UK ratification of the Cape Town Convention

The Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (“Cape Town Convention”) is set to enter into force in the United Kingdom on 1 November 2015.

The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the “Regulations”) were laid before Parliament earlier in the year. The full text of the Regulations can be found here.

The UK’s instruments of ratification were deposited with the International Institute for the Unification of Private Law (“UNIDROIT”) on 27 July 2015.

With the ratification by the UK, the Cape Town Convention as it relates to Aircraft is now in force in fifty nine contracting states, as well as the EU (sixty ratifications in total).

In ratifying the Cape Town Convention, each contracting state must make a declaration as to whether self-help remedies are available, or if any of the remedies require leave of the court. There are various other ‘opt-in’ or ‘opt-out’ declarations which can be made by the contracting state. These declaration affect how the Convention will apply in that contracting state, and the UK, in particular we note the following will apply. The UK has opted for Cape Town “Max”:

• Alternative A insolvency regime to apply – a new insolvency regime
• Retention of non-consensual rights – so no loss of existing rights for priority creditors
• Self Help (extra – judicial) remedies permitted – as currently
• Existing mortgage register and priority of pre-existing registered rights retained – no loss of priority
• IDERAs to be used in the UK – more defined rights under powers of attorney
• Lex situs not to apply to Cape Town Convention international interests – removal of a difficult legal issue in aircraft finance
• Cape Town to apply to internal transactions – fullest use of the International Registry
• Aviation Sector Understanding – Cape Town discount should apply – cost savings for UK airlines ordering aircraft using ECA support

Alternative A

The UK has chosen the “Alternative A” insolvency regime with a sixty-day waiting period. Under Alternative A, an insolvency practitioner or debtor is required to either:

1. give up possession of the aircraft object to the creditor; or
2. cure all defaults and agree to perform all future obligations under the relevant transaction documents by the date specified in national law or by the end of the specified waiting period, whichever is earlier.

The insolvency practitioner or the debtor will be required to preserve the aircraft object and maintain it and its value in accordance with the transaction documents until possession of the aircraft object is given to the creditor. A creditor will not need to obtain permission from the court before taking possession of the aircraft object at the end of the waiting period.

In order to apply Alternative A, the UK has amended the relevant provisions of the Insolvency Act 1986 in so far as they relate to aircraft objects in respect of which an international interest has been registered.

Retention of Non-consensual rights

Non-consensual rights, such as the power to detain aircraft for failure to pay for public services such as airport charges, air navigation charges and amounts relating to the EU Emissions Trading Scheme, currently have priority over a mortgage-type interest under English law. This priority will continue following ratification.

Self Help (extra – judicial) remedies

Self-help, or extra-judicial remedies, allow a creditor to take action against a debtor without leave of the court, provided that the debtor has previously agreed to the use of such remedies in the transaction documents. Self-help is already permitted in the UK and will continue to be permitted following ratification.

Mortgage register and priority of pre-existing registered rights

The UK Civil Aviation Authority operates the UK Register of Aircraft Mortgages (the “UK Aircraft Mortgage Register”) and will continue to do so following ratification. Interests currently registered on the UK Aircraft Mortgage Register will retain their priority over interests which are subsequently registered on the International Registry. However, once Cape Town comes into effect, interests registered on the UK Aircraft Mortgage Register from that time will be subordinate to interests registered on the International Registry.

There will also not be any UK designated entry point to pass information to the International Registry. As the International Registry is accessible 24 hours a day, the UK Government felt that having a designated entry point would increase burdens to business and delay the registration of interests.

IDERAs

Irrevocable deregistration and export request authorisations (“IDERAs”) shall be allowed for use in the UK. The IDERA is a form set out in the Cape Town Convention which is signed by the debtor and allows the designated party to deregister and export an aircraft following a default. The concepts behind the IDERA are already available in the UK through the use of deregistration powers of attorney, however the UK Government took the view that adopting a single system for the de-registration and export of aircraft equipment across a number of contracting states would save costs for businesses in terms of complying with the local rules set by each contracting state.

Lex Situs and the Blue Sky case

Lex situs is the English common law rule which is applied to determine the validity of the creation of a security interest over a moveable asset such as an aircraft, which states that the security interest will only be valid if it was validly created in the jurisdiction where the asset was located at the time the security interest was created. This common law rule was confirmed in the Blue Sky case (Blue Sky One Limited & Others v Mahan & Another (2010) EWHC 63 (Comm)), which cast uncertainty on the use of English law mortgages.

The UK Government have taken the opportunity in the Regulations to confirm that if the conditions set out in the Cape Town Convention in respect of creation of an international interest are satisfied, there is no requirement to determine whether a proprietary right has been validly created or transferred pursuant to the common law lex situs rule.

However, for English law mortgages granted by debtors that are not located in contracting states or in relation to aircraft objects that are not registered in contracting states, validity will still be determined by the application of lex situs.

Internal Transactions

Cape Town will apply to internal transactions in the UK, being transactions where all the parties and the aircraft object are in the UK when the deal is completed. Each contracting state has the option to opt out of including internal transactions and the UK chose not to do so.

The UK Government considered that the Cape Town Convention should apply to internal transactions, so that businesses would be spared any potential increased costs as well as confusion and complexity, in order to understand which interests can be registered on which system (i.e. Cape Town or the UK Register of Aircraft Mortgages). In practice however, we would expect that for UK registered aircraft, financiers would continue to register interests on the UK Aircraft Mortgage Register, as well as the International Registry.

Aviation Sector Understanding

The Aviation Sector Understanding (“ASU”) sets out the internationally agreed rules for officially supported export credits in the aviation sector. The ASU provides a framework for export credit support so that all the participating states use the same principles, creating a level playing field. The current participants in the ASU are Australia, Brazil, Canada, the EU, Japan, South Korea, New Zealand, Norway, Switzerland and the US.

Under the ASU, a buyer or lessor in a Contracting State which has incorporated certain ‘qualifying’ declarations is eligible for a discount of up to 10% on the premium rate of their export credit support. The level of the discount is at the discretion of the relevant export credit agency (“ECA”).

The UK Government’s view is that all qualifying declarations necessary to meet the ASU criteria have been made and UK airlines would be eligible for the ASU discount.

This is despite the unwritten 'home country rule', which is an understanding between the ECAs of the UK, France, Germany and US, which restricts support for the acquisition of Boeing and Airbus aircraft by UK, French, German, Spanish and US airlines (although there have been exceptions). It was noted by the UK Government that although UK airlines have not made any applications to the UK ECA, UK Export Finance for support of the acquisition of Boeing and Airbus aircraft, UK Export Finance would consider any application on its merits. In addition, other home country ECAs may provide support and the ASU discount may be available for aircraft manufactured in other countries eg Embraer or Bombardier.