The Vietnamese aviation market is growing rapidly, requiring an increasing number of transactions related to aircraft mortgages and other security measures. This article provides a comprehensive analysis of the legal framework and practical application in Vietnam, helping stakeholders understand the necessary regulations and procedures.
In the context of international integration, registering security transactions involving aircraft has become an important requirement to ensure the legal validity and enforceability of rights for all parties. Vietnam has gradually improved its legal framework to align with international practices, creating a favorable environment for aviation finance transactions.
Currently, various forms of aircraft security are being applied, ranging from traditional mortgages to more complex structures such as security through project companies. Each form has its own advantages, disadvantages, and legal requirements that parties must carefully consider.
II. Legal Framework for Aircraft Mortgages and Security in Vietnam
The legal framework governing aircraft mortgages in Vietnam is based on various legal documents. According to Article 28.1 of the Civil Aviation Law of Vietnam No. 66/2006/QH11 (as amended), the right to mortgage or pledge an aircraft is one of the three primary rights over an aircraft as stipulated. These three rights include: ownership, use, and disposal, with the right of disposal encompassing the right to mortgage or pledge aircraft.
Additionally, the Civil Code 2015 provides general principles on security transactions, including provisions on form, registration, and enforcement of security measures. Notably, the provisions on pledging of property in the Civil Code are applied supplementarily to security transactions involving aircraft.
The registration of security measures for aircraft is primarily governed by Decree No. 99/2022/ND-CP of the Government on the registration of security measures.
In Vietnam, security measures established on aircraft are referred to as mortgages, as mortgages allow the mortgagor to retain possession of the aircraft for use. Conversely, pledges are a form of security that involves possession, where the collateral is transferred to the pledgee. Aircraft mortgages must be registered with the Civil Aviation Authority of Vietnam (CAAV) to be valid and enforceable in Vietnam.
A significant milestone in legal development was Vietnam’s accession to the Cape Town Convention on September 17, 2014, accompanied by certain declarations. The Cape Town Convention entered into force in Vietnam on January 1, 2015. Therefore, the Vietnamese Government issued Decree No. 68/2015/ND-CP on August 18, 2015, to provide guidelines on certain provisions of the Cape Town Convention, particularly procedures related to the entry point code of the competent authority and the Request for Cancellation of Registration and Export without Cancellation (IDERA). This establishes an international registration mechanism for aircraft security interests, enhancing the security and international recognition of the rights of the secured party.
III. Common Forms of Aircraft Security
The most common form is aircraft mortgage, where the owner (airline or leasing company) uses the aircraft as collateral for a loan or other financial obligation. The aircraft remains in normal use for business operations, but the mortgagee has the right to dispose of the collateral in the event of a default.
Pledging documents related to the aircraft is a less common but still used form in certain cases. The documents that may be pledged include the Aircraft Registration Certificate, the Airworthiness Certificate, or other important technical documents. This form is typically used in conjunction with other security measures.
Retention of ownership in an installment sale agreement is a common form in new aircraft sales transactions. The manufacturer or seller retains ownership of the aircraft until the buyer makes full payment. This form provides strong protection for the seller in the event that the buyer fails to fulfill its payment obligations.
A more complex structure is security through a special purpose vehicle (SPV). In this model, the aircraft is owned by a separate special purpose vehicle, and the shares or assets of this company are used as collateral. This structure offers significant tax and risk management benefits, particularly in international aircraft leasing and financing transactions.
IV. Aircraft Mortgage Registration Process in Vietnam
The aircraft mortgage registration process in Vietnam is carried out in specific steps and is strictly regulated. The Civil Aviation Authority of Vietnam (CAAV) is the competent authority responsible for receiving and processing registration documents for security transactions related to civil aircraft.
To register a security transaction involving an aircraft, the parties must prepare a complete application dossier in accordance with regulations, including: a registration form, the original mortgage contract or a notarized copy, documents proving ownership of the aircraft, and other legal documents regarding the parties involved in the transaction.
