholders. Once appointed, the liquidator realises all of the company’s assets and distributes the proceeds to the creditors.

Compulsory winding-up

The High Court has the power to order the winding-up of a company and appoint a liquidator. A creditor who is not paid monies due to it may present a petition to the High Court that the company is insolvent and unable to pay its debts as they fall due. The insolvency procedure in a compulsory winding-up differs in that the appointment of a liquidator arises not from meetings of members and creditors, but by order of the High Court. It is the obligation of the liquidator to take control of all the company's assets, to realise the assets so as to discharge the company’s liability, and to pay the company's creditors.

See 2.9.2 Other Effects of a Lessee's Insolvency.

Refer to 2.9.2 Other Effects of a Lessee's Insolvency.

The winding-up of the lessee or another insolvency event would usually constitute an event of default under the lease agreement, which would entitle the lessor to enforce its rights with regard to the return of the aircraft, dealing with the security deposit, maintenance reserves, etc. Where an examiner is appointed to the company, the lessor would not be able to repossess the aircraft without the consent of the examiner.

In a liquidation, the aircraft may not be attached by unsecured creditors of the lessee. The lessee only has a right to possession of the aircraft pursuant to the lease agreement, and its rights are subject to the proprietary and security interests of the lessor and its secured creditors. 

As noted in 2.9.2 Other Effects of a Lessee's Insolvency, if any outstanding lease rental payments were due to the lessor when the lessee was being wound up, the lessor would claim as an unsecured creditor of the lessee and would rank behind the preferential creditors of an insolvent lessee.

The Cape Town Convention is in force in Ireland. The International Interests in Mobile Equipment (Cape Town Convention) Act, 2005 is the domestic legislation that enacted the Cape Town Convention. Authorised entry point (AEP) codes are not necessary.

In accordance with Article 39 of the Cape Town Convention, Ireland has declared the following:

  • that when, under a law of the state, a non-consensual right or interest (other than a right or interest to which Article 40 of the Cape Town Convention applies) has priority over an interest in an object equivalent to that of the holder of a registered international interest, that right or interest has priority over a registered international interest, whether in or outside insolvency proceedings; and
  • that if the state or any state entity, or any intergovernmental organisation of which the state or any such entity is a member, or any private provider has provided a public service, nothing in the Cape Town Convention affects the right of the state, entity, organisation or provider to arrest or detain, in accordance with the laws of the state, an object for the payment of amounts owed to the state or any such entity, organisation or provider for those services in respect of that object or another object.

In accordance with subarticle 2 of Article 54 of the Cape Town Convention, it is declared that a creditor who wishes to exercise a remedy that is available to the creditor under a provision of the Cape Town Convention is not required to make an application to the High Court of Ireland for leave to exercise that remedy, unless the provision expressly requires the creditor to make such an application.

In accordance with Article XXX of the Aircraft Protocol, it is declared that Articles VIII, XII and XIII, and subarticle 3 of Article X, of that protocol apply to and in respect of Ireland.

The practical steps for submitting an IDERA are as follows:

  • the IDERA must be in the form specified in the Cape Town Act, and must be signed by the aircraft's registered owner in wet ink. Two signed copies of the IDERA must be submitted, one of which is retained by the IAA while the other is returned to the registered owner;
  • application to lodge the IDERA may be made by the registered owner, by submitting the fully completed and signed form in duplicate to the IAA; and 
  • the IAA will process the applications as required by law.

It is hoped that IDERAs that meet all the requirements, including using the correct format, will be returned to the registered owner duly annotated within ten working days. 

Since the International Registry’s establishment in Ireland, the Irish courts have had exclusive jurisdiction to deal with certain disputes under the Cape Town Convention, in particular those seeking an amendment to or deletion of entries on the International Registry where the registrant refuses to do so. The Irish courts have showed willingness, in appropriate circumstances, to make orders directed to the International Registry to delete invalid or improper registrations. See 2.6.2 Lessor Taking Possession of the Aircraft.

Ireland is a signatory to the Geneva Convention but has not yet ratified it. It is not a signatory to the Rome Convention.

As far as is known, there are no restrictions on foreign lenders financing an aircraft locally or on borrowers using the loan proceeds.

See 2.1.4 Exchange Controls.

There are no restrictions on granting security to foreign lenders. 

Such guarantees are permissible under Irish law, provided the company granting such guarantees is permitted to do so under its constitution. 

