Civil Aviation Agency

CAPE TOWN CONVENTION AND INTERNATIONAL GUARANTEES OF CREDITORS OF AIRCRAFTS, AVIATION ENGINES AND HELICOPTERS

The "Convention on International Guarantees of Mobile Equipment Rights" (hereinafter referred to as the "Convention") and the "Protocol on Aircraft Equipment to the Convention on International Guarantees of Mobile Equipment Rights" (hereinafter referred to as the "Protocol") were signed on 16 November 2001 at a diplomatic conference in Cape Town, South Africa, and hence the Convention and Protocol are commonly referred to as the Cape Convention. It was the result of the joint work of the International Institute for the Unification of Private Law (UNIDROIT), the project initiator and the International Civil Aviation Organization (ICAO). The International Air Transport Association (IATA) and the Aviation Working Group (AWG) were also involved.

The Aviation Protocol and the Cape Town Convention for aviation equipment entered into force on 1 March 2006.

On 28 December 2017, Uzbekistan adopted Act No. ЗРУ-453 on the accession of Uzbekistan to the Convention on International Guarantees of Mobile Equipment (Cape Town, 16 November 2001) and to the Protocol on Aviation Equipment to the Convention on International Guarantees of Mobile Equipment (Cape Town, 16 November 2001).

In accordance with article 49 of the Convention and article 28 of the Protocol, for acceding States, the Convention and the Protocol shall enter into force on the first day of the month following the expiration of three months after the date of deposit of their instrument of accession. The International Institute for the Unification of Private Law (UNIDROIT) officially notified the receipt on 31 January 2018 of Uzbekistan 's instrument of accession to the Convention and Protocol. Thus, as of 1 May 2018, the Cape Town Convention and the relevant Protocol to the Convention entered into force in the Republic of Uzbekistan.

References to the application to the leasing contract of the Cape Town Convention with regard to the protection of the rights of the lessor and creditors of the aircraft are now included in the international aircraft leasing agreement concluded between the world 's largest lessor and airlines. For this reason important to the airlines, the leasing companies and banks connected with financing of aircrafts, aviation engines and helicopters to have an idea of the purposes, requirements and general provisions of the Cape Town Convention.

The Convention was adopted to facilitate the financing of expensive mobile equipment, including aircraft, trains and space objects. The Protocol on Aviation Equipment is directly aimed at creating international guarantees and means of protecting the interests of creditors of aviation facilities. The Convention and Protocol are essential in international transactions involving aircraft facilities, such as financial leasing, pre-sale with reserved ownership and enforcement.

The objectives of the Convention and the Protocol are to achieve five main objectives:

• Resolve the creation of an international guarantee recognized by all States parties to the Convention;
• Provide the creditor with various ways to protect its rights when the debtor (usually airlines) fails to perform its obligations under the agreement, including the possibility of deregistration and return of the aircraft;
• Establish an international electronic register of international guarantees that will enable the creditor to ensure the priority of its rights to the aviation facility vis-à-vis other creditors with registered and unregistered property rights;
• Provide specific measures in the Protocol, taking into account the requirements of the aviation industry sector;
• Based on the above measures, to interest creditors of aviation facilities in providing financing and thus reduce the costs of all interested parties in the transaction.

Definition of an aviation object

The Convention and Protocol use the term "aircraft object," understanding below it (a) aircraft glider, (b) aircraft engines, and (c) helicopters. The Convention and Protocol do not apply to aircraft facilities used by military, customs and police services.

A) aircraft airframe

By "aircraft planters" the Protocol refers to aircraft planters which, once fitted with appropriate aircraft engines, are issued with a type certificate by the competent authorities certifying the suitability for carriage of at least 8 persons (including crew) or more than 2,750 kg of cargo. This definition also includes the entire set of installed equipment and parts (except aircraft engines) and documents.

b) aviation engines

By "aircraft engines," the Protocol means jet aircraft engines with a thrust of at least 1,750 pounds and turbine and piston aircraft engines having a nominal take-off power on the shaft of at least 550 horsepower. Increasingly, aviation specialists and analysts in their publications and speeches consider financial leasing and rental of aircraft engines as one of the most profitable and promising directions of aviation business. At the same time, aircraft engines are considered as separate objects, without extending to them the traditional rule that ownership of a larger object extends to smaller objects attached to it. According to the Protocol, "the ownership or other right or warranty of an aircraft engine shall not be affected by its installation on or removal from an aircraft."

c) helicopters

By "helicopters," the Protocol refers to aircraft which are supported in flight mainly by air interaction with one or more load-bearing screws rotated by the power plant about axes approximately vertical, and which are issued with a type certificate by the competent authorities certifying the suitability for carriage of at least 5 persons (including crew) or more than 450 kg of cargo.

