AIRCRAFT FINANCING: LEGAL AND REGULATORY FRAMEWORK IN NIGERIA
Airline services have increasingly become capital intensive. In this multi-billion dollars industry, manufacturers, aircraft leasing companies and operating lessors, investment banks, export credit agencies and investors want a seamless and successful transaction. Typical transactional work involving domestic and cross border acquisition, mortgage and leasing of aircrafts/ engines require an understanding of each jurisdiction's regulatory and legal framework.
This Note sets out an overview of the regulatory framework for the Nigeria Civil Aviation Sector; it also provides the legal regime for key aircraft financing transactions that are usually carried out in Nigeria and it further discusses the applicable statutory fees, tax regime and the procedure for enforcement regime in the event of a default by a party in a lease or mortgage transaction.
A· REGULATORY FRAMEWORK FOR THE NIGERIAN CIVIL AVIATION SECTOR
Civil aviation services in Nigeria date back to 1925 and over the past decades, there have been various policy, legal and regulatory structures put in place to ensure that the industry complies with internationally accepted standards, particularly in the area of safety and security.
The Civil Aviation Act 2006 ("the Act") which repealed the Civil Aviation Act 1964 and the Nigerian Civil Aviation Authority (Establishment) Act 1999, consolidated and substantially re-enacted the provisions of both documents. The Act was primarily aimed at modernizing and internationalizing the aviation industry in Nigeria and ensuring that it complies with international best practices. Salient provisions of the Act include the conferment of the Honourable Minister for Aviation with the power to formulate policies and strategies for the development of the sector and a clear distinction of the powers of the Honourable Minister from that of the regulatory authority.
In addition, the Act established the Nigerian Civil Aviation Authority ("NCAA") as the regulatory body with powers to regulate and monitor the conduct of air navigation in Nigeria. The NCAA is responsible for the issuance of the foremost safety certificate - Air Operator Certificate, economic licenses, permits and other authorizations such as the Air Transport License and Air Operating Permit. Further, the Act also domesticated other international conventions on aviation that have been ratified by Nigeria. These treaties are - the Convention on International Civil Aviation ("The Chicago Convention 1944"); the Convention for Unification of Certain Rules Relating to International Carriage by Air ("Montreal 1999"); the Convention for the Suppression of Unlawful Seizure of Aircraft ("Hague 1970"); the Convention on International Interest in Mobile Equipment and the Protocol to the Convention on Matters Specific to Aircraft Equipment ("Cape Town 2001").
In 2015, the Nigeria Civil Aviation Regulations 2015 (Nig. Cars 2015) was enacted thus repealing the regulations cited as Nigeria Civil Aviation Regulations 2009 (Nig. CARs) Volume 1 and Nigeria Civil Aviation Regulation 2012 (Nig. CARs) Volume 2, save for the Schedule of Fees published therein, which remains in effect until amended by the NCAA.
Further, there are other agencies that play a key role in the civil aviation industry, particularly as it relates to air navigation services. The Nigerian Airspace Management Agency ("NAMA") is responsible for coordinating aeronautical search and rescue activities in Nigeria. The agency is also responsible for ensuring safe, orderly and expeditious flow of air traffic within the Nigerian airspace. In addition to NAMA, there are other agencies such as the International Civil Aviation Organisation ("ICAO"), the Ministry of Aviation, Federal Airport Authority of Nigeria ("FAAN") and the Nigerian Meteorological Agency ("NIMET"). It is important to note that despite the various functions assigned to the above mentioned agencies, the apex regulatory agency in the civil aviation sector is the NCAA.
B. LEGAL REGIME FOR KEY AIRCRAFT FINANCING TRANSACTIONS
1· Registration/Deregistration of Aircraft
The NCAA is the body responsible for the registration of aircrafts/engines in Nigeria pursuant to the provisions of the Civil Aviation Act 2006 ("The Act") and the Nigerian Civil Aviation Regulation 2015 ("Nig. Cars 2015" or "the Regulation") made pursuant to the Act. The NCAA is required to maintain an aircraft registry showing for each aircraft registered by Nigeria, the information recorded on the certificate of aircraft registration and any other information required by the NCAA.
The Regulation also requires that the NCAA registry should for each registered aircraft in Nigeria show proprietary rights, interests, liens and other dealings.
