Cape Town Convention - Res.cloudinary
Cape Town ConventionNovember 20111
Cape Town ConventionIntroductionThe Cape Town Convention (as it is commonly known), asfar as it relates to aircraft objects (which include airframes,aircraft engines and helicopters - please see below forfurther details), consists of the Convention on InternationalInterests in Mobile Equipment and the Protocol on MattersSpecific to Aircraft Finance (the “Protocol”) (they aretogether referred to as the “Convention”). This briefingpaper is intended as a rough guide to the Convention as itapplies to aircraft objects, and does not constitute legaladvice.The five core objectives of the Convention are:1. to facilitate the acquisition and financing ofinternationally mobile assets by creating rightsrecognised in all Contracting States;2. to give creditors recourse to basic default andinsolvency-related remedies designed to offer rapidrelief;3. to establish an electronic registry of internationalinterests which serves to give notice to third parties andensures priority;4. to ensure that the specific needs of the aircraft industryare met (the other protocols ensure the same for therolling stock and satellite industries); and5. to give prospective creditors a greater degree ofconfidence when extending credit to borrowers.To meet these objectives, the Convention creates thefollowing:1. an “international interest" which is recognised in allContracting States;2. an electronic international register of interests; and3. standard rights for creditors on default.Afghanistan, Albania, Angola, Bangladesh, Belarus,Cameroon, Cape Verde, China, Colombia, Costa Rica(effective 01 December 2011), Cuba, Ethiopia, EuropeanUnion, Fiji (effective 01 January 2012), Gabon, India,Indonesia, Ireland, Jordan, Kazakhstan, Kenya, Latvia,Luxembourg, Malaysia, Malta, Mexico, Mongolia, NewZealand, Nigeria, Norway, Oman, Pakistan, Panama,Russian Federation, Rwanda, Saudi Arabia, Senegal,Seychelles, Singapore, South Africa, Syrian ArabRepublic, The Kingdom of the Netherlands, Tajikistan,Togo, Turkey (effective 01 December 2011), UnitedRepublic of Tanzania, United States of America, UnitedArab Emirates, Zimbabwe.Whilst the UK has signed the Convention, it has not yetratified it; at the time of writing, the UK government isconsidering whether to do so. The next stage in thecurrent process is an economic assessment and thegovernment is due to respond on this at the end ofNovember 2011. There has been an indication fromministers that the government is committed toratification. However, once a decision has been made, itwill still be a lengthy process towards ratification. Withthe need to consult each of the overseas territories, it isestimated that it will take a further two to three years toratify fully the Convention.Registrable interestsThere are several classes of registrable interest underthe Convention, but the most important from a creditor’spoint of view are “international interests" and“prospective international interests".Notably, registrations and searches are carried out inrelation to specific assets (as opposed to documents),and it is not possible, for example, to register an interestin unidentified future property by reference to theprovisions of a security agreement.International interestsContracting StatesThe Convention came into force on 1 March 2006, whenthe first eight contracting states signed and ratified theProtocol. Over sixty states have signed or acceded to theConvention. However, as it is ratification and signature oraccession that brings the Convention into force in therelevant state, as of 01 November 2011 the Convention isin force in respect of the following forty-nine countries andregional economic organisations:2The creation of “international interests” is a centralpurpose of the Convention. Broadly, internationalinterests are interests in uniquely identifiable aircraftobjects: granted by the chargor under a security agreement; vested in a person who is the conditional seller undera title reservation agreement; vested in a person who is the lessor under a leasingagreement;
granted by the seller under an outright sale agreement;or held by an assignee.In relation to sales, only certain provisions of theConvention will apply.The Convention applies when, at the time of the conclusionof the agreement creating or providing for the internationalinterest, the debtor/seller (though not necessarily thecreditor/buyer) is situated in a Contracting State. Further,the relevant object must be located in the relevantContracting State at the time of the conclusion of theagreement creating or providing for the internationalinterest.International interests must also satisfy certain formalrequirements, including that the agreement creating orproviding for the interest: is in writing; relates to an object of which the chargor/conditionalseller/lessor/seller has power to dispose; enables the aircraft object to be identified; and in the case of a security agreement, enables the securedobligations to be determined (but without the need tostate a sum or maximum sum