The Cape Town Convention and Aircraft Protocol
30 September 2018
Sharon Chong provides an overview of the application of the Convention and the Aircraft Protocol in Malaysia.
The Convention on International Interests in Mobile Equipment (“Convention”), commonly referred to as the Cape Town Convention, is an international treaty intended to standardise transactions involving movable property. The Convention creates international standards for registration of contracts of sale, security interests and leases and provides legal remedies for default in financing agreements, including repossession and the effect of bankruptcy/insolvency laws. There are three protocols to the Convention which are specific to three types of movable equipment – aircraft equipment, railway equipment and space assets.
The Convention and its supporting Protocols have five basic objectives:
- to provide for the creation of international interests which will be recognised in all Contracting States;
- to provide the creditor with a range of basic default remedies and a means of obtaining speedy interim relief pending final determination of its claim;
- to establish an electronic international register for the registration of international interests which will give notice to third parties and provide for the order of priority of such interests;
- to ensure that the specific needs of an industry are met through the various Protocols; and
- to give prospective creditors greater confidence when extending credit to borrowers.
On 2 November 2005, Malaysia deposited her instruments of accession to the Convention and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (“Aircraft Protocol”). As such, the Convention and the Aircraft Protocol entered into force as far as Malaysia is concerned on 1 March 2006. The International Interests in Mobile Equipment (Aircraft) Act 2006 (“Act”) which was enacted to implement the Convention and Aircraft Protocol came into force on 19 October 2006.
Based on a visit to the website of the United Nations International Institute for the Unification of Private Law (UNIDROIT) on 23 August 2018, the European Union and 73 Contracting States have become parties to the Convention and the Aircraft Protocol.
APPLICATION OF THE CONVENTION AND AIRCRAFT PROTOCOL
Pursuant to section 2(1) of the Act, the Convention and the Aircraft Protocol have the force of law in Malaysia only in respect of “aircraft objects” which, as defined in the Aircraft Protocol, means “airframes, aircraft engines and helicopters” (each as further defined in the said Protocol).
The Convention applies when, at the time of the conclusion of the agreement creating or providing for an “international interest”, the debtor is situated in a Contracting State. For the purposes of the Convention, the debtor is situated in any Contracting State under the law of which it is incorporated or formed; where it has its registered office or statutory seat; where it has its centre of administration; or where it has its place of business. The creditor is not required to be situated in a Contracting State for the Convention to apply.
WHAT ARE INTERNATIONAL INTERESTS?
An “international interest” means an interest in a uniquely identifiable aircraft object (a) granted by a chargor under a security agreement; (b) vested in a person who is the conditional seller under a title reservation agreement; or (c) vested in a person who is the lessor under a leasing agreement.
International interests must comply with certain formal requirements, including the requirement that the agreement creating or providing for the interest must (a) be in writing; (b) relate to an object of which the chargor, conditional seller or lessor has power to dispose; (c) enable the object to be identified in conformity with the relevant protocol; and (d) in the case of a security agreement, enable the secured obligations to be determined, but without the need to state a sum or maximum sum secured.
WHAT IS THE INTERNATIONAL REGISTRY?
The International Registry of Mobile Assets (“International Registry”) is an electronic registry established under the Convention and the Aircraft Protocol. The International Registry operates 24 hours a day for seven days a week, and provides for the electronic registration and the protection of international interests which are recognised by all Contracting States, with priority being determined on a "first-to-file" basis.
The registration of interest in an aircraft object serves as a notification and is considered to be best practice for owners, creditors, debtors, lessors, lessees, agents and others in protecting their financial interest in such an asset. Searches may be conducted at the International Registry against an aircraft object to determine what registrations have been made and their relative priority.
PRIORITY OF INTERESTS
A registered interest has priority over any other interest subsequently registered and over an unregistered interest. The priority of competing interests or rights may be varied by an agreement between the holders of those interests.
NON-CONSENSUAL RIGHTS OR INTERESTS
Malaysia has declared that the following “non-consensual rights or interests” are to have priority over registered international interests in respect of an aircraft object: (a) liens in favour of airline employees for unpaid wages after a default is declared by the airline under a contract to finance or lease an aircraft object, whether in or outside insolvency proceedings; (b) liens or other rights of a Malaysian authority relating to taxes or other unpaid charges arising from or related to the use of the aircraft object by the owner or operator of the object since the time of default by that owner or operator under a contract to finance or lease that aircraft object; and (c) liens in favour of repairers of an aircraft object in their possession.
