1 Advantages to aircraft financiers

For an aircraft financier, the virtues of the Cape Town Convention and its Aircraft Equipment Protocol (together Cape Town) are that it aims to:  

  • bring speed, certainty and cost savings to the process of repossessing (and otherwise realising value from) aircraft and engines on an insolvency or other default where these assets are in a country whose legal system would otherwise give cause for concern  
  • protect the parties’ title and security interests in aircraft and engines by:  
    • providing for the registration of international interests at a single, web-based International Registry that is open 24 hours a day, seven days a week  
    • subjecting those interests to a simple priority regime whose main principles are:  
      • registered interests beat unregistered  
      • earlier registrations beat later registrations and  
      • the parties can vary priorities by registering subordination arrangements at the International Registry.  

We go into more detail about these benefits and how to take advantage of them further below.  

2 Advantages to airlines

The hope is that the benefits for financiers will result in reduced finance costs to airlines. This is already proving to be the case for airlines in ratifying states that want to add Boeing aircraft to their fleets. As US Eximbank now offers a discount on its exposure fee on financings into Cape Town states.  

US Eximbank is also willing to offer longer term finance for US manufactured engines to airlines in Cape Town states – from a maximum of five to eight years – and offers favourable terms when the lessor and airline lessee are both in Cape Town countries.  

In all these cases, the availability of better Eximbank terms and the exact nature of those terms depend on how creditor-friendly the ratifying state has been in the version of Cape Town it adopts. There are more details on the different versions of Cape Town in section 9 (Contracting state declarations) below.  

So far, there is no indication the European ECAs will offer similar discounts for equivalent Airbus financings. Apparently, Cape Town applicability will, however, be a factor in the OECD’s current discussions of the next version of the Large Aircraft Sector Understanding.  

3 In which states does it apply?

Cape Town came into force on 1 March 2006 in the first eight states to have signed and ratified. These were the USA, Malaysia, Ireland, Oman, Pakistan, Ethiopia, Nigeria and Panama.  

Later ratifications

Since March 2006 the following states have ratified: Afghanistan, Albania, Angola, Bangladesh, Cape Verde, Columbia, India, Indonesia, Kenya, Luxembourg, Mexico, Mongolia, Saudi Arabia, Senegal, South Africa, United Arab Emirates and Zimbabwe (Convention only).

At the time of writing, Cape Town is in force in all of these states, apart from:  

  • Zimbabwe, where only the Convention is in force and
  • Bangladesh, where both Convention and Protocol will come into force on 1 April 2009.  

China’s ratification thought imminent

There are strong grounds for believing that the People’s Republic of China will ratify Cape Town in 2009. At the time of writing, however, China has not ratified.  

EU states

Ireland and Luxembourg were the first two EU states to ratify. In Ireland’s case this is because it is the headquarters of the company that operates Cape Town’s International Registry for aircraft objects. In 2007, Luxembourg hosted the diplomatic conference that adopted a Rail Protocol to the Cape Town Convention and ratified Cape Town shortly afterwards.  

Further independent ratifications by individual EU members are not expected in the near future. Instead, the EU itself will ratify, then its remaining member states will do so.  

Until recently, a dispute between the UK and Spain over Gibraltar had been holding up the EU’s ratification. This dispute appears to have settled, and the EU is committed to ratification. However, it does not seem to be in haste to do so.  

4 To what transactions does it apply?

Cape Town will apply to the type of document listed below when, on execution of the document in question, the:  

  • lessee under an aircraft lease
  • mortgagor under an aircraft mortgage
  • assignor under a security assignment of a lease or other document originally creating an international interest
  • buyer under a conditional sale or hire purchase agreement
  • seller under an aircraft purchase agreement or engine contract is situated in a state in which Cape Town is in force. It also applies when the parties have agreed the aircraft or helicopter in question (but not engines which are detached from an aircraft or helicopter) will be registered in one of those states.  

A party is situated for these purposes in the state, among others, where it is incorporated, has its place of business, registered office or centre of administration.  

The state(s) in which the other parties to the documents listed above are situated has no effect on whether Cape Town applies.  

