Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions

In this Introductory chapter, the author argues that the “primacy criterion”, which means the priority of the rules of the convention over other national law in case of conflict, has become critical with the Cape Town Convention.

This chapter is the general report on the subject, drawing on the reports on various jurisdictions contributed to the volume. After giving an overview of the Cape Town Convention and its three Protocols (together as “the Cape Town Convention”), the chapter makes a “functional analysis” of what changes the Cape Town Convention has brought, or will bring, to existing domestic laws of the countries. As a uniform law instrument, the Cape Town Convention chooses one rule from among a variety of them where countries’ rules diverge. However, such unification in a traditional sense is rather limited, and the Cape Town Convention in many respects creates a novel set of rules and works as a sort of law reform. Furthermore, the Cape Town Convention, together with its Registry regulations, introduces a mechanism to ensure that the intended goal is achieved. Having reviewed these various aspects of the Cape Town Convention, this chapter concludes by emphasising how innovative the Cape Town Convention is as uniform law instrument.

On April 1, 2013, the Convention and the Protocol entered into force in Canada in Alberta, British Columbia, Manitoba, Nova Scotia, Nunavut, Ontario, Quebec, Saskatchewan, Newfoundland and Labrador and the Northwest Territories. On October 1, 2014, these instruments have become applicable to Prince Edward Island and Yukon. They are applicabled across Canada since July 1^st, 2016, following a new declaration of Canada, this time concerning New Brunswick.

In many ways, the fact that Canada has become party to the Convention and the Protocol did not alter the provincial, territorial or federal law that already existed. In other respects, the entry into force of these instruments in Canada has required legislative changes. The Convention and Protocol have thus been implemented federally and in all provinces and territories, because of the constitutional division of powers and the need to implement international treaties to which Canada is a party.

At the moment of Canada's ratification, Alternative A of Article XI of the Protocol was declared applicable. The federal implementation act that was adopted has been modified before its entry into force to give the force of law in particular to this article and to repeal the amendments made to various federal statutes to that effect, that would have become redundant. Therefore Canada qualifies for favorable financial conditions under Appendix II of the Sector Understanding on Export Credits for Civil Aircraft (ASU).

Canada has not made the declaration that would have allowed him to exclude the application of the Convention for internal operations. The Convention and the Protocol has thus enabled the creation of a single registry for securities in aircraft objects covered by the Convention and the Protocol, which was not the case before. Résumé

Le 1^er avril 2013, la Convention et le Protocole sont entrés en vigueur au Canada en Alberta, en Colombie-Britannique, au Manitoba, en Nouvelle-Écosse, au Nunavut, en Ontario, au Québec, en Saskatchewan, à Terre-Neuve-et-Labrador et aux Territoires du Nord-Ouest. Le 1^er octobre 2014, ces instruments sont devenus applicables à l’île-du-Prince-Edouard et au Yukon. Ils s’appliq uent dans tout le Canada depuis le 1^er juillet 2016, à la suite d’une nouvelle déclaration du Canada concernant cette fois le Nouveau-Brunswick.

À plusieurs égards, le fait pour le Canada de devenir partie à la Convention et au Protocole n’a pas modifié le droit fédéral, provincial ou territorial existant. À d’autres égards, l’entrée en vigueur de ces instruments au Canada a nécessité des modifications législatives. La Convention et le Protocole ont donc fait l’objet de lois de mise en oeuvre au fédéral et dans toutes les provinces et territoires, à cause de la répartition constitutionnelle des pouvoirs et de la nécessité de mettre en oeuvre les traités internationaux auxquels le Canada est partie.

Au moment de sa ratification, le Canada a déclaré applicable la Variante A de l’article XI du Protocole. La loi fédérale de mise en oeuvre qui avait antérieurement été adoptée a été modifiée avant son entrée en vigueur pour donner force de loi notamment à cet article et pour abroger les modifications introduites dans différentes lois fédérales à cet effet et qui auraient alors fait double emploi. Le Canada bénéficie donc de conditions financières favorables en application de l’Appendice II de l’Accord sectoriel sur les Crédits à l’Exportation d’Aéronefs Civils (ASU).

Le Canada n’a pas fait la déclaration qui lui aurait permis d’exclure de l’application de la Convention les opérations internes. La Convention et le Protocole ont donc permis la création d’un registre unique pour les garanties sur les biens aéronautiques couverts par la Convention et le Protocole, ce qui n’était pas le cas jusqu’alors.

This report looks into selected issues of English law on aircraft financing through the prism of the Cape Town Convention. There is no doubt that English law provided a creditor-friendly legal framework even before the implementation of the Cape Town Convention that treasured contractual freedom and facilitated the enforcement of both security and “quasi-security” interests. The report analyses the pre-Cape Town Convention legal framework and examines how it fits into the provisions of the Convention that was recently implemented into English law.

