Finance brief - February 2014
Anti-Money Laundering risks and wealth management
- A Guide to Third Party Security
- Letters of Credit
- The Cape Town Convention and Aircraft Protocol: ratification by the UK
What is the equity of exoneration, and when is it important?
The UK government announced, by way of the publishing of the Response to its 2010 Call for Evidence last December, that it is committed to ratifying the Cape Town Convention and Aircraft Protocol (the "Convention"). The ratification will be subject to the results of further consultations on how to implement it, and there are of course further steps to be taken if the Convention is to be made national law in the UK, but this announcement is nonetheless a significant step in the direction towards implementation.
The main objective of the Convention was to facilitate aircraft finance transactions by the creation of an harmonised electronic international registry of "international interests" which are recognised in all Contracting States (i.e. in all countries which have implemented the Convention) and to provide a framework for how disputes are managed.
Registration of an international interest in an "aircraft object" (which, broadly speaking, may be an airframe which can carry at least eight people, an aircraft engine, or a helicopter which can transport a least five people) will provide the holder of the security interest (the "creditor") with three main advantages:
- Third parties will be put on notice of the creditor's interest;
- the creditor will have priority over an unregistered interest and any subsequently registered interest; and
- following a default, the creditor will be able to benefit from clear standard enforcement rights, which will include the right to take possession of the aircraft object, the right to sell or grant a lease of the aircraft object and the right to collect or receive income or profits arising from the management or use of the aircraft object.
For a more in-depth analysis and explanation of the Convention and its application, please refer to Fieldfisher's briefing paper "Cape Town Convention".
Since it came into force on 1 March 2006, the Convention has been ratified by an impressive fifty seven countries (although this figure does not include most of the EU Member States). The UK government's Response chose to recognise and highlight several important features of the Convention which we set out below:
Ratification of the Convention would reduce problems arising from the complexity of cross border aircraft financing transactions by creating a single legal framework, and could also lower financing costs (particularly for airlines raising finance through the issuance of Enhanced Equipment Trust Certificates (EETC's)).
- Another factor of benefit to parties involved on cross border transactions, would be the quick and efficient registration of security interests, facilitated by the easily accessible on-line International Registry which is open twenty four hours a day, seven days a week (the UK CAA Register does not currently offer this type of access) and giving rise to the application of simple and clear priority rules.
- An international interest can be registered separately against the aircraft's engine(s) (which is not an option currently available on the UK CAA Register). Given the movement of engines between aircraft which occurs routinely in the industry, the government agreed that this facility would clearly be a benefit for UK business.
- Further consultation will be undertaken in respect of the insolvency procedure regime which the UK may adopt in relation to the Convention. The Response stated that there is support for the adoption of "Alternative A" which provides that an administrator (or the debtor) must (a) give possession of the aircraft to the creditor or (b) cure the default(s) or agree to perform future obligations within a certain day "waiting period" (often 60 days in length). Most countries which have ratified the Convention have opted for Alternative A. However, there is also a general feeling that UK insolvency law already offers a good level of protection for creditors.
- Finally, the issue of lex situs was of course touched upon. Since the Blue Sky case  there have been calls to resolve the uncertainty surrounding English law governed aircraft mortgages. However, although the Convention provides for the creation of an international interest over an aircraft object without reference to the physical location of the aircraft at the time of entry into the mortgage, this does not mean that the lex situs rules enunciated in the Blue Sky case can be simply ignored in the future and that there will immediately be clarity as to the law in this area. In order for a creditor to be able to rely on the priority rights and enforcement remedies arising out of the Convention by virtue of an English law mortgage being registered as an international interest, a number of factors would need to be taken into account. It is likely that the jurisdiction of the aircraft owner (i.e. the debtor) and / or the jurisdiction of the state of registration of the aircraft will need to have ratified the Convention (UK ratification is not necessarily relevant here).
The Convention contains a number of options for implementation and the next step in the process is for the government to hold a consultation on these options in order for it to decide how to go ahead with implementation.
Fieldfisher shall produce further updates at the appropriate time.
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