28 September, 2015
WHAT YOU NEED TO KNOW
- Following the lodgement of declarations by the Australian Government in May 2015, the Convention on International Interests in Mobile Equipment (done at Cape Town, November 2001) (Cape Town Convention) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Aircraft Protocol) took effect in Australia on 1 September 2015.
- The Cape Town Convention and Aircraft Protocol establish an online registry for recording security and purchase interests in most aircraft, aircraft engines and helicopters. Failure to register an interest can result in loss of priority and even loss of the interest altogether.
- The Cape Town Convention and Aircraft Protocol apply in Australia only to interests that are created on or after 1 September 2015. Where a pre-existing transaction is extended, amended or novated on or after that date, however, the Cape Town Convention and Aircraft Protocol can sometimes apply.
- Other Australian domestic laws, such as the Personal Property Securities Act (PPSA), are excluded to the extent they are inconsistent with the Cape Town Convention and Aircraft Protocol. However, because the PPSA has a broader application than the Cape Town Convention and Aircraft Protocol, it is likely that security interests in aircraft will continue to be registered under the PPSA as well.
- Anyone looking to acquire an interest in an Australian aircraft should undertake a search of the Cape Town registry (as well as the PPS Register in Australia) to check for registered interests in the aircraft.
The Cape Town Convention and Aircraft Protocol were agreed in 2001 in Cape Town, under the auspices of UNIDROIT. To date, 68 contracting states have acceded to the Cape Town Convention and 59 to the Aircraft Protocol.
Australia enacted legislation in 2013 to enable accession to the Cape Town Convention and Aircraft Protocol. After a period of industry consultation, enabling rules were made in late 2014, and in May 2015 Australia lodged declarations which brought the accession into effect on 1 September 2015. For further background on Australia's path to accession, see earlier updates of 13 November 2012 (available here).
What does the Convention do?
The Cape Town Convention and Aircraft Protocol establish an online registry, based in Dublin, for recording "international interests" in "aircraft objects".
These interests can include a financier's or lessor's security interest or the interest of a purchaser under a purchase agreement.
Aircraft objects include most airframes (those type certified to transport at least eight persons including crew or goods in excess of 2,750 kg), aircraft engines (jet engines with at least 1,750 lb of thrust or otherwise 550 rated take-off shaft horsepower) and helicopters (those type certified to transport at least five persons including crew or goods in excess of 450 kg), except those used in military, customs or police services.
The Cape Town Convention and Aircraft Protocol will apply if the debtor (ie grantor) of the relevant interest is situated in a contracting state such as Australia, or if the aircraft is registered or intended to be registered in a contracting state.
The Cape Town Convention and Aircraft Protocol regulate the priorities of international interests, and establish standard default remedies.
As to priorities:
- a registered interest will prevail over an unregistered one
- as between two registered interests, the first to be registered will prevail
- this applies even if the holder of the priority interest knew the other interest existed.
As to default remedies, Australia has by its declarations specified a maximum waiting period of 60 days after an insolvency-related event (such as the appointment of an administrator) before a debtor or insolvency administrator must give possession of an aircraft object to the holder of a priority registered interest. This remedy will prevail over the enforcement moratorium that might otherwise apply under Australia's insolvency administration regime.
The priority creditor may also procure the deregistration and export of the aircraft, without having to seek a court order. To that end, the enabling rules made by Australia in late 2014 confer powers on the Civil Aviation Safety Authority (CASA) in relation to Irrevocable Deregistration and Export Request Authorisations (IDERAs) for Australian-registered aircraft and helicopters. Under those rules:
- the registration holder of an aircraft will be able to submit an IDERA to CASA in the prescribed form and ask CASA to record it on the Australian Civil Aircraft Register
- the IDERA will state who the "authorised party" for the aircraft is, and they will be the only party that has the right to deregister and export the specified aircraft
- the authorised party may issue a Certified Designee Confirmation Letter (CDCL), in effect handing over the authorised party's rights under the IDERA to the certified designee, which can only be withdrawn with the designee's consent.
It will be important for aviation finance participants to understand the process for conducting searches and making registrations on the International Registry established under the Cape Town Convention and Aircraft Protocol.
There are two types of search that can be made of the International Registry:
- an "informational search", which can be undertaken by anyone at no charge – this is a search against the manufacturer's serial number (MSN) of an aircraft object and shows all results for aircraft objects whose MSN includes the requested search term, but it is not a priority search
- a "priority search", which shows only exact matches against the requested search term(s) (and which can only be made after making a more general "informational search" of the aircraft object) – only such a search is considered an official search and will generate a "priority search certificate".
Only authorised users are able to make registrations on the International Registry. To be an authorised user, it is necessary to open an account with the International Registry, as either a "transacting user entity" (TUE) (such as an airline or financier/lessor) or a "professional user entity" (PUE) (such as a law firm or registration company). A TUE or PUE must designate an individual administrator, who may appoint further "transacting users" or "professional users", respectively.
Registrations require the consent of the other parties to the registration, who must also be authorised users.
An authorised user can make a registration online, either as a "multiple object registration" or, since May 2015, through a "closing room" established by the International Registry. The closing room allows registrations to be pre-positioned and checked by the transaction parties before the registrations go live.
Interaction with PPSA
Under Australia's enabling legislation, the Cape Town Convention and Aircraft Protocol prevail over the PPSA, and any other Commonwealth or State law, to the extent of any inconsistency. The scope of the PPSA, however, is in some ways broader than that of the Cape Town Convention – for example, a security interest over sales proceeds or contractual rights relating to an aircraft (such as manufacturers' warranties) would be registrable under the PPSA but generally not under the Cape Town Convention.
For this reason, we expect financiers and lessors will continue to register aircraft security interests under the PPSA as well as under the Cape Town Convention.
Unlike the PPSA, however, the Cape Town Convention and Aircraft Protocol do not include provisions that can allow a third party to "take free" of a registered international security interest. This removes a number of uncertainties for aviation finance participants, for example with engine pooling. Once an international interest in an aircraft engine has been recorded on the International Registry, it will continue to apply even after the engine is removed from its original airframe or is attached to a different airframe.
For further information about the effect of the Cape Town Convention and Aircraft Protocol in Australia, see the UNIDROIT website (http://www.unidroit.org/) or contact any of our Aviation Finance team in Australia shown below.
For further information, please contact:
John Field, Partner, Ashurst
Matt Stott, Partner, Ashurst
Jock O’Shea, Partner, Ashurst
Graeme Tucker, Partner, Ashurst