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17 June 2015
On March 26 2015 the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 were laid before Parliament, marking the commencement of the final administrative steps to ratify the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment in the United Kingdom.
The convention and protocol will, in accordance with Article XXVIII of the protocol, enter into force in the United Kingdom on the first day of the month following the expiration of three months after the date of deposit of the instrument of ratification with the International Institute for the Unification of Private Law (UNIDROIT). This date has not yet been confirmed, but will be notified in the London, Edinburgh and Belfast gazettes. Entry into force could come by the end of Summer 2015.
Following last year's consultation, the Department of Business, Innovation and Skills published its response to the consultation and the draft regulations in early March 2015. The draft regulations were the subject of only minor amendments to clarify that the lex situs provisions of Regulation 6(3) applied in relation to contracts of sale as well as international interests.
The United Kingdom has decided to adopt the Alternative A insolvency regime with a 60-day waiting period. This is consistent with other countries and is the standard emerging for the Organisation for Economic Cooperation and Development (OECD) Aircraft Sector Understanding's qualifying declarations required to obtain a discount on the premium charged by export credit agency-backed financing. The discount for UK airlines is normally restricted due to the unwritten 'home country rule' (for further details please see "Another hurdle cleared on path to ratification: the Cape Town Convention and Protocol"), although there have been exceptions to this rule(1) and it remains to be seen whether the United Kingdom will be included on the OECD list for the discount, which requires compliance with many of the qualifying declarations.
The ability to make certain declarations – although not necessarily all of those affecting the United Kingdom's inclusion on the OECD list – is restricted due to the United Kingdom's membership of the European Union.(2)
Even if the OECD discount is unavailable, the adoption of Alternative A should lead to a more favourable view of the United Kingdom by financiers, which may additionally lead to more favourable rates on financings that do not have export credit agency backing.
The consultation posed the question of the necessity of adopting Alternative A, given the relatively robust UK insolvency regime. However, the UK government is of the view that aircraft may be considered as 'unique assets':
"Aircraft objects regularly cross borders and a creditor cannot be sure in which jurisdiction an aircraft object will be located should an insolvency event occur and therefore how easy or difficult it will be to recover that object."(3)
Accordingly, and noting the economic benefits that may be obtained by the aviation industry, the regulations provide for the adoption of Alternative A.(4)
The UK Civil Aviation Authority will continue to operate the UK National Register of Aircraft Mortgages and pre-existing interests will retain their priority with no requirement to make retroactive registrations on the International Registry. Regulation 22 provides for the implementation of irrevocable deregistration and export request authorisations (IDERAs) and that the Civil Aviation Authority is the registry authority in relation to the use by a creditor of an IDERA. In this regard, the Air Navigation Order 2009 was amended to give the Civil Aviation Authority power to deregister an aircraft pursuant to a properly presented IDERA. The Civil Aviation Authority may refuse to export an aircraft on safety grounds.(5)
The regulations permit self-help remedies without leave of court, but do not provide for "speedy" relief through the courts as contemplated by Article 13 of the convention. However, the regulations stipulate that the relief provided by Article 13 is available to creditors. According to the government's consultation response, many stakeholders had suggested that 'speedy' should be defined:
"in respect of the remedies specified in (i) article 13(1)(a)-(c) of the Convention inclusive, as the number of working days which are not more than (10) calendar days, and (ii) art 13(1)(d)-(e) of the Convention, inclusive, as the number of working days which are not more than (30) calendar days."(6)
The government felt that providing for speedy relief was unnecessary, particularly as it was "not aware of any evidence that the courts are slow in providing interim relief to creditors whilst a claim is being considered".(7)
Those non-consensual rights which currently have priority over a mortgage-type interest under English law will continue to have priority following ratification, with no requirement for registration with the International Registry.
Statutory detention rights – including those arising for unpaid airport charges, unpaid air navigation charges and unpaid amounts relating to the EU Emissions Trading Scheme – will all be retained. Many stakeholders, including the Aviation Working Group, presented arguments to the Department of Business, Innovation and Skills that the opportunity should be taken to end the availability of the fleet-wide lien for unpaid charges, which is at odds with most other EU member states.
Eurocontrol's submission that "effective detention powers ensure that the level playing field between operators is sustained and that good operators do not subsidise bad ones" may be valid, but the government's consultation response does not address the fact that the playing field is not level when it comes to the detention powers available across the European Union. For aircraft owners and financiers, the fleet-wide lien is a real risk arising in relation to operations of the underlying assets to and from the United Kingdom. The opportunity to bring the detention powers into line with other EU member states has been missed.
Regulation 6(3) of the regulations clarifies that where an international interest is validly created (or where a contract of sale is validly created(8)) in accordance with the conditions set out in the convention and the protocol, no reference need be made as to whether it has been validly created or transferred pursuant to the common law lex situs rule.
This effectively ends the concerns arising from Blue Sky(9) in relation to the valid creation of mortgage interests or valid transfer of title in relation to aircraft objects that are covered by the convention and the protocol but in relation to English law mortgages granted, or bills of sale executed, by debtors that are not located in contracting states or in relation to aircraft objects that are not registered in contracting states, questions of validity will still arise.
For further information on this topic please contact John Pearson at Vedder Price by telephone (+44 20 3440 4680) or email (email@example.com). The Vedder Price website can be accessed at www.vedderprice.com.
(1) British Airways obtained Euler Hermes (the German export credit agency) support for its Japanese operating lease with call option transaction for an Airbus A380 in September 2013. In addition, the rule does not apply to, among others, Embraer or Bombardier aircraft.
(2) For further details please see "EU declarations affecting UK implementation of Cape Town Convention" and note 3 below.
(3) Ratification of the Convention on International Interests in Mobile Equipment and Protocol thereto on Matters Specific to Aircraft Equipment: Response to Consultation on Options on Implementation (March 2015).
(4) As the United Kingdom is a member of the European Union, it is unable to make a declaration in relation to Article XI of the protocol, which relates to the selection of Alternative A, as its rules governing insolvency are subject to EU Regulation 1346/2000 (May 20 2000) on insolvency proceedings. However, the United Kingdom was able to amend its domestic insolvency laws to bring them into line with Alternative A. The regulations achieve this by repeating Alternative A and stating that its provisions apply to aircraft objects, amending the relevant provisions of the Insolvency Act 1986 (Regulation 37 of the regulations).
(5) There is some debate as to whether aviation authorities can refuse permission to deregister an aircraft on the grounds of safety. In "De-registration and Export Remedies under the Cape Town Convention" (Gerber and Walton, Cape Town Convention Journal November 2014), the authors explored this in more detail but note that the Official Commentary to the Cape Town Convention (Goode, 3rd edition, UNIDROIT 2013) states that the safety laws and regulations "will normally be applicable only to export and physical delivery, not to de-registration" (emphasis added by Gerber and Walton).
(6) Supra note 3, paragraph 42.
(7) Supra note 3, paragraph 44.
(8) Regulation 38 of the regulations.
(9) Blue Sky v Mahan Air  EWHC (Comm),  EWHC 631 (Comm).
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