The Convention and the supporting Protocol (collectively the Convention) are designed to facilitate asset-based financing and leasing of high value mobile equipment.
The Convention is designed as a 'multi equipment treaty' with protocols for aircraft equipment, railway rolling stock and space assets. Only the Aircraft Protocol, which applies to airframes, aircraft engines and helicopters, has been adopted so far. The Protocol applies to all airframes which can carry at least eight persons or goods in excess of 2750 kgs and all aircraft engines which have at least 1750 lbs of thrust (if jet propulsion) or at least 550 rated take-off shaft horse power (if turbine powered or piston powered).
History of the Convention
The two sponsoring organisations behind the Convention are the International Institute for the Unification of Private Law (UNIDROIT), which is the UN agency that deals with private law conventions and the International Civil Aviation Organization (ICAO). The Convention was concluded at a Diplomatic conference in Cape Town in November 2001 and 29 countries including the UK and the US signed legal texts. The Convention entered into force on 1 April 2004. The Protocol will come into force three months after the eighth ratification. To the present day, five countries have ratified the treaty, the most recent being the US on 28 October 2004.
The Convention supersedes the Geneva Convention on the International Recognition of Rights in Aircraft 1948 with regards to aircraft and aircraft objects and the Rome Convention for the Unification of Certain Rules Relating to the Precautionary Attachment of Aircraft 1933 with regards to aircraft. The Convention also replaces the UNIDROIT Convention on International Financial Leasing 1988 with regards to aircraft objects.
Aims of the Convention
Investment in aircraft has previously been hindered by the variety of approaches by local legal systems to security and title reservation rights, which either do not protect lenders in the event of default or are unpredictable. The Convention aims to reduce creditors' uncertainty by providing secure and readily enforceable rights in aircraft. As a result, creditors will be able to reduce the interest rate they must charge to account for the risk and this will make greater amounts of financing available to airlines on more attractive terms. It is estimated that financing and leasing costs represent on average eight percent of total operating expenses of international scheduled airlines1 and according to the International Air Transport Association these measures will save the aviation industry USD $5 billion a year.
The Convention created:
- an international interest which is recognised in all contracting states
- an electronic international register for the registration of international interests
The registry will reduce creditor uncertainty as a search at the time of a financing will allow the creditor to be sure of the priority of its interest. In addition the Convention provides creditors with the following rights with respect to any aircraft financed in a country that has ratified the Convention and Protocol. If there is a default, the creditor may:
- deregister the aircraft and procure its export
- take possession or control of the aircraft
- sell or grant a lease in the aircraft
- collect or receive income or profits arising from the management or use of the aircraft
Commercial impact of the Convention
The following groups are expected to benefit from the Convention:
- aircraft manufacturers and suppliers - by expanded markets, higher output and sales levels
- airlines - as a result of reduced financing costs and greater access to financing
- through reduced debt levels, where the government is lending the money to purchase the aircraft through sovereign guarantees and national debt;
- through reduced risk, where the government is providing export credits to support aircraft sales; and
- through enhanced privatisation potential of state owned airlines, if this is an option;
- investors - by increased security and higher valuations and returns on investments
- passengers - by related price reductions and increased frequency of services
The Export-Import Bank (Ex-Im Bank), the official export credit agency of the United States, has offered to reduce its exposure fee by one-third on financings of new US manufactured commercial aircraft for buyers in countries that sign, ratify and implement the Convention. This will allow eligible foreign buyers to receive an Ex-Im Bank exposure fee of 2 percent, compared to the usual 3 percent. European Credit Agencies are expected to follow suit and announce similar discounts.
There are three classifications of 'international interests' in airframes, engines or helicopters under Article 2 of the Convention. An international interest may be:
- granted by the chargor under a security agreement
- vested in a person who is the conditional seller under a title reservation agreement; or
- vested in a person who is the lessor under a leasing agreement.
An international interest also incorporates 'proceeds' of an object (Article 2 (5)). This only includes proceeds arising out of an object's total or partial loss, destruction, confiscation, condemnation, or requisition.
Article 7 of the Convention lays down the criteria for an international interest to be constituted. The agreement creating or providing for the international interest must:
- be in writing
- relate to an object of which the chargor, conditional seller or lessor has power to dispose
- enable the object to be identified in conformity with the Protocol
- in the case of a security agreement, enable the secured obligations to be determined, but without the need to state a sum or a maximum sum secured
There is no requirement for the interest to be of an international nature.
The International Registry and the registration system
The Convention created an international registry for the registration, amendment, extension or discharge of:
- international interests
- prospective international interests
- acquisitions of international interests by legal and contractual subrogations
- registrable non-consensual rights
- interests and notices of national interests
- any subordinations of the interests referred above.
