Flying Ever Higher: The Impact Of The Cape Town Convention On Cayman Islands Aircraft Finance Transactions.
Legal News & Analysis – Asia Pacific - Offshore
1 December, 2015
On 1 November 2015, following the ratification by the United Kingdom Government of the Convention on International Interests in Mobile Equipment and the Protocol thereto on matters specific to Aircraft Equipment (the Convention) and its extension to the Cayman Islands, the Cayman Islands implementing legislation, including the International Interests in Mobile Equipment (Cape Town Convention) Law, 2015 (the Enabling Law), came into force.
The Cayman Islands is now a territorial unit of a Convention State for the purpose of the Convention and the Convention has the force of law in the Cayman Islands. The Convention will apply where there is an “international interest” in “mobile equipment” - in the aircraft finance context this will usually be satisfied by an interest granted under a security agreement or lease in an airframe, engine or helicopter – granted by a “debtor” (i.e. a chargor or lessee) located in the Cayman Islands. The location of the secured creditor is irrelevant, and accordingly the Convention will now be available to lenders in non-Convention states (for example Hong Kong), provided that there is a Cayman debtor. To constitute an “international interest” the agreement creating the interest must also: (i) be in writing; (ii) relate to an object of which the debtor has power to dispose; (iii) enable the object to be identified for the purpose of the Convention; and, (iv) if a security agreement, enable the secured obligations to be determined.
What does the Convention do?
The rationale behind the Convention was to create an international framework for aircraft finance and leasing, with clear governance rules for the universal recognition and protection of interests in aircraft. Put simply, aircraft fly. As a result, various jurisdictional considerations come into play in finance and leasing transactions, and it was thought to be advantageous to have a unifying set of principles to govern them.
The Convention provides, among other things, for:
- The following remedies of a secured creditor on default:
- take possession or control of any object charged to it;
- sell or grant a lease of any such object;
- collect or receive any income or profits arising from the management or use of any such object; and
- if the debtor agrees, procure the de-registration of the aircraft and procure the export and physical transfer of the aircraft object from the territory in which it is situated (as well as the governance of de-registration and export);
- “speedy” provision of relief where a secured creditor has applied to court for a preservation, immobilisation or possession order pending determination of a default; as to the meaning of “speedy”, see below;
- the creation of an International Registry for the registration of, inter alia, international interests;
- the ability of any person to make or request a search of the International Registry;
- the priority of registered interests over any other interest subsequently registered and over an unregistered interest (subject to agreement as between holders of interests to vary the priority of their interests);
- the continuing effectiveness of registered international interests in the insolvency of the debtor (subject to local rules relating to preferences and fraudulent transfers);
- special remedies on insolvency of a debtor;
- the ability of purchasers to take free of unregistered interests, even if they have knowledge thereof; and
- quiet possession and use of aircraft objects for debtors.
The Convention must be read together with any declarations made by a contracting state. The United Kingdom deposited various declarations with the International Institute for the Unification of Private Law on behalf of the Cayman Islands, with the result that the version of the Convention in force in the Cayman Islands provides that:
- all existing and future non-consensual rights and interests (such as an airport authority lien – which the Cayman Islands has not opted to make registrable) in an aircraft will take priority over registered international interests, in an insolvency scenario or otherwise;
- nothing in the Convention affects the right of the Cayman Islands or a Cayman entity, intergovernmental organisation or other private provider of public services to arrest or detain an aircraft under Cayman
- Islands law for payment of amounts owed to such entity, organisation or provider directly relating to those services in respect of that object or another object;
- remedies available to secured creditors under the Convention that are not expressed to require application to the court may be exercised without the leave of the court;
- the parties may choose the governing law of their aircraft security agreement, lease or title reservation agreement (which unless otherwise agreed will be Cayman Islands law);
- relief must be granted by the Cayman Islands Grand Court within ten working days of a secured creditor applying for any preservation, immobilisation or possession order where the final determination of its claim of a default remains pending;
- the waiting period for a secured creditor wanting to take immediate possession of an aircraft object is 60 calendar days where a debtor is insolvent;
- the Cayman Islands courts will cooperate with foreign courts and insolvency administrators in carrying out the insolvency remedies set out in the Protocol; and
- de-registration, export and physical transfer remedies under the Convention will only be available to the persons entitled to a recorded irrevocable de-registration and export request authorisation (known in the industry as an “IDERA”).
Benefits of the Convention to the aircraft industry
The Cayman Islands already had a sophisticated regime for the registration of security interests in aircraft under domestic legislation enacted to mirror the effect of the Convention. Nevertheless, the ratification by the United Kingdom of the Convention and its extension to the Cayman Islands has been widely welcomed by practitioners. The most tangible benefits to the industry will be the additional comfort to lenders and lessors of access to the International Registry and the extended range of remedies available under the Convention to assist with repossession of an aircraft. However, the extension of the Convention also brings the reassurance of certainty to aircraft finance transactions – particularly around the insolvency treatment of debtors and cross border insolvency cooperation, but also in relation to the uncertainty surrounding the legal effectiveness of aircraft mortgages resulting from the ruling on lex situs in Blue Sky One Limited v Mahan Air (briefly, that the validity of the mortgage is based on the lex situs of the aircraft, being the law of the physical location of the aircraft at the time of entry into the mortgage). This in turn may potentially reduce the risk in transactions - or at least the perception thereof - leading to smoother negotiations, more straightforward and efficient documentation of transactions and better rates for borrowers or lessees. Export credit agencies will also welcome access to the “Cape Town discount” and all parties stand to benefit from access to the Convention’s disputes framework.
The Cayman Islands is one of only three territorial units of the United Kingdom that applied to have the Convention extended to it, which is somewhat surprising given the prevalence of offshore vehicles used in aircraft financing and leasing transactions. Whether other jurisdictions choose to follow its trailblazing lead remains to be seen.
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