Saidova, Sanam (2012) Security interests under theUNIDROIT Convention on International Interests inMobile Equipment 2001. PhD thesis, University ofNottingham.Access from the University of Nottingham /THESIS.pdfCopyright and reuse:The Nottingham ePrints service makes this work by researchers of the University ofNottingham available open access under the following conditions.This article is made available under the University of Nottingham End User licence and maybe reused according to the conditions of the licence. For more details see:http://eprints.nottingham.ac.uk/end user agreement.pdfFor more information, please contact eprints@nottingham.ac.uk
SECURITY INTERESTS UNDER THE UNIDROITCONVENTION ON INTERNATIONAL INTERESTS IN MOBILEEQUIPMENT 2001SANAM SAIDOVAThesis submitted to the University of Nottinghamfor the Degree of Doctor of PhilosophyJuly 2012
This work examines security interests under the Cape Town Convention on InternationalInterests in Mobile Equipment. The main purpose of the Convention is to provide a uniformlegal regime for the creation, registration and protection of a creditor’s interests held in highvalue types of mobile equipment, such as aircraft, railway and space objects. The Conventionprovides for the creation of an autonomous international interest in these types of equipment andestablishes an electronic International Registry for recordation of interests in aircraft objects. Theinternational interests are supported by an elaborate system of remedies exercisable in the case ofthe debtor’s default or insolvency. These features of the Convention are aimed at promotingpredictability and transparency in the financing of mobile equipment which should reduce therisks and costs of borrowing to the benefit of all stake holders.The work examines such issues as the problems of the definition and creation of securityinterests as well as the possibility of the creation of a floating security under the Convention. Italso explores the aims and assesses the effectiveness of the registration system established underthe Convention. Next, the thesis examines the rules of the Convention on setting prioritiesbetween competing creditors. Finally, the work explored the remedies (and their effectiveness)available to the creditor.One of the aims of this work is to examine the provisions of the Convention and to testwhether the legal regime created by it can operate successfully and help facilitate financing ofhigh value equipment. In order to test the effectiveness of the Convention, its provisions will beevaluated in the context of various factual scenarios, which, considering the absence of casesunder the Convention, were largely inspired by the experience of some major domesticjurisdictions, such as the UK and the US. This exercise may also shed some light on strengthsand weaknesses of the Convention in comparison with these systems.
Table of ContentsIntroduction11. General12. Main features of the Convention43. Aims of the workChapter I: Definition and Legal Nature of Security Interests under the Convention12151. General152. Definition of security interests203. The legal nature of security and international interests under the Convention59Chapter II: Constitution of Security and other International Interestsunder the Convention and the Protocols801. General802. The formal requirements of Article 790Chapter III: Registration of International Interests in Mobile Equipment1261. General1262. The International Registry1293. Objectives of registration and interests which can be registeredin the International Registry1454. The process of registration167Chapter IV: Priority of Competing Security and other International Interests1921. General1922. The general rule: first-in-time, first-in-right1973. Exceptions to the general rule of priority208
4. Effects of insolvencyChapter V: Enforcement of Security Interests under the Convention and the Protocols2172281. General2282. Default remedies of the secured creditor2333. Remedies available under the Protocols2764. Remedies on insolvency282Conclusion294Bibliography297
Introduction1. GeneralThe financing and leasing of aircraft, railway and space objects can be a risky andhighly unstable investment. The nature of these types of equipment is such thatthey are likely to constantly cross national borders which may render a creditor’sinterest in them unprotected.1 It may take less than an hour for an aircraft or atrain to leave the jurisdiction where the interests of a secured creditor, conditionalseller or lessor in relation to these objects were created. If the equipment isrelocated, the creditor may not always be certain that a validly created andenforceable interest held by it in the object will be recognised and protected in thenew jurisdiction.2 High mobility of aircraft and railway objects, as well as the factthat satellites are often intended to be launched into space, may also mean thatconflict of laws rules pointing to, for example, the law of the location