The Cape Town Convention on International Interests in Mobile Equipment 2011 (“the Cape Town Convention”) came into force in Australia on 1 September 2015 following completion of the formal accession process.
In Clyde & Co’s Aviation and Aerospace Newsletter in August 2015, Mark Bisset reported on the United Kingdom’s ratification of the Convention and its related Protocol on Matters Specific to Aircraft Equipment (together for the purposes of this article, “the Cape Town Convention”). In Australia, too, there have been developments on that front, with the Cape Town Convention entering into force in Australia on 1 September 2015 following completion of the formal accession process.
The Cape Town Convention
Signed in November 2001, the Cape Town Convention establishes an “International Registry” for registration and priority of “international interests” in aircraft objects. These interests may include a financier’s or lessor’s security interest or purchaser’s interest under a purchase agreement. It is designed to create a uniform legal framework across signatory States that aims to protect creditors of aircraft and aircraft objects. As of March 2016, there are 70 Contracting States.
The Cape Town Convention regulates the priorities of international interests and also sets out a number of remedies in the event of default. Priorities are determined on a “first-to-file” basis; that is, the interest that is registered earliest on the International Registry will have priority over all other interests for the same object that are registered later or are unrecorded.
The effect on Australian law
The Cape Town Convention framework allows Contracting States to make a number of declarations that affect how the Convention will apply domestically. Australia made declarations under Articles 39(1)(a), 53, 54(2) and 55 of the Cape Town Convention, and under Articles XXX(1) and XXX(3) of the Aircraft Protocol:
- Article 39(1)(a): certain non-consensual rights or interests have priority over registered interests;
- Article 53: the Federal Court of Australia and the State and Territory Supreme Courts are the relevant courts for the purposes of the Convention;
- Article 54(2): if a Convention remedy does not expressly require application to the Court, then leave of the Court is not required;
- Article 55: Australia will not implement the Convention’s interim relief remedies; and
- Articles XXX(1) and (3): Parties to an aircraft lease, contract of sale or security agreement will be free to choose the law which is to cover their rights and obligations; “Alternative A” under the Convention will apply, meaning that in the event of default, the debtor must give possession of the aircraft to the creditor in no later than 60 calendar days.
Interaction with the Personal Property Securities Act 2009 (Cth)
Prior to accession to the Cape Town Convention, security interests in aircraft objects in Australia were solely governed by the Personal Property Securities Act 2009 (Cth) (PPSA). The Cape Town Convention now has an overriding effect and will prevail over the PPSA to the extent of any inconsistency.
The Cape Town Convention applies in Australia to certain interests that are created on or after 1 September 2015. It applies to the following aircraft objects:
- Airframes that can transport at least 8 persons (including crew) or goods in excess of 2,750 kilograms;
- Helicopters that can transport at least 5 persons (including crew) or goods in excess of 450 kilograms; and
- Aircraft engines that have at least 1750lb of thrust.
The PPSA continues to apply to a number of interests in aircraft objects not mentioned above, such as those that were created before 1 September 2015. Accordingly, the PPSA’s application to aircraft objects has not become obsolete.
If an aircraft object is subject to the rules of the Cape Town Convention, a security interest registered with the International Registry under the Convention will have priority over a registration on the Personal Property Security Register (PPSR), despite the fact that the registration may have been affected on the PPSR first.
Consequently, aircraft financiers ought to create, and check for, registrations on both the PPSR and the International Registry of Mobile Assets.
The Cape Town Convention should generate tangible economic benefits for the Australian aviation industry. Prior to the Convention, creditors’ interests were solely governed by domestic laws and processes which provided varying and fractured levels of protection in different jurisdictions. The Government noted, in its Explanatory Memorandum, that financiers had indicated a lack of confidence in the Australian personal property securities framework as it applied to aircraft following the collapse of Ansett Australia in 2001. The cross-border consistency of the Cape Town Convention should have the effect of boosting creditor confidence and lowering creditor risks in Contracting States.
Accordingly, Australian airlines should be able to obtain financing on more favourable terms. Discounted financing will also be available for purchasers of second hand aircraft which should particularly assist smaller regional airlines to upgrade and maintain their fleets.
What lies ahead?
The ratification of the Cape Town Convention by a large number of other countries, and notably major aviation jurisdictions such as the UK, United States, UAE, China and India, indicates the increasing influence of the Convention on the global aircraft financing market. Australia’s accession to the Cape Town Convention will ensure that it remains on par with the global aviation community. It stands to benefit many industry stakeholders through the creation of certain and secure rights and enforcement of default remedies for creditors.