Richard Munden of Walkers explains how the Cayman Islands became a front-running jurisdiction for the financing of commercial aircraft for lessors and airlines and other operators across the globe.
For over two decades special purpose vehicles organised under the laws of the Cayman Islands have featured in a range of cross-border financing structures for commercial aircraft. While legislative and fiscal developments outside the Cayman Islands over the years have caused certain structures to evolve and others to fall out of favour, Cayman Islands vehicles continue to enjoy a very central position in the updated and new structures being used today. The Cayman Islands remains at the front of a very small number of offshore financial centres used for the financing of commercial aircraft for lessors and airlines and other operators across the globe. This is driven by the advantages offered by the jurisdiction generally for cross-border financing and investment as is evidenced by the concentration of Cayman Islands entities in other sectors such as the hedge fund and private equity industries and in the capital markets sector. For certain transactions in recent years involving an overlap between sectors, such as investments by hedge and private equity funds in aircraft assets and leasing companies and capital markets financing/refinancing of aircraft assets, familiarity with the jurisdiction has contributed to time and cost savings in structuring and execution.
The key features of the Cayman Islands as a jurisdiction of choice for lenders, export credit agencies, airlines and other parties that participate in the aircraft finance industry are (i) political and economic stability: the Cayman Islands is a British overseas territory; (ii) the legal framework: the Cayman Islands has a combined common law and statue-based legal system, legislation reflects many principles of the laws of England and Wales and case law from the English courts is persuasive (although not binding) in the courts of the Cayman Islands; (iii) the Cayman Islands currently has no income tax, corporate tax or capital gains tax and no withholding tax is imposed in the Cayman Islands on any cash flows; and (iv) the Cayman Islands boasts a substantial and sophisticated financial and legal services sector and many professionals in the sector have extensive experience from leading onshore financial centres.
The Cayman Islands government works closely with the private sector to review industry trends with a view to implementing changes to practice and legislation to promote the competitiveness of the jurisdiction in respect of both established and new products. In respect of the aircraft finance sector this was clearly demonstrated in 2009 when the Cayman Islands implemented the Cape Town Convention Law, 2009 (the Cape Town Law).
IMPLEMENTATION OF THE CAPE TOWN CONVENTION LAW, 2009
The Cape Town Law was implemented with a view to placing the Cayman lslands on a similar footing with jurisdictions in which the Convention on International Interests in Mobile Equipment 2001 and the Protocol thereto on matters specific to aircraft equipment (together, the Convention) is applicable law. The Convention is likely to be familiar to many readers of this guide and was created with the aim of establishing a substantively uniform approach to protecting, among other things, interests of secured creditors, conditional sellers and lessors in certain aircraft and aircraft engine types including a means for the priority of such interests to be determined by registration of the same. As a British Overseas Territory the Cayman Islands cannot become a party to the Convention in its own right and in order for the Convention to become applicable law in the Cayman Islands a number of steps must be taken, including the accession of the United Kingdom as a party to the Convention and the enactment of legislation in the United Kingdom to extend the Convention to the Cayman Islands.
The Cape Town Law introduces into Cayman Islands law a regime for the constitution, recognition and registration of statutory “international interests” that mimics the principles and framework for the constitution, recognition and registration of international interests that are found in the Convention. The Cape Town Law does not have the effect of making the Convention itself applicable law in the Cayman Islands. It is important to note this distinction, as it is not uncommon for transaction parties and their advisers to believe that the Convention itself is applicable law in the Cayman Islands.
As a result of the coming into force of the Cape Town Law, in respect of any transaction after 7 July 2009 in which a Cayman Islands entity participates or to which Cayman Islands law is or may apply that involves the sale, leasing of, or granting of security interests over aircraft or aircraft engines, an assessment should be made as to whether the Cape Town Law applies.
APPLICATION OF THE CAPE TOWN CONVENTION LAW, 2009
In certain cases the Cape Town Law will apply automatically to a transaction in respect of an aircraft or aircraft engine (in common with the Convention the Law stipulates the types of aircraft and engines it covers). In circumstances where the Cape Town Law would not apply automatically an election in respect of the Law may be made by a Cayman Islands entity that is a “debtor” (which includes a chargor under a security agreement, a lessee under a leasing agreement and a conditional buyer under a title reservation agreement) in a transaction. The election will have the effect of causing the Cape Town Law to apply in respect of the relevant transaction.
