What does the Cape Town Convention mean for UK Aviation Firms and Finance Companies?

Posted on July 20, 2015

The Cape Town Convention on International Interests in Mobile Equipment (also known as the Cape Town Treaty) comes into effect for the UK in August, 2015. So what does this mean for British aviation firms and financiers in the aviation field?

The Treaty is intended to standardise transactions involving movable property – specifically, rather large moveable property:
• Aircraft and aircraft engines
• Railway equipment
• Space assets

However, only the aircraft protocol (“Protocol to the Convention on International Interests in Mobile Equipment on matters specific to aircraft equipment”) has taken effect, after being ratified by more than 60 countries.

Covered Aircraft and Aviation Equipment
The Aircraft Protocol applies to:
• aircraft able to carry at least eight people or 2750 kilograms of cargo
• aircraft engines with thrust exceeding 1,750 pounds-force or 550 horsepower
• helicopters capable of carrying five or more passengers

Light aircraft, such as those used in general aviation, are not covered by the Convention.

International Standards
The Convention creates international standards for:
• Registration of contracts of sale
• Security interests (liens)
• Leases
• Conditional sales contracts
• Remedies for default in financing (including repossession)
• The effect of local bankruptcy laws

Purpose of the Convention
According to the Draft Guidance from the Department for Business Innovation and Skills:
The aim of the Cape Town Convention is to reduce the cost of raising finance for large, high value mobile assets which routinely cross borders. The Convention provides an over-arching framework for the financing of this type of asset whilst the accompanying protocols address issues raised by financing a specific type of asset.

The Convention is designed to accomplish this goal by giving businesses involved in aircraft financing more confidence in the available remedies if an airline or other aircraft owner defaults on an agreement. This reduction in risk is expected to result in lower financing costs.
The Convention aims to reduce the costs of raising finance by:
• Providing for the creation and registration of an “international interest” (such as a lease or mortgage)
• Making remedies available to creditors if an airline or other aviation business defaults on repayments

Changes in UK Law
The Convention will be implemented into UK law under secondary legislation, leading to major changes affecting aircraft finance and leasing.

The largest impact will be on UK airlines, but banks and lessors that work with the aviation industry will also be affected.

One significant change will be in the area of security interests in aircraft. Currently (before the implementation of the Convention) security interests in aircraft are governed by the Blue Sky decision. Under Blue Sky, lenders wishing to take security over aircraft (and aircraft-related property) under English law have needed to have the assets flown into English airspace. This can obviously be inconvenient, expensive, and environmentally unfriendly.

The Convention will allow the creation of security over aircraft without regard to the physical location of the craft.

For more information…
The full text of the Protocol is available here and the Regulations are here.
Guidance notes for business on the Convention are here.

If you need legal advice in this area, contact us via email.

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