Aviation Finance & Leasing 2024 Comparisons

An aircraft sale and purchase agreement is subject to stamp duty if it is executed in Japan, while an engine sale agreement or a sale of an ownership interest in an entity is not subject to stamp duty. Stamp duty does not apply if the agreement is executed outside Japan, even if it is executed by a Japanese party.

An aircraft sale and purchase agreement is not required to be translated, certified, notarised or legalised to be enforceable against a Japanese party.

However, if a party submits the agreement to the court as evidence, a Japanese translation must be attached.

Ownership of an aircraft or engine (including all installed parts) is transferred upon an agreement between a seller and a buyer. In order to perfect the transfer of an aircraft against a third party, registration in the aircraft register maintained by the Japan Civil Aviation Bureau (JCAB) of the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is required. There is no equivalent registration system for independent engines. If ownership of an engine is transferred separately, transfer of possession of the engine or a registration of assignment of movables pursuant to the Act on Special Provisions, etc, of the Civil Code Concerning the Perfection Requirements for the Assignment of Movables and Claims (Act No 104 of 12 June 1998) is required for perfection against a third party.

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

Under the Act on General Rules for Application of Law (Act No 78 of 21 June 2006), which is a statute of Japanese conflict of laws rules, the transfer of ownership of property is mandatorily governed by the law of the place where the property is located, while the parties can, in principle, freely choose the governing law of the transfer agreement itself. In the case of the aircraft, “the place where the property is located” is generally interpreted as “the jurisdiction where the aircraft is registered”. Therefore, if the subject aircraft is registered in Japan or the subject engine is located in Japan, even if the parties choose English law or New York law for the governing law of the sale agreement, that choice will be disregarded with respect to the transfer of ownership.

However, as explained in 1.2.1 Transferring Title, the transfer is effective under Japanese law, as long as the transfer of ownership is agreed between the parties. As a result, even if English law or New York law is chosen as the governing law of the sale and purchase agreement, the ownership can usually be validly transferred.

A bill of sale is not required to be translated, certified, notarised or legalised to be enforceable against a Japanese party. However, in the case of a fresh registration of the imported aircraft in the aircraft registry, a notarised bill of sale must be submitted to the JCAB.

In order to register an aircraft with the JCAB, the bill of sale must be submitted as one of the supporting documents with the application for registration. The outline of the registration process for a newly imported aircraft is as follows.

• Applicant: owner.
• Standard processing period: one week from receipt of the application.
• Major supporting documents (an example for a simple case):

1. application form;
2. power of attorney (only in the case of an application by an agent);
3. certificate of airworthiness;
4. notarised bill of sale;
5. certificate of non-registration;
6. certificate of registered seal;
7. document evidencing empty weight;
8. receipt of registration tax (original);
9. certificates of residence of more than two thirds of officers (if the applicant does not have any other aircraft registered in Japan);
10. list of shareholders or annual securities report;
11. certificates of residence of shareholders holding more than two thirds of voting rights; and
12. other documents required by the JCAB.

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

Please see 2.1.6 Licensing/Qualification of Lessors regarding the requirements for the owner of an aircraft registered in Japan.

Registration tax is payable upon registration of transfer of an aircraft, while it does not apply to the sale of an engine or an ownership interest in an entity that owns an aircraft or engine. Please see 1.1.1 Taxes/Duties Payable Upon Execution of the Sales Agreement regarding stamp duty.

In general, operating/wet/finance leases or leases concerning only engines or parts are permissible and recognised. Depending on the nature of parts, the independent legal title will be lost if the parts are attached to the aircraft and consist of the structure thereof, in which case the lessor will lose the ownership interests and thus the lease agreement will lose its base. See also 2.2.4 Risk of Title Annexation.

The Japanese conflict of laws rules allow parties to choose the governing law of the agreement as a matter of general principle. The parties to a lease may choose the governing law for a lease involving a domestic party or an asset situated in Japan. However, as an exception, under the Japanese conflict of laws rules, those provisions of the foreign law will not apply if the application thereof is against public policy.

No material restrictions are imposed on domestic lessees making rent payments to foreign lessors in US dollars, but certain payments are restricted under the Foreign Exchange and Trade Act; see 2.1.4 Exchange Controls.

