Key Points to Consider when Carrying out Aviation Business in China in the New Era

To optimize the business environment, China has introduced a series of new laws and regulations in recent years, continuously enriching and improving the existing legal framework and system. Among these new regulations, especially the Civil Code of the People's Republic of China (“Civil Code”) and the accompanying laws, regulations, and judicial interpretations that have been introduced, have had a profound impact on aviation business (especially on various types of security arrangements in aviation transactions). Under this background, practitioners in the aviation business in China should pay attention to the following legal and regulatory changes and market practice operation points:

I. Emphasizing the Importance of Security Registration

The Civil Code has absorbed and integrated the provisions related to property rights publicity in the existing laws and regulations, further emphasized the rules of publicity's defense effect, and clarified that registration is the main method of publicity for the acquisition of security rights to be effective against third parties. Under the guidance of this principle, China is also continuously striving to build a centralized and unified registration organization and registration system nationwide, providing convenient registration and publicity services for participants in market transactions.

For some transaction arrangements commonly seen in aviation financing and leasing transactions, financiers and leasing companies conducting aviation business in China should pay attention to completing the relevant registrations involved, for example: (1) the ownership/mortgage of the aircraft should be registered with the Civil Aviation Administration of China (“CAAC”); (2) the mortgage of spare engines should be registered with the movable property financing unified registration and publicity system maintained by Credit Reference Center of the People's Bank of China (“CRC”); (3) the pledge of rental and other leasing receivables should be registered with the CRC. Additionally, as China is also a contracting state of the Cape Town Convention, subject to the declarations made by China when joining the Cape Town Convention, related transaction arrangements (such as cross-border leasing, cross-border mortgages, etc.) should also complete the corresponding international interests registration, and IDERA should also be registered with the CAAC.

II. Enriching the Types of Existing Securities

On the basis of the existing forms of security such as mortgage, pledge, lien, and guarantee, the Civil Code and related judicial interpretations have explicitly affirmed non-traditional forms of security that are not named as traditional forms but may involve security functions, such as retention of title in sales, financial leasing, and assignment for security. It also specifies in detail the methods by which creditors can realize their security rights in such non-typical security arrangements. For example: (1) in retention of title in sales and financial leasing transactions, if the buyer/lessee fails to perform the payment obligations according to the contract, the seller/lessor can request the court to refer to the relevant provisions of the Civil Procedure Law of the People's Republic of China on “cases of realizing security property rights” to receive the amount owed by the buyer/lessee with the proceeds from the auction or sale of the involved property; (2) in assignment for security transactions, if the debtor or a third party and the creditor agree to transfer the property to, and owned under the name of, the creditor, and the parties have completed the publicity of the change of such property transfer, then if the debtor fails to perform the due debt, the creditor can request the court to refer to the relevant provisions of the Civil Code on security property rights for priority compensation from such property.

In the spirit of affirming non-typical securities, the Decision of the State Council on Implementing the Unified Registration of Movable Property and Rights Security (“Movable Property and Rights Security Registration Rules”) that took effect in 2021 also explicitly includes retention of title in sales and financial leasing as registrable types of security in addition to receivables pledge registration and other conventional mortgage and pledge registrations, and also openly specifies that other movable property and rights securities that can be registered may undergo registration.

Under the support of the above laws and regulations, for retention of title in sales or financial leasing arrangements, the parties should complete registration with CRC to ensure their rights are fully protected. However, for lease assignment usually seen in aviation financing and leasing transactions, since the Movable Property and Rights Security Registration Rules do not explicitly specify it is one of the registrable types of rights, whether such arrangement can be registered and whether such registration is necessary remain to be clarified by legislation or tested by judicial judgment.

III. Increasing the Duty of Care Requirements for Creditors

Although it may not have been the legislative intention, some provisions in the Civil Code and related judicial interpretations, aimed at balancing the interests of all parties and protecting the interests of bona fide third parties, have indirectly increased the duty of care requirements for creditors. For example:

1. Compared to the Property Law of the People's Republic of China (now invalid), which stipulated that “during the mortgage period, the mortgagor shall not transfer the mortgaged property without the consent of the mortgagee”, the Civil Code allows the mortgagor to transfer the mortgaged property during the mortgage period, unless otherwise agreed by the parties. Based on this, the mortgagee needs to pay attention to explicitly agreeing in the aircraft mortgage contract that “the mortgagor shall not transfer the aircraft without the consent of the mortgagee”, and based on the above-mentioned requirement for security registration publicity, to explicitly reflect such agreements on the aircraft mortgage right certificate issued by the CAAC.

3. Contrary to the provisions of the Guarantee Law of the People's Republic of China (now invalid), the Civil Code treats guarantees as general guarantees instead of joint and several liability guarantees if the method of guarantee was not stipulated or was unclearly stipulated and treats the guarantee period as six months instead of two years if it was not stipulated or was unclearly stipulated. Based on this legislative change, when signing a guarantee security agreement, creditors need to pay attention to explicitly stipulating the guarantee type as a joint and several liability guarantee and specifying a longer period for the guarantee period.

3. For guarantees provided by listed companies and their disclosed controlled subsidiaries, the listed company needs to announce and disclose that the guarantee has been passed by the board of directors or the shareholders' meeting. Based on this, when accepting guarantees, creditors need to pay attention to checking whether the guarantor and the guarantor's direct and indirect controlling shareholders are listed companies; if so, they need to request the relevant announcement, otherwise, it may affect the effectiveness of the guarantee contract.

Overall, the continuous introduction of new laws and regulations represented by the Civil Code provides a clearer and more systematic legal framework and guidance for the aviation industry, which is beneficial to the healthy development of the aviation industry and also provides a basis for better handling potential legal disputes. How to accurately understand and apply these new laws and regulations in each specific business still requires in-depth analysis based on actual situations.

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