Another factor, is that Cape Town is only intended to apply to high-value airframes and engines in civilian use. To come within the convention and protocol:  

  • airframes (when fitted with engines) must be type certified to carry at least eight persons or goods in excess of 2,730 kilograms and
  • engines must have
    • if jet-propelled, at least 1,750lbs of thrust (or its equivalent)
    • if turbine-powered or piston-powered, at least 550 take-off shaft horsepower (or its equivalent).  

5 What to do about pre-Cape Town transactions

For the most part, there is little to do if Cape Town comes into force in a jurisdiction where the lessee or borrower or buyer etc, under a pre-Cape Town transaction, is situated. This is because a fundamental rule of Cape Town is that it does not affect pre-existing rights and interests or their priorities. In other words, the Cape Town regime does not apply retrospectively.  

Ratifying states can depart from this fundamental rule when or after ratifying. They may do so, broadly, by declaring that, so far as they are concerned, the priority of rights arising under pre-existing transactions, where the debtor (i.e. one of the parties listed in the first set of bullet points in section 4 (To what transactions does it apply?) above) is located in a state that has ratified Cape Town, will be subject to the Cape Town regime.

However, a state cannot do this overnight. Its declaration that it is going to apply Cape Town retrospectively needs to be made at least three years in advance of doing so. And the declaration only applies Cape Town’s priority rules. It does not make Cape Town’s default remedies available (more on default remedies in section 11 (Transaction documents) below).  

So far, no state has said it will apply Cape Town to preexisting deals. There is a rumour that Canada may do so if it decides to ratify. This is because Cape Town might bring a welcome simplicity to, and reduce the costs of complying with, Canada’s existing registration system. Canada apart, it is hard to see what the upside for most states would be in applying Cape Town retrospectively.  

There are two other situations in which Cape Town could affect an existing financing. These are where your documents:  

  • contain a Cape Town further assurance clause or
  • are amended, or novated or supplemented in ways that create interests to which Cape Town applies.  

6 Further assurance

It has been common for several years to provide in documents that the parties will enter into new agreements and take other actions, if Cape Town comes into force in states relevant to the transaction, so as to provide the financiers with rights under Cape Town. If financiers invoke these clauses, then any international interests (see section 12 (What are international interests?) below) those new documents create will need to be registered at the International Registry to protect the priority of the international interests they create (more on this in section 14) . The documents themselves will need to be drafted to take the maximum advantage of Cape Town that the commercial deal permits (on this, see section 11 (Transaction documents) below) .  

Financiers may decide, however, that they would rather rely on the protection given by Cape Town’s priority rules not applying retrospectively, than invoke their further assurance clause. Depending on the circumstances, it may be that creating new international interests will re-start insolvency hardening periods, have adverse tax consequences or involve the need to obtain central bank or other licences without any obvious benefit to doing so.  

7 Amending, novating or supplementing existing transaction documents

If Cape Town has come into force in a state where your lessee, mortgagor or other debtor is located or in a state you have agreed the aircraft will be registered, and, for whatever reason, your transaction documents are amended, novated or supplemented in ways that create international interests, then those interests should be registered under Cape Town.  

There are too many permutations as to what changes to transaction documents will or will not create an international interest under Cape Town to be worth summarising here. It is best to analyse, and take legal advice, on individual cases as they arise.  

8 Default remedies and insolvency regimes

For financiers to get the full benefit of Cape Town’s remedies:  

  • the states that are relevant to your transaction need to have adopted (via contracting state declarations) the most creditor-friendly version of Cape Town
  • the transaction documents need to specify which Cape Town remedies will be available and what events will trigger them
  • the parties need to contract out of those parts of Cape Town which are optional and which do not reflect their commercial deal. The parties can exclude Cape Town’s quiet enjoyment provisions, for instance.  

9 Contracting state declarations

When states ratify Cape Town (and sometimes after they have ratified) they can pick and choose between provisions they want to adopt, provisions where they prefer diluted versions of Cape Town and their own laws.  