Indonesia ratified the Cape Town Convention 2001 and Aircraft Protocol on 2007 by Presidential Decree No.8 in 2007. Indonesia submitted the declaration when it ratified the convention, namely Opt In, Opt Out and Mandatory Declaration, which stipulate on Article 39 and 40 of the convention. In implementing the convention, Indonesia regulates the international interest of the Cape Town Convention in one Chapter of the Aviation Law No. 1 in 2009 and a number of technical regulations. The Cape Town 2001 not only provides for rules of Aviation or Air Law, but also bankruptcy, Civil Law and Private International Law. Based on that condition, especially to implement Cape Town Convention 2001 completely, Indonesia needs to review a number of laws which are related to Cape Town Convention 2001.

Many of us may board an aeroplane without a second thought on issues relating to financing, sale, lien or mortgage of the aircraft. Why do we even want to know? We need to know this because there are many issues regulating the different parts of the aircraft that we board. Different from principles of public air law found in the Convention on International Civil Aviation signed on 7 December 1944 by 52 States, the present private law Convention on aircraft financing is called the Cape Town Convention on International Interests in Mobile Equipment (also called the Cape Town Convention) and Aircraft Protocol. It was adopted by UNIDROIT on 16 November 2001 and it entered into force on 1 March 2006. The two Conventions do meet at some point in relation to mortgages and financing of aircraft engines and parts. With 59 contracting States, the Cape Town Convention represents a very important private commercial law treaty which sets out the law on security and related interests in aircraft objects. Upon ratifying the Convention, it assists States in the uniform adoption of national laws in this field. Professor Sir Roy Goode’s works in drawing up the Official Commentary on the Convention and Aircraft Protocol are only too well-known.

This article seeks to acccount for the implementation of the Cape Town Convention in Malaysia, and to this end highlights the various laws and regulations that impact upon the area before and after the adoption of the Convention . The paper highlights certain lacunae and uncertainties where applicable, particularly the Questionnaire. Systematically reviewing publicly accessible documents and information shows that in Malaysia, there is some systematisation in the implementation of the Cape Town Convention processes delivering on our legislative obligations to meet the Convention’s objectives.

Already in 2004 I expressed the idea that the Cape Town Convention on International Interests in Mobile Equipment (“Cape Town Convention”) with its first-in-time and object- based computerised notice filing system could be a workable model for a registration system of security interests in Europe and even be a model for a European mortgage registration system regarding immovable property. This was at a moment when it was not clear yet whether this convention would be as global in its success as the drafters had hoped for. In the meantime that hope has become true and it was therefore an excellent choice of the International Academy of Comparative Law to devote one of its sessions to this topic during its XIXth International Congress of Comparative Law in Vienna.

The Russian Federation acceded to the Cape Town Convention in 2010. This chapter describes how the Cape Town Convention has been implemented under the domestic Law of Russia, and compared the implemented rules with the general rules such as in the Civil Code. Through such comparisons, it becomes apparent that the Cape Town Convention has improved the status of secured creditors under the Russian law.

To provide an overview of the domestic legal mechanisms adopted by the Republic of South Africa to implement the Convention on International Interests in Mobile Equipment, the Aircraft Equipment Protocol and the Space Asset Protocol). The legal uncertainty surrounding the implementation of the Cape Town Convention relates to the manner in which certain declarations were made and these have been proven to be inconsistent not only with the Constitution of the Republic, but with Company and insolvency laws as well. These uncertainty has resulted in South Africa being excluded from enjoying the benefits flowing from being a State party to the Convention. Presently, South Africa is excluded from the Cape Town List with resultant commercial exclusion under the OECD arrangement. However, efforts are underway to correct the anomalies and suggestions for reforms have been forwarded to the relevant authorities.

Under Finnish law, vessels, aircraft and certain land-based vehicles can be used as security for credit by way of a mortgage system. The interplay between the statutory framework, financing practice and register authorities has given rise to a somewhat peculiar “system of two promissory notes”, which involves using bearer bonds as a mortgage instrument. As compared to the original idea underlying the statutory framework, this development has added some flexibility. However, remaining rigidities and uncertainties raise questions as to the law’s suitability for contemporary finance. At the same time, the law can be criticised for undue complexity. The need for reform has long been recognised, but proposals presented so far have not resulted in legislation. Any major reform can hardly be expected before Finland decides its position on the Cape Town Convention on International Interests in Mobile Equipment. The option of signing and ratifying the Convention and its Protocols on Aircraft and Railway Rolling Stock is currently under review by the Finnish Ministry of Justice.

The Cape Convention knows a great success with about 60 ratifications from important States or organizations in international business, like Russia, India, United States, Brazil, China and European Union. The main idea governing the instrument is to give the most efficiency to securities or bonds which have an utmost economic importance.

