A client asked us: Aircraft financing - the mandatory declaration under the Cape Town Convention and its impact on secured creditors

Q: We heard that a Contacting State can and shall make declarations with respect to certain articles of the Cape Town Convention at the time of ratification, acceptance, approval of, or accession to the Cape Town Convention. We would like to know:

1. What is the mandatory declaration that a Contracting State is required to make under the Cape Town Convention?
2. What is the impact of such declaration on us, as secured creditors?

A: Article 60 The Convention on International Interests in Mobile Equipment (the "Convention") and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (the "Protocol" collectively with the Convention, the "Cape Town Convention") signed on November 16, 2001 establish a special regime for the protection of certain interests in aircraft objects (the "Aircraft Objects"), and create an international registry for filing and searching for those interests. Given that the ratification of the Cape Town Convention may greatly alter aircraft financing and sale regimes in the Contracting States (as such term is defined in the Cape Town Convention), article 56 of the Convention provides for the right or the obligation for a Contracting State to make optional and mandatory declarations with respect to certain specific articles of the Cape Town Convention. ^[1]

The mandatory declaration that a Contracting State is required to make is with respect to Article 54.2 of the Convention regarding remedies of a creditor. This article provides that:

A Contracting State shall, at the time of ratification, acceptance, approval of, or accession to the Protocol, declare whether or not any remedy available to the creditor under any provision of this Convention which is not there expressed to require application to the court may be exercised only with leave of the court.

A declaration under Article 54.2 is a pre-condition of acceptance by UNIDROIT of an instrument of ratification of the Cape Town Convention by a Contracting State. However, the declarations made by the Contracting State with respect to Article 54.2 are not to the same effect, which distinction calls for creditors' attention.

Certain Contracting States, such as Canada, U.S., U.K. and Russia etc., have declared that any remedy available to a creditor under the provisions of the Cape Town Convention, which is not there expressed to require application to the court, may be exercised without leave of the court. On the contrary, other Contracting States, for instance, China and Spain, have declared that all remedies available to a creditor under the provisions of the Convention, the exercise of which is not subordinated by virtue of such provisions to a petition to the court, may be exercised only with leave of the court.

As such, the "self-help"/extra-judicial remedies available under the Cape Town Convention for enforcement of an "international interest" (within the meaning given to such term in the Cape Town Convention) are applicable in certain Contracting States but not in others. The "self-help"/extra-judicial remedies under the Cape Town Convention allow a secured creditor to, without limitation,

1. take possession or control of any Aircraft Objects charged to the international interest;
2. sell or grant a lease of any such Aircraft Objects;
3. collect or receive any income or profits arising from the management or use of any such Aircraft Objects; and
4. agree that ownership of (or any other interest of the secured creditor in) any Aircraft Objects covered by the security interest shall vest in the debtor in or towards satisfaction of the secured obligations;

provided that (i) the debtor had agreed to such "self-help"/extra-judicial remedies^[2], (ii) the exercise of "self-help"/extra-judicial remedies conforms to the procedure prescribed by the law of the place where the remedy is to be exercised^[3], and that (iii) the remedies are exercised in a commercially reasonable manner^.[4]

In practice, a secured creditor shall take into consideration the declarations lodged by a Contracting State with respect to the Cape Town Convention, including, among others, the mandatory declaration made under Article 54.2. For instance, in Canada, a secured creditor must ensure that the debtor's consent to those "self-help"/extra-judicial remedies is included in the agreement creating the "international interest". In Québec, although the "self-help"/extra-judicial remedies with respect to Aircraft Objects are recognized by regulation^[5], as there are no rules of procedure like other Canadian common law provinces to guide the exercise of non-judicial remedies and their limits, a secured creditor must ensure, in particular, that the "self-help"/extra-judicial remedies are exercised in a commercially reasonable manner.