In China, the execution of an aircraft or engine sale agreement can trigger the following taxes and duties: value-added tax, stamp duty, corporate income tax and customs duties.

Under the laws and regulations of the PRC, the domestic party is bound by the sale agreement even if it is not translated, certified, notarised or legalised. However, if the parties to the sale agreement want to solve their disputes by litigation or arbitration, it is advisable to take such steps.

Aircrafts or engines are movable property and the transfer of their ownership is subject to the laws and regulations stipulating the rules of the transfer of movable property. In accordance with the Civil Code of the PRC and Civil Aviation Law of the PRC, the transfer of ownership of aircrafts or engines shall come into effect upon their delivery.

In addition, according to the Civil Code of the PRC, the transfer of ownership of aircraft may be challenged by any bona fide third party if it is not registered. Thus, it is advisable to register ownership of an aircraft.

Although in accordance with the Civil Aviation Law of the PRC, the rights over aircraft include rights in respect of the engines and all installed parts in aircrafts, engines or any parts of an aircraft cannot be registered separately.

The sale of the ownership interest in an entity that owns an aircraft or engine cannot be effectively recognised as a sale of such aircraft or engine itself.

In accordance with the Civil Aviation Law of the PRC, the laws of the country where a civil aircraft was registered will apply to the acquisition, assignment and termination of the ownership of the civil aircraft. Therefore, even if the bill of sale is governed by English or New York law, if the nationality of the aircraft is China, Chinese law shall prevail while considering the transfer of title to an aircraft, and the transfer of title to an aircraft physically delivered will be recognised according to Chinese laws.

Under the laws and regulations of the PRC, it is not required that a bill of sale should be translated, certified, notarised or legalised to be enforceable against a domestic party.

However, if the domestic party wants to register the ownership of the aircraft in China, or the parties to the sale agreement want to solve their disputes by litigation or arbitration, it is advisable to take such steps.

Generally, under laws and regulations of the PRC, there is no need to register or file a bill of sale or obtain any consent from any government entity. However, if an entity wants to register the ownership of an aircraft, they must provide any documents proving the transfer of ownership, including but not limited to the original copy of the bill of sale. After receiving all the documents, the Civil Aviation Administration of China (CAAC) will issue a corresponding certificate within seven working days.

It should be noted that in recent years, a decision has been made to implement export control over items relating to certain unmanned aerial vehicles or unmanned airships. Aircrafts which satisfy certain features shall not be exported without permission. In order to obtain permission, certain exporters need to submit relevant documents, such as the original copy of the sale agreement to the Ministry of Commerce for examination.

The taxes and duties payable for executing and delivering a bill of sale or consummating the sale of the ownership interest in an entity that owns an aircraft or engine will depend on various factors.

If the aircraft is located in China, executing and delivering a bill of sale can trigger the following taxes and duties: value-added tax, stamp duty, and corporate income tax.

If the aircraft is transit to China, executing and delivering a bill of sale can trigger the following taxes and duties: value-added tax and customs duties.

There are no specially prohibited forms of lease in China.

The parties to a lease involving either a domestic party or an asset situated in the PRC are generally free to select the governing law of the lease.

While there are regulatory frameworks in place governing foreign exchange transactions in China, there are generally no outright material restrictions that specifically prohibit domestic lessees from making rent payments to foreign lessors in US dollars once the lease contract has been approved by the authority.

Usually, China’s foreign exchange control regime, administered by the State Administration of Foreign Exchange (SAFE), is designed to monitor and regulate cross-border capital flows rather than to entirely obstruct legitimate business transactions like lease rent payments or the repatriation of realisation proceeds from lease enforcement.

There are stamp duties payable in respect of the execution of a lease in China or by a domestic party to a lease as a result of an original or copy of that lease being brought into China.

There are no specific requirements for a lessor to be licensed or qualified to do business with a domestic lessee.

There are no mandatory terms required to be in a lease governed by English or New York law that would not typically already be included.

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

In China, a lease agreement can certainly cover parts that are installed or replaced on an aircraft or engine after its execution, provided that the agreement explicitly includes such provisions. To ensure that such parts are effectively captured under the lease, several steps should be taken:

• draft the lease agreement with flexibility to accommodate future installations or replacements of parts;
• upon installation or replacement of parts, ensure that the new components are promptly registered with the relevant aviation authorities;
• establish a mechanism within the lease agreement requiring the lessee to promptly notify the lessor of any parts installations or replacements;
• maintain detailed records of all parts installed or replaced; and
• ensure that insurance policies covering the aircraft or engine are updated to reflect the inclusion of new parts.

