Aircraft financing: Ratification by Spain of the Cape Town Convention without any declaration with respect to remedies on insolvency (Alternative A or Alternative B of Article XI of the Protocol)

8 minute read
30 March 2016

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 Nov. 16, 2001 establish a special regime for the protection of certain interests in aircraft objects (within the meaning given to such term in the Cape Town Convention, an "Aircraft Object"), and create an international registry for filing and searching for those interests. The Cape Town Convention also establishes a special insolvency regime for creditors' rights over Aircraft Objects for the contracting states (within the meaning given to such term in the Cape Town Convention, a "Contracting State") having lodged a declaration with respect to remedies on insolvency (the "Insolvency Regime Declaration") with the options of Alternative A or Alternative B. A Contracting State may decide not to make an Insolvency Regime Declaration, in which case the national insolvency laws of the Contracting State will continue to apply.

On Nov. 27, 2015, the Government of Spain (the "Spanish Government") ratified its signature to the Protocol, as confirmed by publication in the "Boletin Oficial del Estado"1 on Feb. 1, 2016. The Cape Town Convention came into effect in Spain on March 1, 20162. This ratification is subject to the declarations lodged by the Spanish Government (the "Declarations") amending and supplementing Articles XIX(1), XXIX and XXX(1) of the Protocol and Articles 39 (1) (a) and (b), 40, 53 and 54.2 of the Convention. The Declarations with respect to the Convention (other than the one with respect to Article 54.2) will only come into effect in Spain on June 1, 2016.

The Spanish Government has not lodged an Insolvency Regime Declaration and therefore, the Spanish Insolvency Act will continue to apply for any "insolvency-related event"3 (an "Insolvency-Related-Event") provided that the "primary insolvency jurisdiction"4 (a "Primary Insolvency Jurisdiction") is Spain. This can be explained by the fact that Spain, as a member of the European Union, was not entitled to lodge an Insolvency Regime Declaration5. In addition, the Spanish Government lodged the declaration with respect to Article 54.2 of the Convention (the "Declaration - Article 54.2") confirming that all remedies available to a creditor under the provisions of the Cape Town Convention may be exercised only with leave of the court and therefore the "self-help" remedies available under the Cape Town Convention for enforcement of an international interest are not applicable under Spanish laws.

It should be noted that several Contracting States have lodged an Insolvency Regime Declaration with the Alternative A option (for instance, UK, Canada, China, Australia and since Feb. 1, 2016, Denmark). The Alternative A option authorizes, among others, a creditor following a specific waiting period included in the Insolvency Regime Declaration of the Contracting State which is the Primary Insolvency Jurisdiction (generally, a 60 day period) following the occurrence of an Insolvency-Related Event to take possession of the Aircraft Object without the need to obtain permission or the intervention from the local courts. During the waiting period in order to avoid re-possession, the insolvency administrator or the debtor must cure all defaults and to agree to perform all future obligations. It is understood that the insolvency administrator or the debtor must, during the waiting period, preserve and maintain the aircraft/helicopter and its value. With the application of the Alternative A option, the Article 30(3)(b) of the Convention, which preserves the power of the court to stay enforcement is not applicable.

Contracting States have also the opportunity to lodge an Insolvency Regime Declaration with the Alternative B option. As of the date hereof, only Mexico lodged the Insolvency Regime Declaration with the Alternative B option. The Alternative B is quite similar to the Alternative A option however, the major distinction is that the local courts of the primary insolvency jurisdiction regulate whether, when and on what terms and conditions the creditor can take possession of the aircraft/helicopter at the expiration of the waiting period. Furthermore, there is no requirement for the insolvency administrator or debtor to preserve and maintain the aircraft/helicopter and its value during the waiting period.

Nonetheless, the Spanish Government has adopted the Declaration with respect to Article XXX(1) of the Protocol regarding the de-registration and export remedies. In accordance with such Article, the registered owner of an "aircraft" or "helicopter" (within the meaning given to such terms in the Cape Town Convention) shall execute an IDERA (irrevocable deregistration and export request authorization) in the form attached to the Protocol to allow the designated party (the creditor or the lessor) to deregister (deletion or removal of the registration of the aircraft/helicopter from its aircraft register) and export if the secured creditor wishes to export such aircraft or helicopter following a default without the leave of the court. Such Declaration expressly stipulates that with respect to Article XXX(1), the Declaration Article 54.2 explained above (remedies available only with leave of the court) is not applicable.

How will this Declaration apply in practice since there is no Insolvency Regime Declaration for Spain? When will the leave of the local courts be required?

In light of the above, creditors involved in aircraft transactions with connections to Spain should retain a Spanish lawyer since there are legal concerns regarding the conflict of laws between the Cape Town provisions with the Spanish laws with respect to movable/personal assets which include Aircraft Objects.

Gowling WLG is 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 Marie-France Béland at Gowling WLG (Canada) LLP.

1 BOE-A-2016-912.

2 The Convention was ratified by the Spanish Government on June 28, 2013 and came into force on October 1st, 2013.

3 Under the Protocol, an "insolvency-related event" means (i) the commencement of an "insolvency proceedings" or (ii) the declared intention to suspend or actual suspension of payment by the debtor where the creditor's right to institute insolvency proceedings against the debtor or to exercise remedies under the Convention is prevented or suspended by law or state action.

Under the Convention, an "insolvency proceedings" means bankruptcy, liquidation or other collective judicial or administrative proceedings, including interim proceedings, in which the assets and affairs of the debtor are subject to control or supervision by a court for the purposes of reorganisation or liquidation.

4 Under the Protocol, a « primary insolvency jurisdiction » means the Contracting State in which the centre of the debtor's main interests is situated, which for this purpose shall be deemed to be the place of the debtor's statutory seat or, if there is none, the place where the debtor is incorporated or formed, unless proved otherwise.

5 Official Journal of the European Union, Council Decision of 6 April 2009, 2009/370/EC, Article 10: "Articles X, XI and XII of the Aircraft Protocol apply only where a Contracting State has made a declaration to that effect pursuant to Article XXX of the said Protocol and under the conditions specified by that declaration. At the time of accession to the Aircraft Protocol, the Community should declare that it will not apply Article XII and that it will not be making any declaration pursuant to Article XXX(2) and (3). The competence of the Member States concerning the rules of substantive law as regards insolvency will not be affected."

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