Following a public consultation during the latter half of 2010, on December 6, 2013 the U.K. Department for Business Innovation & Skills published its response to a call for evidence on the proposed ratification by the U.K. of the 2001 Convention on International Interests in Mobile Equipment and the associated Protocol on Matters Specific to Aircraft Equipment (together, “the Convention”).
The Convention creates an international legal framework for the enforcement and registration of security interests over aircraft airframes, aircraft engines and helicopters. Unlike national aircraft registers, which exist primarily to record and assist in the regulation of operators of aircraft in the local state, the international registry created by the Convention exists primarily to record creditors’ and lessors’ interests in aircraft (regardless of where they may be registered nationally). In this respect the international registry mirrors very closely the national filing system throughout the United States for the perfection of security interests over personal property, which attach pursuant to Article 9 of the Uniform Commercial Code.
One significant advantage offered by the Convention is the uniform set of remedies available to the lessor or creditor following a default by the lessee/debtor, including a power of sale, repossession, (national) de-registration and export. In addition, the Convention seeks to create uniformity and certainty with respect to national insolvency regimes insofar as they hamper the ability of a lessor or secured creditor to exercise its remedies over an aircraft in the possession of an insolvent debtor/lessee. Accordingly, the exercise of the remedies provided for by the Convention in a contracting state reduces risk for aircraft lessors, financiers and investors, thereby encouraging investment in the industry by lowering financing costs.
To date, approximately forty countries have ratified the Convention, including China, Russia, India and the United States, as well as many countries in the Middle-East. Within the European Union, only Ireland and Luxembourg have ratified it (Ireland also hosts the international registry).
The U.K. Government’s response was largely positive and it has decided to proceed with implementation of the Convention into local law, subject to further consultation on the implementation process. The U.K. Government notes at page three of its response that the “majority of respondents to the call for evidence were in favor of the UK ratifying the Convention . . . as it relates to aircraft equipment . . . , and supported ratification as soon as possible.” However, it has not offered a timeline for implementation into local law although following publication of its response, it should occur relatively quickly, absent any protracted arguments by industry stakeholders (see further below).
A perhaps surprising advocate of ratification is UNITE, the U.K.’s largest trade union representing some workers in the aviation industry. UNITE submitted an insightful response to the U.K. Government consultation and noted that: “[t]he Convention . . . creates a regime which has the effect of mitigating, to a very great extent, the [complexity, predictability, availability and cost of aircraft financing] …; whilst having no corresponding disadvantages. Given the potential benefits, Unite members are very firmly in favour of prompt UK ratification.”
The U.K. Government has also identified in particular that, by virtue of the provisions in the Convention relating to insolvency, ratification may improve access to the U.S. capital markets for U.K. airlines, through the potential increased availability of enhanced equipment trust certificates or “EETCs.” This is an attractive option for airlines while commercial debt from corporate investment banks continues to be relatively scarce and expensive. Common in the United States, an EETC is a special type of asset-backed note issued by an airline in order to raise finance in the capital markets. The note grants the noteholder a beneficial interest in a trust comprising aircraft collateral put up by the airline-debtor. In addition, a scheme is put in place with a third party credit-worthy guarantor whereby, in the event of a default by the airline leading to insolvency, the payment stream to noteholders is guaranteed for a fixed period, allowing the trustee holding the collateral sufficient time to enforce its remedies over the aircraft and realize the proceeds to noteholders.
However, the route to ratification and implementation by the U.K. Government of the Convention into local law will not be without potential issues. The U.K. equivalent of the F.A.A., the Civil Aviation Authority, is currently empowered to detain and sell any aircraft operated by an airline who has not paid when due its European navigation and other related charges (called “Eurocontrol” charges), regardless of whether the airline itself owns the aircraft. This regime operates by granting the C.A.A. a preferential lien over such aircraft, ahead of any security interests granted in favor of financiers. Given the Convention has potential to cut across these preferential liens, lengthy negotiations may ensue during further consultation.
Additionally, attendant legislation may be needed to modify existing U.K. insolvency laws, and the U.K. Government will also need to ensure that implementation does not put the U.K. in breach of its obligations under E.U. law (although Ireland and Luxembourg, as sister E.U. member-states, have both overcome this hurdle). A further concern for the U.K. Government will be the impact its ratification and implementation will have on its dependent territories, such as the Cayman Islands, a popular jurisdiction in aviation finance structures. It will also need to continue to consult with the devolved governments of Scotland and Northern Ireland, who have been delegated limited legislative competence in respect of some aviation matters. The U.K. Government will be particularly alive to this sensitivity in light of the upcoming referendum for complete Scottish independence from the U.K. to be held later this year.
Whatever the time-line for ratification and implementation, the mood is now nevertheless much more positive and encouraging and the response by the U.K. Government will likely be accompanied by a corresponding increase in confidence not just in the U.K. aviation industry but it will contribute to a more general boost to the U.K. economy as a whole.
Dominic Pearson is an attorney (solicitor) admitted to practice in England and Wales. Before beginning his LL.M. degree at Berkeley, he practiced for a number of years in the area of aviation finance and leasing at two major law firms in London.