Although there is no specific law on this point, it is generally thought that, because engines are identifiable as distinct from an airframe and can be removed from an airframe and replaced, the risk of annexation is manageable. In practice, engine owners or mortgage holders can register them as movable property and attach identification plates to engines to notify third parties of their interests.

Both the concept of a trust and the role of an owner trustee under a lease is recognised in China.

In China, the CAAC maintains the Aircraft Register where all civil aircraft are registered. The CAAC’s Aircraft Register allows for the notation of interests of an owner (legal or beneficial) or a lessor of an aircraft. Such notation has legal effects that provide notice, establish priority, and offer protection for those interests.

It is possible for an aircraft to be registered in the name of the operator even if the operator is not the legal owner of the aircraft, and vice versa.

In China, the CAAC maintains the Aircraft Register where all civil aircraft are registered, but there is no specific register for leases concerning engines.

While there isn’t a specific mandate under Chinese law to register a lease or a lessor’s interest directly in the domestic aircraft registry administered by CAAC, it is crucial to ensure the legal owner of the aircraft, whether it is the lessor or an SPV, is properly registered. Failing to do so could lead to several consequences including uncertainty in ownership, reduced legal protection and could raise insurance and operational issues.

Leases, particularly those involving foreign entities or significant assets, may require consents or approvals from various government entities in China, including but not limited to Foreign Exchange Control, Ministry of Commerce, etc.

The formalities for obtaining necessary approvals or registering ancillary documents vary and can involve the submission of lease agreements, corporate documents, proof of insurance, and other legal certificates. The process may take from several weeks to a few months, depending on the complexity and the responsiveness of the involved government agencies.

Generally, there is no need for a lease agreement to be translated, served, certified, notarised or legalised to be valid and registrable in the aircraft registry in China.

No taxes or duties are payable.

The two most popular alternative countries in which aircraft habitually based in the PRC are typically registered are Ireland and Singapore.

Generally, the CAAC does not require any document to be either in its original form, translated, notarised and/or authenticated before accepting and processing the registration of an aircraft. However, the exact requirements will depend on the specific circumstances of the registration application. Full guidance can be obtained on the CAAC website.

A foreign lessor leasing an aircraft or engine to a domestic lessee in China may be subject to income tax through withholding tax, and potentially VAT, depending on the specifics of the lease agreement and any applicable tax treaties. If the lessee fails to withhold and remit the tax, the foreign lessor could be liable for the unpaid tax.

Generally, a foreign lessor is not automatically deemed to be resident, domiciled, carrying on business, or subject to taxes in China simply by being a party to, or enforcing, a lease agreement.

Generally, no liabilities in respect of aircraft or engine maintenance and operations can be imposed on a foreign lessor under a lease as a result of its being a party to that lease.

In China, foreign aircraft or engine owners, lessors, and financiers are not typically exposed to strict liability for damages or losses caused by the asset in normal circumstances. However, if the operator cannot be identified when damages or losses on the ground or water have been caused by the aircraft, the owner may be liable for compensation in the first instance.

Under normal circumstances, creditors of a domestic lessee would not be able to attach an aircraft that is leased to the lessee but owned by a different entity.

There are certain circumstances under Chinese law where third-party rights could potentially take priority, regardless of whether the lease or lessor is registered in the national aircraft register. These situations include, but are not limited to, statutory liens, unpaid taxes or other public debts, pre-existing mortgages or other registered security interests on the aircraft.

There is no explicit legal requirement that all or part of the insurance for an aircraft or engine must be placed with domestic insurance companies in China.

There are indeed mandatory insurance coverage requirements imposed on aircraft and airline operators in China such as the liability insurance for third parties on the ground.

Reinsurances can be placed outside China up to 100% coverage.

While cut-through clauses are commonly used in aviation finance transactions to protect the interests of financiers and lessors, there is no specific provision directly addressing cut-through clauses in Chinese insurance law; their enforceability in China ultimately relies on a case-by-case analysis and adherence to the legal and regulatory framework.

Assignments of insurances and reinsurances are generally permitted in China.

While there are no explicit restrictions on a lessor’s ability to terminate an aircraft lease, re-export, or sell the aircraft in China, all actions must be in compliance with the lease agreement and applicable Chinese laws and regulations. The physical location of the aircraft may be relevant for certain legal and administrative processes but is not necessarily a requirement for all actions.

A court order is required for a lessor to take physical possession of the aircraft without the lessee’s consent.

There is no specific court solely for aviation disputes in China.

Pending final resolution of judicial proceedings, a secured party can apply to the court for preservation of the property, and the court may rule that preservation measures be adopted when necessary. The secured party usually has to post a bond or provide a guarantee pursuant to the court’s order.

