Introduction
The law governing aviation finance and leasing in Malaysia does not comprise a single uniform set of laws, but a complex, multilayered international and domestic legal framework. This complexity arises because aircraft are highly mobile assets that fly across country borders, while ownership rights and security interests over them are often grounded in national law.
In this article, we will present to readers an overview of four layered legal framework relating to aviation finance and leasing transactions as follows:
- At the international level, an international treaty that creates a uniform legal framework for financing high‑value mobile equipment, especially aircraft, across different countries;
- At the contract level, the choice of law or governing law where the parties agree which country’s or state’s legal system will be used to interpret the contract and resolve disputes arising from it;
- At the national or country level, the law of Malaysia, as the country of registration of aircraft that implements the international treaty domestically dealing with international interests in mobile equipment, namely aircraft; and
- At the national or country level, the other laws of Malaysia dealing with all relevant legal and practical considerations of aircraft financing transactions.
1. International treaty – Cape Town Convention
The single most important piece of the puzzle at the internation level is the Convention on International Interests in Mobile Equipment (“the Cape Town Convention”) and its related Protocol (“the Aircraft Protocol”). This is an international treaty that has been ratified by over 87 countries including major aviation markets like USA, China, UK, France and Ireland.
Essentially, the Cape Town Convention provides a uniform system for registration of security interests (mortgages, charges and leases) in high-value mobile equipment such as airframes and aircraft engines in a global centralised 24/7 electronic International Registry based in Dublin, Ireland.
The Cape Town Convention reduces risk and legal uncertainty for creditors (chargees, lessors, conditional sellers under title reservation agreements), which in turn lowers the cost of credit, makes it easier for airlines and aircraft operators to acquire and finance aviation assets. While it provides creditors access to speedy remedies including interim relief and court assistance, the ultimate remedies every creditor can resort to are taking possession, selling or re-leasing of aircraft objects. It also establishes a structure of priority based on the system of registration and gives priority to those creditors whose security interests are registered with the International Registry over subsequently registered and unregistered interests.
The Cape Town Convention provides specific insolvency-related remedies to protect creditors in the event of insolvency of debtors (chargors, lessees, conditional buyers under title reservation agreements). Every contracting state has the option to make a declaration to choose between two alternatives, Alternative A or Alternative B, that will guide the insolvency process relating to aircraft objects, with the former generally regarded as the stronger creditor-friendly regime as compared to the latter.
The Cape Town Convention applies when, at the time of the conclusion of the agreement creating or providing for an international interest, the debtor relating to such interest is located in a contracting state. The fact that the creditor may be situated in a non-contracting state does not affect the applicability of the Cape Town Convention. The Cape Town Convention also applies where the aircraft object in question is registered in a contracting state.
2. Choice of law or governing law in contracts
While the Cape Town Convention forms the foundation of aviation finance and leasing, parties to the transactions usually include a contractual clause that specifies which country’s or jurisdiction’s laws will be used to interpret the relevant agreements (e.g., loan agreement, lease, aircraft mortgage, security assignment), the parties’ respective rights and obligations and the modes of dispute resolution if any dispute arises between them. This is commonly known as “choice of law” or “governing law” clause among lawyers.
The choice of law or governing law clause does not decide where a dispute will be heard (that is a separate “jurisdiction” or “forum” clause), but it determines which substantive rules a court or tribunal will apply when deciding the disputes and what the parties’ rights and remedies are.
Since aircraft purchases in Malaysia are very often funded through cross-border lending from the international financial centres based in London and New York, invariably the common choices for governing law in aircraft finance are the English law and the New York law.
Undoubtedly the English law is the most prevalent choice as it has an established set of commercial case law and legal precedents. In recent years, the Irish law has been frequently used for operating leases because Dublin is a major hub for aircraft leasing activities.
3. International Interest in Mobile Equipment (Aircraft) Act 2006
Malaysia became a signatory to the Cape Town Convention and has ratified it on 1 March 2006. The Parliament of Malaysia enacted the International Interests in Mobile Equipment (Aircraft) Act 2006 (“the IIME Act”) to implement the Cape Town Convention and the Aircraft Protocol with effect from 31 August 2006.