It is important to note that the directors of Irish companies have a fiduciary duty to act in the best interests of the company, and in doing so must have regard to the interests of the shareholders collectively. 

Section 82(2) of the Act sets out the prohibition on an Irish company providing financial assistance for the acquisition of its own shares. Noting that the term "acquisition" in relation to shares is defined as meaning "by subscription, purchase, exchange or otherwise", the acquisition of shares frequently occurs within Irish aircraft acquisition and financing structures. The prohibition on financial assistance applies irrespective of whether the financial assistance is given directly or indirectly, with typical examples including the making of guarantees and the provision of security by a target company. 

While a number of exceptions to the prohibition exist, including principal purpose, lawful incurrence of liability by a company and lending in the ordinary course of business, each transaction structure should be considered on a case-by-case basis. The principal exception to the prohibition is the summary approval procedure (SAP) or "whitewash" procedure contained in chapter 7 of part 4 of the Act. Activities that may otherwise amount to prohibited financial assistance, such as upstream guarantees, may be whitewashed or permitted if the procedure as set out in the Act is adhered to.

It is advisable for a lender to take share security over the domestic special purpose vehicle that owns the financed aircraft. 

A share pledge by way of equitable charge and/or mortgage is the most typical type of pledge, and is granted by the deposit of the share certificates and signed undated stock transfer forms with the lender. The charging document will contain provisions that such deposit is made by way of security, and the terms on which such security may be enforced. 

Negative pledge provisions are typically included in share security documents in Ireland; however, it is of note that a negative pledge cannot be specifically registered or noted with the Companies Registration Office (CRO). 

There are no material restrictions or requirements imposed on intercreditor agreements under Irish law. Intercreditor agreements are typically governed by English or New York law, depending on the governing law of the other transaction documents.

Agency is a recognised concept under Irish law. 

Subject to general qualifications regarding enforceability, any method of subordination permitted by the transaction documents governed by English or New York law would be permissible and recognised under Irish law.

In the event of the insolvency of the borrower company, leading to examinership or company voluntary arrangements, the debt owed to subordinated lenders may be written down, particularly if such debt is unsecured. 

Subject to general qualifications as to enforceability, the courts of Ireland would recognise as effective a New York law or English law-governed assignment that is effective under such law.

See 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

There are no applicable usury or interest-limitation laws in Ireland. Irish tax legislation provides that interest payable on a loan or other security which is in excess of a reasonable commercial return will generally be treated as a distribution and will accordingly be non-deductible.

Aviation finance transactions are typically governed by English or New York law. If the aircraft-owning entity is an Irish registered company, the typical forms of Irish law-governed security that the aircraft-owning entity or its parent would be a party to include a charge over the shares in the aircraft-owning entity, a mortgage over the aircraft, an assignment of the benefit of the lease, and a charge over the accounts into which rent receivables, maintenance reserve and security deposits are paid, assuming that the accounts are in Ireland.

As far as is known, there are no restrictions on types of security under Irish law, although it should be noted that the registration and perfection requirements may differ – eg, see the comments in relation to the registration of charges over bank accounts in 3.2.16 Form and Perfection of Security over Bank Accounts

Any restrictions would arise under the governing law of the security documents (typically English or New York law) or the law of the jurisdiction in which such collateral is located. 

The concept of trust and the role of a security trustee are recognised.

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

The common law position is that the burden of a contract cannot be assigned without the consent of the other party to the contract, in which event such consent will give rise to a novation.

A security assignment or guarantee can be governed by English or New York law, and is not required to be governed by Irish law in order to be enforceable, provided the law of the jurisdiction governing the security assignment or guarantee recognises a valid security assignment. See 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

There are no statutory requirements relating to the terms of a security assignment under Irish law. On aircraft finance transactions, such security assignment is typically governed by New York or English law. A common form of security assignment provided by an Irish incorporated company would contain the following:

  • the names and addresses of the parties;
  • recitals;
  • full particulars of the assigned property;
  • a covenant to pay; 
  • charging provisions; 
  • covenants, normally in respect of:
    1. carrying on the business in a proper and efficient manner;
    2. observing all pertinent regulations;
    3. insurance; and
    4. rent;
  • any further assurances, to enable the assignee to protect its interest;
  • a power of attorney to enable the assignee to perfect its interest (if necessary);
  • enforcement of security – details will be given of the circumstances in which the assignee can obtain possession of the assigned property and the assignee's rights in possession. Provision will be made for the appointment of a receiver;
  • notice provisions;
  • governing law clause; and
  • jurisdiction clause.