Chinese courts are likely to uphold a foreign law as the governing law of an aircraft lease, recognise the submission to a foreign jurisdiction, and respect a waiver of immunity by the parties, provided these are clearly agreed upon by the parties and do not violate Chinese law or public policy.

Chinese courts will recognise and enforce a final judgment of a foreign court or an arbitral award without re-examination of the matter, provided that the judgment or award meets the necessary legal requirements and conditions for recognition under Chinese law and any applicable international treaties.

While Chinese courts generally render judgments in Renminbi (RMB), there are exceptions and considerations that could allow for judgments in foreign currencies if the lease explicitly stipulates that the debt shall be repaid in a foreign currency.

Generally, a lessor may have the right to recover default interest or charge additional rent following the termination of a lease for default, including in cases where the lessee fails to return the aircraft, but there are limitations based on the lease agreement, Chinese contract law, and principles of fairness and good faith.

Generally, a lessor under an aircraft lease is not required to pay taxes or fees in a significant amount in connection with the enforcement of such lease in China.

There are no mandatory notice periods for terminating an aircraft lease in China.

A lessee who is a sovereign state or a state-controlled entity might be entitled to claim sovereign immunity, but this immunity can be waived through a properly drafted clause in the lease agreement.

China adopted the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) on 2 December 1986, and Chinese domestic courts are obligated to recognise and enforce arbitral decisions made in other contracting parties to the New York Convention in accordance with the Convention’s terms.

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

The concepts of contractual assignment and novation are recognised by the Civil Code of the PRC.

Generally, an assignment and assumption agreement or a novation agreement governed by New York or English law is likely to be recognised as valid by Chinese courts, and a lessor can transfer its rights under an aircraft lease to a new lessor without the consent of the lessee, but the lessee should be notified or such assignment is not binding on the lessee.

Generally, there is no requirement for an aircraft and/or engine lease assignment and assumption agreement or novation to be translated, certified, notarised or legalised to be enforceable against a domestic party in China.

In China, an aircraft and/or engine lease assignment and assumption/novation agreement does not need to be registered or filed with the domestic aircraft registry, nor does it require government consent. However, if it involves a change in the ownership of the aircraft, such change can be registered in CAAC. The failure to register or file such agreements does not typically affect the legal enforceability of the agreements themselves, but registration can provide public notice of the interests. See 2.3.4 Registration of Leases with the Domestic Aircraft Registry.

Generally, there are no specific taxes or duties payable in China solely in respect of an assignment and assumption or novation agreement related to aircraft and/or engine leases.

The transfer of ownership interest or beneficial interest in an entity (or a trust) that owns an aircraft, while keeping the legal title with that entity, would generally be regarded as an internal restructuring or a change in equity ownership rather than a direct transfer of the aircraft itself.

Generally, the entity with the legal right to operate or own the aircraft can initiate the deregistration process in China, and the steps include preparing necessary documents, notifying the CAAC, settling liabilities, undergoing technical inspections, surrendering documents, and complying with export regulations.

In China, it is possible for an aircraft owner, mortgagee, or lessor to apply for deregistration without the lessee’s or operator’s explicit consent under certain circumstances such as getting a IDERA (irrevocable deregistration and export request authorisation) from the debtor in advance.

Usually, the application for deregistration, the authorisation document, documents proving deregistration and the original certificate of registration are needed.

Typically, the deregistration process will take seven to 30 days.

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

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

Similar to most aviation authorities, the CAAC rules does not expressly recognise a deregistration power of attorney (DPOA), but the DPOA may play a role in the deregistration process, and it may be helpful to have the DPOA written in Chinese.

To enforce a deregistration power of attorney in China, additional documents including corporate resolutions, incorporation certificates, and identification documents may be required to support the enforcement process and to verify the legitimacy and authority of the parties involved.

It is not a requirement for a deregistration power of attorney to be governed by the Chinese law.

If a deregistration power of attorney (IDERA) is expressly stated to be irrevocable, it generally means that the grantor has agreed not to revoke the power of attorney for the duration of the lease.

An aircraft owner, mortgagee, or lessor may be able to export the aircraft without the lessee’s consent, depending on the terms of the lease or mortgage agreement and compliance with Chinese law. It should be noted that, pursuant to the declarations lodged by China under the Cape Town Convention, any remedy available to the creditor may be exercised only with leave of the court.

An export airworthiness certificate or airworthiness approval labelling will be needed. The process will take 20 to 30 days.

There are no abnormal costs/fees/taxes that are charged in respect of the export of an aircraft.

Pursuant to the declarations lodged by China under the Cape Town Convention, the Cape Town Convention shall not apply to a transaction which is a Chinese internal transaction, and any remedy available to the creditor under any provision of the Cape Town Convention may be exercised only with leave of the Chinese court.

