Background
It would not surprise anyone that aircraft can be expensive – a large airframe, suitable for most commercial travel, often costs upwards of 100 million Euros with engines generally running at around 20 million and practice showing that for every four engines at least one spare should be purchased. In the past, when most air carriers were state-owned, funding a reasonably-sized air fleet was done through the deployment of vast public funds [1]. However, following the widespread privatization of airlines around Europe and the world, the financing of aircraft, be it leasing, securing interest, or outright purchasing, has become more fraught with difficulty as companies seek to protect their bottom lines. Private airlines, especially low-cost companies, have developed a business model which requires a constant overhaul of their entire fleets in the pursuit of evermore effective performance with many not owning an aircraft older than 10 years [2].
Yet, practically no national market could sustain the constant modernization of air fleets, leading most companies to turn to the international private market not only for the airplanes themselves but also for the financing services required to meet such significant costs. And it is in the vastly different substantive financing and property laws where issues begin to mount – diverging national laws often lead to uncertainty among international creditors whether their interests are going to be protected in cases of default or insolvency. Furthermore, there is an obvious lack of national aviation lex specialis:
“[The] majority of the Member States of the European Union have neither adopted aviation-specific legislation nor general laws covering financial and operational lease agreements. Consequently, the legal systems governing the creation, validity, effects and enforcement of proprietary rights in financed and leased aircraft objects vary between all the countries in which they are operated.” [3]
This leads to economic uncertainty for all interested parties but especially creditors, which results in more difficult securing of aircraft financing and increased costs for such services, eventually borne by the final consumer of air travel.
Introduction to the Cape Town Convention
It was all of those issues that inspired the development of the Cape Town Convention on International Interests in Mobile Equipment [4], originated by the International Institute for the Unification of Private Law (UNIDROIT). In an attempt to combat the economic risks arising out of diverging national rules, UNIDROIT with the help of national experts succeeded in creating a uniform private law instrument to govern transborder financing of valuable mobile assets, equipped with a comprehensive system of international interest registration and rules of enforcement. The present article serves as a general introduction to the Cape Town Convention by providing a short summary of its structure, delineating its main features and examining its applicability in the European Union as a whole and Bulgaria in particular. It is the aim of this article to provide an overview of the benefits that Cape Town Convention ratification will provide for Bulgaria’s future in the aviation field.
Despite UNIDROIT’s initial plan of creating a broad treaty, covering all high-value mobile assets, the universal law instrument soon took its present shape, whereby the Base Convention is supplemented by special protocols, regulating four different asset types – aircraft, rail, space, and mining equipment. The effective implementation of Convention rules requires that the Base Convention be read along with the relevant Protocol [5]. Accordingly, this introductory article focuses on the Cape Town Convention as it relates to the financing of aircraft equipment [6] (Base Convention and Aircraft Protocol). The Base Convention and Aircraft Protocol were the first instruments on mobile assets to be jointly adopted in 2001 and entered into force in 2006 – as of date, they have 82 and 79 Contracting States respectively [7]. Bulgaria has ratified neither, despite the European Union being a party to both as a Regional Economic Integration Organization (REIO), a point expounded below.
EU accession and applicability in Bulgaria
REIO accession is governed by Art. 48, Base Convention and Art. XXVII, Aircraft Protocol, which prescribe that an organization of sovereign states may accede to the Convention and have the rights and obligations of a Contracting State to the extent that the REIO has competence over the matters governed by the treaty. Consequently, the EU acceded to the Cape Town Convention with Council Decision 2009/370/EC [8], which contained declarations outlining its (exclusive) competence in the areas of jurisdiction and enforcement of decisions (governed by the Recast Brussels I Regulation), applicable law to contractual agreements (Rome I Regulation), and insolvency proceedings (Recast Insolvency Regulation).
The EU’s accession served two main purposes: first, to remove legal obstacles before Member States (MS) to individually ratify the Convention and second, to encourage such individual ratification. Regarding the former, EU accession was deemed crucial because MS are barred from creating legislation or entering into agreements which fall under exclusive EU competence. The Convention represents a mixed agreement – one that covers areas falling under MS as well as EU competence, hence a MS’s accession to the Convention would not have been considered valid without EU membership to it. Yet, the most important feature of the Convention – the possibility to register an international interest over an aircraft financing agreement and benefit from the remedies available under a registered interest, falls under MS sovereignty:
“As the Cape Town Convention only applies to Member States of the [EU] to the extent the [EU] has exclusive competence and given the scope of that [EU] competence, international interests under the Cape Town Convention cannot be created by debtors situated anywhere within the [EU] , but only where the debtor is situated, or, in the case of aircraft objects, the aircraft is registered in a Member State that has individually ratified the Cape Town Convention.” [9]
The preceding statement is based on Art. 3, Base Convention, which limits the scope of treaty application to situations where the debtor is situated in a Contracting State or under Art. IV, Aircraft Protocol, where the aircraft is registered in such a state. At this point, the careful reader might point to the fact that a REIO is to be considered a Contracting State, however that is true only regarding its declared competences – in the EU’s case, only in relation to the three aforementioned regulations. In practice, this means that a MS that has not individually ratified the Convention (e.g., Bulgaria), is only required to keep applying those EU rules and the substantive part of the Convention remains inapplicable.
Convention Remedies – An Outline
The fact that Bulgaria is not an individual party to the Convention means that creditors would not be able to take advantage of treaty protections when the debtor is a Bulgarian air operator, complicating the process of developing a financing agreement and increasing costs.
