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Trusts: the future of aviation finance law in Ireland?

Ireland is internationally recognised as the domicile of choice for aircraft leasing transactions, with 14 of the top 15 lessors located here. Moreover, over half of the world's fleet of leased aircraft are managed by Irish-based companies - a fact that is quite significant when one considers that roughly half of all airplanes in existence are leased. The most commonly-cited reasons for Ireland's unparalleled success in this particular sphere of commercial activity are as follows:

  • Comparatively low corporation tax
  • Sensible regulatory environment
  • Double tax treaty network
  • Membership of the EU
  • Favourable time zone
  • Use of s 110 SPVs

However, before we examine the reasons behind Ireland's success in greater depth, it is first necessary to examine the anatomy of a standard aircraft leasing transaction. The lessee, usually an airline, has the right to use the aircraft while making periodic payments to the lessor. In effect, the airline is leveraging risk. By leasing instead of purchasing aircraft outright, the airline is managing their exposure to potential losses - most usually in the form of particular planes being rendered obsolete by new technology. Moreover, airlines lease as a means of avoiding huge up-front costs, with some even choosing to enter 'sale and leaseback' arrangements for a quick injection of capital to navigate through the turbulent early days.

 

Profile of the aviation finance industry in Ireland 

The tale of aircraft leasing in Ireland begins with Guinness Peat Aviation. Founded in 1975 by one-time Aer Lingus executive, Tony Ryan, GPA was headquartered in the Shannon Tax Free Zone in Co. Clare. This pioneering company would go on to become one of the world's biggest lessors of commercial aircraft, reaching a peak valuation of $4bn towards the latter half of the 1980s. The dominance of GPA led to the development of a unique talent pool in Ireland, which along with the favourable regulatory regime helped to develop the aviation industry into what it is today. 

The main international treaty on aircraft leasing, the Cape Town Convention, was applied directly into Irish law via the International Interests in Mobile Equipment (Cape Town Convention) Act 2005. For the uninitiated, this treaty aimed to standardise all transactions pertaining to moving property - following its democratic adoption in November 2001. Although the treaty was intended to apply to all manner of moveable assets, including equipment designed for space flight, the only aspect currently in force is the Aircraft Protocol which has 73 signatories, one of whom being the European Union.

The International Registry of Mobile Assets, which is headquartered in Dublin and runs on technology developed in Letterkenny, enables lessors, lessees, banks, legal firms and other interested parties to monitor assets which are not domiciled in any one jurisdiction, including aircraft. The Registry provides prospective lessees with a detailed history of an aircraft at the centre of a given transaction, thereby helping to inspire confidence in an industry that could otherwise be wracked with uncertainty. It is also fitting that since the Registry is based in Ireland, the body nominated to adjudicate disputes pertaining to aircraft leasing transactions - wherever they may arise - is the High Court of Ireland.

 

Strong underlying statistics

According to a survey conducted by PwC, the aircraft leasing industry contributes over $600m to the Irish economy annually, supporting around 5000 jobs. Their report notes that 'the industry has real presence and tangible substance in Ireland' which is a 'key differentiator when compared to other leasing hubs'. This statement is backed up by the presence of the International Registry in Dublin and by the fact that the High Court hears aircraft leasing cases from all over the world. Lastly, Ireland's viability as a leasing hub is bolstered by the presence of a strong maintenance, repair and overhaul framework for carrying out repairs on commercial aircraft. A good example of one such company is FL Technics, which employs over 1000 people in Limerick and Dublin.

The responses provided by PwC show that our double tax treaty network is a key component of our attractiveness to overseas leasing companies seeking to relocate here. These agreements ensure that tax is paid in one jurisdiction only. Since the lessee usually bears the risk as regards tax exposure in aircraft leasing arrangements, this network greatly reduces costs for international airlines conducting business with Irish-based lessors. Other leasing hubs such as Cyprus have attempted to replicate the success of Ireland's double tax treaty network, however our 73 concluded treaties still place us head and shoulders ahead of the competition with a further five under review by the Department of Finance. 

Add to the above our talented workforce and the presence of ancillary services - most notably in the form of highly specialised law and accounting firms - it is fair to say that Ireland's success as a leasing hub is no accident. However, there are problems to be addressed if expansion by competing hubs is to be countered, most notably by reducing our onerous personal tax regime. That said, the surge of overseas interest in UCD's MSc in Aviation Finance since its inception is a good barometer of our stellar international reputation in the area. 

 

Contemporary issues: novation and the tripartite transferring of undertakings

While the aircraft leasing industry appears to be going from strength to strength in Ireland, lease novation and the transferring of undertakings to third parties involved therein continues to cause problems for the industry in a more general sense. Murdoch and Hunt define novation as a 'tripartite contract whereby a contract between two parties is rescinded in consideration of a new contract between one of the parties and a third party'. Simply put, such leases involve the creditor, at the request of the debtor, agreeing to take another person in the place of the original debtor - thereby transferring the obligations contained in the lease. 

According to a white paper produced by leading lessor, Avolon Holdings, the past few years have shown a growing trend developing amongst lessees to attempt to use novation as a last-minute attempt to gain a commercial advantage. Since the onerous novation process can take months to resolve, lessees may be tempted to wait until the agreement is due to close and then attempt to push for increased flexibility insofar as the obligations they will be expected to meet. While several draft 'lease novation' agreements have been released to attempt to obviate this problem, it appears as though a more ready made solution may exist in the antiquated legal instrument known as the trust.

 

The growing use of owner trusts 

Though often thought of as a quirk of the common law, various variations of trust-style instruments have existed in many different legal systems reaching back to the Roman Empire. Defined by Underhill as an 'equitable obligation binding a person to deal with property owned by him as a separate fund distinct from his own private property' for the benefit of a third party or charitable purpose, trusts most commonly arise via wills or of course through inter vivos declarations.

In an owner trust scenario, the trustee holds legal title to the aircraft for the benefit of a third party. The trustee leases the aircraft to the airline under an operating lease. When the time comes to sell, beneficial interest is simply switched to the new third party now seeking to purchase the aircraft. This allows the lease to remain in place and thus, obviates the need for novation as the obligations remain the same.

Under the proposed new Global Aircraft Trading System, each aircraft will automatically be tied to a trust, with the trustee and beneficiary associated with that aircraft listed along with any other relevant information on an online, blockchain-based directory. Since blockchain networks are at once transparent and immutable, this proposed system appears to be a match made in heaven - or 30,000 feet up, or whatever your preferred cruising altitude may be.

 

Conclusion

In summation, it is fair to say that the proposed new system is an ideal solution to the novation debacle. Moreover, it is well-suited to the Irish aviation industry, as the trust has a long and storied history in this jurisdiction. One can only hope that this new system will be as transformative as Cape Town, as global adoption would further cement Ireland's position as a world-leader in aircraft leasing, with all of the positive knock-on effects for law and accounting firms that entails.

 

 

 


Note: This article is not intended to be relied upon as legal advice. Any errors should be notified to the editor and will be dealt with accordingly.

 

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