Key choices include:  

  • what remedies will be available on default
  • whether those remedies can be exercised without going to court
  • what, if any, interim remedies (for example, a court order immobilising the aircraft or for its sale and the application of the sale proceeds) will be available pending the outcome of any court proceedings that are required
  • whether the ratifying state’s aviation authority will act on a deregistration and export request authorisation issued pursuant to Cape Town and permit a creditor to deregister an aircraft from that state’s aviation authority register following a debtor default
  • whether a state or private entity will have claims in respect of unpaid charges (e.g. for repairs) to the aircraft that rank ahead of registered international interests and be able to assert those claims by arresting or detaining the aircraft
  • whether such claims need to be registered as international interests.  

10 Insolvency regime declarations

Cape Town also gives ratifying states a choice of three insolvency regimes – the “hard” regime, the “soft” regime and (for states choosing neither) sticking with their own insolvency laws. States can also choose whether to apply any given regime to all or a type of insolvency proceedings. U

nder the hard regime – broadly: if the insolvency administrator or debtor is unable to cure all defaults and agree to perform all future obligations within the waiting period (this period is specified by the ratifying state on ratification), the administrator or debtor must give the financier the opportunity to take possession of the aircraft. The ratifying state’s court has no power to stay the enforcement. In the meantime, the insolvency administrator or debtor must preserve the aircraft and maintain it and its value until the creditor is given the opportunity to take possession.  

Under the soft regime – broadly: the insolvency administrator or debtor must give notice to the financier within the waiting period whether it is able to cure all defaults and agree to perform all future obligations, or whether it will give the creditor the opportunity to take possession of the aircraft. If the insolvency administrator or debtor does not give notice, the court may permit the creditor to take possession upon such terms as the court may order.  

If the ratifying state opts to keep its own insolvency laws, financiers’ rights on insolvency will depend on how pro-creditor that state’s insolvency laws are. The United Kingdom, for example, is a very creditor-friendly jurisdiction. Many civil law countries are more debtor-friendly, providing that security can only be enforced by public auction, for instance, or forbidding self-help repossessions by mortgagees or lessors.  

11 Transaction documents

This section deals with some of the points the documents should cover on remedies. The parties need to agree what events will be defaults and trigger the availability of Cape Town’s remedies if they happen. They then need to agree which of those remedies will be available in their transaction. If they do not agree to a remedy being available, then that remedy is not available.  

However, as noted above (section 9 (Contracting state declarations)), the documents can only select from those Cape Town remedies that are allowed for in the contracting state declarations made by the states where the relevant debtors in their transaction will be based.  

The main Cape Town default remedies that parties should consider adopting are:  

  • a mortgagee of the aircraft and or engines being able to:
    • take possession or control of them
    • sell or grant a lease of them
    • collect or receive income or profits arising from their management or use
    • take ownership of them in or towards satisfaction of the secured obligations – all interested parties need to agree to this last remedy
  • a lessor or seller under a conditional sale or hire purchase agreement (or an assignee of any of those people) being able to terminate the lease, conditional sale or hire purchase agreement and repossess or take control of the aircraft and or engines
  • any of the creditor parties mentioned in the last two bullet points having the ability to:
    • procure the aircraft’s deregistration and export or physical transfer from the territory in which it is located and
    • pending the outcome of any court proceedings following the default giving rise to the above remedies, apply to court for orders in respect of the aircraft and or engines for:
      • their preservation
      • possession, control or custody of them
      • their immobilisation
      • their leasing or management or their sale and the application of their proceeds.  

The documents should also provide for the issue of a Cape Town deregistration and export request authorisation, its recordation at the relevant aviation authority and for the registrations (and amendments and discharges to registrations) that could be required to give effect to the title, security, priority and other arrangements the commercial deal contemplates.  

Related to this, the documents should adopt or exclude Cape Town’s quiet enjoyment rules.  

Including a further assurance clause, and costs and enforcement indemnities, would also be prudent.  

12 What are international interests?

These are the title, security and other rights in an airframe or engine that can be registered at the International Registry. To be international interests, they must be given to a:

  • lessor under a lease
  • chargee under a security agreement
  • seller under a conditional sale or hire purchase agreement.  

Cape Town also allows the buyer under an aircraft purchase agreement or engine contract to register its interest in those objects at the International Registry, but it does not actually call the buyer’s interest an international interest.  

It is possible to assign international interests and pass the rights and priority of an assigned interest to its assignee.  

