The question of how to effectively take security over helicopter engines is one of fundamental importance to creditors. However, despite its importance, this area of aviation financing remains surprisingly unclear.
The confusion surrounding this question stems from the way helicopter engines are defined under the Convention on International Interest in Mobile Equipment (the “Convention”) and Protocol Thereto on Matters Specific to Aircraft Equipment (the “Aircraft Protocol”), herein collectively referred to as the “Cape Town Convention”.
The Cape Town Convention applies to three categories of “aircraft objects”: “airframes”, “aircraft engines” and “helicopters”. Helicopter engines are not defined in the Cape Town Convention. As a result, the category under which they fall varies depending on whether or not the engine is installed on the “helicopter”.
Since there is no definition of helicopter engines, practitioners initially claimed that they were not “aircraft objects” and that therefore interests in those engines were not covered by the Cape Town Convention. However, the official commentary to the Cape Town Convention (the “Official Commentary”) adopted a different position that is now accepted by all practitioners.
According to the Official Commentary, a helicopter engine is considered an “aircraft engine” when it is not attached to a “helicopter”. However, as soon as a helicopter engine is installed on a “helicopter”, it loses its characterization as an “aircraft object” and instead becomes a component of or an accessory on the “helicopter”.
Considering the differing characterization, one might ask what impact this has on how creditors should register their international interests against helicopter engines. When a helicopter engine is not attached to a “helicopter”, and thus is qualified as an “aircraft engine”, it can become the subject of a registrable international interest. However, once it is installed on a “helicopter” and is no longer an “aircraft engine”, but rather an accessory of the “helicopter”, it is no longer capable of being the subject of a separate international interest.
Since it is not possible to register an international interest with regard to a helicopter engine while it is installed on a “helicopter”, how can creditors ensure that their interests are adequately protected once the engine is removed? Below are a few solutions proposed by the Official Commentary depending on the situation of the creditor:
- If the engine is not installed on the “helicopter”, the creditor should register an “international interest” against the helicopter engine.
It is important to note that any “international interest” registered against a helicopter engine prior to its installation to a “helicopter” will retain its priority after the engine’s installation, and even after its subsequent removal from the “helicopter”.
- If the engine is already installed on the helicopter, the creditor should register a “prospective international interest”.
- If the engine is already installed on the helicopter AND there is a prior interest registered against the “helicopter”, the creditor should request the helicopter engine to be removed from the helicopter and register an international interest.
Another solution for that particular situation would be to address this in an intercreditor agreement wherein the creditor that registered an international interest on the helicopter would subordinate his interest to the creditor that has an interest in the helicopter engine.
Although the treatment of helicopter engines is unnecessarily confusing, the solutions proposed by the Official Commentary offer protection to creditors. In practice, and what we recommend, is that creditor should always register an “international interest” and a “prospective international interest” on helicopter engines.