The UK ratification of the Cape Town Convention and Aircraft Protocol (together the "Convention") came into force on 1 November 2015. The Convention aims to facilitate aircraft finance transactions by establishing international legal rules governing the creation, registration, priority, search and enforcement of security interests in aircraft and aircraft objects.
For the sake of brevity, in this article, unless stated otherwise, "aircraft" is used as shorthand for aircraft objects (being airframes, helicopters and aircraft engines).
Impact of ratification and implementation:
Each contracting state ratifying the Convention is required to make a declaration on how the Convention will apply in that state. The UK has opted for adopting the Convention to the fullest extent. Key points to note regarding the UK's implementation of the Convention include:
- The English law lex situs rule will not apply where the conditions of the Convention are met. This will have a significant impact on the so called "Blue Sky" rule, which requires that for valid English law security to be taken over an aircraft it must be physically located in the UK or in a jurisdiction which recognises an English law mortgage at the moment of the creation of the security. The rule has resulted in large numbers of aircraft being flown into English airspace purely for the purposes of taking security. Security under the Convention can only be created either (in respect of airframes, helicopters and engines) where the debtor is situated in a contracting state or (in respect of airframes and helicopters only) where the airframe or helicopter is registered in such a jurisdiction - the Blue Sky rule will continue to apply to English law mortgages over aircraft which are not registered in a contracting state and/or where the mortgagor is not located in a contracting state.
- The Convention will also apply to intra-UK transactions where both the parties and the aircraft are in the UK at the time when the arrangement is entered into (contracting states have the option to opt out of including internal transactions within the scope of the Convention).
- Interests registered on the UK Aircraft Mortgage Register ("UKAMR") after 1 November 2015 are subordinate to those registered on the International Registry ("IRMA") - the registration rules of the Convention will not apply retrospectively although interests registered on the UK Register prior to that date will retain their priority over interests subsequently registered on the IRMA. The Convention requires that a written security agreement involving a debtor situated in a contracting state of the Convention which creates an international interest in aircraft be published in the IRMA in order for such interest to be enforceable against third parties and for its priority to be established. The UKAMR remains open after 1 November 2015 and English law mortgages over aircraft registered on the CAA's G-INFO Register should as a matter of best practice be registered on the UKAMR and (if the Convention criteria are satisfied) also at the IRMA.
- The UK has adopted "Alternative A" for insolvency remedies available to creditors, which includes a 60 day waiting period and permits creditors to exercise self-help remedies without leave of the courts (the rejected "Alternative B" is a significantly more restrictive court-based process). Adoption of Alternative A effectively creates a dual system whereby creditors of aircraft have enhanced rights in an insolvency situation compared to other creditors. The UK government concluded that aircraft are sufficiently unique assets to justify this.
- The UK will allow the deregistration and export of aircraft by use of an irrevocable deregistration and export request authorisation ("IDERA").
Practical points for lenders in aircraft financings to consider:
- Review standard form documents to ensure their compliance with the Convention.
- Consider which states are relevant to your transaction, if they have ratified and implemented the Convention and if so what declarations they have made in respect of adoption.
- Consider those parts of the Convention which are contractually optional (such as quiet enjoyment provisions) and explicitly exclude those which do not reflect your commercial agreement.
- Consider which remedies under the Convention are available and in your loan documents specifically designate those which you require.
- Ensure that IRMA searches are included in the required searches referred to in your loan documents.
- For transactions where the Convention will not apply and English law security over an aircraft is being taken, consider the application of the Blue Sky rule and whether it will be necessary for the aircraft to be located in the UK or a jurisdiction recognising an English law mortgage at the time of the creation of the security.
UK ratification does not affect the requirement that a security agreement creating a charge over aircraft objects created by a company registered in England or Wales must be registered under section 859A of the Companies Act 2006 in the usual way.