13 Registering sales to protect the chain of title

As noted above, Cape Town allows buyers to register the interests they acquire under a sale agreement as if those interests were international interests. This does not give the buyer any Cape Town default remedies, but it does allow the buyer to register the fact that it acquired its title under a given sale agreement.  

A buyer will be able to make this registration when the seller is based in a state in which Cape Town is in force. So, for example, if the seller is located in the US, the buyer can register under Cape Town; but if the seller is located in the UK, the buyer cannot register as the UK has yet to ratify Cape Town.  

14 Some practicalities of registering international interests

Anyone can search the register on the International Registry’s website. Before a party can make, amend or discharge an entry on that register, however, it, its counterparty and any lawyers either of them wants to use for this purpose must all be authorised and registered users of that site.

This is because the registry is purely electronic. Its officials will not register anything on the basis of documents, phone calls, faxes, letters or powers of attorney. Instead the website itself will only allow users to register interests if all relevant parties give their prompt electronic consent via the website’s email system to such registrations.  

The parties’ lawyers can give that electronic consent where the transaction parties have given their previous electronic consent to their lawyers doing so.  

Getting set up on the site can take days rather than the few minutes one might expect. First the financier needs to be a registered user of the following site: https://www.internationalregistry.aero – the s in the url is because it is a secure site.  

The website will require a payment for processing the application. So the applicant should have a credit card to hand. (Once set up on the site, users can make bank transfers in minimum amounts of US$1,000 to cover the future costs of using the site. This is worth considering, as there is a charge for almost all actions on the site.)  

It may take the website a few days to process the application and carry out identity and other checks.  

The International Registry requires that the first person from the financier applying to be a site user be the financier’s “administrator” in relation to the site. The administrator takes responsibility for the financier’s dealings with the registry – though the administrator can delegate the ability to register etc to others.  

The computer that the administrator uses to contact the website is key. The easy bit is that (at the time of writing) it must:  

  • be an internet-connected PC that uses Microsoft Internet Explorer version 5 and above, Netscape version 6 and above or Opera version 6 and above
  • have JAVA 2 Platform Standard Edition Version 1.4.2 (available from www.java.com) and allow pop-ups.  

The harder bit is that the administrator will have to carry on using that computer for all of his or her dealings with the site – even when just responding to emails. To ensure this happens, the administrator will have to download a unique digital signature to that computer’s hard drive once the International Registry has accepted the application to be an administrator.  

The administrator can appoint others within his or her organisation to deal with the website on the financier’s behalf. Those people will also have to contact the website from a computer that meets the specification mentioned above and carry on using that computer for all of their dealings with the registry. Again, the registry will require that computer to download a digital signature.  

If a financier wants to delegate all the Cape Town filings on a transaction to its lawyers, then those lawyers must first have gone through the procedures above. Once they have done that, they apply via the website to make all filings needed in relation to specified airframes and engines financed by the transaction – specified by reference to manufacturer, series and manufacturer’s serial number. The website then emails the financier asking whether it consents. The financier emails back that it agrees and the lawyers are then set up to deal with the International Registry on its client’s behalf on that transaction.  

Once a party has filed the details of a proposed registration with the site, the site will email the counterparty for its consent to that registration. The counterparty must give its electronic consent within 36 hours. If it misses that deadline the details will automatically disappear from the site and the parties will have to start, and pay the registration fee, again.  

Registrations stay on the International Registry until discharged (which requires the consent of the party entitled to that interest) or until any time limit on the interest’s duration specified at the registration stage expires.

15 Registration should reflect the agreed priority position

Many Cape Town priority questions are decided on the chronological order interests appear on the register. It may be easier when closing a transaction for the parties to get this order right if they take advantage of the ability to register prospective international interests. These are registrable before the international interests they seek to protect exist.  

Once the actual interests are created on execution of the finance documents, the prospective international interests automatically become full blown international interests – though their priority dates back to the moment when the prospective international interests were registered.  

In practice, search results make no distinction between prospective and actual international interests.  

If the order of registrations does not reflect the commercial deal on priorities on execution, or if that deal is changed during life of the financing, the parties can execute a subordination agreement. Once registered, this is effective under Cape Town to re-order the parties’ priorities and bind third parties.  

Law stated as at 21 February 2009.