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The Cape Town Convention Comes Into Force In Singapore
June 2009 | Aviation & Shipping | Multidisciplinary Practices | Aviation & Shipping | Litigation & Arbitration | Litigation Brief
Jeannette LIM
The Cape Town 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 (collectively referred to as the "Cape Town Convention") came into force in Singapore on 1 May 2009.
The Cape Town Convention applies to a transaction involving an aircraft or aircraft engine where three conditions are met:- (1) when the aircraft or aircraft engine meets certain size or power requirements; (2) when the transactional documents create an international interest or prospective international interest in the aircraft or aircraft engine; and (3) when at the time the agreement creating the interest is concluded, the aircraft or aircraft engine is registered in a Contracting State or where the debtor or the owner of the aircraft or aircraft engine is situated in a Contracting State.
Objective of the Cape Town Convention
One of the key objectives of the Cape Town Convention is to solve a longstanding problem of enforcing security interests in aircraft and aircraft engines across borders. The Cape Town Convention achieves this objective by establishing a uniform international legal framework in respect of the creation of security interests, priority rules between competing interests, and the enforcement of security and other forms of interests.
An important feature of the Cape Town Convention is the concept called an "international interest", which includes interests of a chargor under a security agreement, a lessor under a leasing agreement, and a conditional seller under a title reservation agreement. An "international interest" under the Cape Town Convention also includes amendments, assignments, subordinations and subrogations in relation to international interests as defined under the Cape Town Convention. The Protocol to the Cape Town Convention has established an International Registry of Mobile Assets where parties may lodge such international interests. The Registry, located in Ireland, is administered by the International Civil Aviation Organization.
Priority under the Cape Town Convention
| (1) | "First-to-file" priority rule |
| Importantly, under the Cape Town Convention, priority in registered interests is determined on a first-to-file basis. | |
| (2) | An exception to the "first-to-file" priority rule: rights which have priority without registration |
| However, the "first-to-file" priority rule may not necessarily apply to all forms of rights or interests, in particular, non-consensual rights or interest. Examples of non-consensual rights or interests are common law possessory liens (such as repairers' liens and mechanics' liens) and the rights of a party who has obtained a court order giving that party certain enforcement rights in relation to the asset in question.
Under article 39 of the Cape Town Convention, a Contracting State may declare that certain categories of non-consensual rights or interest have priority over a registered international interest. A Contracting State may also declare that certain non-consensual rights and interests are registrable. Many Contracting States have made declarations giving priority to common law liens over an interest registered under the Cape Town Convention. Singapore has declared (among others) that all categories of non-consensual rights or interests which under Singapore law have priority over an interest in an object equivalent to that of the holder of a registered international interest shall have priority over a registered international interest. The practical effect of this rule is crucial to creditors. Even if the Cape Town Convention applies to the situation in question, a non-consensual right or interest (such as a repairer's lien or a party’s enforcement rights under a court order) may be given priority over a registered international interest, notwithstanding the fact that that non-consensual right or interest has not been registered. |
Remedies and enforcement rights
The Cape Town Convention also provides for various enforcement rights and remedies in relation to an aircraft that is located in a Contracting State. Some of these enforcement rights and remedies, which are "self-help" in nature, allow a creditor to (among others) take possession of an aircraft, obtain de-registration of an aircraft, and to collect any income or profits arising from the aircraft.
Significantly, Singapore has declared that all remedies available to a creditor under the Cape Town Convention (and which are not expressed under the Cape Town Convention to require application to the court) may be exercised without court action and without leave of the court. This will greatly facilitate the exercise of self-help remedies by a creditor in the event of default.
Benefits of the Cape Town Convention
The ratification of the Cape Town Convention is significant to the development of Singapore's aircraft leasing and aircraft financing industries. Indeed, Singapore's ratification will greatly encourage aircraft financing as the uniform legal framework under the Cape Town Convention standardises rules in relation to priority and self-help enforcement remedies. Such certainty will give creditors greater confidence and in turn promote lower lending costs and encourage more favourable lending terms.
