Another remarkable addition to the branch of private international aviation law is the Convention on International Interests in the Mobile Equipment of 2001 or commonly referred to as the Cape Town Convention. The anticipation with the Cape Town Convention was that it will have the effect of reducing the financing costs and will ease the funding of the aircraft transactions.
This article on Cape Town Convention will address the reason behind formulating this Convention, the Aircraft Protocol attached with it, provisions dealing with aircraft financing, as well as other salient features of the Convention.
Background of the Convention
While the aircraft moved easily from one country to another, there were indeed many hardships in achieving the interests of the lenders and in the financing arrangements. To tackle these concerns, several nations gathered together for the unification of the Private Law at the United Nations International institute. The representatives of 68 nations and 14 international organizations met on 16th November 2001 to attend a diplomatic conference held at Cape Town in South Africa. There the delegates of fifty-three States signed the Cape Town Convention on International Interests in Mobile Equipment. This Convention was drafted and finally adopted in 6 languages viz. Arabic, Chinese, English, French, Russian, and Spanish.
Nevertheless, this diplomatic conference was important for many reasons: in South Africa’s “mother city” this conference was the first major event; the conference brings forth a multilateral treaty that incorporates new financial principles based on assets. Moreover, it exhibited cooperation between the International Civil Aviation Organization (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT). Further, the convention paved way for the unprecedented cooperation of public and private sectors among various States; it also laid a roadmap for adoption as well as negotiation of two new Protocols in the Cape Town Convention.
Thus, the Cape Town Conference was a distinctive outcome of work of more than thirteen years by the UNIDROIT, Aviation Working Group (AWG), the International Civil Aviation Organization (ICAO), and the International Air Transport Association (IATA). The delegates at the Cape Town Convention sought to formulate an agreement that would evolve a more robust and efficient legal framework for the aircraft title, aircraft leasing, and security aspects of the aircraft.
However, on 1st April 2004, the Convention came into effect and initially deals with large commercial aircraft only, but the Aircraft Protocol signed in 2006 further extended the application by including helicopters, corporate jets, and regional jets. “The Convention and the Protocol, adopted under the joint auspices of ICAO and UNIDROIT, shall be read and interpreted together as a single instrument (Article 6(1) of the Convention).” Since, this Convention and Protocol has provided substantial uniformity in the aviation law, below are some of its advantages:
- The right of repossession by creditors of aircraft and/or engines in case of default;
- The establishment of an International Registry in Ireland giving first-in-time priority to creditors having registered an ‘International Interest’; and
- Various other ‘rights’ to persons with registered interests with respect to aircraft.
The Protocol to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment or the Aircraft Protocol was signed with the Cape Town treaty on 16th November 2001. The parties to the Protocol considered it imperative for the implementation of the Convention on International Interests in Mobile Equipment as it deals with the aircraft equipment. One of the main objectives of this Protocol is “the need to adapt the Convention to meet the particular requirements of aircraft finance and to extend the sphere of application of the Convention to include contracts of sale of aircraft equipment” Further, the State parties to the Protocol are required to be mindful Of the fundamental aims and “objectives of the Convention on International Civil Aviation, signed at Chicago on 7 December 1944.”4
However, the Protocol to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment applies only to the aircraft objects fulfilling the given standards:
“aircraft which can carry at least eight people or 2,750 kilograms of cargo or
aircraft engines with thrust exceeding 1,750 pounds-force (7,800 N) or 550 horsepower (410 kW)
helicopters carrying 5 or more passengers.”
Moreover, the Protocol does not cover light aircraft that are generally used in the aviation sector. It also does not include police, customs, or military equipment. To record the international property interests related to the aircraft equipment, an International Registry of Mobile Assets have been established in Ireland. Further, the High Court of Ireland will hear the leasing disputes in the mediation cases.
The Two main provisions in the Aircraft Protocol are as follows:
- “Providing for the creation, registration and prioritisation of an “international interest” (such as a mortgage or a lease)
- (ii) Remedies available to creditors in the event of a default where an international interest exists.”
Provisions Regarding Aircraft Financing
Article III of the Protocol to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment 2001 provides the application of Convention with respect to the sales. The Article states that the provisions of the Convention will apply to an agreement that creates or provides for an international interest as if it is a contract of sale. Further, the international interest shall be deemed as a sale and the prospective international interest shall be deemed as a prospective sale. Furthermore, for the purposes of this Convention, the debtor and the creditor shall mean as the seller and the buyer respectively. The following Articles will apply with respect to sales:Articles 3 and 4; Article 16(1) (a); Article 19(4); Article 20(1) (asregards registration of a contract of sale or a prospective sale); Article 25(2) (as regards a prospective sale); and Article 30.
This Cape Town Convention applies when a debtor is situated in a Contracting State “at the time of the conclusion of the agreement creating or providing for the international interest.” Further, Article 4 provides the as to Article III of the Protocol to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment, 2001.where the debtor is situated. It states that in any Contracting State the debtor is situated
“(a) under the law of which it is incorporated or formed; (b) where it has its registered office or statutory seat; (c) where it has its centre of administration;or (d) where it has its place of business.”
Furthermore, the Convention provides for the establishment of an International Registry for the registration of the “international interests, prospective international interests and registrable non-consensual rights and interests.”12 Moreover, Article 19(4) states that if an interest was registered firstas a prospective interest, and such prospective interest later become an international interest, then “that international interest shall be treated as registered from the time of registration of the prospective international interest provided that the registration was still current immediately before the international interest was constituted as provided by Article 7.”
The Consent to the registration has been dealt under Article 20 of the Convention. It says that the registration, amendment to the registration or the extension of the registration prior to the expiry of the registration of “an international interest, a prospective international interest or an assignment orprospective assignment of an international interest”shall be carried out “by either party with the consent in writing of the other.”
The discharge of registration has been dealt in Article 25. The Article elucidates that “the intending creditor or intending assignee shall, without undue delay, procure the discharge of the registration after written demand by the intending debtor or assignor.”Lastly, regarding the effects of insolvency, the Convention highlights that “In insolvency proceedings against the debtor an international interest is effective if prior to the commencement of the insolvency proceedings that interest was registered in conformity with this Convention.”
Other Salient features
The Convention and the Protocol was created with the intention of reducing the creditors’ risks and also reduces the borrowing cost of the debtors. Another advantage of the Convention was the Predictability and the enforceability, and it highlighted that:
By creating an international interest recognized in all of the Contracting States and establishing an international electronic interest registration system, the Convention and Protocol improve predictability with respect to the opposability of the securities and the interest held by sellers of aviation assets. Some of the most noteworthy features of the Cape Town Convention are as follows:
- In the event of default on a loan, the creditors have been granted with the right to sell or repossess the aircraft
- The establishment of a high-class aircraft registry internationally to provide priority to the creditors that seek to have a security interest in the aircraft
- To create an effective and vigilant system for the protection of interest for both the creditors and the debtors
- In the event of default made by the debtor, the creditors are permitted to deregister any aircraft and can also obtain the export of the aircraft
- Moreover, in case of a default, the creditors have the power to take control as well as the possession of the aircraft.
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