Essentially, the IIME Act incorporates the provisions of the Cape Town Convention so that the international legal framework for secured financing and leasing transactions on aircraft objects operate as the Malaysian law at the national or country level. The IIME Act provides a mechanism for registration of international interests, prospective interests, and non-consensual rights through the International Registry, with priority being determined on a “first-to-file” basis.
The IIME Act applies in respect of “aircraft objects” only, which are defined to mean airframes, aircraft engines and helicopters.
Under the IIME Act, an “international interest in mobile equipment” means an interest in airframes, aircraft engines and helicopters (a) granted by the chargor under a security agreement; (b) vested in a person who is the lessor under a leasing agreement; or (c) vested in a person who is the conditional seller under a title reservation agreement.
Malaysia has declared the following “non-consensual rights or interests” as having priority over registered international interests in respect of an aircraft object:
(a) liens in favour of airline employees for unpaid wages after a default is declared by the airline under a contract to finance or lease an aircraft object, whether in or outside insolvency proceedings;
(b) liens or other rights of a Malaysian authority relating to taxes or other unpaid charges arising from or related to the use of the aircraft object by the owner or operator of the object since the time of default by that owner or operator under a contract to finance or lease that aircraft object; and
(c) liens in favour of repairers of an aircraft object in their possession.
Malaysia has declared that Alternative A of Article XI of the Protocol shall apply. Under Alternative A, upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor is required to give possession of the aircraft object to the creditor no later than the earlier of: (a) the end of the waiting period of 40 working days; and (b) the date on which the creditor would ordinarily be entitled to possession of the aircraft object.
If the creditor wishes to procure the de-registration of the aircraft and procure the export and physical transfer of the aircraft object, the registry authority and the administrative authorities in a contracting state shall expeditiously co-operate with and assist the creditor in the exercise of such remedies within 5 working days after the date on which the creditor notifies such authorities that it is entitled to procure those remedies in accordance with the Cape Town Convention.
4, Other relevant legal and practical considerations
- Civil Aviation Authority of Malaysia (CAAM): CAAM is a statutory body under the Ministry of Transport established to oversee and regulate all aspects of civil aviation in Malaysia. As Malaysia’s sole civil aviation regulator, CAAM is vested with the responsibility for technical, safety, security, and economic regulation of the civil aviation industry. This includes licensing, certification, air navigation services, and the regulation of commercial and economic matters, such as air service licensing, route allocation, oversight of airport charges and consumer protection.
- Aircraft registry: CAAM manages aircraft registration and record keeping for all Malaysian-registered aircraft with information of aircraft owners, mortgages, mortgagors and mortgagees. Financiers should ensure that their mortgages are registered with CAAM. Before buying any Malaysian aircraft, buyers are advised to conduct searches in the aircraft register. Existing mortgages may be removed, and new ones entered, using application forms available in CAAM’s website.
- Airworthiness and maintenance: The aircraft must maintain airworthiness as per CAAM’s requirements and remain properly registered with CAAM. Financiers may require maintenance covenants and regular status reporting from airlines or aircraft operators.
- Insurance: Comprehensive hull and liability insurance with financiers’ names indorsed as the loss payee or the additional insured, and requirement for airlines or aircraft operators to provide and maintain up-to-date insurance policy certificates.
- Insolvency law: If the airline or aircraft operator becomes bankrupt, the laws of its country of incorporation will come into play. The Cape Town Convention provides remedies which can override lengthy and creditor-unfriendly local insolvency procedures.
- Tax law: Financing and security documents are subject to stamp duty under the Stamp Act 1949. Depending on the structure of financing, some exemptions or concessions may apply.
- Contractual protections: The legal framework is supported by very practical, physical controls. These include:
- Maintenance reserves: Contractual payments from airlines or aircraft operators to financiers or lessors to cover major maintenance events.
- Technical monitoring: Financiers or lessors regularly monitor the aircraft’s maintenance status and location.
This article is authored by our Partner, Mr Cheah Soo Chuan and Senior Associate, Mr Khor Wei Wen. The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice
Cheah Soo Chuan
Partner
T: +603 2050 1987
Khor Wei Wen
Senior Associate