Whether you are an airline, lessor or financier in the aviation sector, the UK ratification of the Cape Town Convention, which entered into force on 1 November 2015, will impact the way in which transactions are carried out in the UK aviation industry.
Following the UK government deposit with UNIDROIT on 27 July 2015 of instruments of ratification to the Convention on International Interests in Mobile Equipment and the Protocol (the “Protocol”) to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment (which was concluded at Cape Town, South Africa on 16 November 2001) (together, the “Cape Town Convention”), the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the “Regulations”) has made the Cape Town Convention part of UK law with effect from 1 November 2015.
10 things to know about the UK Ratification of the Cape Town Convention
Below are the key 10 things to know about the UK ratification of the Cape Town Convention and how it will impact your UK aviation transactions:
- Current Documentation: For amendments to existing UK transactions or negotiations regarding current transactions, ensure that your documentation includes drafting to contemplate the introduction of the Cape Town Convention and review the further assurance clauses to cover the obligations and responsibilities of the from 1 November 2015.
- Application: the Cape Town Convention will apply to internal transactions, where the aircraft object and all parties to the transaction are located in the same state when the agreement is concluded.
- Existing International Interests and Mortgage Register: Pre-existing international interests will retain their priority without the need for retroactive registrations with the International Registry. The UK Civil Aviation Authority will continue to operate the UK National Register of Aircraft Mortgages.
- Retention of non-consensual rights: All existing and future non-consensual rights with priority under UK law over an interest equivalent to an international interest shall be retained without registration with the International Registry. Statutory detention rights, including those relating to unpaid airport charges, unpaid air navigation charges and unpaid amounts relating to the EU Emissions Trading Scheme will be retained. The UK Civil Aviation Authority retains the ability to detain one aircraft to recover unpaid charges across the whole fleet, called the ‘fleet lien’ granted to Eurocontrol and certain other creditors pursuant to Section 88 of the Civil Aviation Act 1982 and Section 83 of the Transport Act 2000
- English law Mortgage and the ‘Lex Situs’ Rule: The principle that the validity of an English law governed mortgage is determined by domestic law (excluding choice of law principles) of the lex situs at the time the mortgage is expressed to take effect (the “Lex Situs Rule”) will continue to apply to underlying English law mortgages through the creation of an English law mortgage upon the aircraft first entering into English airspace.
The Lex Situs Rule will not apply to determine the validity of the creation of an international interest, as Regulation 6 (3) determines that an “…international interest has effect where the conditions of the Cape Town Convention and the Aircraft Protocol are satisfied (with no requirement to determine whether a proprietary right has been validly created or transferred pursuant to the common law lex situs rule)”. As long as the debtor location or aircraft registration is based in a Cape Town Convention country and the aircraft mortgage complies with the Cape Town formalities, a mortgagee may be able to rely on the Cape Town Convention’s rights and remedies available to an English law mortgage as an international interest in the aircraft against the mortgagor.
- Creditor rights: creditors can exercise extra-judicial remedies without leave of the court. The UK has made no declaration as to the meaning of the word ‘speedy’ in the context of ‘Speedy Relief’ as per Article X of the Protocol and Article 14(1) of the Cape Town Convention, as the procedures before the UK courts are sufficiently fast in any event.
- De-registration of aircraft and IDERA: Creditors will be able to de-register and export aircraft equipment by use of an irrevocable de-registration and export request authorization (“IDERA”) pursuant to Regulation 22. The UK Civil Aviation Authority is the registry authority in relation to the use by a creditor of an IDERA and the Air Navigation Order 2009, as amended, grants the UK Civil Aviation Authority the power to deregister an aircraft pursuant to a properly presented IDERA.
- Declarations: the implementation of the Regulations and the UK introduction of creditor-friendly declarations will make the UK eligible to appear on the Cape Town List maintained by the Organisation for Economic Cooperation and Development (“OECD”) under the Aircraft Sector Understanding (“ASU”) for ECA supported financing of aircraft, enabling UK airlines eligible to receive a discount of up to 10% from the Export Credit Agencies (“ECAs”). It is important to note that not all airlines are eligible for or will be granted export credit support and therefore will not be able to benefit from this reduction in the premium of export credit support, as UK airlines are not currently entitled to apply for export credit support for Boeing or Airbus aircraft by virtue of the ‘Home Country rule’.
- Insolvency: the UK will adopt the Alternative A insolvency regime with a 60 day waiting period for an asset to be returned to the creditor of the relevant default cured, on a debtor insolvency, which will also strengthen the appeal to Enhanced Equipment Trust Certificate (“EETC”) investors, in addition to current favourable UK insolvency laws. Adopting the Alternative A insolvency regime is one of the declarations required to obtain a discount on the premium charged for ECA financings
- British Overseas Territories: The British Overseas Territories include the Cayman Islands, Bermuda and the British Virgin Islands (the “BOTs”) which are not part of the UK, but are subject to the jurisdiction and sovereignty of the UK. The Cape Town Convention will be implemented in the BOTs only once the UK has implemented it and the UK has passed an Order in Council authorising the extension of the Cape Town Convention to apply to the BOTs. The consequence of the extension of the Cape Town Convention to the BOTs is not to do away with the existing regime of the registration of security interests locally, because there will be circumstances where it cannot be used, (for example, where the owner of an aircraft is located in a non-contracting state or the aircraft does not meet the weight qualifications to fall within the Cape Town Convention).