of the object(lex rei sitae) to govern the interests of a secured creditor, conditional seller andlessor in these objects may not be well suited.3 Reliance on conflict of laws ruleswould also mean dependence on different jurisdictions with varying attitudes tosecurity and retention of title transactions: while some jurisdictions may besupportive of creditor’s rights, others may be less favorable.4 The lack ofinternational uniform substantive rules governing the rights of creditors in thesetypes of equipment has in the past generated uncertainty and affected theavailability of financing, which is particularly significant if the cost of theseobjects is taken into account.5The main purpose of the Convention on International Interests in MobileEquipment and its Protocols is to provide a uniform legal regime for the creation,registration and protection of interests of a secured creditor, conditional seller and1R Goode, Convention on International Interests in Mobile Equipment and Protocol Thereto onMatters Specific to Aircraft Equipment: Official Commentary (UNIDROIT, Rome 2008) 1.2R Goode, H Kronke, E McKendrick, Transnational Commercial Law: Text, Cases and Materials(Oxford, OUP 2007) 434.3G Mauri and B Itterbeek, ‘The Cape Town Convention on International Interests in MobileEquipment and its Protocol on Matters Specific To Aircraft Equipment: A Belgian Perspective’(2004) 9 Unif L Rev 547, 550.4Goode (n 1) 13.5R Goode, ‘International Interests in Mobile Equipment: A Transnational Juridical Concept’(2003) 15 Bond L Rev 9, 10.1
lessor held in high value types of mobile equipment, such as aircraft, railway andspace objects.6 One of the unique features of the Convention is that it provides forthe creation of an autonomous international interest in these types of equipmentwhich derives solely from the Convention and does not depend on any domesticlaw.7 Another important creation of the Convention is an electronic asset-basedInternational Registry of aircraft objects where international interests and otherregistrable interests in such equipment can be registered.8 This should enable thecreditor to give notice and secure priority among other holders of internationalinterests in the object held by the debtor.9 The international registries forregistration of international interests in railway and space objects are expected tofollow in due course. The international interests of the creditor are furthersupported by an elaborate system of remedies which can be exercised in the caseof the debtor’s default or insolvency.10 These features of the Convention and theProtocols are aimed at promoting predictability and transparency in the financingof mobile equipment which should reduce the risks and costs of borrowing to thebenefit of all stake holders.11The Convention and Aircraft Protocol were concluded at the DiplomaticConference held at Cape Town in October-November 2001 under the auspices ofthe International Institute for the Unification of Private Law (UNIDROIT) and theInternational Civil Aviation Organization (ICAO).12 The Convention13 andAircraft Protocol came into force on 1 March 2006, when the number ofratifications reached eight as required by the Aircraft Protocol.14 The Rail6Preamble of the Convention. See Goode (n 1) 148.Art 2, the Convention. See Goode (n 1) 35; See L Weber and S Espinola, ‘The Development of aNew Convention Relating to International Interests in Mobile Equipment, in Particular AircraftEquipment: a Joint ICAO-UNIDROIT Project’ (1999) 4 Unif L Rev 463, 463-465.8Art 16, the Convention.9R Cuming, ‘Considerations in the Design of an International Registry for Interests in MobileEquipment’ (1999) 4 Unif L Rev 275, 276-279.10Chapter III of the Convention.11Goode (n 1) 12.12Ibid 7.13There are currently 49 Contracting State to the Convention. The full list of the ContractingStates can be viewed at: ntion.pdf .14Art XXVIII, the Aircraft Protocol. There are currently 42 Contracting States to the AircraftProtocol. The list of Contracting States is available at: ftprotocol.pdf .72
Protocol was concluded in Luxembourg on 23 February 200715 and the SpaceProtocol is still in the process of development.16The idea that a uniform legal regime for creation and protection of securityinterests in mobile equipment should be established was first advocated by Mr TBSmith QC, a Canadian member of the Governing Council of UNIDROITpresiding over the Diplomatic Conference in Ottawa in 1988.17 The desirabilityand feasibility of the project was further confirmed by positive responses to thequestionnaire prepared by Professor R Cuming.18 Great care was taken not only indrafting of substantive provisions of the Convention and Protocols, but also inensuring that all interest groups were involved in their preparation. Theexploratory working groups, as well as several specialist groups which were setup for the purpose of examining specific issues, such as Aircraft Working Group,Registration Working Group, Insolvency Working