AALPS Attorneys and Legal Services, Ltd.: 2015

AVIATION & AIRCRAFT News–CAYMAN ISLANDS soaring to new heights!

UPDATE on Cayman Islands Aircraft Registry@the Cayman Islands Civil Aviation Authority

By:AALPSAttorneys

www.aalpslegal.com

The Cayman Islands Register of Aircraft ("Cayman Register") has seen a significant increase in activity and interest over the past year, with particular interest arising from Asia, (which continues to rise exponentially).

The Registry has now significantly passed the 340 aircraft mark and continues to grow in a controlled and selective manner - in particular in the private jet category, (and as a result of the excellent reputation result with the consistent application of well-respected safety methods and record maintenance.

Approximately one in every three aircraft on the Cayman Register have mortgages registered against them and approximately 17% of the aircraft on the Cayman Register are registered to British Virgin Islands ("BVI") owners. It is noteworthy that BVI entities are the single largest group of owners after Cayman Islands entities.

AALPS Attorneys, known for is modern proactive approach and high level of client/Attorney communication has advised on many of the issues in transactions involving mortgages over Cayman registered aircraft with BVI owners. Highlighted below are the main points to consider.

Priority of Mortgages

The Civil Aviation Authority of the Cayman Islands ("CAACI") maintains a register of mortgages ("M-Register") pursuant to the Mortgaging of Aircraft Regulations, 1979 ("Regulations").

Registration of a mortgage provides priority for a security interest in an aircraft and protection from deregistration of an aircraft without the registered mortgagee's consent.

A lender notifying the CAACI of its intention to make application to enter a mortgage in the M-Register files a priority notice. Where such a notice has been entered in the M-Register and said mortgage is then made and registered within 14 days from the entry of the priority notice, the mortgage will be deemed to have priority from the date that the priority notice was registered.

Accordingly, another mortgage registered during the period in which a priority notice is current will not take priority over the mortgage.

If the mortgage is not registered within the 14 day timeframe, then the priority notice will have expired and a new notice will have to be filed. It should be noted that registration of the mortgage over an aircraft cannot take effect until the aircraft is registered on the Cayman Register, but a mortgagee may register a priority notice prior to the aircraft’s registration.

The Regulations clearly specify that where two or more mortgages of an aircraft are entered on the M-Register, those mortgages have priority according to the times at which they were entered on the M-Register.

The CAACI typically requires the original priority notice to be filed, however they will process a copy with the original to follow shortly thereafter under certain circumstances. NB: filing fee for a priority notice is CI$250 (US$305)).

Mortgage Registration

A mortgage can only be registered on the Mortgages Register after it is effective.

In order to register a mortgage over an aircraft on the Cayman Register, the CAACI requires an original mortgage registration application in the prescribed form. As with a priority notice, under certain circumstances, the CAACI will process an electronic copy while the original is in transit to them..

There is no specific form of the mortgage which is required but the CAACI will require an original certified true copy of the mortgage to be provided and accompanied by the mortgage registration fee. It is advisable for a certified copy to be sent to the Cayman Islands rather than the original mortgage since the original mortgage will attract stamp duty (up to the maximum amount of US$610).

This allows time for the certified copy of the mortgage to arrive in Cayman without stamp duty assessment. It is also standard procedure that a separate certification page be sent to the Cayman Islands and the signed and dated mortgage sent by email. Once the mortgage can be be registered, the certificate is attached to a copy of that mortgage.

The CAACI will also require a notarised copy of the power of attorney or other document providing signing authority on behalf of the mortgagor and the mortgagee on the mortgage/the mortgage registration application.

Mortgage registration fees are capped at CI$5,000 (US$6,097.56) & depend on the value of the mortgage:

(a) Mortgage value less than $5 million - CI$1,250 (US$1,524.39)

(b) Mortgage value $5 million to $10 million - CI$2,500 (US$3,048.78)

(d) Mortgage value exceeds $20 million - CI$5,000 (US$6,097.56)

Powers of attorney

Any powers of attorney used for the execution of documents to be filed with the CAACI are required to be notarised (and apostilled where required) for filing with the CAACI.