In exceptional cases (eg, payment to a person residing in an area subject to international sanctions), cross-border payments are subject to governmental approval pursuant to exchange controls under the Foreign Exchange and Trade Act but, as a general rule, they are only subject to post facto reporting requirements.

Stamp duty does not apply to a lease of an aircraft or an engine.

It is not necessary for a lessor to be licensed or otherwise qualified in Japan to lease an aircraft to a Japanese lessee.

However, if the lessor is a foreign company, attention should be paid to the requirements for registration with the JCAB. In general, the aircraft operated by a Japanese lessee must be registered with the JCAB.

Under the Civil Aeronautics Act (Act No 231 of 15 July 1952), any aircraft owned by any person who falls under any of the following descriptions may not be eligible for registration:

• any person who does not have Japanese nationality;
• any foreign state or public entity or its equivalent in any foreign state;
• any juridical person or body established in accordance with the laws and regulations of any foreign state; and
• any juridical person of which the representative is any one of those listed in the preceding three items or of which one-third or more of the officers are those persons or one-third or more of voting rights are held by those persons.

It is usually impossible for a foreign lessor to meet the above requirements itself. As a practical solution, a foreign lessor often uses a special purpose company that meets the requirements as nominee title holder.

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

Tax and other withholding gross-up provisions are generally considered to be permissible and enforceable.

A lease can cover parts that are installed or replaced on an aircraft or engine after its execution if parties so agree under the lease agreement.

The Civil Code (Act No 89 of 27 April 1896) has a concept of “accession (fugo)”, whereby if two or more movable properties with different owners can no longer be separated without damage due to accession, the ownership of the composite thing belongs to the owner of the principal movable property. The same applies if excessive expense is required to separate the movables.

In most cases, aircraft engines installed on an aircraft can be easily separated without damage or excessive expense. Therefore, practitioners usually consider the risk of title annexation of the aircraft engines to be relatively low. In practice, an engine owner installs a nameplate on the engine to indicate its interest.

In Japan, the Trust Act (Act No 108 of 15 December 2006) provides for the concepts of a trust and a trustee.

Legal ownership of an aircraft by an owner (lessor) may be registered in the aircraft register in Japan.

Upon registration of ownership in the aircraft register, the aircraft acquires Japanese nationality. In principle, the JCAB may not grant airworthiness certification to an aircraft that does not have Japanese nationality.

Registration of ownership of an aircraft serves as perfection against a third party as well (see 1.2.1 Transferring Title).

A trust beneficial interest of a registered aircraft may be registered, but it has no significant legal effect.

An aircraft must always be registered in the name of the owner in Japan (including cases where the owner is not the operator). It cannot be registered in the name of the operator if the operator is not the owner.

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

In Japan, a lease of an aircraft cannot be registered in the aircraft register. In general, the lease of an aircraft is not subject to any consent from any governmental entity.

A lease does not need to be in a specific form, translated, served, certified, notarised nor legalised to be valid. A lease cannot be registered (see 2.3.3 Aircraft/Engine-Specific Registers and 2.3.4 Registration of Leases With the Domestic Aircraft Registry).

A lease cannot be registered (see 2.3.3 Aircraft/Engine-Specific Registers and 2.3.4 Registration of Leases With the Domestic Aircraft Registry), and therefore will not be subject to registration tax.

In principle, aircraft based in Japan must be registered in Japan (except for foreign-registered aircraft operated by foreign airlines). There is no popular alternative country for registration.

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

A lessee who leases an aircraft from a foreign lessor will be required to pay withholding tax under the domestic tax law of Japan. If the recipient of the rent is qualified to receive the rent without withholding tax under a double tax treaty, the lessee is not required to withhold tax.

A foreign lessor is not generally deemed to have a permanent establishment in Japan just because it is a party to a lease agreement with a Japanese lessee.

Under the default rule of the Japanese Civil Code, the lessor of a lease is responsible for any necessary repairs. However, the parties may agree otherwise in the lease agreement, which is the case for most aircraft or engine leases.