secured).Prospective international interests“Prospective international interests” are interests thatare intended to be created in an aircraft object at somepoint in the future on the occurrence of a stated event. Theoccurrence of the stated event need not be certain, andcould, for example, be the acquisition of the aircraft objectby the debtor.Where a prospective international interest is registered, thestated event occurs and completion of the transaction takesplace (subject to certain provisos), the Convention providesthat no further registration is necessary to convert theprospective international interest into a full internationalinterest.What are aircraft objects?Aircraft objects are:1. airframes which can carry at least eight persons(including crew) or goods weighing at least 2,750kgs;2. aircraft engines with at least 1,750lbs thrust (if jetpropulsion) or at least 550 rated take-off shafthorsepower (if turbine or piston-powered); and3. helicopters which can transport at least five persons(including crew) or goods weighing at least 450kgs.This means, in practice, that all but the very smallestcommercial jet airframes will fall within the application ofthe Convention. For example, even the relatively smallGulfstream G100 aircraft which carries eight to ninepersons falls within the Convention. An example of anaircraft which falls outside the Convention is the CessnaCitation Mustang, which can only carry six persons.It is important to remember that the engines must beconsidered separately from the airframe, so that it ispossible for the Convention to apply to the engines evenif it does not apply to the airframe itself (or indeed viceversa). However, it is fairly unlikely that this will be thecase, as an airframe capable of carrying eight personswill ordinarily have installed on it engines with over1,750lbs thrust. If the airframe falls outside theConvention but the engines fall within it, then it would benecessary to make a registration within the nationalregister of the state (to the extent that such a registerexists) in relation to the airframe and a registration in theInternational Registry in respect of each engine.International RegistryThe International Registry of Mobile Assets (the“International Registry”) is maintained by AviaretoLimited in Ireland and supervised by the InternationalCivil Aviation Organisation (ICAO). The InternationalRegistry operates 24 hours a day and is an entirelyelectronic system; registrations, searches andcertificates are made and issued electronically.How does registration take place?Either party to a particular transaction can register aninterest with the consent of the other party.Strictly speaking, registration may only be effected onthe International Registry’s website by an approved user.However, the Convention provides that ContractingStates may at any time designate an entity or entities inits territory as a “designated entry point" through whichthe information for registration is submitted to theInternational Registry. For example, in the US, the FAA(Federal Aviation Administration) is the exclusivedesignated entry point for authorising the transmission ofinformation to the International Registry.3
Cape Town ConventionBroadly, the registration process is as follows:1. Conditions applicable in a particular Contracting Stateare complied with.2. Registering party logs onto the International Registry’swebsite.3. Registering party enters the relevant information(including the parties to the transaction and thedescription of the aircraft objects).4. Registering party either claims or consents to aninternational interest in the aircraft objects.5. The International Registry system automatically sendsan electronic notice to the other party to the transactionasking it to consent to the registration of the internationalinterest.6. The non-registering party may then respondelectronically to the International Registry eitherconsenting or objecting to the registration of theinternational interest.7. Finally, if consent is forthcoming, the registration isautomatically completed.Effect of RegistrationThe default remedies are available in respect ofinternational interests, irrespective of whether theinternational interest has been registered or not. However,registration is vital in order: to give notice of the interest to third parties; to preserve the creditor’s priority over unregisteredinterests; and to ensure the effectiveness of the interest in insolvencyproceedings.Registration of a purported international interest which doesnot actually exist will be of no effect. In practice, such asituation will arise very rarely, since registration requiresthe consent of both parties.DischargeWhere the obligations covered by a registered internationalinterest have been performed, the debtor may require thecreditor to procure discharge of such registration. Aregistration may also be discharged by or with the writtenconsent of the party in whose favour it was made.Alternatively, the registration may specify an expiry date, inwhich case the registration will automatically expire on thedate