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Brief Counsel

Cape Town Convention makes skies safer for bankers

19 January 2011

​Lenders on certain aircraft and aircraft equipment now have the protection of a specialist international registry after legislation was passed last year to bring the Cape Town Convention and Protocol into effect in New Zealand.

The convention, which also provides for remedies if a debtor defaults, is intended to reduce the risk to financiers and therefore to reduce the cost of aircraft funding.

The Cape Town Convention

The Convention on International Interests in Mobile Equipment and the associated Protocol on International Interests in Mobile Equipment Specific to Aircraft Equipment was adopted at a conference in Cape Town and is restricted to:

  • airframes which can carry at least 8 people or goods in excess of 2750kg
  • helicopters which can carry at least 5 people or goods in excess of 450kg, and 
  • engines of over a certain size.

It was brought into force in New Zealand on 1 November 2010 via the Civil Aviation (Cape Town Convention and Other Matters) Amendment Act 2010. This Act also amended a number of other New Zealand Acts including: the Companies Act 1993, the Property Law Act 2007, the Insolvency Act 2006, the Receiverships Act 1993 and the Personal Property Securities Act 1999 (PPSA)).

Priority of security over smaller aircraft and engines will continue to be governed in New Zealand by the PPSA.

Registration

The International Registry, which is physically operated in Dublin, gives financiers greater certainty of priority and title than when different jurisdictions had their own separate registers.  It is available online and electronically.

A security interest registered on the International Registry will take precedence over all other interests in a property that are registered later in time or not registered at all.  The owner/lessee and the financier must both be registered as users of the International Registry and must both consent to the initial registration and to any subsequent variations.

Previously security interests in New Zealand aircraft and other mobile equipment were registered solely on the Personal Property Securities Register (PPSR).  The PPSA is now subject to the Cape Town Convention, so registration on the PPSR will be subordinate to registration on the International Registry.  Nevertheless, we would imagine that most financiers will wish to register financing statements on both registers to ensure that third parties searching the PPSR will be on notice of the existence of the security interest.

It is important to note that the recording of a security interest on the International Registry affects only priorities of security interests in the relevant aircraft or other equipment.  The intrinsic validity or enforceability of the security interest will be governed by the laws applicable to the security document.  This is also the position under the PPSA in relation to personal property.

Even if a security interest has a registration under the PPSA, the priorities of the parties will be governed by the time of registration on the International Registry.  If there is no international registration then the PPSA priority rules would apply.

As the Cape Town Convention does not apply retrospectively, security interests granted prior to 1 November 2010 will continue to be governed by the PPSA and are not capable of being registered on the International Registry.

Enforcement

The Cape Town Convention sets out standard remedies a financier may exercise if the debtor defaults.  These include taking possession or control of the property charged, selling or granting a lease of the property, and collecting or receiving any income or profits arising from the management or use of such property.  All these powers must be exercised in a “commercially reasonable manner”.  The Protocol enables creditors to have the aircraft de-registered and exported to another jurisdiction. 

Conclusion

The adoption of the Cape Town Convention is on balance a positive move for aircraft financiers and borrowers in New Zealand. 

Although the International Registry is less user-friendly than the PPSR, and registration costs will be higher than under the PPSA, we consider that the benefit of certainty should outweigh these considerations.

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