 

Concept of International Guarantee (International Interest)

The Convention and the Protocol mean:

(A) the right of the pledge under the agreement on the creation of a property interest. For example, in an aircraft leasing transaction involving bank financing, the bank 's right as a creditor under a loan agreement is secured by a mortgage pledge agreement;

(B) the right of a potential seller under a pre-sale agreement with the reservation of ownership. For example, an aircraft engine seller 's right under an installment payment contract where ownership and property interest in the sold aircraft engine would remain with the seller until the full contract price was received;

(C) the right of the lessee under the leasing contract;

(D) the buyer 's right under the contract of sale.

 

Creation of the international guarantee

In order to establish an international guarantee and apply the Convention and the Protocol to a particular transaction, the following conditions must be met:

(A) the parties must enter into an agreement that is the basis for the creation of the right to be protected, for example, a security agreement, a pre-sale agreement with a reservation of ownership, a leasing agreement or a sales contract;

(B) the subject matter of the agreement shall be the aviation facility as understood above in the section "Definition of the aviation facility";

(C) the aviation object shall be identified by specifying its name, type, manufacturer 's name and manufacturer 's assigned number;

(D) the agreement shall comply with the requirements laid down by the Convention and the Protocol to the procedure for its conclusion (in writing, existence of the seller 's right to dispose of the aircraft object, identification of the object, existence of the property right protected, powers of the signatory of the agreement, etc.);

(E) At the time the agreement is concluded, the debtor (usually the airline) must be in a State party to the Convention and the Protocol;

(F) The aircraft shall be registered in the aircraft register of one of the States Parties to the Convention and the Protocol.

 

International register

In accordance with article 16, paragraph 1, of the Convention, an international registry has been established to register:

• International guarantees, conditional international guarantees and registered non-contractual rights and guarantees;
• Cession and conditional cession of international guarantees;
• Acquisition of international guarantees by subrogation by law or contract in accordance with applicable law;
• Notifications of national safeguards;
• The order of subordination of any of the above-mentioned guarantees.

Under article 41 of the Convention, sales and conditional sales may also be registered in the International Register, which is established for aviation facilities under article III of the Aviation Protocol.

The importance of registration under the international regime imposed by the Convention and the Aviation Protocol is reflected in chapter VIII (Effects of an international guarantee on third parties) of the Convention, and in particular in article 29 (Priority of competing guarantees), paragraph 1 of which provides that "a registered guarantee shall have priority over another guarantee registered at a later date as well as over any unregistered guarantee."

 

Definition of a priority

The registration of international guarantees is directly related to the determination of the priority of the creditor 's claims. A registered international guarantee will take precedence over a later registered or unregistered interest. Since the preparation and legal processing of a transaction is a time-consuming process, the Convention provides for the possibility of registering so-called "conditional international guarantees," i.e. the supposed rights of the creditor that will arise if the transaction is done. The date of registration of such a conditional international guarantee would be the date of registration of the international guarantee itself if the registration of the guarantee was made on time when the conditional guarantee was still valid.

 

Ways to protect creditor 's rights in case of default

Default remedies by the debtor are of great importance to the creditor in assessing the risk of a commercial transaction. The Convention understandably distinguishes between ways to protect the rights of the lien from ways to protect the rights of a potential seller or lessor. Under the Convention, the following means of protecting his rights are available to the lien:

• Take possession of and control over the aviation facility provided to it in order to secure performance of obligations;
• Sell or lease any such facility;
• Collect or receive any income or profits resulting from the management or use of such an aircraft facility;
• To request the court to issue a decision authorizing or ordering the commission of any of the acts mentioned above;
• Obtain ownership of the aviation facility in order to satisfy all or part of the secured obligations.

