“Cape Town” Comes to the United Kingdom

The treaty on recognition of rights in aviation assets assumes a greater level of significance with the UK’s recent ratification

Initially implemented in eight countries nine years ago, the international treaty on recognition of rights in airframes, aircraft engines and helicopters, informally known as “Cape Town,” has now been implemented in almost 70 countries. The treaty is set to take on even greater significance in the world’s aviation market as the United Kingdom of Great Britain and Northern Ireland (“GBNI”) ratified Cape Town as of July 27, 2015. Such ratification was extended to the territories of the Cayman Islands, Guernsey (one of the Channel Islands) and Gibraltar (along with the United Kingdom of Great Britain and Northern Ireland, the “UK”).With Cape Town having become effective across the UK on November 1, 2015, knowledge of Cape Town’s basic principles and an understanding of some of its more complicated and country-specific features remains critical for all parties involved in the structuring, documentation and negotiation of aviation-related transactions.

What is Cape Town?

Cape Town is comprised of two components: the Convention on International Interests in Mobile Equipment (the “Convention”), and the Protocol on Matters Specific to Aircraft Equipment (the “Aircraft Protocol”). The Convention governs transactions involving three types of movable assets: aviation-related assets, rail assets and space assets. The Aircraft Protocol is, as its name suggests, the provision that applies specifically to aviation-related assets. The Convention was developed to address concerns that many parties were hesitant to offer financing for aviation, rail and space assets, which are easily and often moved from one jurisdiction to another and therefore from one legal system to another, resulting in uncertainty as to rights and remedies. The drafters of the Convention hoped to offer a uniform framework to eliminate or lessen such transaction risks.

The International Registry

Cape Town serves two primary functions – it establishes an International Registry for registering and prioritizing interests in aviation-related assets and it provides a set of negotiable rights and remedies relating to interests in aviation-related assets. The International Registry (IR), a Web-based system, is the central location for registering what Cape Town refers to as “Contracts of Sale” and “International Interests” (collectively, “Cape Town Interests”) in certain aviation-related assets (airframes, aircraft engines (but not propellers) and helicopters) referred to as “Aircraft Objects.” Cape Town Interests include ownership interests, security interests, lease interests and conditional sales interests. Cape Town’s basic rules for registered interests are straightforward. Generally, the first party to register a Cape Town Interest in an Aircraft Object has priority with respect to that Aircraft Object, regardless of whether the registering party has actual or constructive notice of an earlier, non-registered Cape Town Interest in the same asset. This “first to file” priority rule may be disregarded, however, if the relevant transaction parties register a subordination agreement with the IR, pursuant to which the parties agree to alter their respective priorities.

Cape Town rights and remedies

In addition to setting up the framework to register certain interests and determining the priority of those interests, Cape Town also provides a set of negotiable rights and remedies relating to interests in Aircraft Objects. However, since the rights and remedies created by Cape Town are negotiable, the rights and remedies available to contracting parties may vary widely from transaction to transaction, from country to country and, depending on how a country decides to adopt the Convention, across the various jurisdictions of a single country. For example, Contracting States are given significant latitude to make “Declarations” upon their ratification or accession to Cape Town. Such Declarations determine which aspects of Cape Town will be applicable in each of the Contracting States and, as is the case with the UK, each of its territories. Cape Town also allows contracting parties the freedom to agree upon the applicability of many Cape Town rights and remedies on a transaction-by-transaction basis. In some instances, contracting parties may exclude from their contracts certain rights and remedies that the relevant Contracting State chose to include in its jurisdiction by a specific Declaration.

