On 1 November 2015, the 2001 Cape Town Convention and its Aircraft Protocol (together Cape Town) became part of UK domestic law. This note brutally summarises certain key aspects of that ratification. For brevity's sake, it assumes some familiarity with these treaties. For a general introduction to or refresher on Cape Town, please see our Practical Guide to the Cape Town Convention (the Guide).
Alternative A insolvency regime
The UK has adopted Alternative A, with a maximum waiting period of 60 days. During this period, the debtor (or its insolvency officer) must either cure all relevant defaults and undertake to perform its future obligations or allow repossession. For more on Alternative A, please see Should the UK adopt Cape Town’s Alternative A insolvency regime? Lessons from the US and Canada.
This is good news for UK airlines seeking capital markets finance via enhanced equipment trust certificate issuances (EETCs), as airlines in other Cape Town countries have found. For example, since its 2013 EETC (a transaction on which Dentons acted) Air Canada has achieved its lowest ever financing costs through a series of EETCs benefitting from ratings agency and investor confidence in Alternative A and the wider terms of Canada's Cape Town ratification.
Another effect of Alternative A in the UK may be to make it more likely that creditors will put insolvent operators into liquidation rather than administration. For more on this possibility, please see Helicopters, UK Cape Town ratification and English insolvency law - best leave well alone?
Blue Sky One – a partial solution
A mortgage requires a transfer of title by way of security. Under English law, an aircraft mortgage will only be valid if it would be recognised as valid under the domestic law of the place the aircraft is situated when the mortgage takes effect recognises that security transfer of title as valid. (For more on this "lex situs rule", please see Aircraft mortgages and the English conflict of laws – Blue Sky One revisited.) This rule can be highly inconvenient for airlines asked to route flights over the right "situs" to allow financiers to take English law mortgages.
The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the Regulations) partially address this issue. They provide that:
- a security agreement over an aircraft, helicopter or engine (each an aircraft object) may take effect under English law as a Cape Town international interest; and
- in contrast to a mortgage, this will be so even if the security agreement does not create or transfer a proprietary interest.
Under the Regulations, the "chargee" under such a security agreement would have many of the remedies available to the mortgagee under an English law aircraft mortgage. However, creditors may want an English mortgage as well as a security agreement creating an international interest. Among other things, non-Cape Town states are more likely to recognise the English mortgage than the security agreement.
However, to take an English law aircraft mortgage one must still comply with the lex situs rule – or rely on the aircraft being in international airspace. (For more on taking a mortgage while the aircraft is in international airspace, see Aircraft mortgages and the English conflict of laws – Blue Sky One revisited.)
Under the Regulations, UK-related international interests may be registered at the International Registry. This is to establish their priority – and to facilitate the efficacy in a UK insolvency of the use of an IDERA to deregister the aircraft. (For an explanation of IDERAs, see section 10 (IDERAs) of the Guide.)
International interests are not registerable as such at Companies House. Mortgages and charges granted by UK companies over aircraft objects remain registerable at Companies House (and the CAA's mortgage register).
Thus, not registering at Companies House:
- would have the usual disadvantages for an aircraft mortgage – invalidity against insolvency officers and secured obligations becoming payable on demand;
- would not have those disadvantages for a security agreement creating an international interest. (If correctly drafted, a single security document may create a Cape Town security agreement over an aircraft object and mortgage or charge that object as well.)
No retrospective effect
The UK is not applying Cape Town retrospectively. Thus:
- pre-1 November rights and interests in aircraft objects retain the priority they enjoyed before that date;
- interests under pre-1 November transactions will not be registerable at the International Registry – unless the transaction documents are later amended, extended, supplemented, novated or re-constituted in ways that create international interests (though re-constituting documents just to come within Cape Town is widely regarded as overkill); and
- the UK's Civil Aviation Authority (the CAA) will not record or act on an IDERA for a UK-registered aircraft issued in connection with a pre-1 November interest.
(Two side-notes on the UK approach to IDERAs are that:
- unlike some aviation authorities, the CAA will not record or regard as current more than one IDERA for one aircraft at one time; and
- creditors may continue to seek deregistration powers of attorneys, as well as IDERAs, for UK-registered aircraft to obtain clear, express authority to execute documents in connection with repossession and deregistration.)
The Cape Town Discount – for some types of aircraft
The UK has made the necessary Cape Town declarations and legislative changes to become eligible to appear on the OECD's Cape Town list. Once the UK joins the list, UK operators can qualify for a discount of up to 10 per cent on the premia for ECA-supported aircraft financings. Unfortunately, under the "Home Country Rule", they are unlikely to receive that support for financings of Airbus or Boeing aircraft.
Non-consensual rights and interests
The heading gives the Cape Town term for aircraft liens and detentions rights – for example, for non-payment of Eurocontrol charges. Under the Regulations, these rights may prevail over registered international interests without themselves being registered at the International Registry.
The UK has not made the declaration that would have excluded domestic aircraft transactions from Cape Town or the Regulations.