Restructurings, reorganisations, insolvencies and liquidations of a lessee domiciled in China are mainly based on the Business Bankruptcy Law and the Company Law.

Pursuant to Article 7 of the Business Bankruptcy Law, a debtor may apply to a Chinese court for restructuring, settlement or bankruptcy liquidation. Where a debtor is unable to repay its debts as they become due, the creditors may apply to a Chinese court for restructuring or bankruptcy liquidation of the debtor.

Voluntary Restructuring and Reorganisation

Debt-to-equity swap – a mechanism where a company’s debt is converted into equity, reducing its debt burden and potentially restructuring its capital structure. This can be a voluntary agreement between the debtor company and its creditors.

Pre-packaged reorganisation – a pre-negotiated plan between the debtor and its major creditors before formally filing for bankruptcy. Once filed, the plan is quickly approved by the court, allowing for a swift restructuring process.

Corporate governance improvement – voluntary adjustments to a company’s management structure, internal controls, and business strategies to enhance financial health and avoid insolvency.

Involuntary Restructuring and Insolvency Proceedings

Bankruptcy liquidation – initiated either voluntarily by the company or involuntarily by creditors when the company is unable to pay its debts. This process involves selling off assets to repay creditors and dissolving the company.

Reorganisation under bankruptcy – an alternative to liquidation, aimed at rehabilitating the financially distressed company. The court supervises a plan to restructure the company’s debts and operations, often involving negotiations with creditors.

Compulsory restructuring – creditors holding a certain percentage of the company’s debt can apply to the court for a compulsory restructuring if the company fails to repay debts. This can lead to a court-supervised restructuring plan.

Administration and Receivership

Administrative receivership – although less common now due to legislative changes, administrative receivership previously allowed a secured creditor to appoint a receiver to manage and sell the charged assets to recover debts. The modern trend leans towards bankruptcy and reorganisation processes.

Court-appointed administrator – in cases where a company is insolvent or likely to become so, a court may appoint an administrator to take control of the company’s affairs, with the aim of rescuing the business or achieving a better outcome for creditors than immediate liquidation.

While there are no explicit statutory provisions in China mandating extensive cross-border co-operation as seen in the UNCITRAL Model Law, there are provisions and practices that allow for some level of recognition and co-operation with foreign insolvency proceedings.

Recognition of Foreign Insolvency Proceedings

While China has not adopted the UNCITRAL Model Law in its entirety, Article 5 of the Enterprise Bankruptcy Law allows for limited recognition and co-operation with foreign bankruptcy proceedings. This provision grants Chinese courts the discretion to recognise foreign bankruptcy judgments and co-operate with foreign courts in matters of bankruptcy, although the criteria and procedures for such recognition and co-operation are not extensively detailed.

Cross-Border Co-operation Principles

Although not legally binding, Chinese courts and practitioners may refer to international guidelines and principles, including the American Law Institute and International Insolvency Institute Guidelines, and the INSOL International Global Principles, as soft law instruments to guide their practices in handling cross-border insolvency cases. These guidelines encourage communication, co-ordination, and co-operation between courts in different jurisdictions.

Judicial Assistance

Under China’s Civil Procedure Law and bilateral or multilateral judicial assistance treaties, Chinese courts may provide judicial assistance in obtaining evidence, serving documents, and recognising and enforcing foreign judgments, which indirectly facilitates co-operation in cross-border insolvency cases.

Case-by-Case Approach

In the absence of comprehensive statutory provisions, cross-border co-operation in China often relies on a case-by-case approach, where the courts may exercise their discretionary powers based on the principles of reciprocity and comity. This means that the extent of co-operation can vary depending on the specific circumstances of each case and the willingness of the Chinese court to engage with foreign counterparts.

Potential Developments

There is ongoing discussion and academic debate about the need for China to adopt more comprehensive legislation to deal with cross-border insolvency cases, potentially including a more systematic adoption of the principles found in the UNCITRAL Model Law. As China continues to integrate into the global economy, there may be future legislative changes to better facilitate international co-operation in insolvency matters.

Generally, a properly executed IDERA would not be automatically voided or terminated by the liquidation of the lessee. The IDERA’s validity and enforceability are premised on its irrevocable nature unless revoked in accordance with the terms of the Cape Town Convention or the specific provisions of the IDERA itself. However, the liquidation of a lessee introduces a complex legal situation that could affect its operation. The specific outcome would depend on the terms of the IDERA, the lease agreement, applicable laws, and the action of the involved parties.

According to the Civil Code and the Business Bankruptcy Law, the insolvency administrator has the right to decide whether or not to terminate the lease contract that has not been fulfilled by the lessee.