Air Navigation (Overseas Territory) Order 2013

As a result of the amendments to the Air Navigation (Overseas Territory) Order 2013 ("AN(OT)O"), effective 1 January 2014, the definition of persons qualified, ("Qualified Person"), to hold a legal or beneficial interest, (in the ownership), of an aircraft registered in the Cayman Islands was amended to be:

Ø The Crown - i.e. Her Majesty's Government in the United Kingdom or in right of the Government of the Territory (in this case being the Cayman Islands).

Ø British Nationals, British Overseas Territories Citizens and British protected persons.

Ø Persons ordinarily resident or domiciled in the Cayman Islands.

Ø Incorporated bodies which have a registered office in the Cayman Islands (or the United Kingdom).

The changes to the definition of Qualified Person are significant due to the significant narrowing of criteria for qualification: "bodies incorporated in some part of the Commonwealth and having their principal place of business in any part of the Commonwealth" was the previous definition of Qualified Persons.

In order to provide guidance and clarification in relation to these amendments, the CAACI, working together with Air Safety Support International ("ASSI"), (a subsidiary of the United Kingdom Civil Aviation Authority - established under directions from the United Kingdom's Department for Transport), issued a notice confirming that aircraft registered on the Cayman Register prior to 1 January 2014 to incorporated bodies in some part of the Commonwealth and having their principal place of business in any part of the Commonwealth were validly registered and continue to be so.

The CAACI has also indicated that with respect to aircraft registered after 1 January 2014 to entities incorporated in jurisdictions other than the Cayman Islands or the United Kingdom, the Director General proposes to issue specific exemptions as allowed by AN(OT)O to confirm that any such aircraft registration is validly registered. We would recommend that this be done with respect to BVI owners pending further amendment to AN(OT)O, which we expect to be completed shortly based on representations made to ASSI. These amendments are expected to specifically confirm the position of BVI owners within the definition of Qualified Person.

Taxes

There is no income tax, withholding tax, sales tax, capital gains tax, profit tax, usage tax or tax on lease or mortgage payments imposed by or in the Cayman Islands and given the the provisions of the Regulations, the provisions of the Bills of Sale Law (2000 R) do not apply to any mortgage of an aircraft registered in Cayman.

Customs duty may apply to an aircraft which is brought into the Cayman Islands from another jurisdiction unless the relevant party under the Customs Law (2012 Revision), ("Customs Law") has exercised a discretion to permit the import of such aircraft free of duty – this being for the retention in the Cayman Islands on a temporary basis, with the view to its subsequent departure from the jurisdiction- such period not to exceed six months or such extended period as the Collector of Customs may authorise.

Inspections

Inspection for airworthiness can be completed wherever the aircraft is located!

A certificate of airworthiness is issued once the aircraft satisfies the necessary requirements as designated by International, British and Cayman Islands laws. (NB: There is no requirement for an aircraft registered on the Cayman Register, or which will apply to be so registered, to actually be brought to the Cayman Islands at any time).

Registration of parked aircraft

It used to be that the Cayman Islands accepted only aircraft operated as 'private ', but this is no longer the case: Any type/category of parked (or grounded) aircraft on the Cayman Register (e.g. during the period of fit-out) – subject to fundamental safety and compliance standards.

A major advantageous side-effect: a financier may, during the period of the aircraft’s presence in Cayman, benefit from the registration of a Cayman Islands registered mortgage. Thereafter, the aircraft may be registered in another jurisdiction once ready for commercial operation.

CONCLUSION OF THIS ADVISORY:

It is important for owners and lenders to understand the registration and security regimes in the jurisdiction, in order to ensure that their respective right/obligations and interests are both complied with and upheld via well-established protective measures.