With regard to pre-sale and leasing, the means of protecting the rights of the potential seller and lessee are: termination of the agreement, return of ownership of and control over the aircraft object and recourse to the court.

The Protocol supplements the above remedies with the following:

• Deregistration of aircraft from the aircraft register of one State and subsequent registration in the aircraft register of another State;
• Removal and physical movement of the aircraft object from the territory in which it is located.

By Cabinet of Ministers Decision No. 194 of 6 March 2019, the Regulation on the Procedure for Issuing a Certificate of Registration of a Civil Aircraft was amended to establish the right of the owner of an aircraft to exclude (deregistrate) an aircraft from the State Register of Civil Aircraft of the Republic of Uzbekistan in accordance with article XIII of the Aviation Protocol.

The protocol in the annex contains the form of irrevocable authority for the deregistration and removal of aircraft (IDERA). Such authorization shall be granted by the debtor to the lessor and/or the lien of the aircraft at the time of conclusion of the transaction. This form corresponds in substance to the power of attorney for deregistration, which is now a widespread document issued by airlines when concluding international aircraft leasing contracts.

The Convention also provides for interim protection measures to enable the creditor, pending a final decision, to obtain immediate protection from the court in the form of one or more of the following orders:

• On preservation of the aviation facility and its cost;
• Transfer of an aviation facility to possession, control or storage;
• Prohibition of changing the location of an aviation facility;
• Transfer of the aviation facility to leasing or management with extraction of income from the specified;
• If at any time such is specifically agreed between the debtor and the creditor, on the sale and use of the proceeds thereof.

How to protect the debtor 's insolvency

The Protocol contains rules designed to protect the creditor in the event of insolvency of the debtor. However, two options are proposed for the choice of each State party to the Convention.

Variant "A" ("hard" version) provides that the insolvency representative or (a) transfers the aviation object to the creditor no later than the earliest of the following dates: The end of the period of delay (established by the Contracting State) or the date from which the creditor would have been entitled to take possession of the aircraft object if the article had not been applied or (b) during that time eliminated all breaches of obligations and agreed to perform all future obligations under the agreement.

Option "B" ("soft" version) provides that the insolvency representative, at the request of the creditor, shall notify the latter, within the period specified in the declaration of the Contracting State, whether (a) it will eliminate all breaches of obligations and whether it agrees to perform all future obligations under the agreement or (b) give the creditor the opportunity to take possession of the aircraft object. If the insolvency representative has not notified the creditor or, having stated that he would allow possession, has not done so, the court may permit the creditor to take possession of the aircraft object under conditions established by the court.

Jurisdiction

The Convention and the Protocol contain the following rules on jurisdiction over claims under the Convention. The courts listed below have jurisdiction over claims:

(A) the court chosen by the parties to the transaction has jurisdiction regardless of whether the chosen court has any connection with the parties or the transaction. Such jurisdiction is exclusive unless otherwise agreed by the parties;

(B) the court of the State Party to the Convention in whose territory the debtor is located;

(C) the court of the State Party to the Convention in whose territory the aviation facility is located;

(D) the court of the State Party to the Convention in whose territory the aircraft is registered;

(E) the court of the state in the territory of which the head office of the registrar is located has exclusive competence in claims against the registrar.

Other questions

The Convention and Protocol address many other issues related to guaranteeing the rights of creditors of aviation facilities. In particular:

• determination of location of the debtor;
• Interpretation of the Convention and applicable law;
• understanding of non-execution of obligations;
• cancellation of registration of a guarantee;
• Legal personality of the Registrar and the Supervisory Authority;
• Cession, requirements for cession and its consequences;
• subrogation;
• Rights having priority without registration; Relationship with other aviation conventions;
• internal transactions;
• Signature, ratification, accession and entry into force of the Convention and the Protocol, etc.

 

Conclusion

The Cape Town Convention and the Protocol on Aviation Equipment represent a significant achievement in international aviation law. Creation of the international guarantee and possibility of its registration in the international register are unique means of protection of creditors and lessors of aircrafts, aviation engines and helicopters. The international regime established by the Conventions and the Protocol is intended to reduce the risk of creditors and, consequently, the cost of credit. This, in turn, makes it possible to increase the possibility of obtaining financing for aviation facilities by companies located in developing countries whose legal system sometimes does not create sufficient confidence among creditors that their rights will be protected.