The processing time for aircraft mortgage registration applications typically takes 5-7 working days, depending on the complexity of the transaction and the status of the application. Upon completion of the procedures, the Civil Aviation Authority of Vietnam will issue a Certificate of Registration of Security Interest and update the information in the National Aircraft Registry.
In parallel with national registration of aircraft mortgages, the parties should also consider international registration under the Cape Town Convention through the International Registry. This dual registration ensures that the rights of the secured party are widely recognized internationally, which is particularly important in cases where the aircraft frequently travels across multiple countries.
V. Challenges and Risks in Aircraft Security Transactions
One of the biggest challenges in aircraft security transactions in Vietnam is the overlap and sometimes inconsistency between legal regulations. Legal documents on aviation, civil law, and security transaction registration may have points that are not fully compatible, making it difficult to determine the exact procedures to follow.
Risks related to the enforcement of rights over aircraft collateral are also a matter of concern. The handling of aircraft in the event of a breach of obligations can be complex due to the high value of the asset, the special nature of aircraft, and the limitations of the market for used aircraft in Vietnam.
Exchange rate risk is also a factor to consider, especially since most aircraft mortgage transactions are conducted in foreign currency (typically USD), while Vietnam’s foreign exchange regulations impose certain restrictions. This may affect the ability to fulfill payment obligations and conduct international money transfers.
Finally, aircraft insurance issues require special attention in aircraft-secured transactions. The secured party typically requires designation as the beneficiary in aircraft insurance contracts; however, exercising this right in practice may face challenges due to Vietnam’s insurance laws.
VI. Solutions and Practical Recommendations
To ensure the effectiveness of aircraft security transactions, the parties should conduct thorough legal due diligence prior to signing the contract. This process includes verifying the legal status of the aircraft, any prior registered rights in the aircraft, and assessing potential risks.
The drafting of aircraft mortgage agreements should be done with caution, with the consultation of legal experts knowledgeable in both Vietnamese law and international practices. The agreement should clearly specify the events of default, the rights and obligations of the parties, the measures for the disposal of collateral, and the dispute resolution mechanism.
Dual registration of aircraft mortgages (both national and international registration) is strongly recommended to maximize legal protection for the secured party. This is a best practice widely applied in international aviation transactions.
Regarding procedures for the disposition of aircraft collateral, the parties should agree in advance on detailed processes, notice periods, and methods of asset valuation. This helps minimize the risk of disputes and ensures a smooth disposition process in the event of a default.
Finally, given the ongoing updates to Vietnamese law, parties involved in aircraft security transactions should regularly update their knowledge and consult legal experts to ensure compliance with the latest regulations and apply best practices in this field.
VII. New Trends in Aircraft Mortgage and Security
In recent years, the aircraft mortgage market in Vietnam has witnessed several notable new trends. One of the most prominent trends is the adoption of complex security structures, combining traditional mortgages with other security measures such as cash flow guarantees, equity guarantees, and credit support agreements.
The use of blockchain technology in the registration and management of aircraft mortgages is also being researched and tested in some countries. This technology has the potential to enhance transparency, reduce the risk of fraud, and improve the efficiency of information management related to security transactions.
Green aircraft financing is an emerging trend where loans and mortgages are tied to environmental criteria. Fuel-efficient aircraft and those using emissions-reducing technology may qualify for more favorable terms in financial transactions and collateral arrangements.
VIII. Comparison of aircraft mortgage regulations between Vietnam and international standards
When compared to other ASEAN countries, Vietnam’s aircraft mortgage regulations share many similarities but also have notable differences. Singapore and Malaysia, as developed aviation hubs, have a more comprehensive legal framework for aircraft-secured transactions, particularly in the full implementation of the Cape Town Convention.