Japanese law adopts the principle of negligence liability in principle. There are no express provisions imposing strict liability on aircraft or engine owners. Furthermore, considering the fact that, under aviation leasing practice, an airline lessee is solely responsible for the maintenance of the aircraft, practitioners generally consider that it is unlikely that a foreign aircraft or engine owner or lessor under a lease, or a financier financing the asset on lease, would be liable under the doctrine of strict liability as a result of damage or a loss caused by the asset. In practice, owners and financers are included as additional insureds under third-party liability insurance.

Creditors are not entitled to attach assets that do not belong to the debtor. If the lessee's creditors attach an aircraft leased to the lessee but owned by another entity (ie, lessor as owner), the owner may bring a third-party action against the creditors to prevent such attachment.

Under Japanese law, assuming that the lease is an operating lease, the lessor's rights under the lease (rent claims) are not considered to be claims secured by the aircraft or engine. Claims for rent are considered to be unsecured ordinary claims.

On the other hand, the lessor's interest in the aircraft or engine is not considered to be a security interest but is considered to be an absolute ownership interest.

In general, it is not mandatory for owners or operators of aircraft registered in Japan to place insurance with domestic insurance companies.

From a regulatory perspective, the Insurance Business Act (Act No 105 of 7 June 1995) prohibits a foreign insurer without a branch office in Japan from executing an insurance contract pertaining to aircraft with Japanese nationality in principle. However, an insurance contract that covers Japanese registered aircraft used for commercial flights, cargo transported internationally by such aircraft and obligations arising from them is an exception.

If the insurance with respect to the aircraft in question does not fall under such an exception, it would not be practical for the owner or operator to find a foreign insurance company that would underwrite such insurance.

In order to operate air transport services or aerial work services in Japan, a licence from the MLIT is necessary pursuant to the Civil Aeronautics Act. The MLIT requires applicants for such licences to ensure that an appropriate insurance policy is in place to cover the damages in the event of an aviation accident.

A reinsurance contract is also an exception to the restriction explained in 2.5.1 Requirement to Engage Domestic Insurance Companies, so reinsurances can be placed outside of Japan up to 100% coverage.

As long as the parties involved agree appropriately, a cut-through clause in insurance documents is enforceable.

An assignment of claims under an insurance policy is generally permitted. However, the assignment of claims under a liability insurance policy is prohibited by the Insurance Act (Act No 56 of 6 June 2008).

In principle, a lessor may terminate the lease in accordance with the provisions of the lease agreement. However, there is a possibility that a court may, in its discretion, limit such lessor’s right of termination depending on the circumstances, such as termination based on the lessee's default in the event of a minor breach of the lease agreement (eg, a single failure to pay rent) or termination based on a petition for an insolvency proceeding.

There are no material restrictions on the re-export of the aircraft or sale of the aircraft following the termination of the lease.

The aircraft does not have to be in Japan at the time of termination or sale.

If a lease is validly terminated, the lessor has a right to take physical possession of the aircraft without the lessee’s consent. However, since self-help is not permitted under Japanese law, the lessor must obtain a court order or judgment if the lessee does not surrender the aircraft to the lessor.

There are no specific courts competent to decide aviation disputes.

A lessor seeking a judgment to order the lessee to deliver the aircraft to the lessor may apply to the court for an order of provisional disposition prohibiting the transfer of possession. The lessor must post a bond in the amount designated by the court. In general (not aircraft-specific), it usually takes a few days after the application to obtain an order of provisional disposition prohibiting the transfer of possession.

In general, a Japanese court will uphold:

• a foreign law as the governing law of an aircraft lease (see 2.1.2 Application of Foreign Laws);
• submission to the jurisdiction of the foreign courts by the parties as far as the matter is not subject to the exclusive jurisdiction of Japan, and the foreign court has jurisdiction over such dispute under the laws of the jurisdiction where the foreign court is located; and
• a waiver of immunity by the parties to such lease.

Foreign Judgments

A judgment of a foreign court can be enforced in a court of Japan, without further consideration of the merits of the case, if all of the following conditions are satisfied:

• the foreign judgment concerned is duly obtained and is final and conclusive;
• the jurisdiction of the foreign court is recognised in light of Japanese laws;
• the service of process, accompanied by an appropriate Japanese translation, has been duly effected, in light of Japanese laws, on the defeated defendant other than by public notice, or the defeated defendant has appeared in the relevant proceedings without receiving service thereof;
• the foreign judgment is not contrary to public policy or the good morals doctrine in Japan; and
• judgments of Japanese courts receive reciprocal treatment in the courts of the foreign jurisdiction concerned.

