The Cape Town convention and the Aircraft Protocol

1. The framework

It is most likely that Sweden will soon ratify the Cape Town Convention and the Air-craft Protocol. The Cape Town Convention addresses the difficulties stemming from different jurisdictions having different approaches to rules on secured finance.

The Cape Town Convention provides uniform rules for assetbased financing. The regime comprises two instruments: the Convention, which is not equipment-specific, and a separate controlling Protocol for each category of equipment covered by the Convention. The categories are helicopters, airframes and aircraft engines, railway rolling stock and space assets.

In essence, the Convention, with its Protocols, is designed to overcome the problem of obtaining secure and readily enforceable rights in aircraft objects, railway rolling stock and space assets, which by their nature have no fixed location and, in the case of space assets, are not on earth at all. At this time, only the Aircraft Protocol is in force.

2. Objectives

The Convention and its supporting Protocols have five basic objectives:

a)    to provide for the creation of an international interest, recognised in all Contracting States;

b)    to provide the creditor with a range of default remedies and, where there is evidence of default, means of obtaining speedy interim relief pending final determination of the claim on the merits;

c)    to establish an electronic international register for the registration of international interests which will enable the creditor to preserve its priority against subsequently registered interests and unregistered interests and the debtor’s insolvency administrator;

d)    to ensure, through the relevant Protocol, that the particular needs of the industry sector at hand are met;

e)    to provide intending creditors with greater confidence in the decision to grant credit, enhance the credit rating of equipment receivables and reduce borrowing costs to the advantage of all interested parties.

3. Key provisions

The Convention provides for the protection of five different categories of interest:

International interests, that is, interests granted by the pledgor under a security agreement, or vested in a person who is the conditional seller under a title reservation agreement or a lessor under a leasing agreement. The international interest is the primary category of interest with which the Convention and the Aircraft Protocol are concerned.

Prospective international interests, that is, interests intended to be taken over existing, identifiable equipment as international interests in the future, but which have not yet become international interests. For example, in the case of a security agreement in which the terms of the agreement are still being negotiated or the prospective debtor has not yet acquired an interest in the equipment to be charged. A prospective inter-national interest may be registered as such in the International Registry but does not take effect until it becomes an international interest, in which case it ranks for priority purposes as from the time of its registration as a prospective international interest.

National interests, that is, interests registered under a national registration system which would be registered as international interests but for the fact that they are created by internal transactions in respect of which a Contracting State has made a declaration resulting in that the Convention cannot be applied.

Non-consensual rights or interests arising under national law, with priority without registration. A Contracting State may make a declaration specifying non-consensual rights or interests which under national law would be given priority over interests equivalent to an international interest and which, to the extent specified in the declaration, are to have priority over a registered international interest even though such non-consensual interests are not registered.

Registrable non-consensual rights or interests arising under national law. A Contracting State may make a declaration that non-consensual rights or interests arising under its law may be registered in the International Registry, and any such right or interest that is so registered is then treated for the purposes of the Convention as a registered international interest. Possible examples are a judgment or order affecting equipment of a category to which the Convention applies and a legal lien in favour of a repairer.

4. Status: which countries have ratified the Convention, and what is the driving force?

The Convention was signed in 2001 but has come into focus in a number of countries only in the last few years. It came into force in 2006. The Convention has been ratified by a number of states, such as the US, Russia, Ireland, Malta, Norway and New Zealand. Within the EU, only Ireland, Luxembourg and Malta have ratified the Convention so far, but a number of states, such as Sweden and the UK, are moving towards ratification.

One of the reasons for the interest is, of course, the unification of the rules regulating a global business sector like aviation.

Another reason, with a strong driving force, is the officially supported export credit, and the minimum interest rate, in connection with the financing of new aircraft. When official financing support is provided, the minimum interest rate is allowed to be lowered by a certain percentage, if the state in which the buyer is located has ratified the Convention.

The OECD, which is in charge of regulating officially supported export credits, maintains a list, ‘the Cape Town list’, of countries that have ratified the Convention. If Sweden ratifies the Convention, it may be on the Cape Town List shortly after year-end 2015.