Mr. Hiromi Hayashi
Partner

Hiromi Hayashi is a partner at Mori Hamada & Matsumoto. Hiromi is a member of the Logistics Subcommittee of the Study Group on the Flying of Unmanned Aircraft (Drones) Beyond Visual Line of Sight and Over Third Parties, established jointly by the Ministry of Land, Infrastructure, Transport and Tourism and the Ministry of Economy, Trade and Industry (2017).

Mr. Masataka Hayano
Senior Associate

Masataka Hayano is a senior associate at the Tokyo office of Mori Hamada & Matsumoto. His areas of practice are international and domestic transactions, M&A transactions and structured finance, including aviation finance & leasing. He can provide one-stop services to advise on a wide range of transactions, including buy-out transactions and complexed finance transactions.

Mr. Tetsuji Odan
Senior Associate

Tetsuji Odan is a senior associate at the Tokyo office of Mori Hamada & Matsumoto. He focuses on regulatory matters, including aviation law, space law, radio and telecommunications law, antitrust law, M&A transactions and finance matters. He was admitted to the Japanese Bar in 2016. He received his LLB from Keio University in 2014.

Key Developments & the Latest Trends in Japan from a Legal Perspective

Introduction

Although the Japanese aviation industry, including airlines and the aviation finance industry, was significantly harmed by the COVID-19 pandemic, fortunately no airline in Japan has gone bankrupt due to the pandemic, and the industry is now recovering thanks to the rapid recovery of passenger demand as well as the general global trend of recovery. The recovery trend in Japan is expected to continue, but there are some challenges such as the rising price of oil. From the legal perspective, there have not been any remarkable updates or developments in aviation finance and leasing in recent years.

Legal Framework for Aviation Finance & Leasing

Aviation Finance & Leasing Regulatory Framework In Japan, there is no single, comprehensive piece of legislation regulating aviation finance and leasing.

The following two laws (including the orders and regulations thereunder) are relevant to aviation

finance and leasing on top of Japanese Civil Code and the Commercial Code. Please note that

citations to relevant articles and provisions of the laws below refer to the law in each respective section title unless noted otherwise.

