Thought leadership from our experts

Italian airlines’ insolvency and seizure of aircraft owned by foreign lessors

During the last 12 years, various airlines licensed in Italy have become insolvent or bankrupt (or they have filed petitions with Italian bankruptcy courts seeking protection against creditors, taking advantage of a certain recent law which has introduced into the Italian legal system the sc. "Concordato Preventivo", similar to a certain extent to the US "Chapter 11" remedies and procedure).

Most aircraft operated by Italian airlines are owned by foreign companies, and leased to such airlines either directly, or through a "head-lease" plus "sub-lease" structure, whereby the sub-lessor is usually a company incorporated in the Republic of Ireland, for the registration of aircraft, with a favourable Double-Tax Treaty ("Convention between Ireland and Italy for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income", signed at Dublin on June 11th, 1971) makes the payment of rentals from Italy to any Irish recipient not subject to withholding tax (in particular, pursuant to Article 11 - "Royalties" - of the Treaty, which recites:

"1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State.

2. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use, or the right of use of ….. industrial equipment…………"

In fact, "Aircraft" are deemed to be included in the definition of "industrial equipment" for the purposes of said Convention).

Furthermore, the registration of the aircraft in Ireland can greatly simplify the de-registration process and re-leasing of the aircraft to another lessee, upon the termination of the leasing to the Italian airline, whatever the cause of such termination may be; the foregoing, also after that the relevant Italian Aircraft Registration Laws have been recently amended, so as to make the de-registration of the aircraft from Italy now possible and easier even without any lessee's cooperation or assistance. The current amended Article 760 of the Italian Navigation Code in fact recites:

"The Aircraft is de-registered from the [Italian Aircraft] Registry: …………………… f) if the owner files an application [with the Italian Registry] in order to register the Aircraft under the registry of another EU member State"

(if, on the contrary rather than by the owner, the aircraft is de-registered by the lessor and lessee, a period of sixty days from the filing of the relevant application with the Italian Registry has to elapse, before them being entitled to remove the aircraft from the Italian Registry, unless the lessor prefers, instead of waiting until the end of such term, to place a security bond or bank guarantee with the ENAC-Italian Civil Aviation Authority – which bond or guarantee must be appraised by an ENAC officer, as per the guaranteed amount which ought to be in principle equivalent to the market value of the aircraft, in order to secure any possible third party's - inclusive of Airport Authorities' - claims against that same aircraft).

Having in mind the above cited rules and regulations, which actually make it preferable for a series of reasons to have an Irish company to act as intermediate lessee from the actual owner and as sub-lessor to the Italian airline/lessee, in the event of bankruptcy or insolvency of the lessee, and notwithstanding any possible automatic termination clause of the lease agreement which should apply in such case, Italian Bankruptcy Law provides for the airline's Trustee-in-Bankruptcy (or Commissioner, Receiver, Liquidator or Special Administrator as the case may be, all of them hereinafter simply referred to as "trustee") to exclusively decide whether to continue to lease and operate the aircraft (in which case the trustee shall pay all rentals becoming due after having communicated such a decision to the lessor, pursuant to Article 74 of the Italian Bankruptcy Law), or to terminate the lease agreement and re-deliver the aircraft to the lessor.

If the Italian airline's trustee then decides to re-deliver the aircraft to the lessor, or if the Italian airline files for the Italian Chapter 11-like procedure (and it simultaneously loses its airline operating license pursuant to revocation or suspension by ENAC), the risk is that some creditors of the airline seeks and obtains from a court the attachment of the aircraft with the aim at exerting heavy pressures over, and getting paid by the aircraft owner for all the debts arising from the operation of such aircraft. Among the possible creditors who can act in such a way, we can list the aircraft crew, the aircraft maintenance facilities (this, while the aircraft is still located at such facilities) and, in particular, the Airport Authorities of the airport where the aircraft has been operating.

Under Italian Law no. 324 of May 5th 1976, in fact, all aircraft operations undertaken in Italian airports are subject to the payment to the relevant Airport Authority of certain fees and charges (the "airport charges") becoming due - pursuant to Article 1 of such Law – in connection with any aircraft take-off, landing, parking, and passengers' embarkation. Furthermore, Article 6 of the same Law (as well as Italian Law no. 117 of April 16 1974 as it may relate to airport charges arising from any cargo operation) makes the aircraft owner directly liable, together with the aircraft operator/lessee, for the payment of such airport charges (with the consequence that, if the lessee becomes insolvent, all creditors usually go straight against the owner as the only solvent party which may be able to satisfy and pay their claims).

