One of the effects of the global financial crisis was that it left participants in the Australian aviation industry searching for costs savings from international finance as a source of credit. With global passenger demand expected to rise by 31 per cent by 2017 and air craft traffic expected to grow 4.6 per cent annually, requiring some 32,600 new passenger and dedicated freighter aircraft at a value of US$4.9 trillion, the need to access international funding sources comes at a critical time for the industry.

In 2001, the Convention on International Interests in Mobile Equipment (Convention) and the associated Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol) (collectively, the Cape Town Convention) were signed. The Cape Town Convention is designed to facilitate aircraft financing by reducing risks and costs associated with financing mobile objects by establishing an ‘international registry’ for creditors to register their security interests and record the priority of those interests.

Recently, Australia became a party to the Cape Town Convention which came into effect on 1 September 2015. Time will tell what impact it will have on the aviation industry in Australia, including whether it results in an increase in the availability of asset-based financing and leasing and a reduction of the associated costs. Insolvency practitioners and aviation financiers need to be fully aware of the practical implications of the changes, particularly with respect to its interaction with the Personal Property Securities Act 2009 (Cth) (PPSA).

The limits of the PPSA in Civil Aviation

Following the collapse of Ansett, the Australian aviation industry and international financiers of mobile objects were left timid with concerns around the existing security framework for creditors. At the heart of financier’s concerns was the inability to protect their interests in mobile equipment (ie equipment designed to travel across jurisdictional borders). Their rights and enforceability protections followed the insolvency of the borrower and were subject to the laws of the particular jurisdiction that the aircraft landed in. Such jurisdictional risks resulted in financiers charging a premium for their products.

The PPSA helped to restore some confidence in the industry by creating a comprehensive yet broad framework to protect security interest in aircraft. Presently, creditors are required to register their interest on the national Personal Property Securities Register (PPSR).

Despite the domestic effectiveness of the Personal Property Securities (PPS) regime, the aviation industry has a number of concerns. Such concerns are reflected in the Explanatory memorandum to the Cape Town Convention Bill which argues that the PPS regime alone ‘cannot adequately support the peculiarities associated with aviation finance law, such as the mobile nature of aircraft assets (which frequently move across jurisdictions), inconsistent regulation and the associated uncertainty around the protections applicable to creditors or aircraft equipment’.

Australia’s accession to the Cape Town Convention

At present, there are 66 States contracted to the Convention and 58 States contracted to the Protocol. The European Union has contracted to both. In June 2013, the International Interest in Mobile Equipment (Cape Town Convention) Act 2013 (the Act) and the International Interests in Mobile Equipment (Cape Town Convention) (Consequential Amendments) Act 2013 (Amendments Act) (collectively, the Acts) received Royal Assent in Australia. The Acts provided the legislative framework for Australia’s accession to the Cape Town Convention and, it was acceded to on 26 May 2015.

The Financial Impact Statement attached to the Bill detailed the benefits believed to flow to the industry from the Cape Town Convention, including that airlines could save in the order of $2.5 million on the purchase of a new Airbus A380 and $330,000 on the purchase of a new ATR-72 aircraft (a short-haul regional airliner). The only negative financial implication noted in the Bill is the $300 cost of voluntarily registering on the International Registry of Mobile Assets, created under the Cape Town Convention.

A significant percentage of the savings is predicted to flow from the ‘Cape Town Convention Discount’ under the Sector Understanding on Export Credits for Civil Aircraft (ASU) developed by the Organisation for Economic Cooperation and Development (OECD), to which Australia is a participant. Aside from ratifying the Convention, if contracting states wish to benefit from airline discounts from Export Credit Agencies, they must make specified ‘qualifying declarations’ as set out in Annexure 1 to the ASU.