Compared to developed markets such as the US and the EU, Vietnam’s aircraft mortgage regulations still have certain gaps. These countries have centralized registration systems, more efficient procedures for handling collateral assets, and specialized dispute resolution mechanisms for the aviation sector.
Regarding the implementation of the Cape Town Convention on aircraft mortgages, Vietnam has made significant progress but has not yet fully implemented all provisions of the Convention. In particular, regulations on emergency measures that the secured party may take in the event of a default have not been fully implemented.
IX. Case law and practical cases related to aircraft mortgages
In the history of aircraft mortgage disputes in Vietnam, there have been several notable cases that have established important precedents. The case involving the seizure and disposal of an aircraft belonging to a private airline in 2018 highlighted the challenges in enforcing the rights of the secured party when facing bankruptcy proceedings.
International precedents on aircraft mortgages also offer valuable lessons. The case of Alpstream AG v. PK Airfinance Sarl in 2015 in the UK established important principles regarding the obligations of the secured party when selling aircraft as collateral, particularly the requirement to sell at a reasonable market price.
Lessons from practical cases involving aircraft mortgages highlight the importance of drafting detailed contracts, particularly regarding breach events, asset disposal procedures, and choice of law. These cases also emphasize the necessity of full registration under both national and international systems to maximize the protection of all parties’ interests.
X. Conclusion and Future Prospects
Overall, the legal framework for aircraft mortgage and security in Vietnam has made significant progress over the past decade, particularly since Vietnam’s accession to the Cape Town Convention. However, there are still gaps and challenges that need to be addressed to ensure that this legal framework is truly effective and compatible with international practices.
In the future, the development trend of aircraft mortgage in Vietnam is expected to focus on improving the implementation regulations of the Cape Town Convention, simplifying the registration procedures for security transactions, and enhancing transparency in the handling of collateral assets.
With the strong growth of Vietnam’s aviation industry and the demand for investment in new aircraft fleets, the aircraft mortgage and security market in Vietnam is expected to continue growing and attracting the attention of international financial institutions. This requires lawmakers, regulatory authorities, and market participants to continuously update their knowledge and adapt to the best global practices.
In summary, the aircraft mortgage and security sector in Vietnam is facing numerous opportunities and challenges. A thorough understanding of legal regulations, market practices, and the application of innovative solutions will be key for market participants to successfully execute transactions in this sector.
XI. Frequently Asked Questions (FAQ)
1. How does aircraft mortgage differ from aircraft security?Aircraft mortgage is a specific form of aircraft security, where the collateral (aircraft) remains under the ownership and control of the mortgagor. In contrast, aircraft security is a broader concept encompassing various measures such as pledge, retention of title, deposit, and other forms of security under the Cape Town Convention.
2. Which parts of an aircraft can be registered as separate collateral?Under current regulations, in addition to the aircraft itself, the following components may be registered as separate mortgages: aircraft engines, propellers, radio equipment, and other equipment and parts identified as having significant value and capable of being separated from the aircraft. This aligns with the Protocol on Specific Issues Relating to Aircraft Equipment under the Cape Town Convention.
3. What are the costs for registering a mortgage on an aircraft in Vietnam?The cost of registering a mortgage on an aircraft in Vietnam includes the registration fee for the security transaction and the fee for issuing the registration certificate. The specific fee is specified in the Circular of the Ministry of Finance and may change over time. Currently, this fee is typically calculated based on the value of the collateral, with a certain ceiling. Additionally, there are notary fees for the mortgage agreement if the parties choose to have it notarized.
4. What is the validity period of aircraft mortgage registration?The registration of a mortgage on an aircraft in Vietnam does not have a fixed validity period. The validity of this registration is maintained until the parties cancel the mortgage registration, typically when the secured transaction is completed or terminated in accordance with the agreement between the parties or the provisions of the law.
5. Which parts of the Cape Town Convention has Vietnam ratified?Vietnam has ratified the Cape Town Convention and the Protocol on Specific Issues Relating to Aircraft Equipment. However, Vietnam has made certain declarations and reservations, particularly regarding emergency measures in the event of a breach and the priority of certain debts under national law.