Indeed the Convention provides for the constitution and effects of an international interest in certain categories of mobile equipment and associated rights.

The scope of application of the Convention is defined without any reference to the situation of the material or equipment given in guarantee. The Convention applies if, when at the conclusion of the agreement creating for the international interest, the debtor is located in a contracting State.

The basic framework of the Convention relies on the establishment for registration of an International Registry. A registered interest has priority over any other interest subsequently registered and over an unregistered interest.

The Convention includes also several provisions related to some issues concerning the constitution and the effects of an international interest.

This paper after having presented the Convention and its principal provisions, discusses the differences between substantial French law and the law provided by the Convention. Finally, the paper concludes to the consistency between both systems.

The article highlights some of the core issues in relation to the creation, registration and enforcement of security interests under German law in relation to aircraft, railway rolling stock and other mobile assets. Against this background, the similarities and differences between German law as it stands at present and the legal regime established by the 2001 Cape Town Convention on International Interests in Mobile Equipment and its related equipment-specific protocols become apparent.

The initial idea, when the text of the Cape Town Convention was being prepared, was to create a uniform security interest, following the model of the “security interest” of the article 9 of the USA’s Uniform Commercial Code, assimilating practically the conditional sale agreements and the leasing agreements with the security agreements. This “functional” approach was partly abandoned afterwards, because it was thought that it might find hindrance in the non-common law States.

The subject of this book concerns the (possible) impact on national law of a uniform law instrument developed by an inter-governmental organization, the International Institute for the Unification of Private Law (Unidroit). The International Academy of Comparative Law had already specifically addressed other Unidroit’s instruments in past congresses. The 2014 session from which this volume arose focused in particular on the Cape Town Convention on International Interests on Mobile Equipment and the Protocols thereto (relating to aircraft, railway-rolling stock and space assets).

This chapter describes the Japanese law on security interests in transport vehicles, in particular its creation, registration, enforcement as well as its treatment in the insolvency proceedings. It covers not only the general rules under the Civil Code but also discusses special statutes such as the Aircraft Mortgage Act and Railway Mortgage Act. The Japanese law is unique in that, although Japan is the civil law country, the case law adopts the functional approach and treats title based security as security interest.

There are many methods of securing creditor’s interest in Polish civil law. Authors of this text suggest that a registered pledge is a suitable method most closely resembling security system under the Cape Town Convention. All movable objects may be subjected to the registered pledge, including transport vehicles. It is a limited proprietary right that allows a creditor (pledgee) to satisfy his claim from an object regardless of whose property it has become and with priority over the personal creditors of the owner of the thing, save for those who under the law hold special priority. Contrary to a regular pledge in case of the registered pledge the debtor maintains possession of the object. Instead, a record in a special registry is instituted. As in the Cape Town Convention the creditor who files for registration first entertains priority. There are however broad differences between the system of registration under the Polish law and the convention. Also, concept of security under the Polish law does not reflect a functional approach adopted under the Cape Town Convention. Under the Convention the enforcement methods depend on the type of security chosen by the creditor. In cases of the registered pledge the creditor entertains limited latitude as to ways of enforcing his claims. Priority is given to the judicial enforcement, however other methods are allowed in certain situations which are discussed in the text. Furthermore, Polish insolvency law recognizes the same rule of effectiveness of the security interests as the Convention. Therefore, in case of the security interest in a form of the registered pledge, the creditor has a right to take over ownership or sell the secured asset pending insolvency proceedings. Authors suggest however that some security agreements are ineffective in regard to the bankruptcy estate.

This contribution compares Cape Town Convention on International Interests in Mobile Equipment and Portuguese law, starting from the main features of the Convention: the international interest; the registration system; the enforcement of security interests; and the treatment of security interests under the insolvency procedure.

20.1. Switzerland has signed the Cape Town Convention on international interests in mobile equipment as well as the Aircraft Protocol and the Rail Protocol. However, it has not ratified these instruments (yet) and has not signed the Space Protocol either.

Switzerland keeps an Aircraft Records Register (not to be confounded with the Swiss Aircraft Registry maintained in accordance with Sect. 17 et seq. of the Chicago Convention on international civil aviation, of December 7, 1944) enabling the registering of rights in rem (and of certain personal rights) concerning aircrafts. If an aircraft is registered in this Records Register (which is not compulsory), it may be encumbered by way of filing the security rights in the register (mortgage, transfer of ownership for security purpose and financial lease [including lease-back]).

20.2.3 The Swiss Aircraft Records Register is an asset-based registry. On the other hand, it is not a “notice-based” registry: rights (ownership, security rights, etc.) are filed by a registrar, upon production by the parties of the required documents (contracts, etc.); such filing is necessary to transfer ownership or to create a mortgage; in addition, a specific provision provides for the protection of the acquisition of ownership or of a mortgage relying in good faith in an entry in the Aircraft Records Register.

