The Cape Town Convention in the UAE

Aircraft financing continues to create a long-term challenge for operators, as securing a financier who is willing to provide liquidity to finance aircraft purchase or lease transaction requires that such financier (whether a bank, financing institution, seller or a lessor) has confidence and certainty, before providing such liquidity, that if his debtor defaults in payment or other performance, the relevant legal regime will respect the financier’s contractual and ownership rights pertinent to the aircraft especially due to the aircraft nature that it is always on the move and has no fixed location, which creates challenges in the context of widely differing national laws.

One of the most important and innovative international conventions in the field of transnational commercial law who furnish solutions for such issues, is the Cape Town Convention and its Aircraft Protocol.

The Cape Town Convention & the Aircraft Protocol both adopted on 16.11.2001, Entered into force on 01.03.2006

Contracting States:

• The Convention: 77 + the European Union
• The Protocol: 73 + the European Union

Objective:

The principal objective of the Convention is to facilitate the efficient financing and leasing of mobile equipment. Such financing will assist in the development of cost-effective modes of transport and space assets utilizing modern technologies. The Convention system is designed to bring significant economic benefits to countries at all stages of economic development, and in particular to developing countries by bringing within their reach commercial finance for mobile equipment that has previously been unavailable or available only at relatively high cost.

Forms of Finance & Benefits:

The financing of aircraft objects takes three principal forms:

• a loan secured by a security interest in the object;
• a sale under an agreement (title reservation, or conditional sale, agreement) in which the seller reserves ownership until payment in full; and
• a lease, which may be either a finance lease or an operating lease and may or may not include an option to purchase.

The huge outlays involved in the financing of objects of the kinds covered by the Convention make it essential for the creditor (the financier, seller or lessor) to be able to have confidence that if the debtor defaults in payment or other performance the relevant legal regime will respect the creditor’s contractual and proprietary rights and provide the creditor with efficient and effective means to enforce those rights, and to secure priority for its international interest against competing claimants.

The International Registry:

At the heart of its system of priorities lies an international registration facility established for the purposes of the Convention and its Aircraft Protocol; the International Registry. It is an asset-based electronic registry, where interests are registered against objects and not persons (debtors), and serves as a public notice system in order to establish priority. I believe the Convention would benefit a lot from replacing the centralized registry with a blockchain-based decentralized system of registration. It would be much cheaper to operate and would be free from errors or omissions caused by the registrar or its officers or employees.

The Situation in the UAE:

The United Arab Emirates declared that it will apply Article (11) of the Aircraft Protocol, Alternative A in its entirety to all types of insolvency proceeding and all other insolvency-related events.

• The implications of this choice

1. Upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor, as applicable, shall give possession of the aircraft object to the creditor no later than the end of the waiting period (60 days in the UAE);
2. The registry authority and the administrative authorities in the UAE shall make available to the creditor the default remedies provisions stipulated in Article (9) of the Protocol no later than five working days after the date on which the creditor notifies such authorities that it is entitled to procure those remedies, which include

Challenges:

• The UAE does not recognize “self-help” remedies; hence, it has declared that any remedies available to the creditor under the Convention which are not expressed under the relevant provision thereof to require application to the court may be exercised only with leave of the court.
• The GCAA has developed a new procedure for the enforcement of IDERA which does not require court approval. Nonetheless, in practice, the GCAA would not execute an IDERA without a court order.

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