Group and Public InternationalWorking Group, consisted of a mixture of academic and practicing lawyers fromdifferent legal systems, representatives of relevant business organizations and, inthe case of the Aircraft Protocol, participants from such organizations as ICAOand International Air Transport Association (IATA).19 The consistent and closecooperation of various interest groups in the process of preparation of theConvention and Protocols was vital in ensuring that resulting documents reflectedthe needs and gained support of the industries concerned.2015The Luxembourg Protocol is not yet in force since the International Registry in relation torailway objects is not yet in operation as required by Art XXIII of the Luxembourg Protocol. Formore details, see: ailprotocol.pdf . Lastviewed on 31 October, 2011.16The Diplomatic Conference for the adoption of the Space Protocol is due to be held in Berlin,Germany from 27 February to 9 March, 2012. For more details, see: y072/spaceprotocol/conference/main.htm .Last visited on 31 October, 2011.17Goode, Kronke and McKendrick (n 2) 434.18Ibid 434.19Ibid 434.20Ibid 434.3
2. Main features of the Conventiona) ApplicabilityThe Convention will apply if the following requirements are met. First, the partiesmust conclude a security agreement, a title reservation or a leasing agreement.21The agreement should relate to uniquely identifiable mobile equipment andcomply with the requirements prescribed by the relevant protocol.22 At present,the Convention only covers three categories of equipment, namely a) an airframe,an aircraft engine or a helicopter; b) railway rolling stock; and c) space assets.23The agreement must be constituted in accordance with the formalities stipulatedby the Convention.24 This means that the agreement should be in writing, relate toan object of which the chargor, conditional seller or lessor has power to dispose,enable the object to be identified in conformity with the Protocol and, in the caseof the security agreement, enable secured obligations to be determined, butwithout the need to indicate the sum secured. Of these four formalities, therequirement of power to dispose may give rise to some important questions,which will be considered later in the work. The Convention does not explain inwhat circumstances the power to dispose may arise. It seems clear that the powerto dispose includes the right to dispose, i.e. where the chargor, conditional sellerand lessor are owners of the object or have authority of the owner to deal with it.But the power to dispose is wider than the right to dispose and covers othersituations whereby a non-owner chargor, conditional seller or lessor can deal withthe object in a way that will bind the true owner even if the latter did not authorisethe disposition.25 In this regard, it is suggested that the Convention’s rules onpriority may help identify the circumstances in which the power to dispose mayarise.26 Finally, the Convention will only apply if its requirement relating to theconnecting factor, namely the location of the debtor is met.27 The debtor should be21Art 2(2).Goode (n 1) 21.23Art 2(3). Art 51 indicates that the application of the Convention can be expended in future tocover other types of mobile equipment through new Protocols.24Art 7.25R Goode, ‘The International Interest as an Autonomous Property Interest’ (2004) 1 ERPL 18,24.26Goode (n 1) 176.27Art 3(1), the Convention.224
situated in a Contracting State at the time of the conclusion of the agreementcreating or providing for the international interest.28 This means that if the debtormoves to another state after the agreement is made, the Convention will stillapply. There are six alternative ways to determine whether the debtor is located ina Contracting State.29 For instance, if the debtor is incorporated or formed, or hasa registered office, a centre of administration, a place of business or habitualresidence in a Contracting State where it is located at the time of the conclusion ofthe agreement the requirement of the connecting factor will be satisfied.30 Incontrast, the location of the creditor is irrelevant for the purpose of theConvention.31 Article IV(1) of the Aircraft Protocol provides an alternativeconnecting factor in relation to a helicopter or an airframe pertaining to anaircraft. In the case of these objects, the Convention will also apply if thehelicopter or the airframe is registered in a national aircraft register of the State ofRegistry.32 The State of Registry means the State of the national register in whichthe aircraft is registered and the State of location of the common mark registeringauthority maintaining the aircraft register in accordance with Article 77 of theConvention on International Civil Aviation 1944.33 The alternative connectingfactor cannot apply to aircraft engines because there are, generally, no nationalregistries in relation to these objects.34b) The two-instrument approachIn the early stages of the project, it