In the event that the lessee enters into insolvency proceedings, the lessor is still the owner of the aircraft if the ownership is registered, and if the lessee fails to pay the rent as agreed, it has the right to exercise the right of repossession, to terminate the contract and to take back the aircraft.

The aircraft will not be deemed part of the lessee’s property.

If the lessor’s right is non-secured, the bankruptcy expenses, collective debts, and other secured right to the debt will take priority.

The primary risk is financial loss, as the lessor may not receive lease payments as contracted. Insolvency proceedings can lead to delays in repossession of the aircraft. Besides, during the insolvency process, the aircraft may not be maintained to the standards required by the lease, risking depreciation of its value.

In China, when insolvency proceedings are initiated, a moratorium, known as a “stay”, is typically imposed to halt or suspend any pending legal actions against the debtor. The duration of the moratorium is not fixed but is flexible, depending on the progression of the insolvency proceedings. The initial period is often set by the court at the beginning of the process, and it can be extended as necessary.

In China, the process by which a domestic company, including a lessee, can be liquidated, placed in administration, or receivership is primarily governed by the Enterprise Bankruptcy Law of the PRC and supplementary regulations.

Under Chinese law, ipso facto clauses, which permit one party to terminate or alter a contract merely due to the insolvency or financial distress of the other party, are generally not recognised during insolvency proceedings.

The Aircraft

The aircraft, being an asset of the lessee’s estate during insolvency, would fall under the control of the court-appointed administrator or liquidator. The lessor may need to rely on its rights under the lease agreement and any registered security interests (like an IDERA) to repossess the aircraft. The process could involve negotiating with the administrator or seeking court approval for repossession, ensuring compliance with bankruptcy law procedures.

Lease Rentals

Lease rentals would typically cease once the winding-up process begins. The moratorium imposed during insolvency proceedings prevents further debt collection actions, including lease payments. The lessor may need to file a claim with the administrator or bankruptcy court for unpaid rentals accrued prior to the insolvency commencement and for damages resulting from the lease termination, subject to the priorities set by the bankruptcy law.

Lease Security Deposit

The treatment of the lease security deposit would depend on the terms of the lease agreement and applicable law. Generally, it could be used to offset any outstanding lease obligations or damages suffered by the lessor. If the deposit is held in escrow, access to it might be subject to court approval or agreement with the administrator. The lessor should ensure its claim includes a request for utilisation of the deposit if it’s entitled to do so under the lease terms.

Maintenance Reserves (Whether Classified as Reserves or Supplemental Rent)

Maintenance reserves, whether treated as separate reserves or included as part of the supplemental rent, could be treated similarly to lease rentals during insolvency. If they are designated specifically for aircraft maintenance and are not part of general operating expenses, their use might be negotiated between the lessor and the administrator to ensure continued airworthiness of the aircraft. However, access to these funds may also be frozen during the moratorium, requiring court intervention or agreement with the administrator for their release and application.

Both the Convention on International Interests in Mobile Equipment (the “Convention”) and the related Protocol on Matters specific to Aircraft Equipment (the “Protocol”) came into force domestically on 28 November 2008.

According to Article 4 of the Administrative Measures for the Application of Authorised Entry Point (AEP) Codes for the Registration of Interests in the International Registry of Civil Aircraft of the People’s Republic of China, the registration of interests in the international registry must first obtain an AEP code from CAAC.

The application process will take about seven working days.

There is no requirement that local entities must handle these registrations; foreign lessors can directly register their interests without needing to go through a local entity.

The Convention

China has made extensive declarations under the Convention, as listed below.

Declaration under Article 39(1)(a)

All non-consensual rights or interests which have priority over secured creditors under the law of the PRC shall have priority without registration over registered international interests, including but not limited to: claim for bankruptcy expenses and community debts, employee’s wages, taxes arising prior to the mortgage, pledge or lien of the civil aircraft, claim for remuneration for rescuing the civil aircraft, claim for necessary expenses incurred for the custody and maintenance thereof of the civil aircraft, etc.

Declaration under Article 39(1)(b)

Nothing in this Convention shall affect the right of a State or State entity, intergovernmental organisation or other provider of public services to arrest or detain an object under the laws of the PRC for payment of amounts owed to such entity, organisation or provider directly relating to those services in respect of that object or another object.

Declaration under Article 39(4)

A right or interest of a category covered by the declaration made under Article 39(1)(a) shall have priority over an international interest registered prior to the date of ratification of the Protocol.

Declaration under Article 40

Rights of a person obtaining a court order permitting attachment of an aircraft object in partial or full satisfaction of a legal judgment shall be registrable non-consensual rights or interests.

Declaration under Article 50(1)

The Convention shall not apply to a transaction which is an internal transaction in relation to the PRC.