specified.4A registration in respect of a prospective internationalinterest may be discharged if the intending creditor hasnot given value or contracted to give value.Searches of the RegisterAny person may search the Register – it is notnecessary to be an approved user.Following a search request, an electronic registry searchcertificate is issued. The certificate will state the dateand time of the search and either provide all registeredinformation or state that no registrations exist.Where a search reveals an international interest orprospective international interest, the search certificatein both cases will simply state that the creditor “hasacquired or intends to acquire an international interest inthe object". Therefore, the search result will not indicatewhether the interest is actual or prospective, so thesearching party will need to find out the status of theinterest from the creditor directly.A registry search certificate is prima facie proof of thefacts recited in it.Priority of interestsA registered interest has priority over an unregisteredinterest and over a subsequently registered interest.Priority can be varied by an agreement between theparties (such an agreement need not be registered inorder to have binding effect between the parties to it, butit is advisable to do so as if not registered it will not beeffective against third parties).Some non-consensual liens (such as tax liens) mayhave priority over registered international interests evenif the lien itself is not registered.For prospective international interests, the date ofregistration of the international interest for prioritypurposes is deemed to be the date of registration of theprospective international interest.
InsolvencyEffectivenessGenerally, an international interest is effective in insolvencyproceedings against the debtor if registered prior to thecommencement of the proceedings. “Effective" means thatthe property interest will be recognised and the creditor willhave a claim against the asset for obligations to bedischarged, and will not be limited to a claim against thedebtor’s pool of assets with unsecured creditors.Nothing in the Convention will impair the effectiveness ofan international interest which is in any event effectiveunder national law. One of the benefits of the Convention isthat even if an interest is void due to a failure to attend toregistration requirements under national law, it willnonetheless be valid and enforceable under the Convention(if properly registered). In practice, it is therefore advisablefor creditors to register their interests in the aircraft objectswith both the relevant national registry and the InternationalRegistry.Insolvency procedure regimesUnder the Convention, the Contracting States can opt forthe insolvency procedures under either the “hard regime”or the “soft regime”. If neither option is selected, theContracting State’s national procedural rules will apply.The “hard regime” is intended to facilitate structuredfinancing transactions. Under it, on an insolvency-relatedevent, the debtor or insolvency practitioner must givepossession of the aircraft object to the creditor no later thanthe earlier of:required statement or give up possession after stating itwill do so, the court may permit the creditor to takepossession upon such terms as the court may order.Most of the Contracting States have selected the “hardregime”.To the extent that the Contracting State chooses not tomake any declaration, national insolvency rules willapply. The creditor’s rights on insolvency in these casesdepend on how creditor-friendly the Contracting State’sinsolvency laws are. For example, Ireland, is a creditorfriendly jurisdiction, allowing self-help repossession,whereas in most civil law countries (e.g. in otherEuropean Union member states), self-help proceduresare not available.Default remediesOne major issue which the Convention sought toaddress was the difference between the remediesoffered by common law jurisdictions (such as Englandand Wales) which are considerably more creditorfriendly and allow for self-help remedies, and thoseoffered by civil law jurisdictions (such as France), wherethe concept of a creditor enforcing its remedies without acourt order is simply not recognised. The compromisereached by the Convention was to base the rules oncommon law, but to allow civil law countries to make adeclaration excluding extra-juridical remedies andrequiring the creditor to obtain leave of court.The standard default remedies provided by theConvention to a chargee under a security agreementare: the end of the waiting period; or1. to take possession or control of the aircraft object; the date on which the creditor would ordinarily beentitled to possession of the aircraft object.2. to sell or grant a lease of the aircraft object; andThe “waiting period” is specified by each Contracting State.The aircraft object may be used, but it and its value mustbe preserved and maintained.Under the “soft regime”, the debtor or insolvencypractitioner must give notice to the creditor within thewaiting period stating whether it will:3. to collect or receive the income or profits arising fromthe management or use of the aircraft object.Subject to various further requirements being met(including compliance with security laws and regulations,the debtor’s consent and the issuance of an irrevocablede-registration and export request authorisation), furtherdefault remedies are: cure all defaults and perform all future obligations; or1. to procure the de-registration of the aircraft object;and give the creditor the opportunity to take possession ofthe aircraft.2. to procure the export and physical transfer of theaircraft object from the territory in which it is situated.If the debtor/insolvency practitioner does not give theThe Convention provides that the above remedies may5
