There was no single comprehensive international system of registration of property rights and other interests, including security interests in aircraft and aircraft parts.
Aircraft are expensive capital goods and require considerable investment. The rules by which both states limit interest in airlines to the nationals in broad terms are not applicable to the financing of aircraft. They do apply to equity stakes in the firm itself as this might lead to a change of control in effect or on enforcement.
Each aircraft must have a nationality. This is the State ultimately responsible for enforcement of safety and other obligations through registration in that State. This differs from the concept of nationality and registration of the underlying airline carrier (move the above around).
Aircraft may be financed by retained capital, debt or finance leasing. Secured debt may be advanced by banks or through bond debt. Debt may be secured on aircraft in the manner set out below.
As in other sectors, operational and financing leases are utilised. A truly finance lease is a legal formal lease but is in substance a financing arrangement analogous to secured debt. The lessor retains legal ownership rather than a mortgagee’s interest under the mortgage. However, the economic and legal effects are broadly similar.
Complicated issues arise with securing interests in aircraft for reasons that are readily apparent. Aircraft may travel to various jurisdictions, which have different rights and concepts in terms of enforcement, bankruptcy and security. Different States recognise different types of interest in assets, including aircraft.
Complex issues in terms of priorities may arise in the context of security over aircraft. The security is granted in a particular jurisdiction which may not necessarily be recognised universally. Complex choice of law issues arises, including the notorious renvoi principle, applying another jurisdiction’s conflict of law rules itself.
Aircraft are movables for the purpose of most legal systems, which makes the conflict of law position dependent to some extent on the location as well as other connecting factors. Recent case law has illustrated that courts may apply the law of the place where the assets are situated at the relevant time rather than the law of the place of registration. The law of the place of registration will at least offer some element of assurance in relation to the creation of security.
There have been calls to create a single international system of registration of ownership of aircraft. The Cape Town Convention seeks to go some way towards achieving this in the context of aircraft leasing.
Aircraft leasing is largely determined by the terms of the relevant contract. The lessor retains ownership under both finance and operational leases. Operational leases are a common and useful mechanism by which aircraft with surplus fleet requirements may be leased to those who require aircraft.
An aircraft lease is an agreement by which one person, grants the right of possession or control of the aircraft, with or without an option to purchase to another in return for rental or other payments.
Economically, the finance lease is equivalent to the acquisition of ownership, save that the mortgagor retains title throughout the term. The finance lease involves an option to purchase or an automatic transfer of ownership to the lessee so that it is, in effect, a long-term mortgage. The final price is likely to be the remaining balance of the price rather than the market value at the time.
State of Registration
An EU Regulation requires that the aircraft used by an EU carrier are to be registered at the option of the State whose authority issues the licence, in its national register or within the EU.
The state of registration is responsible for safety and maintenance oversight. It may require the aircraft to be returned for inspection and approval.
The effect of the financier’s requirements may be that there is a separation of the State of registration and the State in which the aircraft is effectively operated. There is a provision under the amended Chicago Convention for the transfer of oversight authority by the State of registration to the place where the aircraft carrier has its principal place of business.
Provision may be put in place through inter-state agreements for the purpose of long-term leases but not short-term, so-called wet leases. A wet lease is a lease of the aircraft and crew.
The 1948 Geneva Convention on the International Recognition of Rights in Aircraft was the precursor of the Cape Town Convention. The Convention required each State to recognise four types of contractual proprietary rights in aircraft registered in public records in accordance with the law of the State of registration. If the security interest or lease is valid under the law of the place of registration at the time of creation, it is to be recognised in other States, party to the Convention.
The Convention was limited in scope, dealing with choice of law issues. It did not address certain key issues. It was also insufficient in giving a clear answer in each case to which country’s laws dealt with insolvency proceedings, is the law of a State other than that of the place of registration may be applied, which could undermine the very purpose of security.
Cape Town Convention
The Convention has been adopted by over 50 states but not by certain key States. The EU is in it a party but does not have full competence in aircraft registration matters.
The International Interests in Mobile Equipment (Cape Town Convention) Act 2005 gave force to the Cape Town Convention. The purpose of the Convention was to provide for security over mobile equipment for the purpose of financing its acquisition and use. It provided clear rules for asset-based financing and leasing.
The convention provides an international framework that facilitates asset-based finding and financing of aircraft, aircraft engines and helicopters. Asset-based financing refers to leasing and loans where the principal asset secured is the aircraft itself.
Because aircraft are internationally mobile, it is necessary to provide the legal framework and give lenders insurance so that they may control the assets if there is a default on the lease or repayments while the aircraft is situated in another country. The incorporation of the convention into Irish law is primarily aimed at large-scale financing contracts between debtors and creditors.
Registering Financial Interests
Financial interest in aircraft must be recorded in the international registry, which is defined in the convention. The time of entry permits the priority of financial interest in order of registration.
The international registry is computerized and operates at all times. Possible to search the database and discover if there are loans registered against a particular aircraft. The international registry is self-financing. It is regulated by the International Civil Aviation Organization.
The international registry is distinct from the Irish aviation authority’s role in recording aircraft on the register under the Cargo Convention for the purpose of safety in that it is concerned only with interest in aircraft and does not deal with safety.
The ICAO elected the company to operate the registry based on competition. An Irish company jointly owned by SITA and the Department of Transport operates the international registry and is based in Ireland