The UK Government is pressing ahead with its commitment to ratify the Cape Town Convention with the Department for Business Innovation & Skills (BIS) issuing a formal UK-wide consultation in June on options for implementation.

In this article, we will look at the three principal issues which will need to be addressed in connection with the ratification and implementation process.

How should non-consensual rights under Article 39 of the Convention be treated?

The key question is which (if any) of the non-consensual rights which currently have priority under UK law over an equivalent interest should take automatic priority over interests registered with the International Registry (Registered Interests)?

This arises as a consequence of Article 39 of the Convention. The normal order of priority under the Convention is that a Registered Interest takes priority over both an unregistered interest and over any subsequently registered right or interest. However, Article 39 permits a declaration to be made that certain pre-existing rights which have priority status under national law will continue to have priority over Registered Interests post-ratification. The UK Government will need to make the relevant declaration in relation to Article 39 if it wishes to protect the status quo.

Rights which currently enjoy priority status over UK registered mortgages (and the proceeds of any sale of the aircraft by a secured creditor) include possessory workmen’s liens, the Eurocontrol fleet lien in respect of unpaid air navigation and airport charges, customs and excise duties or VAT and any expenses relating to the detention and sale.

Although alternative views were being sought as part of the consultation process, BIS have stated their view to be that all current and future non-consensual rights which currently enjoy priority status under UK law against a registered mortgage should continue to have priority against Registered Interests following ratification. Thus, the existing rights to arrest aircraft under the Eurocontrol fleet lien for non-payment of airport and air navigation charges will be unaffected if an Article 39 declaration is made.

Will the UK adopt the Convention’s remedies on insolvency available under Article XI of the Protocol?

The key question is whether the UK should apply the provisions of Article XI (remedies on insolvency) and opt for Alternative A?

If a Contracting State wishes to adopt the remedies provided under the Convention in respect of the occurrence of an insolvency-related event, it needs to make a declaration to that effect under Article XXX(3) of the Protocol and then specify which of Alternatives A or B will apply. If no such declaration is made, national insolvency law will continue to apply. Alternative A essentially permits creditors to exercise self-help remedies (see below) and is much more flexible than Alternative B which is a more restrictive, court-based approach.

The respondents to the initial consultation were divided. The Aviation Working Group and many industry participants are very firmly in favour of Alternative A, believing that it would bring real economic benefits to airlines in the United Kingdom and align it with most of the rest of the world. Others, particularly insolvency practitioners, take the view that the UK’s domestic insolvency regime is already robust, well established and works well in practice. It is also recognised that adopting Convention remedies would mean that a dual system is in force whereby creditors of aircraft assets would have enhanced rights in an insolvency situation as a consequence of the Convention applying whereby other creditors would not. As noted by BIS, any proposal to change the existing balance of interests and rights in an insolvency situation requires careful consideration and analysis.

BIS have announced that it does not intend to adopt Alternative B in any case. Alternative A is by far the most popular choice and has been cited as being the most important economic provision of the Cape Town treaty because it gives creditors certainty as to their ability to recover their secured aircraft assets within a specified “waiting period”. The majority of other Contracting States have adopted Alternative A with a waiting period of 60 days thereby providing aircraft creditors with, amongst others, the following key rights:

  • the insolvency practitioner or debtor has to either give up possession of the aircraft object to the creditor or cure all defaults and agree to perform all future obligations under the relevant documentation within the specified waiting period at the latest
  • in the meantime, the insolvency practitioner or debtor is required to preserve the aircraft object and maintain it and its value in accordance with documentary obligations until such time as the creditor obtains possession
  • the creditor does not require permission from the court in order to take possession of the aircraft object at the end of the specified waiting period and, during the waiting period, is entitled to apply for any other form of interim relief that would be available under national law
  • once the creditor takes possession of an aircraft object, deregistration and export remedies become available to the creditor with the relevant registration authority being required to make those remedies available within 5 working days of receipt of notification from the creditor that it is entitled to such remedies
  • no further intervention from national courts or authorities is permitted.

The other principal advantage of adopting Alternative A is that this is one of the conditions required to be satisfied by UK airlines should they wish to apply for, and be granted, export credit support in line with the OECD’s Aircraft Sector Understanding at a discounted rate of up to 10% on the premium charged by export credit agencies. The benefit of this is, however, diminished by the so-called Home Countries Rule which provides that airlines in the United Kingdom, France, Germany, Spain and the United States of America are not allowed to benefit from export credits for Boeing and Airbus aircraft.

The decision for BIS will ultimately involve a detailed cost/benefit analysis as to whether any likely reduction to the costs of financing aircraft as a result of adopting Alternative A are significant enough to warrant interfering with the existing insolvency regime.

How would ratification of the Cape Town Convention interact with the Blue Sky rule for creating mortgages under English law?

Most readers will be familiar with the issues caused by the ruling in the Blue Sky case1. In summary, in order for a valid security interest to be created over an aircraft under English law, the aircraft has to be situated in England at the time of creation.

This conflicts with the mechanism provided for creation of international interests under the Convention whereby an international interest can arise independently of domestic laws provided that the requirements for creating such international interests as set out in the Convention are satisfied. The Convention was specifically designed to allow international interests to be created independently of local jurisdictional requirements so, as part of the ratification process, BIS will need to consider how to ensure that such conflict does not arise in practice.

We will be following the ratification process closely and will advise of any key developments, including detailed analysis of what the changes involved with implementation of the Convention will mean in practice for our clients. Under the current timetable, BIS is due to publish their response to the consultation in mid-November setting out how the UK Government intends to implement the treaty and a timetable for ratification so watch this space.