In making such declarations, these are some of the more significant implications for Australia:

1. In the event of the borrower’s insolvency, the debtor (or external administrator) must automatically transfer possession of the aircraft object to the creditor after a waiting period of a maximum of 60 days (Alternative A under Article XI of the Protocol). The insolvency administrator (or debtor) is required to preserve the aircraft object and maintain it and its value in accordance with the agreement;
2. Parties to the transaction are able to agree as to which jurisdiction governs their contractual rights and obligations, wholly or in part (Article VIII of the Protocol);
3. The Registry Authority, Civil Aviation Safety Authority (CASA), must record and assist the exercise of a request to register and export an aircraft object by the debtor (Article XIII of the Protocol) (see below);
4. Remedies under the Cape Town Convention that do not require application to a court may be exercised without leave of the court (Article 54(2) of the Convention); and
5. By electing not to adopt Article XXX(2), the provisions of the Cape Town Convention permitting relief pending final determination of claims will not apply in Australia.

The self-help remedies available to creditors under Chapter III and in particular, Article 54(2) of the Convention, are likely to be well received by financiers. The remedies, including repossession, deregistration and export, the sale of or grant of a lease over an asset and the rights to any proceeds derived from a secured asset, must be recognised by Australian courts. Australian courts will not however, have powers to prevent or delay enforcement of these remedies.

The Mobile Equipment Rules 2014

The Australian Parliament has passed the International Interest in Mobile Equipment (Cape Town Convention) Rules 2014 (the Rules) to give effect to the self-help remedies available to creditors under the Convention. The rules confer powers upon CASA in relation to Irrevocable Deregistration and Export Request Authorisations (IDERA), a voluntary security measure whereby an IDERA may be recorded by a registration holder enabling a creditor to deregister an aircraft which, once deregistered, would prevent the aircraft being flown out of a jurisdiction in which the Cape Town Convention applies.

The PPSR and International Registry of Mobile Assets

Registration on the International Registry of Mobile Assets requires creditors to provide Manufacturers Serial Numbers and to record electronically their interest and priority. Priority on the International Registry of Mobile Assets is on a first to register basis.

In Australia, security interests (as defined in the PPSA) in aircraft objects are currently regulated by the PPSA. The Convention is only applicable to certain aircraft objects of particular engine capacity, power and purpose as defined as follows in Chapter 1 of Article 1 of the Protocol:

1. aircraft engines with at least 1,750 lb of thrust;
2. airframes capable of transporting at least 8 persons (including crew) or goods in excess of 2,750 kg; and
3. helicopters that can transport at least 5 persons (including crew) or goods in excess of 450 kg.

Financiers must continue to register on the PPSR the interest in all aircraft objects that do not meet the above criteria. It would be prudent for financiers to continue to register on the PPSR even where the Convention applies.

A security interest in an aircraft asset registered with the International Registry of Mobile Assets will have priority over a registration on the PPSR, even if that registration was registered on the PPSR first. Additionally, Article 39(1)(a) of the Convention mandates that any inconsistency that may arise between the two registration regimes will see the Cape Town Convention regime prevail.

These changes are recognised in the Amendments Act, which amends s 256 of the PPSA. The Amendments Act also amends the Air Services Act 1995 (Cth) to make clear that a statutory lien over an aircraft in favour of Airservices Australia under s 59 of that Act for unpaid service charges will prevail over a subsequent registered interest in that aircraft under the Cape Town Convention.

Practical Implications

The mobile and depreciative nature of aircraft assets provide strong reasons to ensure assets can be repossessed in the event of insolvency. It will be interesting to see what impact these changes have for the industry now that the Cape Town Convention has come into effect.

Meanwhile, the following are but a few points that should be kept in mind:

1. Borrowers and financiers must ensure they are compliant with these changes and update their documentation sooner rather than later;
2. Given that the PPS regime secures proceeds of sale, registration should be considered on both the PPSR and the International Registry of Mobile Assets to provide the greatest security;
3. Registration checks will now need to be made with respect to both the PPSR and the International Registry of Mobile Assets; and
4. Insolvency practitioners must be mindful of their obligations under the Cape Town Convention, particularly the requirement to preserve aircraft objects and their value during the period of preservation under Article XI of the Protocol.

This article was first published in the Law Society Journal, November 2015 and is reproduced with permission.