Pledge over Aircraft in Serbia

Aircraft are, as a rule, objects of high value and are therefore very suitable as means of securing claims.

Depending on whether the contracting parties themselves intended for the aircraft to serve as collateral, or statutory conditions for that were met, or whether the court (upon the creditor’s motion) ordered that the claim be secured precisely by the aircraft, a distinction is made between contractual, statutory, and judicial pledge over aircraft.

Although an aircraft is a movable object, in legal transactions it has the status of immovable property. The rules governing transactions of immovable property apply accordingly to transactions of aircraft, especially with regard to the legal form of the contract by which such transaction is performed. This means that delivery of the aircraft alone is not sufficient to acquire rights in it; rather, a formal contract is required first, followed by registration of the aircraft in a special register.

From the tax perspective, aircraft are subject to special provisions and are not considered immovable property.

In addition, due to the primary purpose of aircraft, namely the transport of passengers and goods, mostly across borders, many international regulations apply to aircraft transactions.

Aircraft Register

Given that an aircraft is a movable object that can easily change location, the Aircraft Register is a necessary means to determine the affiliation of the aircraft and the applicable law. The Aircraft Register is, as a rule, a state institution.
Aircraft may be civil or state-owned. Both are entered into the Aircraft Register, but state aircraft (military, police, customs, and other state aircraft) are not in free circulation and cannot be subject to security interests.

Contractual pledge over aircraft

A contractual pledge over an aircraft, in practice – a mortgage over an aircraft – means that the creditor and the debtor agreed that their primary transaction would be secured by pledging the aircraft as collateral, and such agreement was included in the contract.

Precisely because aircraft are by nature very expensive objects, they are suitable as collateral, whether for financing the purchase of the aircraft itself, or for securing another transaction.
The Cape Town Convention of 2001 regulates pledges over aircraft and has significantly facilitated contractual pledges over aircraft and popularized them as collateral. Namely, the secured creditor may be satisfied either through out-of-court settlement or through commercial use of the aircraft until the due claim is satisfied.
However, since Serbia is not a signatory to this Convention, domestic aviation law leaves only one option for the pledgee to satisfy its claim – through judicial sale of the aircraft.
In addition to the principal claim, a contractual pledge also covers: contractual or statutory interest accrued over three years until initiation of enforcement, interest accrued during the proceedings, as well as costs of registration, litigation, and enforcement.

The subject of a pledge over an aircraft, i.e. mortgage, may be the aircraft (as a whole), an aircraft under construction, as well as items incorporated in an aircraft under construction. All of this is registered in the Aircraft Register. Engines and aircraft parts may be a separate subject of pledge in the Pledge Register maintained by the Serbian Business Registers Agency (APR).
In case of loss or damage to the aircraft, the insurance amount that otherwise belongs to the aircraft owner, provided that the insurer has been notified that the aircraft is pledged, will belong to the secured (mortgage) creditor.
On the other hand, freight, rental fees and any other payments arising from the use of the aircraft belong to the owner or user of the aircraft, not to the pledgee.

Permanent withdrawal of an aircraft encumbered by a pledge from circulation is not possible without the consent of all creditors. If such consent is not given, the debtor may request judicial (public) sale.

A contractual pledge terminates:
(1) by deletion of the pledge from the Register – usually due to repayment of the debt,
(2) by sale in enforcement or insolvency proceedings.

It should be noted that the pledge, i.e. the priority rank of secured creditors, does not terminate by deletion of the aircraft from the Register. For example, in the event of permanent unserviceability, disappearance of the aircraft, etc., registered pledgees still retain priority for satisfaction of their claims against the pledgor.

Statutory pledge over aircraft

To establish a statutory pledge over an aircraft, entry into the Aircraft Register is not necessary. By occurrence of certain objective circumstances, a statutory pledge arises, and the holder of such right is entitled to register the pledge in the Aircraft Register.

Why is a statutory pledge constituted?

In situations where an aircraft is threatened with destruction, and there is a possibility of saving and preserving it, which usually entails high costs for such undertaking, and where compensation for salvage makes sense, a statutory pledge is constituted by law so that creditors of such costs and salvage compensation are paid with priority, before any other creditors.

The terms “salvage of aircraft” and “compensation for salvage” are rather broad, which raised the question of their definition. Serbian laws have defined them as follows:

Statutory pledge in Serbia exists for:

1.  court costs incurred in the common interest of all creditors during enforcement or security proceedings for the preservation of the aircraft or execution of forced sale;

2.     claims relating to payments owed on account of search for or salvage of the aircraft;

3.     claims relating to extraordinary expenses necessary for preservation of the aircraft.
If there are several creditors with statutory pledges of the same rank, and insufficient funds to satisfy them fully, they shall be satisfied proportionally.
Our law does not classify as privileged creditors those persons who suffered damage on the ground (death or bodily injury) caused by the use of the aircraft. Persons injured on the ground are satisfied after privileged creditors with statutory pledges, and only up to 20% of the achieved price in forced sale. Thus, they have priority over other creditors, but not over privileged creditors with statutory pledges.
A statutory pledge terminates:

4.     upon termination of the secured claim (including interest and costs),

5.     upon expiry of one year from the occurrence of the claim,

6.     by forced sale in enforcement or insolvency proceedings,

7.    by voluntary sale subject to cumulative conditions: that transfer of ownership or use rights has been entered in the Register and that the creditor with a statutory pledge has not initiated judicial proceedings to satisfy such claim.
It is important to note that a statutory pledge over an aircraft not entered in the Register does not terminate by deletion of the aircraft from that Register.

Judicial pledge over aircraft

A judicial pledge arises when a creditor, in court proceedings, proposes establishment of a pledge over a specific aircraft, and the court accepts the proposal. The pledge is then registered in the Aircraft Register on the basis of the court’s decision.
This pledge may be established to secure any monetary claim, not only one connected with the use of the aircraft. The purpose of such pledge is that the creditor obtains priority over other creditors of the same debtor. At the time of registration of his pledge, the creditor acquires priority for satisfaction over other unsecured creditors, as well as over those who later become pledgees (second, third, and subsequent ranks) on the same object.

Conclusion

While statutory pledges over aircraft are constituted in connection with the operation of air transport and its consequences, contractual and judicial pledges “regard” aircraft as very practical and convenient means of security, precisely because they are, as a rule, of great monetary value.

Therefore, it is prudent to have an aviation law expert “at your side”: someone who will, already at the stage of contracting and registration, set the correct course – from the form of the contract and entry in the Register, through annotations and insurer notifications, to potential enforcement.

Furthermore, deadlines are strict (e.g. one-year and 90-day periods), there are priority ranks (with the exception of up to 20% for persons injured on the ground), and cross-border elements are often present, and a single missed or undertaken action may change the course of the proceedings.

Law Firm Petrović Mojsić & Partners