1. The Civil Aeronautics Act (Koukuu Hou) The Civil Aeronautics Act governs civil aeronautics activities in Japan based on the Convention on International Civil Aviation (the Chicago Convention) and its Annexes. For treaties related to aviation finance and leasing, in addition to the Chicago Convention, Japan has ratified the Convention for the Unification of Certain Rules for International Carriage by Air (the Montreal Convention). On the other hand, Japan has not ratified the Convention on Damage Caused by Foreign Aircraft to Third Parties on the Surface (the Rome Convention), the Convention on the International Recognition of Rights in Aircraft (the Geneva Convention), and the Convention on International Interest in Mobile Equipment (the Cape Town Convention) and the Protocol to the Convention on International Interest in Mobile Equipment on Matters Specific to Aircraft Equipment. Under the Civil Aeronautics Act, the Ministry of Land, Infrastructure, Transport and Tourism (“MLIT”) is the principal regulator of aviation matters. In addition, the act defines “aircraft” as any aeroplane, rotorcraft, glider and airship that can be used for air navigation with a person on board and any other apparatus used for air navigation as may be specified by a cabinet order related to the act. Aircraft in the context of aviation finance and leasing would fall under “aeroplane” (hikouki) in the definition above. Under the Civil Aeronautics Act, MLIT registers an aircraft in the Aircraft Register (Koukuuki Tourokugenbo) by application of an owner of the aircraft (Article 3, Article 5). This Aircraft Register is a registry of owners of aircraft. As it currently stands, there is no registration system for engines of aircraft, lease interests in aircraft and lease agreements over aircraft in Japan, and lessees of leased aircraft cannot be registered in the Aircraft Register. By completing registration in the Aircraft Register, the registered aircraft acquires a Japanese nationality. In principle, any aircraft which does not have this registration cannot be operated in Japan with exceptions for foreign-registered aircraft (Chapter 8). Under this law, any registration in the Aircraft Register cannot be made regarding any aircraft owned by (i) any person who does not have a Japanese nationality, (ii) any foreign state or public entity or its equivalent in any foreign state, (iii) any juridical person or body established in accordance with the laws and regulations of any foreign state, or (iv) any juridical person of which the representative is any one of those listed in the preceding three items or of which one-third or more of the officers are those persons or one-third or more of voting rights are held by those persons (Article 4, Paragraph 1). In the context of aviation finance and leasing, in order for a foreign owner to lease aircraft that are or will be registered in the Aircraft Register to a Japanese airline, in practice, the owner nominates an SPC that does not fall under any of the requirements above to own the registered aircraft. Under the laws of Japan, any transfers of aircraft ownership take effect upon execution of an agreement between the seller and the purchaser, and no formalities are required, but the new owner of the registered aircraft is required to apply for a transfer of registration within a period not exceeding 15 days (Article 7-2). However, the act stipulates that no acquisition or loss or change of ownership of any registered aircraft (more precisely, limited to aeroplanes and rotorcraft) may be duly asserted against a third party unless the aircraft has been registered. That is, registration in the Aircraft Register also functions as a means of perfect ownership. However, it should be noted that if the registration is false and there is a true owner who is not registered in the Aircraft Register, the buyer cannot acquire ownership of the aircraft. In this sense, the Aircraft Register acts as a crucial piece of evidence to prove ownership, but it does not per se protect a person who relies on a false registration.
2. The Aircraft Mortgage Act (Koukuuki Teitou Hou) The Aircraft Mortgage Act clearly stipulates that aircraft can be the subject matter of a mortgage (teitouken; Article 3) though the act explicitly provides that the registered aircraft cannot be the subject matter of a pledge (shichiken; Article 23). The types of mortgages when it comes to aircraft include revolving mortgages (neteitouken), which secure unspecified claims of a certain scope, up to the limit of a maximum amount on top of ordinary mortgages as well as ones stipulated in the Civil Code. The Aircraft Mortgage Act does not stipulate a mortgage over engines or other spare parts of aircraft, but those parts may be subject to security assignments (jototanpo; note that pledges are practically not used for those parts since the Civil Code stipulates that a pledgee may not allow a pledgor to possess the thing pledged on behalf of the pledgee (Article 345 of the Civil Code)). Although creation of aircraft mortgages takes effect without any registration, a registration of an aircraft mortgage in the Aircraft Register in which ownership of the aircraft is registered is necessary for its perfection against any third party (Article 5 of the Aircraft Mortgage Act). To register an aircraft mortgage, the mortgagee and the mortgagor must jointly apply for registration and submit a document verifying the existence of the mortgage, such as the mortgage agreement, and other necessary documents. The aircraft mortgage registration tax is JPY 0.003 multiplied by the loan amount or the maximum secured amount. Since the amount of tax tends to be high, it is customary to make a provisional registration (karitouroku) for the mortgage and pay only JPY 2,000 as a registration tax per aircraft. In addition, for the priority of aircraft mortgages, the Aircraft Mortgage Act stipulates that an aircraft mortgage has the same priority as a first-rank lien (sakidoritokken; Article 11). First-rank liens include liens for leases of immovables, lodging at hotels and transportation (Article 330, Paragraph 1, item 1 of the Civil Code).

Repossession and Enforcement of Security

1. Repossession Procedures Under the laws of Japan, in principle, self-help is illegal. Thus, even if a lessee does not voluntarily return leased aircraft to a lessor after the termination of a lease agreement, if the lessor repossesses the aircraft from the lessor by itself, the repossession can be judged as a tort (Article 709 of the Civil Code). Thus, in the case above, the lessor needs to file a petition for compulsory execution and, if necessary, an execution of provisional seizure of the aircraft to a competent district court in order to retrieve the aircraft from the lessee. More specifically, under the Civil Aeronautics Act, the compulsory execution and the execution of provisional seizure of a registered aircraft are governed by rules issued by the Supreme Court (Article 8–4, Paragraph 2 of the Civil Aeronautics Act), and the Civil Execution Rules (Minji Shikkou Kisoku) and the Civil Provisional Remedies Rules (Minji Hozen Kisoku) apply to the compulsory execution and execution of provisional seizure of the registered aircraft (Article 84 of the Civil Execution Rules and Article 34 of the Civil Provisional Remedies Rules). If the court decides to commence the procedures for compulsory execution, it must order a public auction of the aircraft, obtain the documents which are necessary to fly the aircraft, including verification of the aircraft’s nationality, and prohibit the aircraft’s departure (Article 84 of the Civil Execution Rules and Article 114 of the Civil Execution Act). In addition, the execution of a provisional seizure is carried out by (i) making an entry of the provisional seizure in the register, or