Declaration under Article 53

The intermediate people’s courts where the headquarters of relevant airlines of the PRC are located have jurisdictions over aircraft equipment leasing disputes covered by the Convention.

Declaration under Article 54(1)

While the charged object is situated within the territory of the PRC, the chargee shall not grant a lease of the object within the territory of the PRC.

Declaration under Article 54(2)

Any remedy available to the creditor under any provision of the Convention which is not there expressed to require application to the court may be exercised only with leave of the court of the PRC.

Declaration under Article 55

Article 43 is applicable to the PRC, and paragraph 1 and 2 (a) hereinto are applicable under the condition that the court of a Contracting State chosen by the parties shall be a court located in a place that has actual connections with the dispute of the agreement.

Unless otherwise notified by the Government of the PRC, the Convention and the Protocol shall not apply to the Hong Kong Special Administrative Region and the Macao Special Administrative Region.

The Protocol

China has made extensive declarations under the Protocol, as follows.

The PRC declares that it will apply the provisions of Article VIII, Article XII and Article XIII of the Protocol.

The PRC declares that it will apply the provisions of Article X(1), (2), (3), (4), (6), (7) of the Protocol. The court of the PRC, upon receipt of the application shall, in respect of the remedies specified in Articles 13(1)(a), (b) and (c) of the Convention, make order within 10 calendar days which shall be enforced immediately and in respect of the remedies specified in Articles 13(1)(d) and (e) of the Convention, make order within 30 calendar days which shall be enforced immediately.

The PRC declares that it will apply the entirety of Alternative A of Article XI of the Protocol to all types of insolvency proceeding defined by the Protocol, and that the waiting period shall be 60 calendar days.

According to provisions of Article XIX of the Protocol, the PRC designates the Aircraft Rights Registry under the Civil Aviation Administration of China (CAAC) as the entry point.

Unless otherwise notified by the Government of the PRC, the Convention and the Protocol shall not apply to the Hong Kong Special Administrative Region and the Macao Special Administrative Region.

Article XIII of the Protocol applies domestically. To submit and record an IDERA with the domestic aircraft register in China, the IDERA must be prepared and signed by the authorised party, typically the owner or lessor, and the registered owner/lessee of the aircraft, in accordance with the requirements set forth by the Cape Town Treaty and its Protocol. Before recording the IDERA with the domestic aircraft register, the IDERA must first be registered with the International Registry established under the Cape Town Treaty. The original or a certified copy of the executed and registered IDERA, along with supporting documents as required by the CAAC, is then submitted to the relevant department of the CAAC or the domestic aircraft register. Once received and processed, the domestic aircraft register will record the IDERA and issue an acknowledgment or confirmation of its registration.

There is no recent public case in relation to parties enforcing the Convention or the Protocol.

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

Foreign lenders financing an aircraft locally or on borrowers using the loan proceeds should comply with regulations concerning foreign exchange control in China.

Foreign organisations and individuals making direct investments in China shall, upon approval by the relevant authorities in charge, process registration formalities with the foreign exchange control authorities.

Generally speaking, borrowers are not restricted from granting security to foreign lenders.

Downstream, upstream and cross-stream guarantees are permitted in China, as long as a resolution is passed by the board of shareholders or a general meeting.

However, when it comes to unlisted companies, where the company provides security for its wholly owned subsidiary to carry out business activities, or where a one-person limited liability company provides security for its shareholder, the guarantor shall bear the security liability even if it has failed to make the resolution.

It is indeed advisable for a lender to consider taking share security over a domestic special purpose vehicle (SPV) that holds title to the financed aircraft. Establishing a pledge of shares in such an SPV is a recognised and widely adopted practice in the industry, serving as an effective means to secure financing and manage risk.

Negative pledge is recognised in China.

While China’s legal system generally allows for the establishment of intercreditor arrangements, there are certain material restrictions and requirements including financial regulatory guidelines and foreign exchange control and tax issues that need to be considered.

The concept of agency and the role of an agent (such as the facility agent) under a syndicated loan is recognised in China. Article 11 of Guidelines on Syndicated Loan Business released by China Banking Regulatory Commission defines that concept.

Generally, contractual subordination and structural subordination are permissible and recognised methods of debt subordination in China.

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 China. However, where the law of a foreign country cannot be ascertained or certain rules are not provided by the law of that country, the law of the PRC shall apply.

According to the Civil Code of the PRC, usury is prohibited. Interest rates on loans shall not exceed four times the market interest rate for a one-year loan at the conclusion of the contract, which is released by the National Interbank Funding Centre with the authorisation of the People’s Bank of China, pursuant to Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Laws in the Hearing of Private Lending Cases.

