Krzysztof Wojdyło

An aircraft as the subject of a registered pledge

Transactions involving aircraft typically require that security be established in favour of the financing parties. Due to the small number of such transactions, this issue is still not well-known in Poland.

Unlike ships, a registered pledge under the Act on Registered Pledges and the Pledge Register of 6 December 1996 may be placed on an aircraft. For many reasons, this is an attractive form of security, and thus it is no surprise that it is used in transactions involving aircraft.

When may a registered pledge be established on an airplane under Polish law?

A discussion of registered pledges on aircraft should begin with determining in what instances a security interest in an aircraft, and specifically a registered pledge, will be governed by Polish law. This issue is of great practical importance, because transactions involving aircraft are often carried out with the participation of entities from different jurisdictions.

This issue is determined by Art. 43 of the Private International Law of 4 February 2011, under which in rem rights to an aircraft, ship or rail vehicle are governed by the law of the state in which it is registered. Clearly, a pledge, as a form of in rem right, is subject to this rule. The determination of the register in which an airplane is registered is thus decisive for determining what law will govern the pledge to be established on the airplane. The actual location of the airplane is irrelevant, as is the law governing the pledgor (in many cases, the law governing the register is not the same as the law governing the owner of the aircraft).

When is a registered pledge on an airplane established?

Until recently, the time when a pledge on an aircraft is established generated significant controversy in Poland. This was because there was an inconsistency between Art. 38 of the Aviation Law of 3 July 2002 and Art. 2(1) of the Act on Registered Pledges and the Pledge Register. The general rule concerning registered pledges is that they arise upon entry of the pledge in the pledge register. But the previous wording of Aviation Law Art. 38 suggested that the pledge was not fully effective until it was also entered in the register of aircraft (as Aviation Law Art. 36 provides for entry in the register of in rem rights to an aircraft).

An amendment to the Aviation Law in 2009 cleared up the doubts in this respect. A registered pledge on an aircraft is now regarded as fully effective upon entry in the pledge register, and the entry of the pledge in the register of aircraft is irrelevant in this respect.

It is worth noting the practice of the Civil Aviation Authority connected with the procedure for disclosure of pledges in the register of aircraft. The pledge is noted in the register upon receipt of the relevant information from the pledge register. Prior notice to the authority by the pledgor or pledgee is disregarded in practice.

Who may establish a pledge on an aircraft?

Before drawing up a pledge on an aircraft, it is worth conducting a thorough analysis of the factual and legal aspects of title to the aircraft on the part of the future pledgor. Given the specific nature of the aviation market, in many cases actual use and possession of an aircraft often do not coincide with the right to dispose of the aircraft. Under the Act on Registered Pledges and the Pledge Register, the pledgor must be an entity entitled to dispose of the subject of the pledge.

Particularly notable in this context are situations in which the potential pledgor is the user of the airplane under a leasing agreement or a sale agreement with a reservation of title. The user of the airplane in these cases is not the owner of the plane and thus will not be authorised to establish a pledge on the airplane (unless it is a pledge on items that the pledgor is to obtain title to in the future).

What is the subject of a registered pledge on an airplane?

There may be certain difficulties in attempting to define more precisely what is the subject of the pledge in the case of a pledge on an aircraft—particularly with respect to the engines. Whether the engines are regarded as an integral component of the airplane or as an accessory, the question is whether a registered pledge on the airplane also covers its engines. This is controversial largely because of the distinction made in the regulations on organisation of the pledge register, under which there are separate forms for a pledge on an airplane and a pledge on an engine. This may suggest that these items may not be covered by one pledge. But this is also part of a broader issue concerning airplane financing. In practice, airplane engines may be financed separately from the financing of the airplane as such. In specific situations, this requires a legal distinction between the airplane and the engine. Not all legal systems address this issue well, and thus attempts have been made to regulate this issue through international law (the Cape Town Convention on International Interests in Mobile Equipment).

Practice in this respect may vary, and under current law these controversies cannot be resolved unequivocally. Therefore, the parties should provide for specific solutions in the pledge agreement to minimise the risks associated with this issue.

Finally, it should be considered whether a single registered pledge may be established on an entire fleet of aircraft. The Act on Registered Pledges and the Pledge Register permits establishment of a registered pledge on a collection of movables or intangibles. But it also imposes the condition that the collection must constitute an economic whole—a condition that generates certain controversies. It appears that the ability to establish such a pledge may not be excluded a priori, because it is clear that under certain circumstances, a fleet of airplanes may constitute an economic whole.

Krzysztof Wojdyło, Regulatory Law Practice, Wardyński & Partners