The Cape Town Law will apply automatically if after the commencement date of the law and at the time of conclusion of the agreement that would create an international interest for the purposes of the law or, as the case may be, a contract of sale, the party that is the debtor in respect of such agreement is situated (within the meaning of the Cape Town Law) in a country that is party to the Convention. The Cape Town Law will also apply automatically in relation to a helicopter or an airframe pertaining to an aircraft registered in an aircraft register of a country that is party to the Convention that is the state of registry.
The Cape Town Law will apply by election if after the commencement date of the law and at the time of conclusion of the agreement that would create an international interest for the purposes of the law or, as the case may be, a contract of sale, the party that is the debtor in respect of such agreement is a “Cayman entity” (which includes a Cayman Islands exempted limited company; the typical form of Cayman Islands special purpose vehicle used for aircraft finance transactions) and has elected that the Cape Town Law should apply to it generally or with respect to the relevant aircraft and/or aircraft engines.
EFFECT OF THE CAPE TOWN CONVENTION LAW, 2009
If the Cape Town Law is applicable to a transaction then international interests will be created as a result of the execution of the relevant agreements, the priority of those interests will be determined in accordance with the Cape Town Law (which looks to the date of registration of the relevant interest on the International Registry) and the holder of an international interest will have the rights and remedies prescribed by the Cape Town Law. As the nature of such interests and the associated rights and remedies are materially equivalent to the nature of the international interest and the associated rights and remedies set out in the Convention, the end result is that as a matter of Cayman Islands law the holder of the interest should be in substantively the same position as if the Convention was applicable law in the Cayman Islands (ie, the Cape Town Law has an effect substantively equivalent to the effect of the Convention without the need for the Convention itself to be applicable law in the Cayman Islands).
The triggers to automatic application are such that if the Convention is applicable to a transaction as a matter of the laws of jurisdictions other than the Cayman Islands then, as a result of the application of the Cape Town Law, the interests and rights of the parties to that transaction that arise pursuant to the Convention should also be constituted and recognised in a materially equivalent fashion as matter of the laws of the Cayman Islands.
The option of “application by election” can be viewed as a means of conferring the advantages provided by the Cape Town Law on parties to a transaction that would not otherwise have the benefit of the Cape Town Law. Examples of such transactions include (i) a transaction in respect of an aircraft that is owned and financed by a Cayman Islands exempted limited company that is leased to a lessee in, and registered in, a jurisdiction that is not party to the Convention and (ii) a transaction in respect of an aircraft registered in the Cayman Islands that is owned, financed and operated by a Cayman Islands exempted limited company.
If the Cape Town Law does not apply to a transaction then the rights and interests of contracting parties and the priority thereof will be determined in accordance with the governing law of the relevant agreements without regard to the Cape Town Law. In such circumstances no international interest nor any of the rights provided in the Cape Town Law will be created.
ELECTION – ADDITIONAL PROTECTION FOR THE CREDITOR?
As noted above the Cape Town Law applies automatically if a debtor is situated in a state that is party to the Convention and will also apply automatically in respect of an airframe registered in a state that is party to the Convention. In the latter case the automatic application will result in international interests being constituted under the Cape Town Law with respect to the relevant airframe only and not in respect of any aircraft engines that are also the subject of the relevant transaction. In a situation where a debtor in respect of such aircraft – for example, the owner of the aircraft as mortgagor thereof – is a Cayman Islands exempted limited company the Cape Town Law does not prohibit such company from making the election described above. Such election would have the result that, as a matter of Cayman Islands law only, an international interest would also be created in respect of the aircraft engines.
The aim of the Cape Town Law is to replicate in Cayman Islands law the substantive concepts contained in the Convention. Given the high volume of transactions for the financing of commercial aircraft that use Cayman Islands structures, lenders, export-credit agencies, airlines, lessors and other stakeholders and their counsel and other advisers have quickly become familiar with the provisions of the Cape Town Law and the purposes for which it was implemented. Although to date there has not been any reported case law before the courts of the Cayman Islands to provide any guidance as to the application and construction of the Cape Town Law, from a Cayman Islands perspective it has generally been accepted to be a positive legislative development that enhances creditor remedies and reduces risk for lenders.