For the purpose of registering an aircraft, the following items are required to be submitted in respect of every application for registration of aircraft.
i) An application letter and the official application form (AW003) for Certificate of Registration (C of R).
ii) Evidence of payment of statutory charge.
a) Air Transport License (ATL) for scheduled operators; or
b) Air Operating Permit (AOP) for non-scheduled operators; or
c) Permit for non - commercial operation
iv) Evidence of ownership viz bill of sale, lease/purchase agreement.
v) Copy of document(s) detailing the aircraft specification. (This must be from a recognised source such as a manufacturer's manual etc.)
vi) Document attesting to the aircraft noise certification.
vii) Evidence of deregistration addressed to NCAA (if currently registered in another country).
viii) The age of the aircraft shall not be more than twenty-two (22) years.
i) Copies required as per items iii (a), (b) and (c) are applicable to new operators processing their initial aircraft registration. Note 3(a) and (b) are not required for aircraft to be operated in the private category.
ii) The ATL/AOP/Permit must still be valid.
iii) Every agreement to be submitted as required in (iv) must be duly signed by all parties to the said agreement.
iv) A type certification validation exercise must have been concluded by NCAA if the aircraft type is the first of its type on the Nigerian Register of Civil Aircraft.
The NCAA shall remove an aircraft from the Nigerian registry if the owner of the aircraft does not meet the eligibility standards specified in the Regulation. Nigeria as a signatory to the Cape Town Convention and the NCAA will honour an irrevocable deregistration and export request authorisation (IDERA) and deregistration power of attorney (DPoA). The operator can only prevent a proposed deregistration or export in circumstances where it can prove that there has been no default or breach of agreed contract terms in very limited circumstances.
Prior to deregistration, the original certificate of registration has to be returned to the NCAA. It follows that the original be held or kept in escrow and a certified true copy of the certificate of registration is retained on the aircraft. Where the NCAA exercises its power of de-registration of an aircraft, the Certificate of Registration shall be cancelled and the entry of the aircraft in the aircraft register shall be deleted.
2· Leasing of Aircraft/Engines
The concept of leasing of aircraft/engines registered in Nigeria is recognised under Nigerian law. The lease agreement usually governed by foreign law (English or New York) would ordinarily be upheld on the basis of the principle of pacta sunt servanda. However on certain exceptional circumstances, the court may mandate that Nigeria law should apply.
A lease agreement for an aircraft must be in writing and stamped for it to be enforceable in Nigeria. There is no express provision for the document to be notarised and apostilled. However, if the document is not in English, it would be necessary to translate it to English language. Typically, the translated document would be certified by the Nigerian Embassy or in the absence of the Nigerian Embassy, the British Embassy.
Pursuant to Section 74 of the Civil Aviation Act (2006), the obligation to maintain adequate insurance covering for its liability and also towards meeting compensation for damages that may be sustained by third parties is placed on the operator of the aircraft. It follows that the obligation to obtain requisite regulatory approval is imposed on the lessee.
However, it pertinent to note that the Civil Aviation Act provides that liabilities arising from injuries caused by the aircraft shall be recoverable without proof of negligence or intention or any other cause of action, subject to the right of the lessor to be indemnified by the lessee or operator.
There are restrictions on the ability of the lessor to re-export the aircraft from Nigeria. It is pertinent to point out that under Nigerian law, whoever registers an aircraft can deregister and export it. If an owner or a mortgagee's interest is filed, the NCAA will usually give notice and almost certainly, if the owner is seeking to deregister or export the aircraft, the operator shall be notified.
As a signatory to the Cape Town Convention, Nigeria is obligated to comply with Article 30(1), which is to the effect that an international interest (i.e. a lease or mortgage) remains effective, provided it was registered prior to the commencement of insolvency proceedings and in accordance with the provisions of the Convention. Thus, if the lessee operator (as the party in possession) is put into liquidation, administration or similar process, the liquidator of the lessee operator can impose the rights of any other creditors in priority to the lease or delay the ability of the lessor to repossess the aircraft on the termination of the leasing in Nigeria.
The fact that the lessor entered into the lease will not be sufficient for it to be deemed as resident, domiciled or carrying on business in Nigeria. For a business entity to be deemed as resident or domiciled in Nigeria it has to be incorporated or exempted from registration pursuant to the Companies and Allied Matters Act ("CAMA").