Under Irish law (and typically under the governing law of the security assignment), the assignor should provide notice of the security assignment to the other party to the underlying contract being assigned by way of security. An acknowledgement of such notice should be requested from the counterparty, although this is not a perfection requirement. 

If the assignor is a company, then a Form C1 containing particulars of the security assignment executed on behalf of both the assignor and assignee should be filed in the CRO. Section 409 of the Act provides that particulars of a created charge must be received by the CRO within 21 days of the date of its creation. 

Failure to register within 21 days of the creation of the security assignment by a company renders the security assignment void against the liquidator and any creditor of the company.

No additional domestic law security instruments are needed. With respect to IR filings, where the security assignment creates a registrable assignment of associated rights under the Cape Town Convention, such assignment may be recorded on the IR established under the Cape Town Convention. 

No additional domestic law security instruments or filings are required in order to make Cape Town filings.

Registration of a Form C1 with the CRO, as mentioned in 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments, costs EUR40. 

An English or New York law-governed security assignment or a domestic law security instrument granted by an Irish registered company can be registered domestically, as per the procedure outlined in 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments

It is possible to transfer security interests over an aircraft by way of assignment of contractual rights or novation. In the event of a transfer of security interests, there are a number of considerations that are not specific to Irish law, such as whether consent from the security provider is required, the existence of covenants to pay the debt in favour of the transferor, and cross-collateralisation of the debt.

In the assignment of security interests that have previously been registered with the CRO, a Form C17 must be filed noting the change of charge holder. If the security interest is novated, a new security interest is deemed to be created and, as such, novation may require registration, depending on the type of interest. 

A transfer of security interest can be registered with and therefore recognised by the IR. 

If the identity of the secured parties under a security assignment changes after its execution, the security interests are not jeopardised, provided the security assignment is in favour of a security trustee, and the security assignment (or related finance documents) contemplates that the secured parties may change from time to time. 

"Parallel debt" structures are not typically used in Ireland. 

A secured party under a security assignment would not be deemed to be resident, domiciled or subject to any taxes as a result of its being a party to or its enforcement of such security assignment, provided that the secured party is not otherwise resident in Ireland and does not have a permanent establishment or other taxable presence in Ireland, or, if the secured party is so established in Ireland, provided it does not act through a branch or agency in Ireland or other taxable presence in Ireland in respect of its acts.

As per 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments, if the mortgagor is an Irish incorporated company, then a Form C1 containing particulars of the mortgage executed on behalf of both mortgagor and mortgagee should be filed in the CRO. 

Assuming that the mortgage satisfies the requirements for classification as an "international interest" pursuant to the Cape Town Convention, then IR filings can be made in respect of such mortgage.

There is no difference in the forms of security or perfection taken over an aircraft or over spare engines. 

Charges are typically taken over Irish opened rent accounts, maintenance reserves accounts, or accounts into which supplemental rent, security deposits, insurance and sales proceeds are paid. In order to perfect the charge, the account bank must be notified of the charge. An acknowledgement of the notice would typically be obtained from the account bank, but this is not necessary for its perfection. 

The Act exempts charges over cash, funds in a bank account or securities from CRO registration. 

See 2.4.5 Attachment by Creditors and 2.4.6 Priority of Third Parties' Rights.

A security interest created by a company is released or discharged upon the execution and dating of the relevant deed of release or release agreement, and the release or discharge becomes effective at this point. The discharge is effected with the CRO by the submission of a Form C6 to the CRO, verifying the satisfaction of the secured debt. The filing of a Form C6 in respect of such a release or discharge will appear on Irish company searches within a number of weeks of filing the Form C6 (this is an administrative matter for the CRO). There is no time limit on when a Form C6 should be filed in respect of a release or discharge of a mortgage, and it does not have an impact on the effectiveness of the release. 

Aside from security registrations to be made at the CRO, there is no specific aircraft mortgage registry in Ireland, and it is not possible to note the interest of a mortgagee in the IAA's register of aircraft. The creation of a mortgage or charge over an aircraft by an Irish incorporated company must be registered in the CRO in accordance with Section 409 of the Act, as noted in 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments

See 2.4.5 Attachment by Creditors and 2.4.6 Priority of Third Parties' Rights.

