The British Virgin Islands is becoming an increasingly popular jurisdiction for aviation finance transactions in both the commercial and business jet sectors. Among the reasons for this are the British Virgin Islands' tax neutral status, its political stability, the developed English-based legal system, a bespoke commercial court, the flexible and commercial nature of its legislation and its adherence to international standards of compliance and other matters.
In the corporate and private jet sphere, while many such aircraft are, and will continue to be, cash purchases, in recent years an increasing number of such aircraft have been financed with bank finance - whether with respect to new or used aircraft and/or pre-delivery payments. Such financings are very frequently structured using a British Virgin Islands business company as the vehicle which finances, acquires title to, and then operates or leases the aircraft.
This article, explores some of the features and issues which may arise in corporate and private jet financing transactions involving the British Virgin Islands.
The Special Purpose Vehicle
Typically, the structure will involve the establishment of a new company, a special purpose vehicle ("SPV"), the sole activities of which will be to finance, own and operate the aircraft. Unlike in a commercial aircraft transaction, the acquisition of the aircraft is mostly for the operator's private use and, consequently, there will not generally be a leasing arrangement to a lessee/commercial party but there may instead be an operator/management agreement with a professional operator/MRO.
Additionally, again unlike in many commercial deals which often involve a bankruptcy-remote orphan trust structure, the SPV will generally be within the direct ownership of the principal behind the transaction, whether a large multi-national corporate or a high net worth individual.
Some features of a British Virgin Islands business company:
- the establishment and maintenance of a British Virgin Islands business company is straightforward, quick and cost-competitive. The company is incorporated on a same day basis and the certificate of incorporation and the stamped registry sealed memorandum and articles of association are received within 24 hours;
- the British Virgin Islands is a tax neutral jurisdiction and, as such, no corporation tax, income tax, capital gains tax, inheritance tax, gift tax, or any other tax is payable by a business company in the British Virgin Islands;
- there are no minimum capital requirements for a British Virgin Islands business company under the laws of the British Virgin Islands (save in the case of certain regulated entities), although there must be at least one share in issue at all times;
- there is no British Virgin Islands law requirement to have locally resident directors or other officers or to hold shareholder or director meetings physically in the British Virgin Islands. A British Virgin Islands business company must, though, maintain a registered office and registered agent in the British Virgin Islands and keep certain corporate records and registers at such registered office;
- there is no statutory requirement to prepare annual accounts or to file accounts in the British Virgin Islands (save in the case of regulated entities). A British Virgin Islands business company is required to keep such books of account that give a true and correct view of its affairs; and
- the British Virgin Islands AML/KYC regime complies with international standards and will, therefore, be familiar to most transaction parties.
Financing and Security Documentation
The SPV will enter into certain documentation providing for the financing of the aircraft, including, typically, an aircraft sale and purchase agreement, a loan facility agreement and security documentation.
Title to the aircraft will be transferred to the SPV by way of a bill of sale. If the aircraft is new, this will come from the manufacturer; if used, title will be derived through the chain of ownership affected via bills of sale back to the manufacturer.
The security package would normally include an aircraft mortgage between the aircraft owner (and, if, for example, a US foreign owner trust structure, also the beneficial owner) and the lender and one multi-party agreement or separate security assignment(s) of the SPV's/operator's rights under the various contracts relating to the maintenance and operation of the aircraft - for example, the operating/management agreement, maintenance programs and policies of insurance over the aircraft and assignments of manufacturers' warranties. As a further protection for the lender in the context of the security provided by the SPV, a BVI business company is required to keep a register of all relevant charges created by the company. Where a company creates a relevant charge an application to register the charge may be made to the registrar pursuant to Section 163 of the BVI Business Companies Act (the "Act"). A relevant charge registered under Section 163 of the Act has priority over any subsequently registered and unregistered charges. Third parties are deemed to have notice of any publicly registered charge.
Additionally, the lender may take a charge over the shares of the SPV. As part of the share charge, the lender will also receive and retain certain ancillary "deliverables", all designed to facilitate and allow the lender to take control of and potentially sell, the SPV and the underlying aircraft on an enforcement. These may consist of some or all of the following: (i) the original share certificate (if any) with respect to the charged shares, (ii) an executed, undated blank share transfer form, (iii) executed but undated resignation letters from the SPV's directors and accompanying letters of authority to date the same on an enforcement, (iv) an irrevocable proxy in favour of the lender permitting it to vote the shares in the SPV on an enforcement and (v) an undertaking from the SPV and, potentially from its registered agent, inter alia, to co-operate with and take instructions directly from the lender on an enforcement. The SPV's articles of association may also be amended to include certain share charge-related provisions. As a further protection for the lender in this context, it is standard practice for a notation that the shares have been charged to be placed on the register of members of the company and filed with the registrar for registration, thereby putting third parties on notice that the shares of the company have been so charged.
Further, it is also typical in a corporate/private jet financing for the principal/the ultimate beneficial owner of the SPV (in many transactions, the "true credit") to provide a guarantee.
In a pre-delivery payment financing, the security package may consist of the aforementioned guarantee, a security assignment of the purchase contract for the aircraft (or of the SPV's assignment thereof) and often also a share charge.
All of the aforementioned principal transaction documents (save for the charge over shares, which will commonly be British Virgin Islands law-governed) will be written under laws other than British Virgin Islands law, for example English law, New York law or Hong Kong law.
Almost invariably, British Virgin Islands counsel will render a British Virgin Islands law corporate and enforceability opinion addressed to the lender/other interested parties as to the SPV and its entry into the transaction documents and additionally where a mortgage over that aircraft is registered such opinion will also include confirmations as to such registration.
The British Virgin Islands bespoke commercial court will commonly recognise and enforce foreign law contractual and security arrangements provided such matters are validly created under such other laws. They will also customarily recognise self-help remedies, which will allow a lender to take possession of the SPV or the aircraft via the security granted in its favour without the requirement for a British Virgin Islands court order.
The lender will not be deemed to be resident, domiciled or carrying on business in the British Virgin Islands as a result solely of the entry into/performance and/or enforcement of the relevant transaction documents, nor is it the case that the lender must necessarily be licenced, qualified or otherwise entitled to carry on business in the British Virgin Islands in order to enforce its rights under such transaction documents.
In the event of the insolvency of the SPV, as a matter of British Virgin Islands law, the lender's position and priority as a secured creditor would in general terms be preserved.
When selecting a jurisdiction for an aircraft transaction the parties will require consistency of application of laws and procedures, a safe and stable political environment with no unnecessary jurisdictional risks, a lack of additional tax consequences, certainty as to how security and contractual rights may be enforced, and highquality professional support. The British Virgin Islands meets all of these needs. We expect to see the British Virgin Islands at the forefront of offshore aircraft financing in years to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.