In China, typical forms of security and recourse granted in an aviation finance transaction include mortgage, charge, pledge, retention of title, financial leasing, etc.

Generally speaking, there are no specific types of security that cannot be taken over an aircraft or engines.

In terms of insurance, only policy pledge can be established, or the creditor can be directly designated as the beneficiary of the insurance.

In general, no security can be taken over warranties.

The concept of a trust and the role of a security trustee is recognised in China.

Under Chinese law, a borrower generally can assign contractual rights (including rights in relation to insurances and aircraft lease) to a third party, including a security trustee.

It is not prohibited to assign the rights and benefits only without also assigning the attendant obligations of the lessor under an aircraft lease.

See 3.4.3 Application of Foreign Laws.

For security assignments to be valid in China, completion of the public announcement of changes in property rights by the parties concerned is needed. Moreover, if it is agreed in the contract that the debtor fails to perform due debts, the property will be owned by the creditor, and the court shall hold such agreement to be invalid.

A security assignment doesn’t need to be translated, certified, notarised or legalised to be enforceable.

If an aircraft registered domestically in China is subject to an English or New York law-governed security assignment, it is indeed advisable for financiers to also take a domestic law security instrument to ensure maximum protection and enforceability within China. This is because foreign law-governed agreements, while recognised in China, may face challenges in enforcement due to differences in legal systems and potential conflicts with mandatory Chinese laws. A domestic security instrument, such as a pledge or mortgage agreement governed by Chinese law, would provide clearer recognition and enforceability within China’s jurisdiction.

Taking domestic law security instruments and completing local law filings are not strictly mandatory for making Cape Town filings. However, it is highly recommended to do so because the Cape Town Convention and its Aircraft Protocol operate alongside, not in lieu of, domestic laws. Proper registration under the Cape Town Convention provides international recognition and priority of security interests, but it does not replace the need to comply with local registration and filing requirements to perfect those interests domestically.

In China, to perfect a security interest over an aircraft, registration with the CAAC is typically required. This is separate from the registration with the International Registry under the Cape Town Convention. Both registrations serve different purposes and complement each other in ensuring comprehensive protection of the financier’s interests.

The costs associated with executing a domestic law security instrument and completing local law filings in China can vary depending on several factors such as the complexity of the transaction, legal fees and administrative charges.

While foreign law-governed security assignments themselves are not registrable in China, any related domestic law security instruments should be registered according to Chinese law to give them full effect and protection under the Chinese legal system.

The transfer of security interests over an aircraft and/or engines is generally recognised under international practices and in jurisdictions that have adopted the Convention and Protocol. China is a contracting state to the Convention and Protocol, which provide a legal framework for the creation, registration, and enforcement of international interests in aircraft objects, including aircraft and engines.

In China, the security interests under a security assignment are generally not automatically jeopardised if the identity of the secured parties changes after its execution, provided that the change is properly managed and documented in accordance with the terms of the security agreement and relevant laws.

“Parallel debt” mechanics are sometimes used in China, although not explicitly defined in legislation, and their effectiveness is untested.

Generally, being a party to or enforcing a security assignment under Chinese law does not inherently result in the secured party being deemed a resident, domiciled, carrying on business, or subject to taxes in China. Tax obligations and other legal implications depend on specific circumstances, including the presence of a permanent establishment and the nature of activities conducted by the secured party in China.

In the context of Chinese law, perfecting a mortgage over an aircraft or engine in China involves a registration process with the CAAC, adherence to specific documentation requirements, and compliance with relevant laws and regulations.

The mortgage over aircraft shall be registered with the CAAC, whereas the mortgage over spare engines shall be registered with Unified Registration Publicity System for Movable Asset Financing of the Credit Reference Centre of the People’s Bank of China.

In China, the typical form of taking security over a bank account is a deposit account pledge. It is typically perfected as follows:

• execution of pledge agreement;
• notarisation;
• notice to bank; and
• bank confirmation.

For the security to be valid, the bank account shall be especially used for security and shall be actually controlled by the creditor. The creditor is entitled to priority receipt of payment from such money if the debtor fails to perform its obligation.

In China, a third party is allowed to take a lien over an aircraft or engine. However, the lien cannot be registered.

Whether the lien could cover the value of work done on other assets besides work done on the actual secured asset, and whether a fleet lien will be recognised, depends on whether the lien could be defined as “the lien between enterprises”, according to Article 448 of Civil Code of the PRC, which is still under dispute in China.

The concept of a “fleet lien”, is not formally recognised under Chinese law. Instead, liens in the aviation context are typically tied to specific aircraft or engines based on the services rendered or debts accrued against those particular assets.