A potential purchaser of an aircraft could search the IR and CRO to verify that an aircraft is free of encumbrances. 

Enforcement will depend on the terms of each such instrument.

Subject to certain qualifications regarding recognition of the governing law of the security assignment by the Irish courts, and assuming all other necessary factors to bring proceedings against the lessee are in place (eg, cause of action, etc), an acknowledgement and notice of assignment would assist the security trustee in pursuing any action or claim against the lessee that may arise pursuant to a security assignment. 

See 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

See 2.6.5 Domestic Courts' Approach to Foreign Laws and Judgments.

Enforcement will be determined by the provisions of the relevant security agreement. 

Domestic Irish courts are competent to decide enforcement actions. See 2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards.

See 2.6.4 Summary Judgment or Other Relief

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

A secured party is not required to pay taxes or fees in connection with the enforcement of a security agreement/aircraft mortgage.

There are no other relevant issues at this time.

These issues are not applicable in Ireland.

EU Anti-Tax Avoidance Directive

Similar to all EU member states, Ireland is required to implement a number of corporation tax measures as a result of the EU Anti-Tax Avoidance Directives (ATAD) – the EU's response to the OECD's base erosion and profit shifting (BEPS) project of corporation tax reform. Of the measures proposed in ATAD, the "interest limitation rule" (BEPS Action Item 4) and the "hybrid mismatch rules" (BEPS Action Item 2) could have an impact on Irish aircraft leasing structures by restricting or denying a deduction for interest in certain circumstances. 

Hybrid mismatch rules

The Irish Finance Act 2019 (effective since 1 January 2020) contains legislation implementing the hybrid mismatch rules. The rules seek to counteract no tax outcomes from payments made on, or after, 1 January 2020 under cross-border arrangements between "associated enterprises" which result in deduction without inclusion or double deduction outcomes.

Irish leasing platforms financed by EU or treaty resident investors should be unaffected by the hybrid mismatch provisions on the basis that such investors should be taxed on their returns in their home jurisdiction. Similarly, interest payments which are made to non-tax jurisdictions or tax-exempt entities may also be unaffected by the hybrid mismatch provisions on the basis that the non-inclusion is not as a result of hybridity.

Interest limitation rule

The interest limitation rule operates to limit deductible interest expenses in a tax period to up to 30% of EBITDA. Deductible net interest expenses (referred to as exceeding borrowing costs) are restricted to excess borrowing costs over taxable interest revenues and other economically equivalent taxable revenues according to national law. 

Once implemented, the rule will be particularly relevant for leveraged leasing companies in Ireland which have a substantial annual interest expense. However, the manner in which Ireland will implement the rule has yet to be confirmed. It is expected that Ireland will avail of various options provided for under ATAD which could limit its scope and exclude many common financing transactions. For example, if taxable revenues consist entirely of interest income or income economically equivalent to interest income (such as income arising from a finance lease arrangement), there should be no excess, so the rule should not apply. SPVs engaged in finance lease arrangements are therefore unlikely to be affected by the rules. While it is possible that income arising from an operating lease may also be regarded as economically equivalent to interest income, this is currently unclear pending draft implementing legislation.

While Ireland has sought to delay the implementation of this rule to 1 January 2024, work has commenced to examine options to bring forward the implementation date to the Finance Bill 2020 (due to be published in October) at the earliest. Given the complexity of the interest limitation rule, a public consultation is expected in advance of the publication of draft legislation seeking taxpayer and industry views as to how the rule should be implemented into Irish legislation and the practical aspects of its application.

Multilateral Instrument

Ireland was also among the first group of countries to sign the BEPS Multilateral Instrument (MLI) in June 2017 which will see the majority of Ireland's 74 double tax treaties updated to be BEPS-compliant. The MLI seeks to implement changes to double tax treaties on a multilateral basis to counteract treaty misuse that results in base erosion and profit shifting. The MLI entered into force in Ireland on 1 May 2019. It took effect for Ireland's double tax treaties in respect of withholding tax on 1 January 2020. For all other taxes the MLI came into effect on 1 November 2019 at the earliest, however, the date on which the MLI modifies Ireland's double tax treaties will depend on when a relevant treaty partner deposits its instrument of ratification with the OECD. Ireland is adopting a principal purpose test (PPT) as an anti-avoidance measure to prevent treaty abuse. This test will operate to deny the benefit of the treaty if obtaining that benefit was one of the principal purposes of any arrangement or transaction, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant tax treaty provisions. 