The Convention provides a system of enforcing mechanisms for three types of aircraft financing agreements: security agreements, title reservation agreements, and leases [10]. A security agreement is one whereby the debtor (chargor) grants an interest, including ownership right, over an aircraft object to the creditor (chargee) until a certain obligation is met. This type of agreement could be likened to a mortgage or hypothec in an immovable asset. Title reservation agreements relate to situations whereby following a sale of an aircraft to a debtor, the creditor remains vested with the ownership title until certain agreed conditions are met. Lastly, leasing agreements are defined as ones where the creditor (lessor) grants control over the aircraft to the debtor (lessee) in return of a rental payment regardless of whether there is a purchase option at the end of the agreement period. Leases have become one of the most popular financing contracts in the industry with more than half of the world’s air fleet consisting of leased airplanes [11].
Default
The remedies provided by the Convention in case of default by the debtor differ between security agreements and leasing/title reservation agreements. This demarcation is such because, generally, under a security agreement the owner of the aircraft is the debtor, whereas under a lease or title reservation it is the creditor [12]. Naturally, it is easier for a creditor to take enforcement steps regarding property over which they have an actual ownership right. Nevertheless, the Convention affords the same basic rights to a creditor under the three agreement types in case of default with some additional measures for security agreements: terminating the contract, taking possession of the aircraft, deregistering it and exporting it to a different territory [13]. Additionally, a chargee under a security agreement may sell or lease the aircraft in a commercially reasonable manner, such as public auction or competitive tender, or receive the profits from the aircraft’s operation until the default is cured. The Convention also provides for speedy remedies, similar to interim measures, which ensure the protection of the aircraft’s value and its immobilization until a final court judgement establishing default is delivered [14]. Those remedies might seem rather simplistic and straightforward, but the reality is that they are far from readily available under the national Bulgarian legislation.
For example, the Bulgarian Aircraft Leasing Agreement Ordinance [15] sets up a procedure by which a leasing agreement is to be approved by the Civil Aviation Authority (CAA), complete with airworthiness, maintenance, and other technical requirements for contract approval. However, the law is disconcertingly silent on issues of contract enforcement – in fact, the Aircraft Registration Ordinance [16] prescribes possible aircraft deregistration from Bulgaria only if the airplane is sold or is no longer airworthy. Requiring ownership change for deregistration is outdated and problematic, especially when the creditor is a foreign party entitled to take back possession of their own property and wishing to reregister it in another country.
The Convention and Protocol provide an easy and effective solution, proven in the Contracting States – following the registration of an international interest, the debtor to the agreement simply signs and submits an Irrevocable De-registration and Export Request Authorisation (IDERA) to the relevant CAA, which gives the creditor the right to take back possession of the aircraft in specific circumstances such as continued default [17].
Insolvency
Similarly, in case that insolvency proceedings are commenced against the debtor, the Convention establishes clear-cut, yet practical and effective measures. The treaty provides two remedial options, from which a country can choose upon accession, called Alternative A and B [18]. Alternative A is by far the more popular option as it provides for the protection of the aircraft’s integrity and value while the procedures on insolvency are still ongoing. Alternative B does not provide for such protection and has so far been chosen by only one country – Mexico [19]. Both alternatives provide for aircraft repossession by the creditor if the defaults are not cured or insolvency is declared.
Conclusion
Since their fairly recent entry into force, the Cape Town Convention and Aircraft Protocol have become some of the most successful international private law instruments in the world. In 2019, the International Registry of Mobile Assets, created under the Convention, recorded its 1 millionth registered interest in an aircraft object [20]. Countries in the EU have slowly but progressively been signing and ratifying the treaty seeing its extensive benefits for a growing, barring the presence of an international pandemic, air transport industry. Could Bulgaria create specific national laws, which regulate the financing of aircraft and engines? Theoretically – yes, but by being a Contracting State to the Convention, the country will benefit from the proven track record and experience with the instrument that many creditors around the world have. It will benefit from tried-and-tested remedies and procedures, which increase economic and legal certainty for creditors, leading to more and better financing options, lower costs and ultimately, cheaper shipping and travel.
[1] Honnebier, B. Patrick. “Analysing the Effects of the Cape Town Convention on Four Selected Issues That Hinder the International Financing and Leasing of Aircraft and Engines.” In Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions , pp. 337-361. Cham, Switzerland: Springer, 2017
[2] Statista
[3] Honnebier. “Analysing the Effects of the Cape Town Convention […]”, 2017, p. 339
[4] Text of the Cape Town Convention
[5] Kozuka, S. “Why National Implementation of the Cape Town Convention Matters.” In Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions , pp. 1-8. Cham, Switzerland: Springer, 2017
[6] Text of the Aircraft Protocol
[7] Convention Status
[8] Council Decision 2009/370/EC
[9] Crans, Berend. “The implications of the EU accession to the Cape Town Convention.” Air and Space Law 35, no. 1 (2010), p. 6
[10] Art. 2, Base Convention
[11] Statista
[12] Deschamps, Michel. “The perfection and priority rules of the Cape Town Convention and the Aircraft Protocol A comparative law analysis.” In Cape Town Convention Journal , vol. 2, no. 1 (2013), pp. 53-54
[13] Art. 8-12, Base Convention & Art. IX, Aircraft Protocol
[14] Art. 13, Base Convention & Art. X, Aircraft Protocol
[15] (Only in Bulgarian)
[16] (Only in Bulgarian)
[17] Annex, Aircraft Protocol
[18] Art. XI, Aircraft Protocol
[19] Aviation Working Group. “Practitioners’ Guide to the Cape Town Convention and the Aircraft Protocol” (2015), pp. 126-132
[20] Aviareto