Foreign Arbitral Awards

Japan has ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), and a foreign arbitral award can be enforced in a court of Japan without further consideration of the merits of the case, unless certain conditions set forth in the Arbitration Act (Act No 138 of 1 August 2003) are met, which are substantially the same as those set forth in the New York Convention.

There are several precedents of judgments obtained in a foreign currency. However, there is a possibility that the debtor may be allowed to pay in Japanese yen if it so wishes.

There are basically no limitations on a lessor’s ability to recover default interest or to charge additional rent following termination of the lease upon default, as long as it is not against public policy.

In order to judicially enforce the lease and recover possession of the aircraft, the lessor must first obtain a court judgment ordering the lessee to return the aircraft to the lessor and then apply to the court for enforcement of that judgment.

The lessor must pay fees to the court for such proceedings.

The lessor must also deposit with the court in advance the costs to be incurred by the court in enforcing the judgment, although these costs may be reimbursed by the lessee. In addition to the court fees, the lessor must also bear the legal fees of their legal counsel.

There is no mandatory notice period for terminating an aircraft lease under Japanese statutes.

As far as a commercial lease is concerned, an aircraft lessee is unlikely to be entitled to sovereign immunity from the civil jurisdiction of Japan. Sovereign immunity can be waived by written contract.

See 2.6.6 Domestic Courts' Recognition of Foreign Judgments/Awards.

There are no other material issues.

Under Japanese law, it is possible to contractually replace the parties to a contract, which can be achieved through the assignment of contractual status (and the assignment of claims and assumption of obligations).

Although Japanese conflict of laws rules applicable to the governing law of the assignment of contractual status are not clear, it would arguably be safer if the assignment or novation is made in compliance with the governing law of the lease agreement being assigned or novated.

See 1.1.2 Enforceability Against Domestic Parties.

There is no registration system for leases and their assignment or novation. However, if the owner of the aircraft is changed (which occurs at the same time as a change of lessor), such a change must be registered. See also 1.2.4 Registration, Filing and/or Consent From Government Entities and 2.3.1 Notation of Owner's/Lessor's Interests on Aircraft Register regarding the registration of ownership.

There are no taxes/duties payable in respect of such assignment or novation of a lease agreement.

A transfer of the ownership interest of the entity (or the beneficial interest in the trust) owning an aircraft (with the legal title to the asset remaining with that entity) will be treated as a transfer of the ownership interest or the trust beneficial interest, not as a transfer of the aircraft itself.

However, as explained in 2.1.6 Licensing/Qualification of Lessors, to register an aircraft in Japan, the owner must not meet under certain characteristics (in particular, one-third of the owner’s voting rights held by foreigners). If the transfer of ownership results in the requirements no longer being met, the registration will be deleted.

The owner of an aircraft registered in Japan can apply to the JCAB for deregistration.

Theoretically, an aircraft owner can apply for deregistration without the lessee's or operator's consent.

The following documents are typically required in an application for deregistration by the JCAB:

• application for deregistration;
• power of attorney (only in the case of an application by an agent);
• certificate of registered seal;
• certificate of residence of the owner (only in the case of individual losing Japanese nationality);
• aircraft registration certificate; and
• request for telegram of aircraft deregistration certificate (if required for registration in a foreign jurisdiction).

The standard processing period is one week from receipt of the application.

The JCAB does not provide advance assurances to an aircraft owner or mortgagee as to the prompt deregistration of the aircraft.

Although the amount is not large, registration tax is payable for the deregistration of the aircraft.

The JCAB has prepared and made public a form of power of attorney for deregistration applications on its website. Such power of attorney is supposed to be affixed with the registered seal of the owner of the aircraft. The language of the form is Japanese. Such power of attorney cannot be registered.

A deregistration power of attorney that is not prepared based on the form may be accepted by the JCAB. However, it must cover the descriptions in the form and must be accompanied by a Japanese translation.