As many aircraft financing transactions rely on double tax treaties to ensure there is no withholding tax on payment flows (eg, lease rentals and loan payments), parties will need to understand the impact of the changes to relevant double tax treaties given the importance of tax treaty relief. Structures that incorporate intermediate lessor entities in order to make use of a particular double tax treaty may be affected by the MLI. 

The changes introduced by the MLI could result in more scrutiny where intermediate lessors rely on treaty protection to avoid withholding tax being imposed on lease rentals. The risk of withholding taxes under an aircraft lease is generally allocated to the lessee on the basis that withholding taxes are generally imposed by the jurisdiction of the payor. However, under the MLI a restriction on treaty benefits may also occur due to a lack of substance or commercial rationale for the lessor entity. Irish leasing platforms should not be affected by the provisions of the MLI on the basis that such platforms generally have significant substance and operations in Ireland. 

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Trends and Developments


Authors



A&L Goodbody (ALG) is one of Ireland’s leading Irish corporate law firms, with over 800 staff. The six-partner aviation and transport finance team has extensive experience when it comes to advice on Irish aircraft leasing transactions, ABSs, financing structures and sophisticated and innovative financing products (AFIC-support, EETCs, Islamic financing). The team works with clients in Asia, the United States and the Middle East looking to start or expand their business through a presence in Ireland and has helped them navigate the Irish legal, tax and regulatory environment. With a dedicated partner-led aviation team in New York, the firm can offer Irish legal support throughout the US business day. Furthermore, as one of the largest aviation teams in Ireland, the firm has the experience and bandwidth to advise on the largest and most complex transactions and place a focus on delivering client-first, solution-based Irish legal advice.

Introduction

Prospects have moved rapidly this year for the aviation industry. In January, the industry marked a decade of growth, noted record levels of profitability and predicted a potential slow downturn. By March, the industry faced its biggest crisis yet as much of the global fleet was grounded due to COVID-19. This article will take a look at some of the key trends and developments in the aviation finance and leasing industry in Ireland and how they may shape its future.

Trend Towards Substance

Ireland has been the centre of the global aircraft leasing industry for many decades and this position has strengthened in recent years as the aircraft leasing community trends towards increased substance in Ireland. This increased substance can be seen in a number of ways including:

  • a significant increase in the number of senior and highly experienced aviation executives based in Ireland:
  • Irish companies holding the ownership interest in the aircraft rather than just acting as an intermediate lessee; and
  • lessors establishing full operations in Ireland with increased employees across a range of functions being located in Ireland.

All of this translates to the heart and soul of the industry now being based in Ireland.

Talent

Access to talent is a key part of Ireland's attractiveness as a location for an aircraft leasing base. Those who are ambitious about their career in aviation finance and leasing see Ireland as the place to be in order to realise that goal. Forward thinking industry leaders have invested significant time and effort into ensuring that we have a strong talent pool of new generation aircraft leasing professionals.

Key to this has been the development of innovative, industry-relevant undergraduate, post-graduate and professional training courses in Ireland. The aviation industry is in vogue and the brightest minds know of the outstanding career opportunities that it can offer people from across a range of disciplines.

Tax developments

The move to substance in Ireland is in line with recent global tax developments which require a substance threshold to be met in order for companies to enjoy certain tax benefits. The Irish 12.5% corporate tax rate enjoyed by companies trading in Ireland is attractive for leasing companies but the key driver for Ireland's success from a tax perspective is its extensive and unparalleled double tax treaty network. An increasing number of lessee jurisdictions have insisted on proof of substance in Ireland as part of their analysis around the availability of benefits under double tax treaties.

This has become easier to satisfy as the industry has moved away from the previous lease in and lease out structures and the Irish companies own the aircraft and the lease revenues. The OECD's Base Erosion and Profit Shifting (BEPS) project focuses on aligning profits with substance and, thankfully, this is the direction the industry has moved in recent years in terms of the leasing companies established in Ireland as they responded to various indicators suggesting that substance in Ireland brings many benefits and solves many potential issues.