(ii) obtaining the documentation necessary to fly the aircraft, including the verification of the aircraft’s nationality (Article 34 of the Civil Provisional Remedies Rules and Article 48 of the Civil Provisional Remedies Act). Since aircraft without any registration certification cannot be used for aviation under the laws of Japan, aircraft subject to the court’s orders will be detained through the procedures for compulsory execution and execution of provisional seizure. On top of that, if it is likely that a compulsory execution will become significantly unfeasible unless the aircraft is in detention, the lessor may file a petition with the district court with jurisdiction over the aircraft’s home base (teichijyo) before commencing the compulsory execution procedures to request that the court order for the delivery of the registration certification. Furthermore, if there are pressing circumstances, the lessor may file the petition with the district court with jurisdiction over where the aircraft is located (Article 84 of the Civil Execution Rules and Article 115 of the Civil Execution Act). Even if the certification of registration is delivered, the possession of the aircraft is not deemed delivered to the lessor or the court. The lessor may file a petition to appoint a custodian to maintain the aircraft until the compulsory execution starts (Article 84 of the Civil Execution Rules and Article 116 of the Civil Execution Act).

For the compulsory execution, it shall be carried out based on “title of obligation” (Saimumeigi), which includes, among others, (i) a final and binding judgment, (ii) a judgment of a foreign court for which an execution judgment has become final and binding and (iii) an arbitral award for which an execution order has become final and binding (Article 22 of the Civil Execution Act). For (ii), in order to obtain an execution order from a court, it must satisfy the following requirements (Article 118 of the Code of Civil Procedure): (a) the jurisdiction of the foreign court is recognised pursuant to laws and regulations, conventions, or treaties;

(b) the defeated defendant has been served (excluding service by publication or any other service similar thereto) with the requisite summons or order for the commencement of litigation, or has appeared without being so served;

(c) the content of the judgment and the litigation proceedings are not contrary to public policy in Japan; and

(d) there is a guarantee of reciprocity in the country of the foreign court.

In terms of (iii) above, Japan has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The Arbitration Act stipulates that an arbitral award (irrespective of whether or not the place of arbitration is in Japan) shall have the same effect as a final and binding judgment; provided, however, that a civil execution based on said arbitral award requires an execution order (Shikkoukettei; Article 45, Paragraph 1 of the Arbitration Act). However, this provision is not applied in some exceptional cases such as if the petition filed in the arbitration procedure is concerned with a dispute that may not be subject to an arbitration agreement pursuant to provisions of the laws and regulations of Japan or the content of the arbitral award is contrary to public policy in Japan.

B) Procedures for Enforcement of Security

As mentioned above, under the laws of Japan, in principle, self-help is not permitted. Thus, even if an owner of an aircraft declines to cooperate with a mortgagee to conduct a voluntary sale other than a disposal agreed under a security agreement between the mortgagee and the owner, the mortgagee needs to file a petition for compulsory execution to a competent court. The compulsory execution is the same as the one for repossession mentioned above (Article 175 of the Civil Execution Rules).

Choice of Law

The Act on General Rules for Application of Laws stipulates that (i) a real right to movables or immovables and any other right requiring registration are governed by the law of the place where the subject property of the right is situated and (ii) acquisition or loss of the right is governed by the law of the place where the subject property of the right is situated at the time when the facts constituting the cause of the acquisition or loss were completed regardless of (i) (Article 13 of the Act on General Rules for Application of Laws). Although it is not expressly provided for in the act, the law of the registration is usually considered as the governing law of real rights regarding aircraft.

Taxation

If a business provider transfers or lends any property or provides services to a third party for consideration

within Japan, a consumption tax will be levied on the transaction (the current rate is 10%). However, if

the transaction is considered an export under the Consumption Tax Law and the business provider has an export permit, the transaction may be exempt from consumption tax. In the case of an aircraft that delivers passengers or cargo outside Japan, the transfer of the aircraft may be exempted if certain requirements under the Consumption Tax Law are satisfied.

Furthermore, the Stamp Tax Law requires that stamps be affixed to certain documents, including an agreement to sell and purchase an aircraft. The amount of the stamp depends on the purchase price. For example, if the price is more than JPY 100,000,000 but not more than JPY 500,000,000, the stamp amount is JPY 100,000; and if the price is more than JPY 5,000,000,000, the stamp amount is JPY 600,000.

In addition to the above, annual property tax is imposed on the owner of an aircraft. On top of that, withholding tax may be imposed on rent paid by a Japanese lessee to a foreign lessor.

Furthermore, as mentioned above, when an aircraft is registered in the Aviation Register, a registration tax is imposed.

Exchange Control

Under the Foreign Exchange and Foreign Trade Act, except in the event of certain exceptional cases such as payment to a person subject to economic sanctions, payments in relation to aviation financing and leasing are not subject to any approval requirements. However, it should be noted that a post-closing report on certain payments or receipt of payment is required if the payment amount is equal to or greater than JPY 30,000,000.