Cape Town ConventionR172 G173 B173be exercised by the creditor without a court orderprovided that the debtor has at any time so agreed.However, as mentioned above, this right can be limited bya declaration made by a Contracting State to the effect thatremedies may only be exercised with leave of the court. Tothe extent that the creditor is not entitled or does not wishto exercise the rights by way of “self-help”, the remediesare available by court order. The creditor is obliged toexercise any remedy in a “commercially reasonablemanner”, meaning the remedy is exercised in accordancewith the security agreement (unless the provision in suchagreement is manifestly unreasonable).It should be noted that the procedural requirements ofthe place in which a remedy provided by theConvention is to be exercised will need to be compliedwith.Interim reliefA creditor who adduces evidence of default pending finaldetermination of the creditor’s claim is entitled to “speedyrelief” under the Convention. Interim relief is onlyavailable to the extent that the debtor has agreed to it.Such relief may take the form of such one or more of thefollowing orders as the creditor requests:1. preservation of the aircraft object and its value;2. possession, control or custody of the aircraft object;3. immobilisation of the aircraft object; and/or4. lease or management of the aircraft object and theincome therefrom.The court may add such conditions as it considersnecessary to protect the debtor or other interested personsin the aircraft object.Contracting States may make a declaration disapplying theprovisions relating to interim relief.In addition to the orders stated above, the creditor canrequest an order for a sale and application of proceeds,provided that the Contracting State has made a declarationto opt for this additional relief and it is specifically agreed bythe debtor and creditor in the documentation.As with the other default remedies, interim relief will only beavailable:6 where the aircraft object is in a Contracting State at thetime of enforcement; and prior to the onset of insolvency.IDERAIrrevocable de-registration and export requestauthorisations (IDERAs) are only available in respect ofContracting States that have elected to apply these.IDERAs are issued by a debtor and recorded on theInternational Registry. The person in whose favour theauthorisation has been issued shall be entitled toprocure:1. the de-registration of the aircraft object; and2. the export and physical transfer of the aircraft objectfrom the territory in which it is situated,provided that:a. the debtor has so agreed at any time; andb. the chargee has given reasonable prior written noticeof the de-registration and export to interested persons(such as the debtor and the guarantor) unlesspursuant to a court order (in which case prior writtennotice is not required).As a practical point, in order to assist in the enforcementof a mortgage of an aircraft object, it is advisable for thefinancier to require an IDERA from the debtor as acondition precedent to the grant of a facility.Relationship betweenremedies and insolvencyprovisionsDefault and interim remedies apply to all internationalinterests regardless of registration whereas theprovisions providing insolvency protection only apply toregistered international interests.In the vast majority of cases, the creditor and the debtorwill have agreed in the agreement giving rise to theinternational interest that “default” will include thedebtor’s insolvency. Therefore, when insolvencyproceedings are commenced against the debtor, this willnormally constitute a default under the agreement whichwill therefore theoretically entitle the creditor to reliefunder the default remedies and interim relief provisionsof the Convention, irrespective of whether the interestwas registered.However, in practice, the default remedies would not beapplicable. If the interest was not registered, theavailability o
Cape Town Convention Introduction The Cape Town Convention (as it is commonly known), as far as it relates to aircraft objects (which include airframes, aircraft engines and helicopters - please see below for further details), consists of the Convention on International Interests in Mobile Equipment and the Protocol on Matters
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