Group Ownership of Private Aircraft
Group Ownership of Private Aircraft
This article is written for non-commercial operations and non-complex aircraft. The parts pertaining to changes made in the Air Navigation Order 2016 have been written with advice from and review by the CAA.
If you are a commercial operator and a member of AOPA UK you should contact us if you have a specific enquiry.
Prior to the Air Navigation Order 2016, for any Aircraft that was not subject to a Certificate of Airworthiness there was a minimum share holding of 5% if the owners wanted to take advantage of the exception in Article 269. For Aircraft with a Certificate of Airworthiness this limit did not apply so long as the aircraft was maintained to Public Transport standards.
The Air Navigation Order 2016 no longer stipulates any minimum share value.
It is a requirement for a group that all owners of an aircraft are notified to the CAA using the appropriate form. Not all shareholders in an aircraft appear on the UK Register.
Aircraft can be registered in the names of multiple owners without it being registered as a Group. However, if there are more than three joint owners it is probably best that the aircraft is registered to the trustee of the assets of the group. The trustee must have a share in the aircraft and that person is deemed to be the legal owner of the aircraft. The other shareholders are beneficial owners and, as such, do not have to appear on the Register itself. However, the CAA must be informed of all shareholders and changes that may subsequently occur.
To be registered as a Group, one of the owners must be nominated as a trustee of the Group and then you can add or remove group members without having to re-register the aircraft. If the trustee leaves the group then the aircraft does have to be re-registered.
Group ownership allows the aircraft to be better utilised, reducing the overall hourly cost of flying when both direct and annual costs are considered. However, unless the group members are carefully chosen it can be a bad option.
For national permit to fly aircraft, there must be a permission (general or individual) from the CAA in order to be hired out to another pilot. If the pilot flying the aircraft is a joint-owner, then no such requirement applies. In order to be considered to be a joint owner they must:
- Own equity in the aircraft; and
- Either be a registered owner or in the case of an aircraft registered to a trustee, the trustee must have notified the CAA of the owner joining or leaving of the group.
Under the ANO 2016, there is no longer a direct limit of 20 owners before a group would be considered a self-fly hire arrangement. Whilst it may appear that you can set up a group with unlimited numbers with registered owners having a very notional financial interest in the aircraft, a sensible approach should be adopted such that a group arrangement between joint owners remains as such, and does not appear to be effectively self-fly hire concealed through notional amounts of equity that might change hands on a short term basis. Arrangements that have a very high number of owners and/or frequent changes of group members might arise suspicion and should be avoided.
The CAA has a page about Group Ownership with appropriate links here. NOTE: At the time of writing the CAA article has not been updated for the Air Navigation Order 2016.
Any owner or beneficial owner of the aircraft can then:
1. Self-Fly the Aircraft (subject to ratings and differences training if required)
2. Pay the *Direct Costs for the flight on an hourly basis.
3. Pay a proportion of the Annual Costs. To be seen to be proportional this should be an hourly sum calculated as an hourly cost by dividing the annual costs by the estimated number of annual flying hours.
The cost directly incurred in relation to a flight, e.g. fuel, airfield charges, rental fee for an aircraft. There is no element of profit.
Annual cost means the cost of keeping, maintaining and operating the aircraft over a period of one calendar year. There is no element of profit.
Effectively, there are two ways of managing group ownership of an aircraft. The first of these is a joint, or co-ownership, arrangement and the second is by means of a limited liability company.
There are usually three concerns to be addressed by private owners when deciding how to structure their group. These are cost, ease of administration and the important issue of liability to third parties.
As far as costs are concerned, it is fair to say that the co-ownership arrangements should be cheaper than the costs of incorporating a company and the need for various filings to be made at Companies House. However, whether a co-ownership group or a company, it is vital that the members agree a formal and properly drafted agreement between them, which should deal with a number of important questions. A properly drafted members', or if appropriate shareholders’ agreement should deal with:
· membership entitlement
· for joint owners with a financial share, the sale of either shares in the aircraft or, if a company, shares in the company
· treatment of equity members versus non-equity members
· retirement from membership
· the provision of audited accounts
· the frequency of meetings and the ability of a number of members to call meetings
· the management of the group
· insurance and indemnity arrangements
· expulsion from the group
When setting up the agreement careful consideration must be given to the question of borrowing.