United Kingdom Declarations

  • When a country ratifies or accedes to Cape Town, it is required to make certain mandatory Declarations but may choose to make other optional Declarations as well. Some of the more significant Declarations made by the UK include the following:
  • In addition to applying to GBNI, Cape Town will apply to the territories of the Cayman Islands, Guernsey and Gibraltar. However, Cape Town will not be applied in the same manner across all UK jurisdictions.
  • Contracting parties in the Cayman Islands and Guernsey are free to decide upon the governing law applicable to the terms of their contract of sale, security agreement, title reservation agreement and/or leasing agreement, to which Cape Town is applicable (a “Cape Town Agreement”). This Declaration was not made in respect of GBNI or Gibraltar.
  • Remedies available to a creditor under Cape Town will not require leave of an appropriate court unless such permission is expressly required by the terms of Cape Town – i.e., creditors are entitled to “self-help” remedies.
  • The courts of the Cayman Islands and Guernsey are required to provide maximum cooperation with foreign courts in matters of insolvency. This Declaration was not made in respect of GBNI and Gibraltar.
  • “Alternative A” under the Aircraft Protocol shall apply only in the Cayman Islands and Guernsey with respect to repossession remedies available in connection with insolvency proceedings of a lessee or debtor, and the “waiting period” with respect thereto shall be 60 calendar days. Under this Declaration, the insolvent lessee/debtor must either cure all contract defaults (other than the insolvency itself) within the designated waiting period or provide the creditor with possession of the Aircraft Object. During the waiting period, the debtor must preserve the value of the Aircraft Object. Because this Declaration does not apply to GBNI or Gibraltar, the insolvency laws in existence in those jurisdictions prior to ratification will remain in effect.
  • Relief pending final determination by a court of appropriate jurisdiction as to whether a default under a Cape Town Agreement occurred, commonly referred to as “interim relief,” shall be available across the UK. However, the additional rights of a creditor to lease or sell an Aircraft Object prior to any such final determination are limited to the Cayman Islands and Guernsey only.
  • The courts of the Cayman Islands shall provide interim relief within 10 business days of the application for such relief. The courts of Guernsey shall also provide interim relief within 10 business days of application therefor, except where a creditor seeks to lease or sell the Aircraft Object, in which case such relief shall be provided within 30 business days.
  • A debtor may issue and have filed with the appropriate aircraft registry within the UK an irrevocable deregistration and export request authorization (IDERA), making the “person” in whose favor such IDERA has been issued, or its certified designee, the sole person that may, upon a default, procure the deregistration from the UK of an airframe and procure the export and physical transfer of an Aircraft Object out of the UK. The applicable administrative authorities within the UK are also obligated to “expeditiously” cooperate with and assist in the exercise of the deregistration and export remedies.
  • Certain stated categories of nonconsensual rights or interests shall have priority over a duly registered International Interest, whether inside or outside of an insolvency proceeding. For example, an aircraft repairer with a possessory lien for services performed by it on, and value added by it to, the aircraft in its possession will have priority over a duly registered International Interest. Lessors and lenders, take note that this Declaration by the UK makes clear the rights of an intergovernmental organization or a private provider of public services, e.g., Eurocontrol, to arrest and detain an Aircraft Object for payment of services remain paramount.
  • The following are the relevant UK courts where Cape Town related issues are to be heard: the High Court of Justice in England and Wales, the Court of Session in Scotland, the High Court of Justice in Northern Ireland, the Supreme Court of Gibraltar, the Grand Court of the Cayman Islands and the Royal Court of Guernsey.

Conclusion

While GBNI already has an established history of certainty in the realm of aircraft leasing and finance, the promulgation of Cape Town across the UK demonstrates the continued movement of the global market toward a recognized set of rules, rights and protections intended to reduce uncertainty and risk levels for aircraft lenders and lessors. Furthermore, the ratification of Cape Town in a manner that extends to the Cayman Islands should help to ensure that the Cayman Islands remains an important player in the global aviation market. The UK’s ratification of Cape Town is exciting and newsworthy. However, it is worth noting that the ratification documents deposited by the UK, including its specific “Declarations,” particularly with respect to the entry point for the IR, will need to be digested fully by airlines, lessors and lenders and become part of the negotiation, documentation and closing procedures of their transactions for them to take advantage of the protections and benefits of Cape Town as effective in the UK.