23 November 2021
Global Aircraft Trading System (GATS) is a fully electronic system designed to facilitate certain aircraft trading and financing transactions. We have previously discussed the practical considerations for lessees, lessors and financiers in terms of transitioning to GATS (https://hsfnotes.com/aviationfinance/2021/04/28/the-global-aircraft-trading-system-gats-some-practical-and-documentary-considerations/). In this article, we discuss the operation of GATS in an enforcement scenario.
In a GATS aircraft transaction, the aircraft is legally owned by a trust created on the GATS platform (GATS Trust) for which a professional trustee company acts as trustee. When the aircraft is traded, the beneficial interest in the GATS Trust is able to be transferred by the beneficiary, with no change to the legal ownership of the aircraft.
Security over beneficial interest
The beneficiary can grant a security interest over its beneficial interest in the GATS Trust in favour of its financier under a GATS standard form security instrument electronically signed by the parties on the GATS platform. As with the commonly seen owner trustee structure, such security interest is in addition to the other security package typical in an aviation financing transaction, such as an aircraft mortgage and a security assignment of the lease agreement.
It should also be noted that, once a security interest in the GATS Trust is recorded on the GATS e-Ledger, no transfer by the beneficiary is permitted through the GATS Platform without consent of the financier, until the security interest is discharged and such discharge is recorded on the e-Ledger.
Upon occurrence of an enforcement event which is continuing, the GATS security instrument permits the financier/secured creditor to, among other rights and remedies, serve an enforcement notice on the trustee, following which, the secured creditor is permitted to exercise all powers and rights of the beneficiary under the GATS Trust including the right to request the transfer of the beneficial interest from the beneficiary to the secured creditor (or its nominee).
Transfer of beneficial interest upon enforcement
Beneficial interest in a GATS Trust can be transferred by execution and delivery of a transfer instrument. It can be done by electronic execution of a GATS standard form transfer instrument on the GATS platform (GATS Transfer), or manual execution of other forms of transfer instrument agreed between the parties (Non-GATS Transfer).
Given the secured party does not have controls over the GATS user account of the beneficiary, it may be challenging for a GATS Transfer to be completed without the beneficiary’s co-operation. Nevertheless, pursuant to the GATS security instrument, the secured party can still exercise the rights of the beneficiary and transfer the beneficial interest by way of a Non-GATS Transfer. Alternatively, the secured party can request, as a condition precedent to the financing, for the executed but undated Non-GATS Transfer documentation to transfer the beneficial interest to the secured party, which can be dated and effect the transfer upon occurrence of an enforcement event which is continuing.
Once a Non-GATS Transfer is recorded on the GATS e-Ledger by the parties, the trust ceases to be a GATS Trust and no further transactions relating to the trust will be recorded on the GATS e-Ledger unless and until the trust is re-migrated into GATS as a new GATS Trust.
Based on our enquiries to AWG, we understand that AWG are considering to implement a technical change on the GATS platform to allow the secured party to electronically execute a GATS transfer instrument on behalf of the beneficiary on the platform, without the need for the beneficiary to co-operate in an enforcement scenario.
For further information, please contact:
Timothy Stutt, Partner, Herbert Smith Freehills