Cape Town Convention

Cape Town Convention

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 relations, 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.

International System of Security Interests

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, and reduces 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. 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 a 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 an independent registrable concept under the Convention, which has priority on registration over later registered interests and unregistered interests.

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, aeroplanes, and helicopters.

The Convention applies to debtors who are situated in a party State at the time. A debtor is situated in the State if its state of incorporation, registered office, or central place of business is located in that contracting State. The location of the creditor does not matter in this context.

Register in Ireland

Ireland is the location of the international register, which is operated as a joint venture between the Irish State, the 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’s liens and repairer’s liens, similar to those in the shipping context.

Some such liens are given a proprietary status, which allows the 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.

Remedies

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 as an event which deprives the creditor substantially of the expectations it is entitled to under the agreement. On default, the creditor is likely to be required 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 lease 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 agreement. The appropriate remedy is usually to take possession and control of the objects 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 is a balance, it is paid to the debtor.

Local registry authorities must honour a request for deregistration and export of an aircraft on request.

Remedy Issues

All States must make a declaration as to whether a court order is required before repossessing 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 a 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.

Insolvency

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 the 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 and agree to perform future obligations. 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 the commencement of insolvency.

Choice of Law

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 the court in which the debtor is located.

States may make a specific declaration by which contracting parties under an agreement may choose the law to govern their contractual rights and obligations. They must be the domestic law of the State designated and not the choice of law rules. This choice is to be enforced in other contracting States.