Developments in aviation finance in Australia

by David Hodgkinson, Rebecca Johnston

18 Sep 2014

Australia will adopt the Cape Town Convention, which provides creditors under a security agreement with certain rights in the event of a debtor's default or insolvency.

Australia is set to adopt the Cape Town Convention later this year, which will benefit Australian airlines and provide greater security for creditors in the Australian aviation industry.

The Cape Town Convention comprises the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment.

The Convention is designed to create a global framework to simplify the aircraft registration process and protect the security interests of international financiers of aircraft equipment. It does so by establishing an international registry to record security interests and providing internationally recognised remedies for creditors in the event of default or insolvency.

The Convention entered into force on 1 March 2006.

Application of the Convention

The Convention applies if the debtor/seller of the asset is located in a State that has ratified or acceded to the Convention (Contracting State). The relevant asset must also be located in a Contracting State when the agreement to create or provide for the international interest is finalised. The creditor/buyer does not need to be so situated.

Currently, the Convention has 60 State parties including the United States, New Zealand, China, Singapore, and one Regional Economic Integration Organisation (the European Union). While Australia is not yet a Contracting State, it is in the process of acceding to the Convention (which is expected to occur later this year).

An international registry for mobile assets

The Convention establishes international registration facilities to enable "mobile equipment" from Contracting States to be registered in one place. The International Registry of Mobile Assets is maintained in Ireland by Aviareto Limited under the supervision of the International Civil Aviation Organisation (a UN body).

The International Registry is an online registration system available 24 hours a day. Registrations, searches and certificates are all issued electronically. Any person can search the register, and the results provide prima facie proof of the facts contained therein.

Creditors can register their security interest on the International Registry to ensure priority over unregistered security interests and give notice of the interest to third parties. Once a creditor has properly registered its interest with the International Registry, the interest will be valid and enforceable under the Convention even if that the interest is void under the relevant national law for failure to meet national registration requirements.

Registration may be discharged by written consent or may automatically expire (if an expiry date is provided).

International interests

As applied to aircraft, an international interest in "mobile equipment" includes:

  • airframes certified to transport at least eight persons (including crew) or goods in excess of 2750 kilograms;
  • helicopters certified to transport at least five persons (including crew) or goods in excess of 450 kilograms;
  • jet propulsion aircraft engines with at least 1750 pounds of thrust (or equivalent); and
  • turbine-powered or piston-powered aircraft engines with at least 550 rated take-off horsepower (or equivalent).

As the airframe and engines are considered separately, it is possible for the Cape Town Convention to apply to the airframe but not the engines (or vice versa).

The Convention also applies to railway equipment and space assets by virtue of other protocols to the Convention.

Remedies for default

The Convention provides creditors under a security agreement with certain rights in the event of a debtor's default or insolvency.

The following remedies are available to the creditor (upon obtaining a court order or as agreed by the debtor at any time):

  • take possession or control of the aircraft object;
  • sell or grant a lease of the aircraft object; or
  • collect or receive any income or profits arising from the management or use of the aircraft object.

These remedies are designed to strike a balance between the remedies available in common law jurisdictions (which allow for self-help) and civil law jurisdictions that are somewhat less creditor-friendly (providing few remedies absent a court order).

Subject to any applicable safety laws and regulations, a request for deregistration and export of the aircraft may also be granted in certain circumstances.

However, interim relief (which may include preservation, possession, control or custody, immobilisation and lease or management of the aircraft object and the income derived from it) is only available to the extent that the debtor has at any time agreed to it.

The default and interim remedies are available regardless of registration. For any insolvency-related event, however, protection is only afforded if the interest is registered.

Priority of interests

The remedies available to the debtor will depend on whether the debtor's security interest has priority over any other interested person. Under the Convention, first registered interests take priority over unregistered interests and subsequently registered interests. The priority of interests can be varied by agreement between the parties.

Introducing the Convention to Australia

Australia is yet to accede to the Convention. Federal Parliament has however passed the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (and consequential amendments) which received Royal Assent in June 2013. These legislative rules facilitate Australia’s accession and give effect to the Convention in Australia, in relation to aircraft and aircraft objects.

The Convention will come into force three months after an instrument of accession and a series of declarations have been deposited with the International Institute for the Unification of Private Law. The Department of Infrastructure and Regional Development anticipates that Australia will accede to the Convention later this year.

Benefits for the Australian aviation industry

There are a range of benefits for the Australian aviation industry if Australia becomes a party to the Convention (and makes certain qualifying declarations). These include:

  • Australian airlines may have access to a fee discount (currently set at up to 10%) from export credit agencies in the European Union, United States, Japan, Brazil and Canada for the purchase of aircraft and aircraft objects;
  • Australian airlines may be able to obtain cheaper finance when purchasing aircraft, jet engines or helicopters as a result of reduced creditor risk; and
  • financial institutions may choose to lower their lending rates in light of enhanced creditor security (though for many lenders this option may be considered commercially unviable).

Interaction with the Personal Property Securities Act

The legislative rules do not exclude the operation of the Personal Property Securities Act 2009 (Cth) as it applies to aircraft and aircraft objects. Instead, the Convention will simply prevail to the extent of any inconsistency (unlike in New Zealand, where the personal property securities legislation has effectively been excluded).

Once the Convention comes into effect in Australia, airlines and aviation financiers should register their interests on both the national and international registries. Until such time, security interests in aircraft equipment should continue to be registered under the Personal Property Securities Act.

Statutory liens over aircraft

In terms of priority of interests, the legislative rules provide that a statutory lien against an aircraft in favour of Airservices Australia for unpaid service charges will prevail over any interests that are subsequently registered under the Convention. This approach clarifies the position under the Air Services Act 1995 (Cth) and is consistent with the current personal properties framework.

Civil Aviation Safety Authority functions

The legislative rules also confer power upon the Civil Aviation Safety Authority to record, remove and exercise Irrevocable Deregistration and Export Request Authorisations (IDERAs), as contemplated by the Convention. IDERAs provide additional security to creditors by enabling creditors to deregister an aircraft and prevent it being flown to a jurisdiction where the Convention does not apply.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.