Aircraft As Collateral In Kazakhstan: Movable Property With “Immovable” Registration

Aircrafts are increasingly used as collateral for loans, credit facilities, and other financial obligations. However, unlike ordinary movable property, a mortgage over an aircraft is subject to a special legal regime. Ignoring these legal nuances may significantly weaken a creditor’s security or render it ineffective.

Outlined below are the key legal considerations to be taken into account when structuring an aircraft mortgage in Kazakhstan.

Special legal status: movable property with “immovable” registration regime

Under Civil Code of the Republic of Kazakhstan (the “Civil Code”), aircrafts are treated similarly to immovable property and, as such, are subject to state registration. As a matter of law, rights to an aircraft as well as encumbrances over it (including mortgages) arise and are recognised only upon their registration in the State Aircraft Register. In practical terms, this means that:

• a mortgage agreement without a state registration does not create a full-fledged security interest;
• the mortgage cannot be enforced against third parties; and
• in the event of the debtor’s insolvency, the creditor risks losing the priority.

At first glance, the registration process appears to be simple – especially considering the relatively low state fee (see below). Meanwhile, in fact, this process involves strict documentation requirements, precise identification of the aircraft, and careful drafting of the mortgage agreement. In other words, state registration of an aircraft is not a formality – it is the legal cornerstone of the entire financing structure.

Mandatory application of Kazakh law

Where a transaction contains an international element, such as a foreign lender, foreign governing law of the loan agreement, or a cross-border financing structure, applicable law becomes particularly important. According to Article 1113 of the Civil Code, the rights over a property subject to state registration are governed by the law of the country where the property is registered. Thus, if an aircraft is registered in the State Aircraft Register, the mortgage over the aircraft must be governed by Kazakh law. This means that even where the loan agreement is governed by English law, the lender is a foreign financial institution, and the financing structure follows international market standards, the aircraft mortgage agreement must still be executed and registered under Kazakh law. This requirement is often not taken into account at the early stages of structuring a cross-border transaction and this might later result in legal conflicts or unenforceability of the aircraft mortgage agreement.

State registration of the aircraft mortgage: procedure and formalities

The registration procedure is governed by Order No. 409 of the Minister of Investments and Development of the Republic of Kazakhstan dated 30 June 2017 On Approval of the Rules for State Registration of Civil Aircraft and Rights Thereto. Under the Rules, the state fee for registration of an aircraft mortgage is one monthly calculation index for inpiduals and five times the monthly calculation index for legal entities.

To register an aircraft mortgage, the following documents must be submitted: a copy of the document confirming payment of the state fee, the mortgage agreement (as amended, if so) in three originals, and a copy of the foundation document of a foreign legal entity or an identification document of a foreign inpidual, as applicable.

Particular attention must be paid to the accurate identification of the aircraft (including manufacturer’s serial number and registration number), proper description of the secured obligations, and clear provisions on the validity and unconditional nature of the mortgage. Even minor errors in the document preparation or the documentation might entail refusal of registration, challenges to the security interest, or delays in the financial closing of the transaction.

International creditor protection: IDERA mechanism

Kazakhstan is a party to the Cape Town Convention on International Interests in Mobile Equipment, which the country joined in 2008 and ratified in 2012. In line with the Convention, the Law of the Republic of Kazakhstan on the Use of Airspace and Aviation Activities introduced the Irrevocable De-registration and Export Request Authorisation (IDERA) mechanism. The essence of the mechanism is that the creditor is granted an irrevocable right in advance to initiate the de-registration of the aircraft from the state register, ensuring the ability to export the aircraft from the country in the event of default and minimising the risk of the debtor obstructing the process.

For international banks and leasing companies, the availability of IDERA is a key factor in the jurisdiction’s investment attractiveness. Essentially, the creditor receives a tool for prompt control over the asset in the event of default.

Strengthening creditor protection: Security assignment agreement

In addition to a traditional aircraft mortgage, aviation financing practice widely employs an additional instrument, the security assignment agreement. Under such agreement, the creditor is assigned to the borrower’s rights under contracts related to the operation of the aircraft, including the right to receive lease, charter and other payments, the right to demand the return of the aircraft from a lessee or operator; the right to manage and operate the aircraft; the procedural rights in litigation and arbitration proceedings; and the right to receive compensation, interest, and damages. This instrument allows the creditor to control not only the asset but also the cash flows generated by the asset. In the event of default, this significantly increases the effectiveness of enforcement.

The legal regime governing aircraft in Kazakhstan represents a unique hybrid structure where movable property effectively operates under a regime similar to immovable property. Mandatory state registration, application of Kazakh law to rights in rem, formalised procedure for registering encumbrances, and implementation of international creditor protection mechanisms, such as IDERA, collectively create a robust and predictable legal framework for aviation financing.

Unicase Law Firm has extensive expertise in aviation financing and aircraft security transactions. We are ready to assist clients in drafting and reviewing mortgage agreements, security assignment agreements, IDERA-related documentation, and other legal instruments, ensuring full protection of creditor interests and smooth execution of transactions in Kazakhstan.

Sources:

1. Civil Code of the Republic of Kazakhstan No. 268-XIII dated 27 December 1994 https://prg.kz/document/?doc_id=1006061
2. Order No. 409 of the Minister of Investments and Development of the Republic of Kazakhstan dated 30 June 2017 On Approval of the Rules for State Registration of Civil Aircraft and Rights Thereto https://adilet.zan.kz/rus/docs/V1700015553
3. Law of the Republic of Kazakhstan on the Use of Airspace and Aviation Activities № 339-IV dated 15 July 2010 https://prg.kz/document/?doc_id=30789893

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.