The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015  (the “Regulations”) became effective on 1 November, further to UNIDROIT’s  publication on UK ratification and entry into force of the Cape Town Convention earlier this year. Although the Regulations apply only to England, Wales, Scotland and Northern Ireland, UK ratification also extended to the overseas territories of Guernsey, Cayman Islands and Gibraltar.

Some of the key points:

Transitional Provisions – no retrospective effect

The Regulations do not apply to pre-existing rights or interests, and there will no retrospective effect. However, an International Interest has priority over a subsequently registered interest at the CAA.

The International Interest & lex situs – an International Interest (a mortgage for example) will be effective under English law at the point of creation

This provides an alternative route towards effectively creating a security interest in an aircraft object under English law. However, such International Interest can only be effective if the Cape Town Convention applies. It should be re-emphasised that the Regulations do not alter or remedy the common law Blue Sky authority, which remains law.

Insolvency regime – introduction of “Alterative A”

Subject to an International Interest existing, in an insolvency scenario, an insolvency officer must either return the aircraft object to the creditor by the end of a 60 day waiting period, or cure all defaults and agree to perform any relevant obligations. It will not be necessary to obtain a court order for possession of the aircraft object. These provisions are known as the creditor friendly “Alternative A” regime.

Liens – Priority of NCRI’s

The Regulations provide that certain interests will have priority over Cape Town Convention interests. Referred to as non-consensual rights or interests (NCRI’s), the traditional English law possessory lien and the CAA authorities and air navigation detention powers are NCRI’s.

IDERA – a standardised deregistration and export instrument

The Regulations oblige the CAA to both record and de-register and export an aircraft, subject to the CAA having received a completed form of Irrevocable De-registration and Export Request Authorisation (“IDERA”).

Some key observations:

  • Capital Markets – Prior to the introduction of the Cape Town Convention, some were of the view that its insolvency offering was not essential for facilitating an Enhanced Equipment Trust Certificate (“EETC”), a common financing tool used to access capital markets. In British Airways (“BA”) most recent EETC transaction, responding to the absence of the insolvency offering provided by the Cape Town Convention, Moody’s commented:

“We believe that UK courts typically respect ownership rights in leasing transactions, which implies that under a payment default scenario by British Airways, the Trustee would likely be able to repossess in a timely manner.”

That said, other commentators used the Cape Town Convention to draw comparisons between the BA EETC transaction and a similar transaction for Air Canada, which employed Cape Town, citing a USD$15m premium on the BA transaction on the basis on non-ratification by the UK at that time.

  • ASU – the Aviation Sector Understanding (“ASU”) is an industry wide set of agreed rules made to provide equal access for participating countries to export credit support. If an ASU participating country has incorporated certain Cape Town Convention declarations, it can qualify for up to 10% on the premium rates of export credit support.
  • Lex Situs – the introduction of the Cape Town Convention in the UK is of special significance as the Regulations have seized the opportunity to employ the Cape Town Convention International Interest method to create effective security over aircraft objects, subject to compliance with Cape Town Convention. This is greatly welcomed as an alternative to the Blue Sky case and industry practices emerging from it. Prior to ratification, the Blue Sky case re-confirmed the English law position that the validity of an English law aircraft security interest would only be effective if such interest was validly created under the laws of the jurisdiction of the location of the aircraft at the time of creation. Helpfully, the draftsmen of the Regulations have gone so far as to say that there is “no requirement to determine whether a proprietary right has been validly created or transferred pursuant to the common law lex situs rule”.
  • Fleet lien – unfortunately, ratification has not resolved the issue of the fleet lien: a lessor or financier can find that its aircraft can be grounded on account of unpaid charges by the operator, whether or not such charges relate to its aircraft. Eurocontol, the emissions trading scheme, mechanics lien and the relevant provisions of the Civil Aviation Act 1982 have been given NCRI status as part of UK ratification. However, we understand that the Aviation Working Group is continuing to work with relevant authorities to find alternative approaches to address fleet lien concerns, whilst at the same time seeking to ensure that air navigation and airport systems can collect fees to finance air navigation and airport systems.