Aircraft financing: Ratification by the United Kingdom of the Cape Town Convention

10 minute read
01 December 2015

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") which occurred on Nov. 16, 2001 establish a regime for the protection of security interests in aircraft objects, and create an international registry for filing and searching for those security interests. On July 27, 2015, the Government of the United Kingdom of Great Britain and Northern Ireland (the "UK Government") ratified its signature in respect of the United Kingdom of Great Britain and Northern Ireland ("UK") and the territories of Gibraltar, Cayman Islands and Island of Guernsey1 (collectively, the "Territories") to the Cape Town Convention. This ratification is subject to the declarations lodged by the UK Government for itself and the Territories (the "Declarations") amending and supplementing sections 39 (1) (a) and (b), 39 (4), 52, 53 and 54 (2) of the Convention.

The UK Government also passed The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the "Regulations") in order to implement and enact the Cape Town Convention into UK law2. Those regulations extend only to England and Wales, Scotland and Northern Ireland. The Cape Town Convention came into effect in the UK on Nov. 1, 2015 (the "Implementation Date").

The Cape Town Convention and the Declarations together with the Regulations provide, among others, that:

  • Subject to the exceptions indicated therein, a written security agreement, title reservation agreement, leasing agreement or contract of sale3 involving (i) a debtor situated4 in a contracting state of the Cape Town Convention (a "Contracting State") (which includes, among others, U.S.A., UK, Canada and since Sept. 1, 2015, Australia) or (ii) a helicopter or an airframe pertaining to an aircraft registered in an aircraft register of a Contracting State which is the State of registry5, which creates an international interest6 or prospective international interest7 in aircraft equipment meeting certain size and power requirements,8 must be published in the International Registry of Mobile Assets (the "International Registry") in order for such interest to be enforceable/perfected against third parties and for its priority to be established.

    In that regard, the Cape Town Convention is applicable to internal transactions that satisfy those conditions even if the Aircraft Object (within the meaning set forth in the Cape Town Convention, an "Aircraft Object") and the parties to the transaction are all located in the same state at the time of the conclusion of the agreement creating or providing for the interest. If the conditions set out in the Cape Town Convention are satisfied, the English common law lex situs rule (which was confirmed in the Blue Sky case law in respect of aircraft objects creating an uncertainty on the use of English law for mortgages over such type of assets) will no longer govern the priority of a mortgage over International Interests9 (within the meaning set forth in the Cape Town Convention, an "International Interest").
  • Although registration is not required for International Interests, Prospective International Interests or Non-Consensual Rights or Interests (within the meanings given to such terms in the Cape Town Convention) created before the Implementation Date to maintain their priority (without any requirement to make retroactive registrations at the International Registry)10, all such rights and interests created after the Implementation Date will need to be published in the International Registry in order for their priority status to be preserved and protected. The priority of International Registry registrations is established on a "first to register" basis.

    The UK Civil Aviation Authority (the "CAA") will continue to operate the UK National Register of Aircraft Mortgages (the "UK Registry") for existing registrations and for registrations made following the Implementation Date. If an interest is created under the national UK law and such interest is also an International Interest, a creditor can and should register the mortgage at the International Registry and also at the UK Registry and other appropriate UK registries. However, the creditor’s priority will be determined by the registration at the International Registry.
  • Non-Consensual Interests (within the meaning set forth in the Cape Town Convention) which under the law of UK have priority over International Interests registered or not at the International Registry will continue to have priority whether in or outside insolvency proceedings11, such as those arising from a government decree or a legal judgment.
  • Nothing in the Cape Town Convention shall affect the rights of the UK (or any intergovernmental organization of which the UK is a member state) or other private provider of public services in the UK to arrest or detain an Aircraft Object under UK law for payment of amounts owed to such entities directly relating to those services in respect to such Aircraft Object or any other object.12 Such amounts would typically include airport charges, air navigation charges and amounts relating to the EU Emissions Trading Scheme.
  • The alternative A insolvency regime (similar to Canada) with a 60 day waiting period following which a creditor will not need to obtain permission from the Court before taking possession of the Aircraft Object will apply in the UK. The UK has amended the Insolvency Act (1986) in that regard.
  • IDERA (irrevocable deregistration and export request authorization) in the form attached to the Protocol can be used in the UK to allow the designated party to deregister and export an aircraft following a default. Each IDERA must be recorded by the CAA13. Such document will replace the deregistration powers of attorney.
  • Any remedy available to a creditor in the UK under any provision of the Cape Town Convention that is not expressed to require an application to the court may be exercised without leave of the court: the "self-help" /extra-judicial remedies14. The UK law permits such types of remedies provided that the transaction document authorizes the creditor to use them.

The ratification of the Cape Town Convention by the UK Government will greatly alter aircraft financing and sale regimes in the UK. The law imposes new obligations for publication and, in practical terms, will require that International Registry searches be included among the standard publication searches conducted in the context of aircraft financing or sale transactions.

In light of the above, creditors involved in transactions with connections to the UK should conduct a thorough review of their standard financing documents to ensure that the terms and conditions of the Cape Town Convention have been accounted for. For creditors, this will include ensuring that standard documents provide for all rights, recourses and remedies available under the new law.

Gowling Lafleur Henderson LLP (Gowling WLG as of early 2016) has been registered as a Professional User Entity at the International Registry since the ratification of the Cape Town Convention by the Government of Canada in 2012. We have the expertise to register entities as a Transaction User Entity ("TUE") at the International Registry and to act as their administrator in order to register and consent to International Interests for TUEs.

For further information about the Cape Town Convention and the International Registry please contact us.

1 The ratification of the Cape Town Convention by the UK Government shall be extended to the Territories for whose international relations the UK Government is responsible. See the Declaration regarding section 52 of the Convention.

2 This Article will be limited to UK.

3 Subject to the adaptations made pursuant to the Protocol.

4 For the purposes of the Convention, the country where a debtor is deemed to be situated is based on the law of which it is incorporated or formed; or where it has its registered office or statutory seat; or where it has its centre of administration; or where it has its place of business.

5 Article IV of the Protocol. Pursuant to the Protocol, "State of registry" means, in respect to an aircraft, the State on the national register of which an aircraft is entered or the State of location of the common mark registering authority maintaining the aircraft register.

6 Amendments, assignments, subordinations and subrogations relating to an international interest may also be published.

7 Section 19 of the Convention also allows for the registration of "Prospective International Interests". A Prospective International Interests which becomes an International Interests is treated as if registered from the time that the Prospective International Interests was registered.

8 Section 1 of the Protocol and section 2 of the Convention establish the particular application of the Cape Town Convention.

9 Article 6(3) of the Regulations.

10 See the Declaration regarding section 39(4) of the Convention.

11 See the Declaration regarding section 39(a) of the Convention.

12 See the Declaration regarding section 53 of the Convention.

13 Article 22 of the Regulations.

14 See the Declaration regarding section 54(2) of the Convention.

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