Borrowing by the group or the company should normally be by unanimous consent of the group members or shareholders only.
Insofar as administration is concerned much, of course, depends on the goodwill of persons involved to ensure the group is run smoothly. To avoid future difficulties adequate provision should always be made for each and every member to be kept fully informed and, most importantly, to be sent a copy of the insurance policy each and every year as it is renewed and to be made fully aware of its terms, conditions and exclusions.
The corporate structure involves more administration in that there are regular filings, which need to be made at Companies House, and annual accounts must be prepared and submitted along with an annual return. However, recent amendments to the companies legislation has made provision for a much simplified form of company accounts to be prepared.
There is also the question of transfer of interests. If a company has its liability limited by shares, then a formal transfer of the shares must be made with appropriate entries in the company's books. Should the co-ownership agreement be adopted then some of these formalities are unnecessary, but it should be remembered that the CAA must be informed of every change to the co-owners who is also a trustee, then an appropriate amendments needs to be made on the aircraft register.
In any event, whether a co-ownership or corporate structure is adopted, full and up-to-date financial data should be readily available to its members at all times.
The next issue is the tricky one of the potential liability of the aircraft owners to any third party who is injured or killed or whose property is damaged as a result of an accident involving the aircraft.
It is in this particular area that, in an attempt to reduce insurance cost and potential liability, many individuals favour the corporate structure rather than co-ownership. It has been clearly established for nearly a century that a company is treated in the eyes of the law as an entity wholly distinct from the persons who are its members. Because a company is treated as a distinct entity, one of the principal advantages of trading through this medium has always been that the members of the company are only liable to contribute towards the payments of its debts to a limited extent. It therefore follows that if a company is unable to pay its debts, because for example, its insurance cover is inadequate, an unpaid creditor may petition the court to wind it up.
If an order is made, a liquidator will be appointed to realise the company's assets (in the present case, usually only the aircraft) and if he realises insufficient to pay its debts he will call upon its shareholders to make good any deficiency; their liability is limited to the balance of capital unpaid on the shares (if any) plus any unpaid premiums. This will usually be little or nothing.
However there is a certain limitation to the protection that can be derived from the company structure. Take the following example:
There is an accident involving, an aircraft which is jointly owned. The accident was caused by a mechanical defect in the aircraft which was known by one of the members, who was charged with having the defect rectified but who did nothing about it. It is likely that, in such a circumstance, not only would the company be sued but also the person who was negligent in failing to rectify the defect and also, possibly, the pilot in that he should have made appropriate checks to ensure that the aircraft was airworthy.
Where does this leave the other innocent members if the company is sued?
While there might be some liability upon the company as owner of the aircraft, a properly drafted agreement would provide for a right for the company to seek redress or indemnity from the guilty parties. It is possible that those guilty individuals would be sued by the parties and may be made bankrupt. In these circumstances the indemnity would be worthless. The litigant might then look to the company for payment of all damages and, if necessary, petition for the winding up of the company and sale of its only asset i.e. the aircraft. However, the members would be able to limit their individual liability as before. This is slightly different from the position with co-owners who risk not only losing the aircraft but would also be personally liable, their only rights being by way of contribution from the other members.
The corporate structure, therefore, will not absolve the individual from liability for his own culpable negligence but may protect the other innocent shareholders. However, there is no substitute for procuring full third party legal liability insurance and ensuring that each member who operates the aircraft adheres fully to the terms and conditions of the policy: underinsurance can have disastrous consequences, as can breach of policy terms.
It is always important to ensure that the company trades only when solvent and is able to pay its debts as they fall due, thereby avoiding some of the pitfalls which directors of companies find themselves in under the draconian provisions of the new insolvency legislation.
As you will see there are many factors to be considered when finalising a joint ownership structure. One vital factor is the likely number of participants. Two individuals, who know and trust each other, may prefer the looser arrangement which co-ownership offers. However, on balance, I would always recommend the use of a company, especially if there are a large number of participants. The most important lesson for any party considering a joint ownership is that the arrangements are given careful and proper thought. Lawful operation and full insurance must always be paramount aims.
Group Arrangements by ROBERT RICKETTS, a Partner and Solicitor in the aviation law firm of Clark Ricketts, London (September 1996)
Updated reference to ANO 2016 by M Elborn, AOPA UK (September 2016), with advice from and review by the CAA.