Aircraft leasing eco-system

The developed and supportive eco-system for aircraft leasing companies in Ireland makes the decision to base an aviation company in Ireland an easy and logical one. As the leasing companies have grown in strength and substance in Ireland they are increasingly being recognised outside the aviation industry as key corporate players in Ireland. This has been seen in terms of the expansion of their needs for legal services growing from asset finance advice to employment, property, corporate, governance and regulatory advice.

The directors on the boards of these Irish companies who manage and control the companies in Ireland have roles of increasing importance to ensure the companies are compliant with recent developments in anti-money laundering, data protection and other laws now impacting on aircraft leasing companies. They will need to respond to the drive towards meeting ESG (Environmental, Social and Governance) principles as investors become more demanding on these standards. The law around the duties of a director of an Irish company came into sharp focus in recent months as Irish boards had to consider a flood of lease deferral requests and navigate a solution that protected the solvency of the company as they considered the obligations of the company as borrower under its debt facilities.

Although there was delay of a few months in timing from when the rent deferrals were being requested, we are now seeing debt restructuring discussions gather pace and lenders and borrowers try to work together to allow lessors weather this storm. Companies and their directors are being faced with challenges and legal questions they have never had to consider previously. The cross border nature of the industry adds a further layer of complexity to deciding the best strategy in terms of understanding the impact of the various different laws.

The maturity and significance of the aircraft leasing companies in Ireland now compared to a decade ago during the global financial crisis is marked and means they will play a greater role in shaping the recovery.

ABS Developments

Pre-COVID-19

2020 had been on track for another record-setting year for aircraft asset backed securitisation (ABS) deals. The first eight weeks of the year saw five ABS deals comee to market, AASET 2020-1 (Carlyle Aviation Management), Sapphire II (Avolon), Lunar 2020-1 (DVB/Sculptor Asset Management), WEST V (Willis Lease Finance Corp) and Sunbird Engine Finance 2020-1 (Total Engine Asset Management). Ireland plays a key role in most ABS transactions and is the jurisdiction where the issuer of the debt, the servicer and the aircraft owning and leasing companies are located and managed.

However, as soon as travel routes were restricted and airlines were partly grounded by COVID-19, it became clear that liquidity was going to be a big issue for airlines and by extension leasing companies arising out of the pandemic.

During the peak of COVID-19

March and April 2020 saw a huge number of rent deferral requests from airlines who had seen passenger numbers and ticket bookings plummet and who understandably sought breathing space and forbearance from their lessors. A combination of strong customer relationships, an understanding that this was a crisis like no other the aviation industry had seen and, frankly, a lack of remarketing alternatives saw lessors largely go along with these requests and share some of the pain of the airlines.

Cash flows

As aircraft lease cash flows stuttered and stalled there was an immediate focus on the financial product in our industry which probably relies on steady lease cash flows more than any other – the ABS. With an estimated 80% of the world's airlines seeking rent deferrals, how could a special purpose issuer continue to make its contractual debt payments or were we about to see a series of defaults on ABS notes? In a number of cases, reduced debt service coverage ratios triggered the sweeping or trapping of cash (to the extent that it was available) and rating agencies moved to either downgrade notes or place them on negative watch.

However, no aviation ABS notes actually defaulted. While the pandemic certainly put pressure on ABS structures, the availability of a revolving liquidity facility (sized at an amount equal to nine months' worth of interest on the senior notes) meant that even if none of the leases in the portfolio were performing, there would be sufficient cash available to the issuer to meet its senior interest obligations (and therefore avoid any default on the notes) until early 2021.

ABS portfolios

In reality, no ABS portfolio suffered a 100% reduction in lease income and even into March and April 2020 some ABS portfolios were collecting up to 50% of expected lease rentals. As the first liquidity facility drawdowns began, it was clear that most existing ABS deals would be able to stave off a default for at least 12-15 months and all indicators pointed to a return to some degree of normality in the industry by then.

The secondary trading of ABS notes has been quite telling. Newer investors in the industry were quick to sell their positions at distressed prices while more experienced industry participants tended to either retain their existing notes or even buy additional ABS debt such has been their confidence in the market.

Nonetheless, it is as clear that there will be no market for new aviation ABS issuances in the short term (even if you could find a portfolio of aircraft with current leases attached). It is likely that we will not see any more aviation ABS deals coming to market in 2020 and those deals (hopefully) coming to market in 2021 are likely to raise debt only and not issue equity notes.