When applying to the JCAB for the deregistration of an aircraft, a certificate of registered seal of the owner, issued within three months, is required as one of the supporting documents.

The form prepared by the JCAB does not have a governing law provision.

Even if a deregistration power of attorney is expressed to be irrevocable, the grantor may be allowed to revoke it if there is a compelling reason.

An owner (mortgagor or lessor) can export the aircraft without the lessee’s consent. A mortgagor may be allowed to export the aircraft without the owner's or lessor’s consent.

Exports are minimally regulated from the point of view of maintaining international peace and security under the Foreign Exchange and Foreign Trade Act (Act No 228 of 1 December 1949). In certain circumstances, an export permission from the Minister of Economy, Trade and Industry may be required to export an aircraft.

There are no significant fees to be charged in respect of the export of an aircraft.

There are no other material issues.

There are three main insolvency proceedings under Japanese law:

• a bankruptcy proceeding under the Bankruptcy Act (Act No 75 of 2 June 2004);
• a corporate reorganisation proceeding under the Corporate Reorganisation Act (Act No 154 of 13 December 2002); and
• a civil rehabilitation proceeding under the Civil Rehabilitation Act (Act No 225 of 22 December 1999).

A bankruptcy proceeding is a liquidation type of insolvency proceeding, while a corporate reorganisation proceeding and a civil rehabilitation proceeding are restructuring types of insolvency proceedings.

A corporate reorganisation proceeding is only available to a stock company (kabushiki-kaisha), which is the most common form of business company in Japan.

A civil rehabilitation proceeding is a type of debtor-in-possession (DIP) proceeding. In bankruptcy proceedings and civil rehabilitation proceedings, the enforcement of security interests by secured creditors is not prevented. On the other hand, in a corporate reorganisation proceeding, secured creditors may not freely enforce their secured interest outside the proceeding.

The Bankruptcy Act provides that, if foreign insolvency proceedings are taken against the bankrupt, the bankruptcy trustee may request the foreign trustee to co-operate and provide any necessary information for the proper implementation of the bankruptcy proceeding, and the bankruptcy trustee shall endeavour to do the same for the proper implementation of the foreign insolvency proceeding. There are similar provisions in the Corporate Reorganisation Act and the Civil Rehabilitation Act.

Under the Act on Recognition of and Assistance for Foreign Insolvency Proceedings, which is based on the UNCITRAL Model Law on Cross-Border Insolvency, a foreign trustee may file a petition with a court for recognition of foreign insolvency proceedings. Upon such filing, the court may issue an order of recognition of the foreign insolvency proceeding and order a stay on compulsory execution or other procedures on the debtor’s property, as necessary.

It is the owner of an aircraft, not the lessee, who applies for deregistration under the Japanese aircraft registration system. Therefore, a deregistration power of attorney from a lessee is irrelevant. Insolvency proceedings with respect to a lessee do not have any effect on the validity of the deregistration power of attorney from the owner.

If the owner becomes subject to an order commencing a bankruptcy proceeding, the deregistration power of attorney will be automatically terminated. Unlike a bankruptcy proceeding, the deregistration power of attorney will not be automatically terminated even if the owner becomes subject to an order commencing a corporate reorganisation proceeding or civil rehabilitation proceeding.

In the case of an operating lease, if an insolvency proceeding commences with respect to the lessee, the trustee (or the lessee in the case of a civil rehabilitation proceeding) is given an option to terminate or continue the lease. If the termination option is chosen, the lease will be terminated.

The lessor may also terminate the lease if they have already been entitled to terminate the lease pursuant to the provisions of the lease agreement before the commencement of the insolvency proceeding or if the lessee does not pay the rent accrued after the commencement of the insolvency proceeding. However, the lessor may not terminate the lease due to non-payment of the insolvency claims. If the lease is validly terminated, the lessor may repossess the aircraft outside the insolvency proceedings.

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

In the case of a finance lease, the lessor is treated as a secured creditor with a security interest in the aircraft.