The Convention provides for default remedies which are available in respect of registered international interests. The debtor and the creditor may at any time agree in writing as to the events that constitute a default or otherwise give rise to the rights and remedies. If there is no agreement between the parties, “default” means a default which substantially deprives the creditor of what it is entitled to expect under the agreement. The standard default remedies provided by the Convention to a chargee of an aircraft object under a security agreement are to (a) take possession or control of the aircraft object; (b) sell or grant a lease of the aircraft object; and (c) collect or receive any income or profits arising from the management or use of the aircraft object.
Further default remedies available are the de-registration of the aircraft object and the export and physical transfer of the aircraft object from the territory in which it is situated. The Convention requires the registry authority in a Contracting State to honour a request for de-registration and export if the request is properly submitted by the authorised party named in a recorded irrevocable de-registration and export request authorisation (IDERAS). If required by the registry authority, the authorised party must certify that all registered interests ranking in priority to that of the creditor in whose favour the authorisation has been issued have been discharged or that the holders of such interests have consented to the de-registration and export.
Malaysia has declared that any and all remedies available to a creditor under the Convention may be exercised without court action and without leave of the court, unless the Convention expressly provides otherwise.
A creditor who adduces evidence of default by the debtor may, pending final determination of its claim, obtain from a court “speedy relief” in the form of one or more of the following orders as the creditor requests:
(i) preservation of the object and its value;
(ii) possession, control or custody of the aircraft object;
(iii) immobilisation of the aircraft object;
(iv) lease or management of the aircraft object and the income thereof; and
(v) sale and application of proceeds from the aircraft object.
In the context of the above, a “speedy relief” means within 10 working days in respect of the remedies specified in (i), (ii) and (iii) above, and 30 working days in respect of the remedies specified in (iv) and (v) above, from the date of filing of the application for relief.
Further, the court may impose such terms as it considers necessary to protect the debtor or other persons with an interest in the aircraft object.
DISCHARGE OF REGISTRATIONS
Where the obligations secured by a registered security interest or the obligations giving rise to a registered non-consensual right or interest have been discharged, the holder of such interest will be required to discharge the registration of its interest without undue delay after a written demand is issued by the debtor.
In insolvency proceedings against the debtor, an international interest is effective if registered prior to the commencement of the insolvency proceedings. This means that the property interest will be recognised and the creditor will have a claim against the asset for the obligations to be discharged.
Malaysia has declared that Alternative A of Article XI of the Protocol shall apply. Under Alternative A, upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor is required to give possession of the aircraft object to the creditor no later than the earlier of: (a) the end of the waiting period of 40 working days; and (b) the date on which the creditor would ordinarily be entitled to possession of the aircraft object.
However, if by the time specified above, the insolvency administrator or debtor has cured all defaults other than a default constituted by the opening of insolvency proceedings and has agreed to perform all future obligations under the agreement, the insolvency administrator or debtor may retain possession of the aircraft object.
In the meantime, the insolvency administrator or the debtor must preserve the aircraft object and maintain it and its value in accordance with the agreement and the creditor shall be entitled to apply for any other forms of interim relief available under the applicable law.
In the event that the creditor wishes to procure the de-registration of the aircraft and procure the export and physical transfer of the aircraft object, the registry authority and the administrative authorities in a Contracting State shall expeditiously co-operate with and assist the creditor in the exercise of such remedies within five working days after the date on which the creditor notifies such authorities that it is entitled to procure those remedies in accordance with the Convention.
ADVANTAGES TO AIRCRAFT FINANCIERS/LESSORS
The merits of the Convention and the Aircraft Protocol are as follows:
(1) they bring speed, certainty and cost savings to the process of repossession, de-registration and export of aircraft objects on a default by, or an insolvency of, the debtor, particularly where the aircraft object is in a country whose legal system may otherwise not be creditor-friendly.
(2) they protect the creditors’ security interests in aircraft objects by providing for the registration of international interests in such objects through a single web-based International Registry that is accessible 24 hours a day, seven days a week; and
(3) they subject international interests to a simple priority regime whose main principles are that registered interests take priority over unregistered interests and earlier registrations prevail over later registrations and provide flexibility for parties to vary the priority as between themselves by registering subordination arrangements at the International Registry.
It is to be noted that there is at least one known case, namely GAFS-P Labuan Limited v Eaglexpress Air Charter Sdn Bhd (KLHC OS No. WA-24NCC-240-06/2016 (unreported)) where the Malaysian Courts directed the lessee to redeliver possession of an Airbus 330-200 to the lessor who held an international interest in the aircraft object.
In light of the above, aircraft financiers and lessors of aircraft objects should consider subjecting their interests in aircraft objects to the regime established under the Convention and the Aircraft Protocol.