Aviation Finance Comparative Guide

• Published date: 26 September 2023
• Subject Matter: Finance and Banking, Transport, Financial Services, Aviation, Leasing
• Law Firm: TAN HASSANI AND COUNSELS
• Author: Mr Kerwin Tan and Eugene Kaw

1 Legal framework

1.1 Which laws typically govern aviation finance transactions in your jurisdiction?

The following statutes apply to aviation finance transactions in the Philippines:

• the Civil Code of the Philippines, which is the general law covering contracts and obligations;
• the Civil Aviation Authority Act (9497/2008), which is the special law covering aircraft registration and operations; and
• the Financing Company Act (8556/1998), as amended, which governs Philippine financing companies.

1.2 If aviation finance documents are governed by laws other than your local law, what local law requirements (documentary and procedural) are required to ensure that foreign law documents are recognised and enforceable locally?

The High Court of the Philippines has held that no conflicts rule on the validity of contracts is expressly provided for under Philippine law. Nonetheless, choice of law is recognised by the Philippine courts under the Civil Code provision that the parties are free to stipulate the terms and conditions of their contract, provided that such terms and conditions are not contrary to the laws, morals or public policy of the forum.

In preparing for an aircraft finance transaction, the Philippine courts will consider:

• where the contract is made, is negotiated and is to be performed; and
• the domicile, place of business or place of incorporation of the parties.

All of these factors are taken into consideration in determining the validity of choice of law.

Philippine government agencies, tribunals and courts are formalistic insofar as foreign-issued or foreign-executed documents are concerned. Generally, these foreign-sourced documents must be notarised and apostilled (or consularised or legalised in the Philippine consulate where signed) in order to be recognised and enforced in the Philippines. Documentation such as the aircraft finance transaction documents that must be filed with the Civil Aviation Authority of the Philippines (CAAP) must be apostilled if foreign sourced.

The practical effect of this is that the aircraft owner-lessor - even if it signs through a counterpart outside the Philippines - should have its counterpart notarised and apostilled, since the lease will be filed with CAAP.

2 Finance structures

2.1 What aviation finance structures are most commonly used in your jurisdiction?

For aircraft finance, the first and most common structure is a lease agreement between the aircraft owner-lessor and the Philippine lessee. Under this structure, the aircraft owner will be directly leasing to the Philippine lessee, which will also be the operator of the aircraft in the Philippines.

The second structure is a combination of a head lease and a sublease agreement. The head lease will be between the aircraft owner-lessor and an offshore company owned or controlled by the Philippine lessee and acting as head lessee (this offshore company can be, say, in the British Virgin Islands or the Cayman Islands). This offshore company then acts as sublessor and subleases the aircraft to the Philippine lessee, which will also be the operator of the aircraft in the Philippines. Under this second structure, the aircraft owner will be indirectly leasing to the Philippine lessee.

The third, but uncommon, structure is where an aircraft owner has a separate company or entity for each and every aircraft under finance leasing (rather than all aircraft owned by the aircraft owner and consolidated under one entity acting as lessor for all aircraft). Each separate company will then act as an aircraft lessor that can directly lease to the Philippine lessee, which will also be the operator of the aircraft in the Philippines. This structure is more common in operating leases than finance leases.

2.2 What are the advantages and disadvantages of these different types of structures?

The main advantage of the first structure outlined in question 2.1 is the simplicity of the lease, which is a direct lease to the Philippine lessee-operator and thus reduces the transaction documents required to implement the first structure. However, the major disadvantage of this structure is the risk of the aircraft owner-lessor being seen as 'doing business without a licence' in the Philippines. The 'doing business without a licence' rule states that a foreign company doing business in the Philippines without a licence cannot sue in the Philippines, but may be sued in the Philippines. Effectively, this is a defence that the Philippine lessee can put up in case of dispute and that could potentially lock the aircraft owner-lessor out of access to the Philippine courts. This is the major hurdle under this structure; so before starting each finance lease transaction, care must be taken to avoid being seen as doing business in the Philippines without a licence. The phrases 'doing business' and 'without a licence' have specific legal definitions and must be taken into account in the overall structuring. To be sure, there are exceptions to this rule which will validate this structure; but this will vary on a case-by-case basis, depending primarily on the situation of the aircraft owner and its history (or lack thereof) in financing Philippine lessees.

The main advantage of the second and third structures outlined in question 2.2 is that they take into account the 'doing business' rule and veer away from its coverage. Because of this, these structures are far safer for an aircraft owner-lessor insofar as access to Philippine courts is concerned. However, because of this, the major disadvantage is the additional steps, requirements and costs for either (or both) the aircraft lessor and the Philippine lessee. Because there is another layer involved - the offshore company in the second structure and the 'per entity lessor' in the third structure - these structures are not as quick to implement. There are also more transaction documents required to be prepared and more documents to be filed with CAAP.

2.3 What other factors should operators bear in mind when deciding on a financing structure?

For operators, aside from the usual commercial terms - which is a paramount consideration - one of the most important factors to determine is the tax implications on the rent payable by the operator to the lessor. In deciding on the structure, can review which jurisdictions has a tax treaty with the Philippines.

2.4 Who are the most common providers of aircraft finance in your jurisdiction? Do any restrictions apply in this regard?

The most common providers of aircraft finance in the Philippines are foreign financing companies which do not have a local presence or a permanent establishment in the Philippines. Such foreign financing companies (or even foreign aircraft lessors under an operating lease) are mostly domiciled outside the Philippines.

3 Title transfer

3.1 How is title to an aircraft legally transferred in your jurisdiction?

Title is transferred through a bill of sale as evidenced by registration with the Civil Aviation Authority of the Philippines (CAAP).

3.2 What are the formal and documentary requirements for transferring title?

The requirements are:

• the application form prescribed by CAAP;
• a previous copy of the certificate of registration;
• documentary evidence of ownership (eg, a bill of sale);
• a copy of accounting clearance issued by CAAP to the former and new owners of the aircraft;
• a corporation document issued by the Securities and Exchange Commission/Department of Trade and Industry, if applicable;
• a secretary's certificate (if applicable);
• CAAP prescribed fees (eg, registration fees, energy tax recordation fee);
• air operator certificate specification (if applicable);
• the Civil Aeronautics Board's list of aircraft approval (if applicable); and
• unless assumed by the new owner, confirmation that all liens and encumbrances annotated at the back of the certificate of registration have been:
• • satisfied or complied with; or
  • declared by competent authorities as null and void or ineffective.

For re-registration of an aircraft with the same nationality and registration mark, a new certificate of...