As mentioned in 2.9.2 Overview of Relevant Types of Voluntary and Involuntary Restructuring, Reorganisations, Insolvencies and Receivership, in a corporate reorganisation proceeding, secured creditors are prevented from enforcing their security interests to collect their claims, although the secured creditors are given preferential treatment in the reorganisation plan.

In a civil rehabilitation proceeding, the debtor may apply to the court for an order to suspend the enforcement procedure of the security interests for a reasonable period of time. In addition, the debtor subject to a civil rehabilitation proceeding may file a petition to the court for permission to have security interests that exist on its assets extinguished, by paying to the court the amount of money equivalent to the value of the assets if the relevant assets are indispensable for the continuation of the business of the debtor.

After the commencement of an insolvency proceeding, the legal procedures (such as compulsory execution) for the collection of insolvency claims cannot generally be exercised. However, in a bankruptcy proceeding and a civil rehabilitation proceeding, the secured creditors are not subject to such restrictions, in principle. There is no limitation on the period for such restrictions.

However, please note that, in the case of a lessee’s insolvency, since the aircraft is not an asset of the lessee but an asset of the owner, the owner’s lender may enforce its mortgage (as long as an enforcement event under the mortgage exists) irrespective of the lessee’s insolvency proceeding.

In general, the lessee (as debtor) or its creditors including the lessor may make a petition with the court for the commencement of insolvency proceedings. Upon the petition, the court will make an order of commencement of insolvency proceedings if it finds the grounds for such proceedings.

The validity of an ipso facto termination clause (ie, a clause providing for automatic termination, or giving the lessor the right to terminate the lease, upon a petition for insolvency proceedings) is likely to be denied by the court, considering court precedents.

If a Japanese lessee becomes subject to an insolvency proceeding, the effect will be as follows.

Aircraft

Unless the lease is terminated, the lessee may continue to use the aircraft.

Lease Rentals

Unpaid lease rentals accrued before the commencement of the insolvency proceeding may only be paid in accordance with the insolvency plan (usually with material discount). The lease rentals accrued after the commencement of the insolvency proceeding may be paid from the insolvency estate at any time without going through insolvency proceedings.

Lease Security Deposit

The lease security deposit held by the lessor is not affected.

Maintenance Reserves

The treatment of the payment obligations of the lessee with respect to the maintenance reserve (supplemental rent) is the same as that of the lease rentals. The treatment of the amount deposited to the lessor as maintenance reserve is the same as that of the lease security deposit.

Japan has not signed the Convention on International Interests in Mobile Equipment and the related Protocol on Matters specific to Aircraft Equipment.

See 2.10.1 Conventions in Force.

See 2.10.1 Conventions in Force.

See 2.10.1 Conventions in Force.

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

In principle, registration under the Money Lending Business Act (Act No 32 of May 13 1983) is required to provide loans in Japan, unless otherwise specifically permitted under other laws.

There are no material restrictions on borrowers using the loan proceeds.

There are no exchange controls or government consents that would be material to any financing or repatriation of realisation proceeds under a loan, guarantee or security document; see 2.1.4 Exchange Controls.

Borrowers are permitted to grant security to foreign lenders.

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

No consideration, corporate benefit or registration is required for a guarantee to be valid. However, in providing the guarantee, directors need to fulfil their duty of care. If there is not a 100% capital relationship between the guarantor and the obligor, a corporate approval of the conflict of interest transaction may be required, depending on the circumstances.

As a step-in right, it is advisable for a lender to have a security interest over the shares of the Japanese special purpose company that owns the financed aircraft. A pledge of shares (kabushiki shichi ken) is recognised.

A negative pledge is generally recognised.

No material restrictions or requirements are imposed on intercreditor arrangements.

The concept of agency and the role of an agent such as the facility agent under a syndicated loan is recognised.

In practice, the following two methods for subordination are often used.

Condition Method

An agreement between the subordinated creditor and the debtor to repay the subordinated creditor on the condition that the preferential claims have been repaid.

Consensually Subordinated Insolvency Claim

An agreement between the subordinated creditor and the debtor that, in the event of the commencement of insolvency proceedings, the claim will be treated as a consensually subordinated insolvency claim in such proceedings, pursuant to the insolvency laws.

The transfer or assignment of an outstanding debt under an English or New York law-governed loan is permissible and recognised, provided that such transfer or assignment is valid under English law or New York law.

