Vedder Thinking | Articles UK Ratifies Cape Town Convention and Aircraft Protocol—Effective November 1, 2015
On 26 March 2015 The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the Regulations) were laid before the UK Parliament, marking the commencement of the final administrative steps to ratify the Convention on International Interests in Mobile Equipment (the Convention) and the Protocol thereto on Matters Specific to Aircraft Equipment (the Protocol) in the United Kingdom.
The Convention and Protocol will, in accordance with Article XXVIII of the Protocol, enter into force in the UK on 1 November 2015 being the first day of the month following the expiration of three months after the date of the deposit of the instrument of ratification with UNIDROIT. The instrument was deposited with UNIDROIT on 27 July 2015 by the Justice and Home Affairs Counsellor at the British Embassy in Rome.
Following last year's consultation, the Department of Business, Innovation and Skills (BIS) published its response to the consultation and the draft regulations at the beginning of March. The draft regulations were the subject of only minor amendments to clarify that the lex situs provisions of regulation 6(3) of the Regulations applied in relation to contracts of sale as well as international interests. (See Lex Situs below.)
The UK has decided to adopt the Alternative A insolvency regime with a 60-day waiting period—this is consistent with other countries and is the standard emerging for the ASU's qualifying declarations required to obtain a discount on the premium charged by Export Credit Agency-backed financing. As noted in Another Hurdle Cleared on the Path to Ratification—The UK and the Cape Town Convention and Aircraft Protocol,1 the discount for UK airlines is normally restricted due to the unwritten "Home Country Rule", though there have been exceptions to this Rule2 and it remains to be seen if the UK will be included on the OECD's list for the discount, which requires compliance with many of the qualifying declarations.
The ability to make certain of the declarations, though not necessarily all of those affecting the UK's inclusion in the OECD's list, is restricted due to the UK's membership of the European Union. (See footnote 3 below and EU Implications on Cape Town Convention Implementation in the UK.)3
Even if the OECD discount is not available, the adoption of Alternative A should lead to a more favourable view of the UK by financiers which may additionally lead to more favourable rates on financings that do not have Export Credit Agency backing.
The consultation posed the question on the necessity of adopting Alternative A, given the UK's relatively robust insolvency regime. However, the UK Government considers that aircraft may be considered to be "unique assets."
Aircraft objects regularly cross borders and a creditor cannot be sure in which jurisdiction an aircraft object will be located should an insolvency event occur and therefore how easy or difficult it will be to recover that object.4
Accordingly, and noting the economic benefits that may be obtained by the aviation industry, the Regulations provide for the adoption of Alternative A.5
The Mortgage Register and IDERAs
The UK Civil Aviation Authority (the CAA) will continue to operate the UK National Register of Aircraft Mortgages, and pre-existing interests will retain their priority without any requirement to make retroactive registrations on the International Registry. Regulation 22 provides for the implementation of irrevocable de-registration and export request authorisations (IDERAs) and that the CAA is the registry authority in relation to the use by a creditor of an IDERA. In this regard, the Air Navigation Order 2009 was amended to give the CAA power to de-register an aircraft pursuant to a properly presented IDERA. The CAA may refuse to export an aircraft on safety grounds.6
Relief but not speedy relief
The Regulations also permit self-help remedies without leave of court but did not provide for "speedy" relief through the courts as contemplated by Article 13 of the Convention; however, the Regulations provided that the "relief" afforded by that Article would be available to creditors. According to the Response, many stakeholders had suggested that "speedy" should be defined:
[I]n respect of the remedies specified in (i) article 13(1)(a)- (c) of the Convention inclusive, as the number of working days which are not more than ten (10) calendar days, and (ii) article 13(1)(d)-(e) of the Convention, inclusive, as the number of working days which are not more than thirty (30) calendar days.7
The UK Government felt that providing for "speedy" relief was unnecessary particularly as they were "not aware of any evidence that the courts are slow in providing interim relief to creditors whilst a claim is being considered."8
Those non-consensual rights which currently have priority over a mortgage-type interest under English law will continue to have priority following ratification, without any requirement for registration on the International Registry.
Statutory detention rights, including those arising for unpaid airport charges, unpaid air navigation charges and unpaid amounts relating to the European Union Emissions Trading Scheme, will all be retained. Many stakeholders, including the Aviation Working Group, presented arguments to BIS that the opportunity should be taken to end the availability of the "fleet-wide" lien for unpaid charges, which is at odds with most other Member States of the EU.
Eurocontrol's submission that "effective detention powers ensure that the level playing field between operators is sustained and that good operators do not subsidise bad ones" may be valid but the Response does not address the fact that the playing field is not level when it comes to the detention powers available across the Member States. For aircraft owners and financiers, the fleet-wide lien is a real risk arising in relation to operations of the underlying assets to and from the UK. The opportunity to bring the detention powers in line with other Member States has been missed.
Regulation 6(3) of the Regulations clarifies that, where an international interest is validly created (or where a contract of sale is validly created)9 in accordance with the conditions set out in the Convention and the Protocol, no reference need be made as to whether it has been validly created or transferred pursuant to the common law lex situs rule.
This effectively ends the concerns arising from Blue Sky10 in relation to the valid creation of mortgage interests or valid transfer of title in relation to aircraft objects that are covered by the Convention and the Protocol but in relation to English law mortgages granted, or bills of sale executed, by debtors that are not located in Contracting States or in relation to aircraft objects that are not registered in Contracting States questions of validity will still arise.
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1 This article can be found in the April 2014 Vedder Price Global Transportation Finance Newsletter.
2 British Airways obtained Euler Hermes’ (the German ECA) support for its JOLCO transaction for an Airbus A380 in September 2013. Additionally, the Rule does not apply to, amongst others, Embraer or Bombardier aircraft.
3 This article can be found in the April 2014 Vedder Price Global Transportation Finance Newsletter.
4 Ratification of the Convention on International Interests in Mobile Equipment and Protocol thereto on Matters Specific to Aircraft Equipment: Response to Consultation on Options on Implementation (March 2015) (the Response).
5 As the UK is a member of the European Union, the UK is unable to make a declaration in relation to Article XI of the Protocol which relates to the selection of Alternative A, as its rules governing insolvency are subject to Council Regulation (EC) No. 1346/2000 of 20 May 2000 on insolvency proceedings. The UK was, however, able to amend its domestic insolvency laws to bring them in line with Alternative A. The Regulations achieve this by repeating Alternative A and stating that its provisions apply to aircraft objects, amending the relevant provisions of the Insolvency Act 1986 (regulation 37 of the Regulations).
6 There is some debate as to whether aviation authorities are able to refuse permission to de-register an aircraft on the grounds of safety. In “De-registration and Export Remedies under the Cape Town Convention” (Gerber and Walton, Cape Town Convention Journal, November 2014), the authors have explored this in more detail but note that the Official Commentary to the Cape Town Convention (Goode, 3rd edn UNIDROIT 2013) states that the safety laws and regulations “will normall y be applicable only to export and physical delivery, not to de-registration” (emphasis added by Gerber and Walton).
7 Paragraph 42 of the Response.
8 Paragraph 44 of the Response.
9 Regulation 38 of the Regulations.
10 Blue Sky & Others v. Mahan Air  EWHC (Comm),  EWHC 631 (Comm).