A prospective interest is an interest which is either intended to be made in the future or is dependent upon the occurrence of a certain event.
Either party to an international interest may register an interest with the consent in writing of the other party (Article 20 of the Convention). The registration of an international interest remains effective until discharged or until expiry of the period specified in the registration (Article 21 of the Convention).
An international interest will rank for priority as from the time of registration over a subsequently registered interest and over an unregistered interest (Article 29 of the Convention). Under the Convention, the registered international interest will have priority over the unregistered interest even if the registered international interest was registered with actual knowledge of the unregistered interest. The only exception is for an outright buyer whose interest is protected under the protocol if it acquires the aircraft before the registration of the creditor's international interest.
The registered interest will not be affected by insolvency proceedings provided that the interest is effective under applicable national law (Article 30 (1) and (2) of the Convention).
Once a country has ratified the Convention on a particular basis, withdrawal or change in the terms of ratification will have only prospective and not retrospective effect. An aircraft will have the protection of the Convention as existing at the time delivered.
Aviareto, an Irish company based in Shannon, has been selected to host the International Registry. The Registry will be operational in early 2005 at the same time as it is expected that the Protocol comes into force. The registrar will be liable for damages for any loss suffered as a result of an error or an omission by it or a malfunction of the international registration system (Article 28 (1) of the Convention).
The Aircraft Equipment Protocol
Article III of the Protocol extends the provisions of the Convention to outright sales, allowing buyers to take advantage of the registration facilities and priority provisions.
Article XI of the Protocol sets out two alternative regimes for remedies on insolvency:
- Alternative A - 'The Hard Regime'
If the insolvency administrator/debtor is unable to cure all defaults and agree to perform all future obligations within the waiting period, the administrator must give the creditor the opportunity to take possession of the aircraft. The court has no powers of intervention to stay the enforcement. The insolvency administrator/debtor must preserve the aircraft and maintain it and its value until the creditor is given the opportunity to take possession of the aircraft.
Each contracting state may choose the length of the waiting period in its declaration under Article XXX (3) of the Protocol.
- Alternative B - 'The Soft Regime'
The insolvency administrator/debtor must give notice to the creditor within the waiting period whether it is able to cure all defaults and agree to perform all future obligations or if it will give the creditor the opportunity to take possession of the aircraft. If the insolvency administrator/debtor does not give notice, the court may permit the creditor to take possession upon such terms as the court may order.
A contracting state may adopt either alternative or apply its own insolvency rules. If a contracting state chooses to adopt one of the alternatives it must make a declaration pursuant to Article XXX (3) of the Protocol.
Ex-Im Bank has indicated that the 'hard regime' and a waiting period of 60 days are preferable.
The courts of a contracting state selected by the parties and the courts of contracting state of which the aircraft is situated have jurisdiction to grant orders relating to:
- preservation of the aircraft and its value
- possession, control or custody of the aircraft
- immobilisation of the aircraft
(Article 43 (1) of the Convention)
The courts of a contracting state selected by the parties and the courts of a contracting state on the territory of which the debtor is situated, may grant orders relating to the lease, the management of the aircraft and the income derived from it (Article 43 (2) of the Convention).
List of Signatories
|Jordan||United Republic of Tanzania|
|Kenya||United States (Ratified)|
We suggest all leases include the following clause in order to take into account of the Convention coming in to force:
If at any time in the State of Registration there shall be, or be brought into force, any legislative or other provisions giving effect to the Geneva Convention of 1948 or the Cape Town Convention on International Interest in Mobile Equipment and the Aircraft Equipment Protocol 2001 (the Cape Town Convention) or otherwise relating to the recognition of rights in aircraft, the Lessee shall immediately do and join with the Lessor in doing all such acts as may be necessary to perfect recognition of the Lessor's title and interest and the interest of the Lessor and the Financing Parties in the Aircraft in accordance with such legislative or other provisions. The Lessee now consents to the Lessor registering this Agreement under the Cape Town Convention."
Now that the US has ratified the Protocol and with support from Ex-Im Bank, it can be assumed that the Protocol will shortly come into effect. It is hard to know what effect the Convention will have in practice. China has been a strong supporter but it cannot be said whether the Convention will make aircraft repossession easier in China because as yet there has been no attempted repossession, without consent, of an aircraft operated in China.
All parties involved in leasing or financing aircraft should welcome the coming into force of the Convention including airlines not only because this could create greater liquidity in aircraft financing markets but also because airlines will themselves sometimes lease out/sub lease aircraft and seek to rely on its terms.