The Interest Rate Restriction Act (Act No 100 of 15 May 1954) provides for a limitation on maximum interest rates. The maximum annual interest rate permitted under the Interest Rate Restriction Act is as follows, and an agreement is void and unenforceable in respect of any amount in excess thereof:

• if the principal amount in less than JPY100,000, the interest rate is 20%;
• if the principal amount is between JPY100,000 and JPY999,999, the interest rate in 18%; and
• if the principal amount is JPY1 million or more, the interest rate is 15%.

A typical security package for an aircraft financing transaction for a Japan-registered aircraft registered is as follows;

• aircraft mortgage under the Aircraft Mortgage Act (Act No 66 of 1953);
• security assignment (lease receivables, insurance claims, warranties, etc);
• account pledge;
• share pledge (if the owner is a special purpose corporation); and
• parent undertaking (if the owner is a special purpose corporation).

It is not possible to create an aircraft mortgage over the engines only, although an aircraft mortgage on an aircraft covers the engines installed in that aircraft. See also 3.2.15 Differences Between Security Over Aircraft and Spare Engines.

A pledge cannot be created over an aircraft registered in Japan.

The concept of a trust and the role of the security trustee are recognised under the Japanese Trust Act, although a security trust is not often used in Japan.

However, the validity of the security trust structure created under foreign law is not necessarily clear in Japan. In this regard, in a cross-border aircraft financing transaction involving a security trust structure established under foreign law, a security interest governed by Japanese law is sometimes created to secure the parallel debt to avoid using the foreign security trust structure.

A borrower can assign its rights under an aircraft lease or insurances to a security trustee, pursuant to a security assignment. Although it is possible for the owner to assign the right to the aircraft (ownership) to a security trustee pursuant to a security assignment, it is not practically used as the amount of the registration tax is considerably high.

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

Security Assignment

Regardless of the parties' choice of governing law, under the Japanese conflict of laws rules, the effect of an assignment of claims vis-à-vis the obligor or a third party is mandatorily governed by the law applicable to the claims assigned.

Guarantee

The parties can choose the governing law of a guarantee, so it may be governed by English or New York law.

Under Japanese law, a security assignment can be created by an agreement between the assignor and the assignee. It is perfected by:

• a notice to the obligor with a certified date (kakutei hidzuke);
• a consent of the obligor with a certified date (kakutei hidzuke); or
• registration in the claim assignment registration file maintained by the Legal Affairs Bureau (in the case of monetary claims, and this perfection is valid only vis-à-vis a third party, not an obligor).

In practice, the consent of the obligor is obtained, and the parties have it stamped by a public notary with a certified date.

Failure to perfect results in the assignee not being able to assert its security interest against a third party.

A security assignment is not required to be translated, certified, notarised or legalised to be enforceable against a Japanese party. However, if a party submits the agreement to the court as evidence, a Japanese translation must be attached.

If the claims to be assigned under a security assignment include claims governed by Japanese law, the obligor's consent with a certified date should be obtained in relation to such claim assignment; see 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments. Obtaining a certified date stamp from a notary public costs JPY700 per document.

If the governing law of a claim is foreign law, the security assignment cannot be registered. The security assignment for an engine located in a foreign jurisdiction can be registered.

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

Where a security trust structure (or a parallel debt structure) is adopted, the security interests continue to be validly held by the security trustee even if there is a change of lender (due to an assignment of its loan claims). Where a security trust structure is not adopted, if a lender transfers its loan claims, the procedures relating to the transfer of the security interest must also be carried out.

A parallel debt structure is possible under Japanese law, but it is rarely used in domestic transactions; see also 3.2.3 Trust/Trustee Concepts.

A foreign lessor is not generally deemed to have a permanent establishment in Japan just because it is a party to a security assignment.

An aircraft mortgage under Japanese law is perfected upon registration of the aircraft mortgage in the aircraft register, pursuant to the Aircraft Mortgage Act.

It is not possible to create an aircraft mortgage over the engines only. In practice, instead of an aircraft mortgage, a security assignment (joto-tanpo) is available for engines. Please see 3.2.14 Perfection of Domestic Law Mortgages regarding perfection.