20.2.4 The rank of aircraft mortgages created by the parties (as opposed to those arising by operation of law) does not depend on the date of filing, but on the rank indicated by the parties upon registration. The parties may thus establish a mortgage in a second (or lower) rank, even though no other mortgage encumbers the aircraft yet, provided the amount taking precedence is specified in the entry; a mortgage may be established subsequently in the first rank and will have priority even though its date is posterior to that of the second-ranked mortgage; this system presents some similarities to that of the prospective international interests provided by Articles 16.1(a), 18.3 and 19.4 of the Cape Town Convention, although the parties are not the same (grantor and secured creditor to be subordinated under Swiss law; [prospective] chargor and [prospective] secured creditor under the Convention).

Likewise, if a mortgage is deleted from the registry, lower-ranked mortgages do not advance in rank and a mortgage may be registered in place of the one that has been deleted.

20.3.3 Under Swiss law, the parties to a security agreement are at liberty to agree on other remedies in the case of an event of default, within the limit of compulsory law.

It is usually accepted that the parties may agree after default that the asset encumbered by a limited right in rem security interest shall vest to the secured creditor in satisfaction of the secured obligation (cf. Article 9.1 of the Cape Town Convention); likewise, the creditor who is entitled to realize the asset by way of private sale may acquire it itself, provided it accounts to the grantor and remits any excess proceeds resulting from such sale. It can be argued that the beneficiary of an aircraft mortgage may be contractually allowed to resort to these two remedies provided no enforcement proceedings have been initiated yet.

The intent of this publication is to address four significant issues that have played a major role in the international aviation finance and lease practice. These matters are covered by the ‘Convention on International Interests in Mobile Equipment’ and the ‘Protocol on Matters specific to Aircraft Equipment’ (Cape Town Convention, 2001). First, the article addresses the existing national secured interests of the lessees (operator-lessees) of aircraft. For example, in the United States, the Kingdom of the Netherlands and other countries the airlines can obtain these important secured rights. Also at the global level an operator-lessee needs adequate protection of its financial interests when the lessor defaults or becomes insolvent. This contribution submits that the national secured interests of operator-lessees are governed by the Cape Town Convention. Secondly, the fundamental problem of the non-consensual rights that can be established in aircraft is discussed. Where certain requirements are met, under the Cape Town Convention the holders of national liens may be protected. These third-party rights have priority over the registered international interests of the financiers, lessors and operator-lessees. Anecdotal evidence corroborates that several (major) stakeholders are not aware of this important fact which may have a grave impact on their own interests. Thirdly, the contribution investigates the legal effects of choosing the applicable law in aviation finance and lease agreements. For instance, continuously it is proposed that the laws of New York and England provide adequate and modern aviation-related property law regimes. This publication contends that worldwide many lawyers do not appreciate that any choice of law clause in an agreement only has a very limited effect. This theory is endorsed by the Cape Town Convention. Fourthly, the negative consequences of the alleged application of the doctrine of accession to aircraft engines finance and lease transactions are reviewed. This controversial theory dictates that under all circumstances the owner of the aircraft becomes the owner of the engine as soon as the latter object is installed in the former. The Cape Town Convention stipulates that engines are separately financed and leased from the aircraft. Finally, some concluding remarks are made.

There are some commonalities between the aviation and rail industries, but there are also important differences deriving both from the divergent domestic rules, and applicable private international law, as well as from the varying characteristics of the equipment being financed. Consequently there are also legal differences between the Aircraft Protocol and the Luxembourg Rail Protocol) and practical differences in the way the two protocols are applied.

Amongst the key legal considerations are the additional options available to a contracting state when weighing creditor and debtor rights on debtor insolvency, the specific, but highly restricted, public service limitation on creditor repossession rights and the treatment of pre-existing interests.

On the practical side, the Luxembourg Rail Protocol has had to deal with the absence of any globally recognised system for determining what constitutes railway rolling stock and its identification as well as the general lack of any national railway rolling stock registries recording ownership or secured creditor rights, searchable against the respective assets.

As a result in most jurisdictions the Luxembourg Rail Protocol will not just be upgrading a system for recording, prioritising and enforcing security interests because in most cases it will actually be creating the system. When in force it will transform the rail industry by fundamentally and irrevocably changing the way railway rolling stock is financed in the coming decades.

Following the adoption of the Unidroit Protocol to the Cape Town Convention on Matters specific to Space Assets, there are still numerous procedural challenges ahead. One such challenge will be finding the necessary number of ratifications to bring the Space Protocol into force. This article discusses how the Space Protocol could be brought into force by courting emerging space actors.