was expected that the Convention wouldconsist of a single document relating to all types of mobile equipment which itintended to cover.35 However, it soon became clear that the traditional route of28Art 3(1), the Convention.Art 4, the Convention.30The main purpose of providing various alternative ways of establishing the connecting factor isto widen the applicability of the Convention. See Goode (n 1) 170.31Art 3(2), the Convention.32Goode (n 1) 22.33Art I(h), (p), the Aircraft Protocol. The Convention on International Civil Aviation (the ChicagoConvention) is a public law treaty designed to promote safe and secure flights, whereas the CapeTown Convention is a private law treaty and its main objective is to facilitate financing and leasingof aircraft, railway and space objects. The Cape Town Convention should not be, generally,interpreted by reference to the Chicago Convention. See Goode (n 1) 300.34Goode (n 1) 111.35R Goode, ‘The Preliminary Draft UNIDROIT Convention on International Interests in MobileEquipment’ (1999) 4 Unif L Rev 265, 269-271.295
international treaty making may not be the most constructive one for the purposesof the Convention. The aviation working group was well ahead of the rail andspace groups. If the drafters of the Convention were required to wait until allequipment groups completed their work, the progress of the project would havebeen subjected to a considerable delay.36 To resolve the matter, the AviationWorking Group and IATA proposed a novel solution under which the Conventionwould only govern the issues relating equally to all types of equipment.37 TheConvention would then be complemented by the Protocols which would deal withspecific issues relating to a particular type of equipment. The novelty of thisproposal consisted of the idea that the Protocol should prevail over theConvention in the case of any inconsistency between the two instruments.38 Therewas much debate about whether the two-instrument approach should be followedand the matter was only settled at the beginning of the Diplomatic Conference.39Another alternative was to have a set of stand-alone Conventions relating to eachtype of equipment.40 But it was soon realised that this would only multiply thework as each time the drafters would have to reconsider and evaluate theprovisions of the Convention.41 More importantly, this approach could underminethe integrity and uniform application of the Convention.42 In contrast, the novelsolution of the base Convention supplemented by equipment specific Protocolshad several advantages and was ultimately adopted at the Diplomatic Conference.It allowed each working group dealing with a particular type of equipment toproceed at its own speed.43 Leaving the issues relating to specific types ofequipment to the Protocols also meant that the text of the Convention could bekept as simple and clear as possible.44 At the same time, the Protocols could bedrafted in a way which could better reflect the nature of the equipment and theneeds of industry. For example, aircraft objects are defined in the Protocol byreference to jet propulsion and horse power which, if incorporated into the36Goode, Kronke and McKendrick (n 2) 443.Ibid 444.38C Chinkin and C Kessedjian, ‘The Legal Relationship between the Proposed UNIDROITConvention and its Equipment Specific Protocols’ (1999) 4 Unif L Rev 323, 323-325.39Goode, Kronke and McKendrick (n 2) 445.40Goode (n 35) 269-271.41Ibid 271.42Ibid 271.43Goode (n 1) 17.44Ibid 17.376
Convention, could render its text too technical. Finally, the separation of the baseConvention and Protocols allows Contracting States to choose which Protocol toratify which may help secure greater number of ratifications.c) The international interestThe Convention is mostly concerned with three types of financing of mobileequipment. The debtor may obtain a loan secured by the aircraft, railway or spaceobject, the creditor may sell the object to the debtor in a conditional sale or theobject may be leased to the debtor.45 Some jurisdictions, namely the UnitedStates, Canada and New Zealand, characterise conditional sale and some leases assecurity interests.46 Other jurisdictions distinguish between ‘true’ securityinterests and conditional sale and leases and subject them to different legalregimes.47 Since the agreement on uniform approach to characterisation for thepurposes of the Convention could not be reached, it was decided that this issueshould be left to the applicable domestic law.48 But a solution which would reflectthe differences between a security interest, conditional sale and a lease and stilltreat these arrangements in a similar way was still needed under the Convention.This gav
Matters Specific to Aircraft Equipment: Official Commentary (UNIDROIT, Rome 2008) 1. 2 R Goode, H Kronke, E McKendrick, Transnational Commercial Law: Text, Cases and Materials (Oxford, OUP 2007) 434. 3 G Mauri and B Itterbeek, ‘The
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