A security assignment over an engine is perfected upon delivery.

A pledge is usually used to take security over a bank account. In practice, an account pledge is perfected by consent from the account bank with a certified date stamped by a notary public.

Unlike ships, there are no specific statutory liens (sakidori tokken) for aircraft or engines under Japanese law. The ordinary statutory liens for movable property apply to aircraft or engines, but a third party cannot register these liens over an aircraft or engine. If there are competing statutory liens on the aircraft that is subject to the aircraft mortgage, the priority of the aircraft mortgage is equal to the first priority statutory liens under the Civil Code. The first priority statutory liens under the Japanese Civil Code are statutory liens for leases of immovables, lodging at hotels and transportation, which are unlikely to arise on the aircraft.

A statutory lien or aircraft mortgage is extinguished when the relevant secured obligations are paid in full. The standard period of time for processing the deregistration of an aircraft mortgage is one week from the date of application.

An aircraft mortgage can be registered in the aircraft registry. Registration of an aircraft mortgage operates as perfection against a third party.

Pursuant to the Commercial Code (Act No 48 of 9 March 1899), if performance is due on a claim arising between merchants from an action that constitutes a commercial transaction for both parties, a creditor may retain an object belonging to the debtor that the creditor has gained possession of in the commercial transaction with the debtor, until the claim is satisfied. Please see 3.3.1 Third-Party Liens regarding non-consensual preferential liens.

A potential purchaser can search the aircraft register to verify that an aircraft is free of aircraft mortgages. Please note that other encumbrances do not appear on the aircraft registry, and that the accuracy of the descriptions in the aircraft registry is not guaranteed.

There are two major methods for a creditor to enforce a security assignment:

• the creditor obtains the claims definitively and applies the value of the claims to the secured obligations; or
• the creditor sells the claims to a third party and applies the proceeds to the secured obligations.

These processes can be done without the involvement of the court.

In order to enforce (collect) the loan or guarantee, the creditor must first obtain a court judgment and apply to the court for an attachment of the debtor's assets.

If, under a security assignment, security is granted to a security trustee by a lessor in respect of its rights under an aircraft lease, that security trustee can enforce its rights under the security assignment pursuant to a notice and consent (with certified date) executed by that lessor and the relevant lessee, respectively, in connection with such security assignment.

See 2.6.5 Domestic Courts' Recognition of Foreign Judgments/Awards.

However, the following security interests are subject to mandatory Japanese conflict of laws rules:

• security interest: governing law;
• aircraft mortgage: the laws of the jurisdiction where the aircraft is registered;
• security assignment of claims: the governing law of the claims;
• share pledge: the governing law of the issuer; and
• account pledge: the governing law of the account.

See 2.6.6 Domestic Court's Recognition of Foreign Judgments/Awards.

A Japanese aircraft mortgage does not entitle the mortgagee to take physical possession of the aircraft. If the secured party acquires the ownership of the aircraft as a result of the enforcement of the aircraft mortgage, the secured party may take physical possession of the aircraft without the consent of the lessee. However, if the lessee does not voluntarily surrender the possession of the aircraft to the secured party, the secured party must obtain a court order or judgment.

The district court having jurisdiction over the location of the aircraft at the time of issuance of a commencement order for enforcement of the aircraft mortgage has jurisdiction as the execution court.

A creditor is generally entitled to provisional relief under the Civil Provisional Remedies Act, which is designed to cover the period before obtaining a court judgment necessary for enforcement. Since a secured creditor can judicially enforce its security interest without a court judgment, provisional relief is not usually used.

There is a special provisional relief with respect to the enforcement of aircraft mortgages. An aircraft mortgagee is entitled to apply to the court for a provisional order to deliver the aircraft registration certificate, which is necessary for flight, before the petition for enforcement of the aircraft mortgage, to prevent the aircraft from flying away from the current location. Such provisional relief does not require a bond.

See 2.6.7 Judgments in Foreign Currencies.

A borrower who pays interest to a foreign lender will be required to pay withholding tax under the domestic tax law of Japan. Although registration tax will apply to a registration of a security interest in an aircraft, it is usually borne by the borrower.

There are no other material issues.