3· Creation of Mortgage over Aircraft/Engine
The legal framework in Nigeria makes it possible to create a mortgage over an aircraft/engine in Nigeria. It is pertinent to note that registration of the mortgage over an aircraft is accepted only for an aircraft that is registered in Nigeria and a technical search can only be conducted on an aircraft registered in Nigeria.
In creating a mortgage over an aircraft/engine registered in Nigeria, the security document must be filed with the NCAA. The mortgagee who wishes to register a mortgage interest must apply in writing to the Director General of the NCAA and submit the deed of mortgage duly endorsed by the parties with stamp duty paid. The mortgage must also pay the statutory fees as contained in NCAA Schedule of Fees stated in the Regulation; and the deed of mortgage must specify the aircraft type, registration marks, and serial number amongst others.
Nigerian law also requires that the security document used for the mortgage transaction be by deed, stamped and duly executed between both the mortgagor and mortgagee.
In addition, pursuant to the provision of the CAMA the security document must within 90 days be filed at the CAC, where the mortgagor is a limited liability company. This is known as the notice of charge. The following is required for filing of notice of charge on a company's property or undertaking:
a) duly stamped and sealed deed with counterpart copy;
b) duly completed form for notice of charge;
c) court order where applicable;
d) photocopy of previous registered deed in case of deed of upstamping; and
e) payment of fees.
The registration of the mortgage confers priority over subsequent security interests irrespective of whether that subsequent interest is registered and unregistered. Under the CAMA, the registration of a charge created by a Nigerian limited liability company will ensure that third parties who conduct searches at the CAC have actual notice of all charges created by the company. It is also important to note that the same principle of priority applies when the mortgage is registered pursuant to the Regulation.
C· APPLICABLE FEES AND TAX REGIME
At the NCAA, depending on the type of the aircraft, the minimum charge for registration under the fee arrangement is 10,000.00 Naira; while the maximum charge is 150,000 Naira. In addition, where a mortgage transaction to be registered does not specify the amount, the fee to be paid is 50,000.00 Naira.
At the CAC, a fee of 10,000 Naira on every 1 million or any part thereof is payable to register the security document for a private companies, while for a public companies a fee of 20,000 Naira on every 1 million or any part thereof is payable.
In addition to the registration fees, stamp duties are also payable. Stamp duties are taxes that are imposed on instruments, parchments and other legal documents. A document is 'stamped' as evidence of payment of the duties. It is payment made on several instruments specified in the Stamp Duties Act such as leases, mortgage deed, power of attorney etc. While some documents attract duties at flat or fixed rate, others attract duties ad valorem.
D· ENFORCEMENT IN THE EVENT OF DEFAULT
Article 54(2) of the Cape Town Convention and associated protocol which came into force in Nigeria on 14 November 2006 and was domesticated by the Nigerian Civil Aviation Act, 2006 provides to the effect that any remedies available to a creditor under any relevant provision under the Cape Town Convention that do not require application to the court may be exercised without court action and without leave of court. Alternatively, the mortgage can be enforced by obtaining a court order to that effect.
An English court judgment would be enforceable in Nigeria without going through re-examination on the merits. The lessor can obtain a judgment in US Dollars or any other foreign currency from the court in Nigeria, once it can be shown that there are sufficient foreign elements in the transaction. The foreign elements to be evaluated here include nationality of the parties, the agreed currency, place of performance etc.
There are two statutory regimes for the enforcement of foreign judgments in Nigeria. The statutes are the Reciprocal Enforcement of Judgment Ordinance Cap 175, Laws of the Federation of Nigeria and Lagos, 1958 (the ''1958 Ordinance'') and the Foreign Judgments (Reciprocal Enforcement) Act, Cap F35 Laws of the Federation of Nigeria 2004 (the ''Reciprocal Enforcement Act'').
Considering the infrastructural development needs in Nigeria and the bid to diversify the means of transportation, aircraft and aviation financing transactions in general are already becoming prime investment for the investors and the deal makers, and would remain so over the coming years. Nevertheless, it is important that in achieving a successful transaction the parties should understand the regulatory structures in place irrespective of whether it is an acquisition, lease, mortgage or even registration/deregistration of the aircraft for commercial or private use.
*Author - Mr. Ikemefuna Stephen Nwoye
Principal Chief Counsel - NWOYE (Barrister and Solicitor)
Disclaimer: This article should not in any way serve as a substitute for legal advice or opinion. The views expressed are personal to the author and do not necessarily reflect the views of any organization or person that the author is or might have been affiliated to.