While until a dozen years ago Italian courts would very unlikely grant to a creditor any pre-judgment attachment order to block or seize an aircraft (almost never, indeed, if the aircraft was involved in any scheduled route for the transportation of passengers, since in that case the mandatory prior consent of the Italian Minister of Transportation was required and should have been obtained by the creditor prior to trying to pursue any such action in Court), the relevant Italian jurisprudence has more recently changed, in particular after the insolvency of Volare Airlines in 2004: the Court of Milan created (by its judgment no. 314/2010, published on January 12 2010) an important precedent and a guideline for other Courts in some later similar cases, by granting a pre-judgment attachment order in favour of SEA (the Milan Airport Authority), which then seized an aircraft leased to Volare by SL Zermatt Limited (a company incorporated and with its main offices at Grand Cayman, Cayman Islands). The aircraft was released after the placement of a bond by Zermatt with the Court, and the litigation continued until the issuance of the final judgment by the Milan Court on the liability of Zermatt for all airport charges due and arisen from the operation in the Milan and Malpensa airports, of the Zermatt aircraft, while being operated on lease by Volare.

Starting from such a precedent, various other Airport Authorities have afterwards obtained pre-judgment attachment orders over aircraft leased by foreign lessors (and owned by foreign owners) to Italian airlines, after the insolvency of such airlines and just before the re-delivery of the aircraft to the respective lessors (we can mention similar events, which have occurred after the My Air, Alpi Eagles, Windjet and Alitalia insolvencies).

In the Zermatt case, though, the aircraft owner unsuccessfully tried to oppose the accuracy of the SEA's invoices as proper evidence of the latter's claims to be used in the Court proceedings, as well as the lack of jurisdiction of the Italian Court or the fact that SEA had not informed Zermatt of the abnormal and sudden increase of the Volare's debt vis-à-vis the Airport Authority just before the insolvency of Volare itself; all Zermatt's arguments were fully rejected by the Court.

Learning from the Zermatt case, therefore, other lessors which have been later on summoned to appear before various Courts (not only Milan, but also Rome, Verona, Bergamo, Catania and other), have better defended their cases and obtained either the revocation of the attachment, or a final Court award against SEA and the other Airport Authorities which had brought suit and sought to attach the aircraft.

If we examine some of those more recent cases, we can note to start the court's decision dated February 4th, 2009, where Aergo Capital Limited was able to have a SEA claim and attachment petition against such Irish company rejected by the Milan Court because of SEA's inability to properly and duly prove that Aergo was the "owner" of the aircraft on lease to the insolvent Alitalia. In summary, SEA had not submitted any certificate of ownership of the aircraft registered in Ireland, which it could request and obtain from the IAA-Irish Aviation Authority, but only some non-better specified report obtained through an internet search.

In another case after the Alitalia's insolvency, SEA had similarly requested the attachment of an aircraft allegedly owned by Pegasus Aviation, because of the lack of payment by the operator Alitalia of the relevant airport charges to that Airport Authority. Pegasus, in this specific case, defended its position and argued that the attachment could not be granted on the bases of the petition filed by SEA, having in mind that SEA had not duly proved all its claims and that the guarantee which it was seeking to obtain by attaching the Pegasus' aircraft, was unbalanced if the Court considered the amount of the airport charges at stance vis-à-vis the much bigger market value of the aircraft; finally, Pegasus objected that one of the main SEA's arguments to obtain the attachment had been that Pegasus was not an Italian (but an Irish) entity, hence it could be difficult to reach it if the aircraft were removed or left to fly from Italy.

The Court rejected the SEA's arguments and dismissed its claim, and in turn wholly accepted Pegasus' arguments, in particular that a foreign owner (or lessor), if based in another EU member-country, cannot be discriminated or treated more unfairly than an Italian debtor, for the sole reason that it may be more difficult to enforce an Italian judgment in another EU jurisdiction; to such regard, the Court referred to an old judgment (no. 3558) issued by the Supreme Court of Italy in 1957, which held that the foreign domicile or residence of a debtor and the difficulty for his creditor to enforce his claim in accordance with Italian Law outside of Italy, do not per se justify or support the granting of any pre-judgment attachment, missing any other substantial reason therefor.

If that was true almost 60 years ago (when the Supreme Court so decided), it must be held even more significant and binding (for a Court to reject a petition for any such requested attachment) nowadays, if we consider that after the issuance of the EU Regulation no. 44/2001, it is much easier for any creditor located in any EU member-country to enforce a Court decision within the jurisdiction of any other member-country of the European Union.

Also the Court of Civitavecchia (which can exert its own jurisdiction over cases arising at the Rome's Leonardo da Vinci Airport) issued a judgment on May 6 2009 similar to the Milan Court's in the above described case: the Rome Airport Authority had succeeded to attach an aircraft which had been on lease until a few days before, to the insolvent Alitalia, just when it was being prepared for re-delivery to its owner TARA-Thomas A. Ryan Associates Aerospace Limited. TARA's main defence upon appearing before such Court to request the release of the aircraft, was that the value of the Rome Airport's claim was much less than the global market value of the attached aircraft, which the airport had failed to mention, and also that the pre-judgment attachment over the aircraft had been sought and obtained by the airport only because – if actually re-delivered to TARA -, there would be no other assets of the latter located in Italy against which the airport could try to satisfy its claim. The Court of Civitavecchia therefore released the aircraft and revoked the attachment only after a few weeks after having granted it, accepting all TARA's arguments and rejecting the airport claims.