Post-COVID-19

The first problem centres around liquidity, nine months' of senior interest may have seemed like more than enough to handle regular, cyclical airline defaults; global recessions like that seen in the aftermath of the 2008 credit crisis and even industry-specific shocks like that resulting from 9/11 or even SARS, we are now in a world where pandemic risk will be a real factor in all future investments in our industry for some time.

This is likely to result in structural changes to future ABS deals designed to increase the available liquidity of the issuer vehicle. In addition to the traditional liquidity facility covering senior interest and sized at nine months' worth of senior interest (although that size may increase), there may be a second, subordinated liquidity facility, which would be much larger in size and which would cover not just senior interest but scheduled principal for a certain period also. The question would arise as to who could provide such a facility and at what cost.

One solution may be for the leasing company sponsoring the transaction to itself act in this role. We have seen this type of subordinated sponsor credit support used outside of aviation in structured finance deals and it may offer a potential solution to restart the aviation ABS market also.

The use of the ABS product as a source of low-cost financing is extremely important to the aviation leasing industry. Although the current crisis makes new issuances temporarily impossible, industry minds are already at work to find solutions to address concerns about issuer liquidity and other risks for investors to facilitate the return of the ABS product or perhaps even a new improved version of it.

Going Digital

The relative success or failure of many industries during the COVID-19 crisis centred on the ability to continue some degree of !business as usual" during the pandemic. Those areas which embraced working from home, Zoom meetings and electronic transactions were always going to feel the impact of COVID-19 less than those areas which needed face-to-face contact in order to continue.

GATS

The launch of the Aviation Working Group's Global Aircraft Trading System (GATS) on 1 June 2020 was very timely. The wholly-electronic platform allows participants to buy, sell and secure economic ownership of aircraft from the safety and security of their laptop and minimises the negotiation involved in completing aircraft trades.

GATS is based on a central concept that all aircraft on the platform are held in trusts (governed by the laws of Ireland, Singapore, Delaware or Utah) and economic ownership is transferred through the assignment of the beneficial interest in the trust rather than conveying legal title (which would remain with the trustee of the trust). This means that the existing lease chain between the trustee (acting as lessor) and the airline (acting as lessee) remains unaffected by the transfer.

Using GATS

GATS uses fixed form instruments to affect transactions and only factual information (such a party names, details of aircraft equipment and dates) varies from deal to deal. Schedules to the standard form documents will be populated with such factual information automatically by the platform to reflect responses provided by the user to a series of prompts. Once the GATS instruments have been fully populated, each party is sent a copy and asked to execute the instrument.

The GATS platform uses digital signatures and electronic delivery so no "wet ink" signatures should be required. Once a transaction has been completed through the platform, high-level, non-sensitive information is recorded on a searchable electronic ledger to provide enhanced transparency of aircraft ownership.

Until recently, the aviation leasing and financing industry had been slow to embrace technology for trading of aircraft and aircraft transfers had used the same inefficient processes and procedures as those used in the 1990s. GATS is an enormous leap forward in the industry's move towards digital solutions and will significantly increase the efficiency of aircraft transfers during and beyond the COVID-19 crisis.

Climate Action Targets

Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is the global offsetting CO2 emissions scheme adopted in October 2016 by the International Civil Aviation Organization (ICAO) which will require aircraft operators to buy and surrender emission units representing CO2 emission reductions generated by non-aviation projects in other sectors.

CORSIA sets a baseline emissions level and airlines will be required to buy and surrender emission unites to offset their share of any increase in CO2 emissions from the baseline emissions of the international aviation sector.

The baseline level to be used is to be calculated as the average of CO2 emissions from routes covered by the scheme for the years 2019 and 2020.

COVID-19 and CORSIA

As the current CORSIA provisions call for 2020 emissions (along with 2019 emissions) to be used in determining the baseline for CORSIA an unforeseen consequence has resulted from the impact of COVID-19 on air travel. The reduction in flight traffic and emissions as a result of the pandemic will significantly lower the baseline to be used going forward compared to what was projected as a basis for adopting CORSIA. This will result in significantly higher offsetting requirements (estimated to be approximately 30% more stringent) when air traffic levels return to previous levels.

The greater the offsetting requirements, the higher the costs for the airlines and this could increase the risk of non-payment. The potential results of that could be that liens would be placed on the aircraft by the relevant monitoring authority.

CORSIA does not revise the baseline each year so the levels set for 2019/2020 would continue to apply for years to come likely setting an impossible standard for airlines to reach.

