There was no single international comprehensive 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, is not applicable to financing of aircraft. The 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 of the 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. But the economic and legal effect 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 arise, including the notorious ronvoi principle, applying another jurisdiction’s, conflict of law rules itself.
Aircrafts are movables for the purpose of most legal systems, which make 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 place of registration. The law of place of registration will at least offer some element of assurance in relation to 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 common and a useful mechanism by which aircraft with surplus fleet requirements may lease 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 a automatic transfer of ownership to the lessee so that it is in effect long-term mortgage. The final price is likely to be the remaining balance of the price rather than the market value at the time.
An EU Regulation requires that the aircraft used by an EU carrier are to 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 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 provision under the amended Chicago Convention for 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 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.
The Cape Town Convention, the Convention on International Interests in Mobile Equipment, operates as an umbrella framework of rules for security interests in a range of mobile equipment in relation to, including aircraft. There are different protocols to deal with different categories of mobile equipment. The protocol takes precedence over the Convention.
The Convention has been adopted by over 50 states but not by certain key States such as the UK. The EU is in it a party but does not have full competence in aircraft registration matters.
States may opt in or out of provisions of the Cape Town Convention. States declare whether or not certain rules or principles are adopted within their State. There are incentives for adopting the key sections of the Convention.
The Convention seeks to provide an internationally recognised system of security interest in all State parties. It provides for an electronic international registry, searchable by creditors, reduced aircraft financing costs. It offers basic default remedies and the possibility of swift relief.
The Convention seeks to create an independent source of international security based on the Convention free of underlying domestic law. A stand-alone system of registration and an international registry is provided for. This system is to become part of the domestic law and take effect in ordinary proceedings including insolvency proceedings in that State. This is supplemented by providing system of remedies which must be enforced in national courts.
The Cape Town Convention provides for priority rules and access to remedies in the event of default to an international interest in aircraft objects as defined. An international interest is a independent registrable concept under the Convention, which has priority on registration over later registered interests and unregistered interest.
An international interest may be a security agreement, title reservation agreement, or leasing agreement. Contracts of sale may be protected to some extent. The international interest is granted by the person or power to dispose of the aircraft object created. It must identify the aircraft object. Aircraft objects include aircraft engines, airplanes, helicopter.
The Convention applies to debtors who are situated in a party State at the time. A debtor is situated in the State, if its states of incorporation, registered office, central place of business is located in that contracting State. The location of the creditor does not matter in this context.
Ireland is the location of the international register, which is operated as a joint venture between the Irish State, Irish government and a private company. The register is completely electronic in form and is accessible at all times. Certain States may access the international registry to harmonise their national registration with the international register. This allows direct registration with the National Registration Authority and the Cape Town Register.
Registration is perfected upon on assignation of a file number. Once an interest is registered, the holder obtains priority over later registered and unregistered interests. Notice therefore, is not a feature.
States may opt in by declaration to certain categories of nonconsensual rights or interests which although not registered are given priority. These include liens imposed by law, such as workmen liens, repairer’s liens, similar to those in the shipping context.
Some such liens are given a proprietary status which allows seizure and sale of the aircraft in satisfaction. Some States impose liens for tax due. If a State does not make a declaration under the relevant article, nonconsensual rights and interests under the national law of that State do not take priority over registered international interests.
The Conventions allow certain guaranteed minimum remedies. Further remedies may be provided for under local law and contractually provided they do not conflict with the Convention. Remedies are triggered by contractual default.
A default is defined an event which deprives the creditor substantially of the expectations it is entitled to under the agreement. On default, the creditor is likely to require to seize and repossess the aircraft. It may re-register it to another jurisdiction in most cases. A creditor may
- take possession or control of the aircraft, object ;
- sell or leases it;
- collect or receive income arising from its management or use.
A creditor may alternatively apply for an order authorising remedies under a lease or conditional sale agreements. The appropriate remedy is usually to take possession and control of the object as they are already owned.
In exercising a right of sale or lease, at least 10 business days notice must be given to the debtor and other creditors with other later interests. Sums secured in realisation are used to satisfy the secured obligations of the debtor. Any surplus is paid to later creditors and if there was a balance it is paid to the debtor.
Local registry authorities must honour a request for deregisteration and export of an aircraft, on request.
All States must make a declaration as to whether a court order is required before repossesing or selling an aircraft after default. Any self-help remedies / non-judicial remedies must be undertaken in a commercially reasonable manner. In the case of interests arising under security agreements, the debtor’s consent is required for non-judicial enforcement. This is usually provided for in the relevant security agreement, conditional sale agreement etc. from inception.
There is provision for interim remedies. Where a default has occurred, this allows the grant of a court order to prevent the aircraft’s value from being jeopardized pending a full determination of default. The remedy may allow
- the preservation of value of the aircraft object,
- taking position control and custody of the object,
- immobilisation of the object, lease,
- sale or managing the operation of the object and claiming income.
These remedies, by way of interim relief must be provided for in the contractual agreement. The parties to the Convention may decide whether the speedy relief will be available and if so, how and on what terms and how quickly it will be available.
The Cape Town Convention’s provisions on insolvency take effect if the debtor’s primary residence for the purpose of insolvency is a party to the Convention, which has made a declaration to adopt the Convention’s insolvency rules. There are two alternative provisions; alternative A hard provisions and alternative B soft provisions. States may elect for A or B entirely or for neither.
Alternative A is most protective for creditors. The insolvency administrator must within the time specified in the State’s declaration give possession of the aircraft or cure defects under the contract, agree to perform future obligation. This option is given to the debtor or insolvency administrator. If this is not done, there is no further opportunity to remedy defaults and the aircraft object is to be transferred immediately.
The administrator or debtor must preserve the object and maintain it until the creditor takes possession. The creditor is entitled to deregister and export on an expertise basis. Insolvency courts may not stay or interfere with the exercise of rights and remedies.
Under Alternative B, the debtor or insolvency administrator must give notice that it will cure all the defects by the commencement of insolvency proceedings and perform future obligations under the agreement or provide a creditor with the opportunity to repossess.
The creditor does not have the option of interim and self-help remedies, if the debtor fails to provide notice. The creditor is then subject to the local bankruptcy court, which may allow the creditor to repossess on terms as may be ordered. Alternative B has been adopted minimally.
Under option A, registered international interests have priority in insolvency proceedings over all other interests, save those which the contracting States has declared have priority of the type mentioned above. Under option B, the international interest is subject to the local regime of insolvency. The interest must be registered prior to commencement of insolvency.
Generally, parties to agreements may choose the relevant jurisdiction to govern the dispute. Applications to preserve, possess and mobilise an aircraft must be brought where the aircraft is located. Where a creditor seeks to receive the income from a secured aircraft, pending resolution of this final resolution, this is done either in the court elected by the agreement or of court in which the debtor is located.
States may make a specific declaration by which contracting parties under an agreement may chose the law to govern their contractual rights and obligations. They must be the domestic law of the State designated and not its the choice of law rules. This choice is to be enforced in other contracting States.
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 a framework, international framework that facilitated asset based finding, financing of aircraft, aircraft engines and helicopters. Asset based financing refers to leasing and loans where the principle asset secured is the aircraft itself.
Because aircraft are internationally mobile that is necessary to provide the legal framework, give lenders insurance 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 and used to protection of the convention.
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, discover if there are loans registered against the 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 that it is concerned only with interest in aircraft, does not deal with safety.
The ICAO elected the company to operate the registry based on a competition. An Irish company jointly owned by SITA and the Department of Transport operates the international registry and is based in Ireland