More recently, after the filing by Windjet of a petition for a Chapter 11-like protection from its creditors, SAC-the Catania Airport Company seized certain aircraft leased to that Italian airline by various Irish lessors, with such attachments having been simultaneously enforced both in Sicily and in Malta (such trans-national Court assistance is something new in this scenario, at least with regard to the issue arising from unpaid airport charges to Italian Airport Authorities).

In one of those mentioned cases, the key issue was whether the Irish lessor of one of those attached aircraft sued by SAC for the payment of the relevant airport charges after the Windjet's delinquency and insolvency, could be held to be the "owner" of the aircraft, as alleged by SAC on the basis of an aircraft certificate issued by IAA (the aircraft was registered in Ireland) which recited that the Irish lessor was the "Registered Owner" of such aircraft. Contrary to SAC's allegations and submitted evidence, however, the Irish defendant was able to submit as its own evidence and explain to the Catania Court - which had jurisdiction to confirm or revoke the pre-judgment attachment in that case - the Irish Law on Registration of Aircraft (and, more in particular, the "S.I. no. 634/2005 – Irish Aviation Authority (Nationality and Registration of Aircraft) Order, 2005").

Pursuant to section 7 (1) of Part II of the Irish Law, only an aircraft which is wholly owned by Irish citizens, or by EU citizens having a place of residence or business in Ireland, or by a company registered and having a place of business in Ireland or in another EU member-country, whereof not less than 2/3 of the directors are citizens of Ireland or another EU member-country, can be in principle registered in Ireland. This would have supported SAC's allegations that the aircraft, if registered by a company in Ireland, ought to be owned by such company.

However, section 7 (4) in turn recites:

"An aircraft, the ownership of which does not comply with paragraph (1) of this Article, but which is chartered by demise, leased or on hire to, or in course of being acquired under a lease-purchase or hire-purchase agreement by, a citizen or company such as is referred to in that paragraph, or by such citizen and company in combination, may be registered in the State but such registration shall be subject to any conditions the Authority may deem fit to impose".

Finally, section 9 (3) of the Irish Law, recites:

"The following particulars shall be included in the aircraft register in respect of every aircraft registered therein:

(a) The name and address of the registered owner of the aircraft, that is, every person who is entitled as owner to a legal interest in the aircraft or a share therein or, in the case of an aircraft which is the subject of a charter by demise or a lease contract or a hire purchase agreement, the name and address of the person or undertaking to whom the aircraft is chartered, leased or hired and in whose name the aircraft is registered"

Such section 9 (3) (a) clarifies that also the sub-lessor can be qualified as "registered owner" of an aircraft registered in Ireland, if he has entered into a lease agreement with a foreign owner, but this does not imply that the sub-lessor can so obtain the legal title of ownership over the aircraft thus become entitled to also dispose thereof.

Based on such clarification the foreign lessor, in the case decided by the Catania Court on May 9 2013, was able to convince the Court that the lessor was only the "registered owner" pursuant to Irish Law, but not the "legal owner" of the aircraft which, pursuant to Article 6 of Italian Law no. 324 of 1976, is liable for the payment of the airport charges in the event of the operator's default or insolvency; the Court consequently dismissed the case after having revoked the attachment over the aircraft previously granted in favour of SAC.

In summary, and in order to conclude this paper: there is always the risk that an aircraft leased to an Italian airline, if all airport charges due and arising from the operation of such aircraft are not duly and wholly paid, can be attached by the relevant Italian Airport Authority; the lessor of the aircraft, in turn, can defend its case and try to get the attachment revoked, by proving that the airport claim is worth much less than the global market value of the aircraft, or that the attachment is unfair and discriminatory if only granted to such Airport Authority because of the latter's argument that the lessor is a foreign company (but still located in another EU member-country), missing any better and proper evidence (to be submitted by the Airport Authority) that the lessor is in financial troubles like the airline/lessee.

Finally, the foreign lessor can prove that it is not the "legal owner" of the aircraft, in which case the Airport Authority's action would not be supported or consistent with basic legal requirements under Italian Law; consequently, such case shall be dismissed and the petition for attachment rejected by the Court. A last defence argument is available only when the aircraft is not registered in Italy, and this, because the Italian Aircraft Registry must record the name of the legal owner of each aircraft registered in Italy, hence that subtle difference between "registered" and "legal" owner which exists pursuant to the respective aircraft registration laws of other jurisdiction, cannot be found in Italy.