6. How can you verify whether an aircraft is subject to a mortgage?To verify the mortgage status of an aircraft in Vietnam, you may:
- Check the information in the Vietnam Aircraft Registry at the Civil Aviation Authority of Vietnam
- Search at the Security Interests Registry under the Ministry of Justice
- Check in the International Registry under the Cape Town Convention (International Registry)
- Request the relevant party to provide the Certificate of Nationality and Aircraft Status
7. Can foreign banks directly accept aircraft mortgages in Vietnam?Foreign banks may accept aircraft mortgages in Vietnam if they meet the conditions set forth in Vietnamese laws on foreign investment and credit institutions. For aircraft registered in Vietnam, the foreign mortgagee must comply with the regulations on registration of security transactions in Vietnam and may need to appoint a representative in Vietnam for the purpose of performing legal procedures.
8. In the event of an airline’s bankruptcy, what is the priority order for repayment to mortgagees of aircraft?In the event of an airline’s bankruptcy, the priority order for payment to aircraft mortgagees in Vietnam is determined as follows:
- The provisions of the Bankruptcy Law on the order of asset distributionPriority rights under the Civil Aviation CodeThe principles on the order of registration of security transactionsVietnam’s declarations upon ratifying the Cape Town Convention
In summary, in the event of an airline’s bankruptcy, the aircraft mortgagee has strong rights protected under the Cape Town Convention and access to swift remedies, including the right to recover the asset within 60 days if obligations are not fulfilled. However, certain rights or interests not recognized under Vietnamese law (such as taxes, fees, or court judgments) may have priority over the registered international interests of the mortgagee.
9. Is notarization of the aircraft mortgage contract required?Under current Vietnamese regulations, notarization of an aircraft mortgage contract is not required for the contract to be effective between the parties. However, the aircraft mortgage contract must be registered with the Civil Aviation Authority of Vietnam (CAAV) to be valid and enforceable in Vietnam. Although not mandatory, notarization of the aircraft mortgage contract is recommended as it enhances the legal validity of the contract and may assist in dispute resolution.
10. How is the de-registration and export of an aircraft under IDERA carried out in Vietnam?The Irrevocable De-registration and Export Request Authorization (IDERA) is an important tool under the Cape Town Convention. In Vietnam, the IDERA process includes:
- The secured party registers the IDERA with the Civil Aviation Authority of Vietnam (CAAV) when registering the security transaction
- Upon the occurrence of a default event, the secured party submits a request for de-registration and export of the aircraft along with the registered IDERA
- The Civil Aviation Authority of Vietnam reviews and processes the deregistration of the aircraft’s nationality
- After completing the deregistration process, the secured party may proceed with the export of the aircraft in accordance with customs regulations
However, it is important to note that Vietnam has certain reservations regarding the implementation of IDERA provisions, and the specific procedures may differ from international practices.Specifically, the application and enforceability of the Cape Town Convention in Vietnam, particularly in the context of deregistration and export of aircraft, have been tested in at least one case before Vietnamese authorities (the case involving FW Aviation and VietJet). Although CAAV has facilitated the deregistration and export process, it has encountered delays and become one of the issues addressed in legal proceedings in the United Kingdom. This has led the Aviation Working Group (AWG) to place Vietnam on the compliance monitoring list under the Cape Town Convention. Currently, a draft decree amending and supplementing certain provisions of Decree 68 is being drafted to facilitate compliance with the provisions on deregistration and export under the Cape Town Convention and enhance Vietnam’s compliance score under the Cape Town Convention. This draft decree proposes that the Civil Aviation Authority of Vietnam (CAAV) will issue the ECoA concurrently with the certificate of cancellation of Vietnamese aircraft nationality and revoke the certificate of Vietnamese aircraft nationality within five working days from the date of receipt of a complete and valid application.
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