Generally speaking, after the property is taken as lien, the third party shall stipulate with the debtor the time limit of no less than 60 days for the discharge of debts. If the debtor defaults, the third party may claim in priority the proceeds from a discount by agreement with the debtor, auction or sale of the property under lien.

In China, the average timeframe to discharge a lien or mortgage over an aircraft can vary depending on the specifics of the case (settlement of debt) and the efficiency of the administrative process (filing with the CAAC).

The register of civil aircraft rights, including mortgages and charges, is established by CAAC. The interests of an aircraft mortgagee are noted on the register.

The notation of a mortgage or security interest on the aircraft register has several significant effects including establishing the priority of the mortgage or security interest, serving as public notice to all interested parties and providing a legal basis for the mortgagee or security trustee to enforce their rights and protection against good faith buyers.

Statutory rights of detention or non-consensual preferential liens can indeed arise over an aircraft in China under specific circumstances including unpaid airport charges, repair and maintenance costs. However, “fleet-wide” liens or detentions, it is not a common practice under Chinese law.

A potential purchaser of an aircraft could verify that an aircraft is free of encumbrances in the Civil aviation rights registration and authorization code application system for international interests registration of aircraft.

Enforcing a security assignment involves realising the value of the collateral to satisfy the debt. This might include selling or otherwise disposing of the asset to repay the secured amount.

Enforcing a loan can involve various mechanisms, such as suing the borrower for the outstanding debt, applying for a court judgment, and potentially seizing the borrower’s assets if necessary.

Enforcing a guarantee means pursuing the guarantor for payment if the borrower defaults. This can be similar to loan enforcement but directed towards the guarantor instead of the borrower.

While a notice and acknowledgment play a vital role in documenting consent and facilitating the enforcement process, the enforceability of a security trustee’s rights under a security assignment is contingent upon a comprehensive legal framework that includes the security assignment agreement, compliance with Chinese law, and the terms of the lease agreement itself.

In general, it is permitted in China for the parties to choose a foreign law as the governing law for foreign-related civil relations. When it comes to a finance or security document, whether Chinese courts will uphold the choice, depends on whether the choice would be deemed as violating the mandatory provisions of laws in China.

There have been cases that hold the choice violates foreign exchange control regulations in China, and thus the choice is invalid. As the law is being revised and amended, cases with opposite opinions have also emerged.

Chinese courts will have no jurisdiction if the parties have concluded an exclusive choice of foreign court agreement.

In accordance with the Civil Procedure Law of the PRC, the prerequisites for the recognition and enforcement of a final judgment of a foreign court or an arbitral award by a Chinese court are that, there exists an international treaty concluded, or bilateral treaty acceded to between the foreign country that issued the judgment and China, or the principle of reciprocity.

After reviewing the case in the light of the international treaty, or the bilateral treaty, or the principle of reciprocity, it is found that the judgment or award does not contravene the basic principles of Chinese law, and does not undermine the country’s sovereignty, security or social and public interests, hereinafter referred to as public policy.

The Chinese courts shall rule that a final judgment of a foreign court or an arbitral award shall not be recognised or enforced under the following five circumstances:

• the foreign court has no jurisdiction;
• the litigation rights of the respondent have not been guaranteed;
• the judgment or award was obtained by fraudulent means;
• a Chinese court has made a judgment or ruling on the same dispute, or has recognised the judgment or ruling made by a court of a third country for the same dispute; and
• the judgment or award violates the public policy of China.

In China, a secured party, such as a mortgagee under an aircraft mortgage, generally cannot simply take physical possession of the aircraft to enforce a security agreement without the lessee’s or operator’s consent. The process for enforcing security interests is regulated by law and typically involves a more formal procedure to ensure fairness and protect the rights of all parties involved.

In China, there are domestic courts that are competent to decide enforcement actions under a security agreement or aircraft mortgage. Domestic courts which are competent to decide enforcement actions under a security agreement/aircraft mortgage shall be the court of first instance or a court at the location of the enforced property at the counterpart level of the court of first instance.

Pending final resolution of judicial proceedings, a secured party can apply to the court for preservation of the property, and the court may rule that preservation measures be adopted when necessary. The secured party usually has to post a bond or provide a guarantee pursuant to the court’s order.

While Chinese courts generally render judgments in Renminbi (RMB), there are exceptions and considerations that could allow for judgments in foreign currencies, if the security agreement or aircraft mortgage explicitly stipulates that the debt shall be repaid in a foreign currency.

Generally, a secured party may be responsible for certain fees associated with the enforcement process, such as court filing fees or administrative costs related to the repossession and deregistration of the aircraft. However, the obligation to pay significant taxes or fees in connection with enforcement is less common. If such taxes or fees are required, they would typically be specified in the security agreement or aircraft mortgage documents.

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