As we previously reported, Australia has now enacted the implementing legislation to give effect to the Convention in Australia, however several steps remain to be taken before it is in effect as described in this article. In addition, the interaction of the Cape Town Convention and other Australian law will need to be considered, and industry advisors will need to come to a view and agree a new approach to documentation and registration of aircraft transactions.

What is the Cape Town Convention?

Signed at Cape Town in November 2001, the Cape Town Convention and the relevant Aircraft Protocol, together the “Convention”, bring into force a framework for an international standard for the protection of ownership rights and security interests in aircraft.

The Convention establishes:

  • that an “international interest” in aircraft assets (such as airframes, aircraft engines and certain helicopters) arises in favour of:
    • the seller/conditional seller under a sale/title reservation agreement;
    • the lessor under a lease agreement; and
    • the creditor under a credit agreement.
  • an electronic registration system for the perfection and priority of “international interests” (“International Registry”); and
  • default rights and remedies to enforce such international interests (including interim remedies) that are more tailored to aircraft finance transactions, such as giving secured parties the right to de-register or immobilise aircraft.

Afforded within the Convention’s framework is flexibility whereby ratifying nations are permitted to make declarations (“Declarations”) to opt-in, opt-out or determine within pre-defined parameters how the Convention is to apply to its jurisdiction. Based on the declarations we now know will be made, the Convention will not have retrospective effect and therefore existing transactions will not need to be registered on the International Registry.

We have described the Convention and its benefits and provided regular updates regarding the progress of draft enabling legislation through the Australian Parliament – see our articles from:

  • 28 May 2013 - Joint Standing Committee on Treaties recommends ratification of Cape Town Convention and Aircraft Protocol
  • 4 June 2013 - Cape Town Bills introduced in the Australian Parliament on 29 May 2013
  • 4 July 2013 - Cape Town Convention Bills receive Royal Assent on 28 June 2013

Several steps remain before the Convention is in effect in Australia, which we expect will be progressed expediently by the new Coalition Government once it resumes business.

We expect that the Convention system would be operational in Australia for new transactions in early 2014.

As outlined below, there are a number of implications that industry needs to consider now, and take the necessary steps to prepare before the Convention is in effect.

What has happened to date?

As we previously reported, Australia has now enacted the following implementing legislation to give effect to the Convention in Australia.

  • International Interests in Mobile Equipment (Cape Town Convention) Act 2013 which provides that the Convention will have force of law in Australia and that the Convention will prevail over any law of the Commonwealth and any law of a State or Territory to the extent of any inconsistency.
  • International Interests in Mobile Equipment (Cape Town Convention) (Consequential Amendments) Act 2013 which provides for consequential amendments to the following legislation:
    • Air Services Act 1995 – to make it clear that a registered interest under the Convention will be a security interest for the purposes of provisions of that Act dealing with the priority of statutory liens. Under the new regime, an earlier Convention registration will prevail over a statutory lien. Given Air Services Australia has had a long standing practice of passing on service charges by contract and not by statute, this is not expected to have any practical implications.
    • Civil Aviation Act 1988 – to confer upon the Civil Aviation Safety Authority (“CASA”) functions associated with the Convention.
    • Personal Property Securities Act 2009 (“PPSA”) – if the PPSA is inconsistent with the Convention, then the Convention will prevail.

What are the next steps?

The following next steps are set to take place:

  • CASA will be conferred functions to deal with recordation, removal and the exercise of the Irrevocable Deregistration and Export Request Authority (IDERA), the instrument under which an aircraft can be de-registered as part of an enforcement action. The Convention also provides that the “authorised party” under an IDERA is the sole person who can exercise such de-registration. This is important as it gives financiers the comfort of the negative assurance that there will be no change in the registration of the aircraft (nor re-registration in another country) without hearing from CASA.
  • The formal lodgement of the Instrument of Accession to the Convention, accompanied by Declarations in respect of the Convention, with the International Institute for the Unification of Private Law (UNIDRIOT).

We now know that Australia will take the following approach to Declarations:

  • it will declare that upon the substantive insolvency of a debtor, the aircraft will be returned to the creditor on the earlier of:
    • a waiting period of no more than 60 days; and
    • the date under applicable law on which the creditor is entitled to the possession of the aircraft,

unless all defaults (other than the insolvency default) under the relevant security agreement have been remedied and the debtor has agreed to perform all further obligations under the relevant security agreement. This regime, based on the US Section 1110 of the Bankruptcy Code, is also known as “Alternative A”;

  • it will declare that upon receiving an IDERA, CASA will record the authorisation and assist with the authorised party to exercise relevant remedies;
  • it will declare that transaction parties will continue to be free to agree which law will govern their contractual rights and obligations;
  • it will declare that any remedies available to a creditor under the Convention which are not expressed under the relevant provisions of the Convention to require application to a court may be exercised without leave of the court;
  • it will declare that Australia will co-operate to the maximum extent possible with foreign courts and foreign insolvency administrators in the repossession of aircraft as set out above; and
  • it will declare that the Federal Court and the courts of the States and Territories will have jurisdiction under the Convention.
  • The formal ratification of the Convention with the Federal Executive Council’s approval.

