Guernsey SPVs as useful structuring tools in aviation transactions

Introduction

Special purpose companies or vehicles ("SPVs") are commonly used by owners, lessors and financiers as structuring tools for the ownership, leasing and financing of aircraft in cross-border aviation transactions. SPVs are frequently used as simple asset-holding vehicles, separating the owner or lessor from the asset, as off-balance sheet or orphan vehicles, or in more sophisticated financing and leasing transactions.

Guernsey is a politically stable and well-regulated jurisdiction with a mature financial services sector. This, together with its flexible corporate regime, tax neutral environment and creditor friendly laws including the Cape Town Convention, makes it an attractive jurisdiction for the incorporation of aircraft-owning SPVs for simple or sophisticated structuring.

We set out below the common uses by, and benefits for, owners, lessors and financiers in using Guernsey SPVs in aviation structures and transactions.

SPVs in aviation transactions

In the context of aviation transactions, it is common for aircraft to be held through a corporate structure with the title to the aircraft being held by or transferred to the SPV rather than to the ultimate owner or beneficiary (whether an individual or a corporation) directly. Broadly, the aircraft-owning SPVs are then structured as either "on-balance sheet" SPV structures or "orphan" / "off-balance sheet" structures.

In an "on-balance sheet" structure, the ultimate beneficiary or owner directly owns and controls the SPV, typically as its parent. The SPV is usually consolidated onto the parent's balance sheet, hence it being called an "on-balance sheet" structure. These structures are commonly used for accounting, tax, administrative and succession planning purposes and to limit personal liability where high net worth individuals acquire assets such as corporate or business jets.

In the case of an "orphan" or "off-balance sheet" SPV structure, the shares of the SPV are held by a professional corporate trustee under a trust (usually a purpose trust, i.e. a trust established for a particular purpose such as holding shares in the SPV), with independent professional directors being appointed on the trustee board. As neither the owner/lessor nor financier has any direct ownership interest in the aircraft-owning SPV, the SPV is legally separate from these parties and may be kept off their respective balance sheets (as appropriate). These SPV structures are often referred to as "orphan" or "off-balance sheet" SPVs. These structures are often used by owners, lessors and financiers in secured finance transactions.

Attractiveness of SPV structures for owners/lessors and financiers

The following attributes of SPVs make them attractive as holding vehicles:

Limitation of liability for owners/lessors

Under Guernsey law, a Guernsey company is a legal person, which means it is a legal entity in its own right, separate and distinct from its members. It has the power to own assets in its own name, to borrow and/or lend money, to enter into contracts and to sue and be sued in its own name.

The effect of this is that absent fraud, the members of the company will not be liable for the acts of the company. This means that there will be limited circumstances in which a claimant could look through the Guernsey SPV to bring a claim against the member or owner in respect of the aircraft asset. Therefore, using an SPV allows the aircraft to be owned, leased and financed through the SPV rather than directly by the owner or lessor, and claims relating to the aircraft would be against the SPV as legal owner of the aircraft, insulating the beneficiary/member from direct liability.

SPVs provide asset segregation as well as a degree of control and certainty

Because the SPV is incorporated to hold a specific aircraft asset, it is a useful tool for segregating the SPV and the aircraft from other SPVs and assets in the parent's group.

For the owner and SPV, this reduces the risk that issues affecting the parent will affect the aircraft and vice versa.

For financiers, this means that the SPV and the aircraft are not exposed to unrelated activities or assets of the parent or owner that could affect the aircraft and related security arrangements. Financiers often take security by way of a charge over the shares of the SPV, which allows the financier to take control of the SPV upon the occurrence of an event of default. On enforcement, this enables the financier to sell the shares in the SPV rather than arrest and detain the aircraft, which can be more complex given the mobile nature of aircraft.

Off-balance sheet SPV structures offer bankruptcy-remote structuring

A key purpose of an off-balance sheet SPV is bankruptcy remoteness. Properly structured, the SPV is legally separate from the operator/owner/lessor and financier, reducing the risk that the insolvency of a transaction party affects the aircraft or security.

Bankruptcy-remote structures give financiers comfort that an operator/owner/lessor's insolvency should not undermine their security and give operators/owners/lessors comfort that issues affecting financiers or the aircraft should not contaminate the wider structure.

Key features of Guernsey SPVs

Guernsey companies provide the following attractive features for SPV aviation structures:

• Separate legal personality.
• No authorised capital or capital maintenance requirements, other than a statutory solvency test on distributions. In turn, this means no share premium account requirements and the ability to redeem or repurchase shares out of any capital account.
• No financial assistance restrictions other than satisfaction of the solvency test.
• Standard constitutional documents available by default.
• Unrestricted company objects.
• The ability to have single member and single director companies.
• Membership can be transferred easily.
• No statutory codification of directors' duties.
• No stamp duty is chargeable in Guernsey on the issue, transfer or redemption of shares.
• In most cases, the income of Guernsey companies is taxable at 0% and there is no separate corporation, capital gains, inheritance, capital transfer, value added or general withholding taxes in Guernsey.

Benefits of using Guernsey as a jurisdiction

The benefits of using Guernsey as a jurisdiction for incorporation and administration of an SPV include:

• Internationally recognised jurisdiction with a stable legal and political framework.
• British Crown dependency which has its own legislature and judicial system, with the UK government being responsible for its defence and international relations.
• Outside of the European Union.
• Tax-neutral environment for companies.
• Creditor-friendly jurisdiction.
• The Cape Town Convention was extended to Guernsey in November 2015 and implemented locally.
• Guernsey has an established financial services industry, with experienced corporate service providers, offshore lawyers and banks able to support aircraft finance SPVs.
• Straightforward and swift incorporation process.
• Corporate service providers can also provide independent directors and support with FATCA, CRS, AML, accounting, audit and reporting obligations.
• Incorporation and maintenance fees are competitive and depend on the company, service providers and registry or regulatory requirements.
• Established and leading aircraft registry (2-REG) which is well suited to private, corporate and transitional aircraft registrations.