ICAO

Airlines have been petitioning ICAO to calculate the baseline using 2019 emissions levels only (disregarding 2020 levels) but have faced significant opposition from an assembly of non-governmental organisations led by the Environmental Defence Fund.

There is no doubt that the majority of participants in aviation are committed to a greener industry but it remains to be seen whether the artificially low emissions baseline resulting from travel restrictions arising from COVID-19 will apply going forward (likely at significant cost to airlines) or will the baseline be adjusted by ICAO in spite of the objections from climate activists.

Market Trends

Ireland's role as a hub of aircraft leasing provides a wide lens as to trends generally in the market as so many deals flow through Ireland in some form. The direction the market was predicted to take in January of this year has been seriously distorted by the COVID-19 crisis. The current wave of rent deferrals, lease extensions and debt restructurings are expected to give way to a wave of lessor consolidation through corporate acquisition or joint venture activity, larger solvent and insolvent restructurings and sale and leaseback transactions.

The sale and leaseback transactions have already started and will become a feature of the landscape for at least the remainder of this year. The move towards sale and leaseback transactions and the lack of liquidity in certain pockets is likely to drive an increase in airlines leasing rather than owning aircraft. Such a model will provide airlines with greater flexibility and assist with their cash flow issues. Ireland will play a key role in these transactions as it holds approximately 65% of the leasing market.

Acquisitions and joint ventures

The acquisitions/joint venture activity is still mainly at discussion stage as investors wait for some volatility to leave the market and asset values to be recalibrated. There is still confidence in the market with many expecting that the demand for flying will return. Liquidity is available for investment and the deep experience required is there to manage the industry through this, so the medium to long term prospects for the industry are positive.

New investors are actively looking to enter the market and experienced investors will realise the long-term value being created and the opportunity it represents. The timeline for when such investments are likely through consolidations and restructurings will take place is not certain but is likely to kick off to some degree in the last quarter of the year. Experience, liquidity and agility will be key factors in determining which companies will survive this crisis and indeed which ones will thrive.

Conclusion

We have only been able to touch on some of the trends and developments in the industry and there are many more which may impact the future recovery of the industry greatly such as Brexit, political upheavals and trade wars. Many of the trends and developments currently at play in the market did not arise because of COVID-19 but were accelerated or highlighted in recent months. There are green shoots of a recovery now being seen and the industry is holding its breath that a second wave will not break out to damage this.

It is likely that there are some seriously bumpy months ahead for the industry but resilience and the ability to innovate has never been in short supply in the aircraft leasing world and these qualities will be essential again to move the industry forward. One thing that is guaranteed is that Ireland as a stable and reliable jurisdiction will continue to support the industry and remain centre stage for its recovery and future success.

A&L Goodbody (ALG)

International Financial Services Centre
North Wall Quay
Dublin 1
D01H104
Ireland

+353 1 649 2000

www.algoodbody.com
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Law and Practice

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Walkers is a leading international law firm that provides legal, corporate, fiduciary and compliance services to global corporations, financial institutions, capital markets participants and investment fund managers. Walkers has 118 partners and 918 staff, providing 24/7 service to its clients, which include Fortune 100 and FTSE 100 companies, as well as many of the most innovative firms and institutions across the financial markets. Walkers is experienced in all types of international and cross-border transactions covering a broad range of sectors, with a particular focus on both contentious and non-contentious corporate and finance law, investment funds, private equity, structured products, capital markets, private capital and trusts. The firm delivers clear, practical advice based on an in-depth knowledge of the legal, regulatory and commercial environments in Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Ireland from ten global offices.

Trends and Development

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A&L Goodbody (ALG) is one of Ireland’s leading Irish corporate law firms, with over 800 staff. The six-partner aviation and transport finance team has extensive experience when it comes to advice on Irish aircraft leasing transactions, ABSs, financing structures and sophisticated and innovative financing products (AFIC-support, EETCs, Islamic financing). The team works with clients in Asia, the United States and the Middle East looking to start or expand their business through a presence in Ireland and has helped them navigate the Irish legal, tax and regulatory environment. With a dedicated partner-led aviation team in New York, the firm can offer Irish legal support throughout the US business day. Furthermore, as one of the largest aviation teams in Ireland, the firm has the experience and bandwidth to advise on the largest and most complex transactions and place a focus on delivering client-first, solution-based Irish legal advice.

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