Questions arising from the implementation of Convention

The interaction between the Convention and Australian domestic law (particularly the PPSA and insolvency law) needs to be further considered. We understand that the Australian Government does not have any plans at present to enact any further legislation amending domestic laws to cater for the introduction of the Convention.

The guiding principle is that the Convention will prevail only to the extent of any inconsistency with any other Australian law (so the aviation industry and the courts will have to work out when the Convention is “inconsistent”).

Various formulations for determining “inconsistency” have been put forward over the years in the constitutional law or statutory interpretation context, but in the present circumstances where industry participants will favour pragmatism, industry advisors will need to come to a view and agree a new approach to documentation and registration of aircraft transactions.

This was made clear in the Explanatory Memorandum to the International Interests In Mobile Equipment (Cape Town Convention) Bill (“Explanatory Memorandum”), which noted that if the Australian Government adopts an implementation model which provides that the Convention will prevail in the event of any inconsistency, the onus will be on the aviation industry and the courts to understand the operation of both the PPSA and the Cape Town Convention and identify where inconsistencies arise, and that it would not be unreasonable for industry to incur some of the costs associated with operating under and within the two schemes (see paragraph 4.32 of the Explanatory Memorandum).

In the following paragraphs below we raise some matters for consideration and highlight some examples where analysis needs to be undertaken to determine the extent of inconsistencies.

PPSA

Given the approach to implementing the Convention described above, it is expected that the PPSA will still apply in aviation transactions and registrations under the PPSA will be required. A multitude of reasons can be put forward for this position, but in simple terms the PPSA will continue to apply where there is no inconsistency between the Convention and the PPSA. One clear example which practitioners could put forward and was cited in a Parliamentary discussion earlier in the Convention implementation process and the Explanatory Memorandum (see paragraph 1.28 of the Explanatory Memorandum) is to do with the definition of “proceeds” under PPSA which is broader than the definition in the Convention.

It should be noted that the Convention provides that any additional remedies permitted by applicable law may be exercised with respect to a transaction registered under the Convention to the extent that those remedies are not inconsistent with the mandatory provisions of the Cape Town Convention. This could also be taken to suggest that the local law requirements for the creation and perfection of security interests under PPSA continue to apply.

Insolvency laws

Analysis will need to be undertaken as to what provisions of the Corporations Act will be inconsistent, and which provisions will continue to apply.

As the Australian government is not contemplating any specific amendments to insolvency laws in Australia, it appears that the Convention will simply co-exist with the current insolvency regime (to the extent not inconsistent).

For example, practitioners will need to consider whether provisions such as s 588FL Corporations Act, relating to the vesting of security interests in collateral in the grantor if it becomes insolvent if not registered within a certain time, will continue to apply to aircraft. If this registration requirement is construed as being “inconsistent” with Alternative A of the Convention, then a secured party’s rights under Alternative A to require the aircraft to be returned (or defaults cured) as described above would prevail (regardless of whether the secured party registered its security interest within the timeframe prescribed under s 588FL of the Corporations Act). However, because the Convention does not deal with any matters other than “international interests” and associated rights, registration under the PPSA would still be required at least in respect of other aspects of aviation financing transactions which are not covered by the Convention (for example, bank account charges and other ancillary security).

Taking another example, the maximum 60 day waiting period for repossession (or for the debtor to cure all defaults other than the insolvency default) will likely operate concurrently with the current regime under s 440B and related provisions of the Corporations Act. These are already quite creditor friendly in that it requires an administrator of a lessee to make a decision as to continuing to use or possess an aircraft or else incur personal liability for rent and other amounts attributable to the use or possession of the aircraft from the end of that decision period.

Even so, Alternative A would prevail after 60 days and the 60 day requirement under Alternative A of the Convention would alleviate any uncertainties around the present regime including, for example, removing the potential need to go to court or seek the administrator’s consent even where the administrator has issued a disclaimer notice within the 5 business day decision period under s 443B of the Corporations Act.

Such a result would be consistent with one of the objects of the Convention which is to provide more certainty to those who invest in the aviation industry given the unique situation of aircraft assets as high value, highly depreciable and mobile assets requiring speedy, effective and tailored remedies.

The above are some examples of the interactions between the Convention and current domestic laws, and there will be others that will need to be worked through prior to and during the implementation period.