UK ratification of the Cape Town Convention

On 27 July 2015, the UK ratified the Cape Town Convention on Interests in Mobile Equipment, as well as the Aircraft Protocol to the Convention.  The associated Regulations will come into force on 1 November 2015.  The point of this important transnational commercial law treaty (as identified in the Explanatory Memorandum to the Regulations prepared by the Department for Business Innovation and Skills) is to enable the cost of financing aircraft to be reduced in Contracting States, by reducing the creditor's risk of lending.  This is achieved by allowing creditors to be protected by a security interest or a title finance interest which is protected internationally by registration in the International Register in Dublin, and access to a whole raft of default remedies.

Because of the speed with which the value of an aircraft and its engines decreases once it is stationary, the remedies include self-help and judicial relief in advance of final determination, as well as the ability of a creditor to obtain deregistration of an aircraft.  A Contracting State, by implementing the Treaty, undertakes that these remedies will be available to creditors if an aircraft is physically within that State, although States have the ability, when ratifying, to opt out of certain remedies such as self-help.   By doing this, however, they make it difficult or impossible for airlines in that State to benefit from all the reductions in the cost of finance offered by the OECD and the favourable ratings offered for capital market transactions to finance secured by a Cape Town interest.

The Cape Town Convention Academic Project, a joint venture between the Universities of Oxford and Washington, and linked to the Commercial Law Centre through its academic leads, Louise Gullifer and Jeffrey Wool, runs an annual conference on the Cape Town Convention.  This year, the UK ratification was the subject of the opening session, with contributions from Hayley Gowan from the Department of Business, Innovation and Skills, and Robert Ferris from the UK Civil Aviation Authority, and comments from Professor Roy Goode, the patron of the Commercial Law Centre.

One interesting point debated in this session was the relationship between the International Register and the UK Company Charges register.  A charge or mortgage over an aircraft granted by a UK debtor may be registered by the secured creditor in the International Register.  Registration is largely for priority protection: whether or not it is registered, it falls within Article 2 of the Cape Town Convention as an international interest and so the Cape Town remedies are available to the creditor.  It is the choice of the creditor whether to register in the International Register, but if a creditor does not register it is vulnerable to losing priority to another creditor who does register.

Does such a charge or mortgage need to be registered in the Company Charges register under the regime in part 25 of the Companies Act 2006?  

Schedule 5 to the Regulations provides that ‘Section 859A of the Companies Act 2006... is not to apply to a charge which is an international interest’.  One might, therefore, think that the charge described above is not registrable in the Company Charges register.  However, the majority view is that such a charge or mortgage is both an international interest and a domestic security interest, and must be registered under part 25.  It does not seem to me, though, that this is crystal clear on the wording of Schedule 5, which refers to a ‘charge which is an international interest’: the concept of a charge which is both a domestic interest and an international interest (in the absence of express provision in the charge agreement) is not wholly intuitive.  This, however, is a drafting point: the policy requiring registration in the Company Charges Register is to promote transparency, and this is generally to be encouraged.

If the charge is not registered under part 25, this will not affect the availability of the Cape Town remedies, including rights on insolvency, which are effective under regulation 36 if the interest is registered in the International Register.  This is the effect of the provision in Schedule 5, so that the interest is valid as an international interest even if not registered in the Company Charges Register.  However, the majority view is that such a charge would fall foul of section 859H, and would be void against other secured creditors, the liquidator or administrator of the debtor.  This will not be a practical problem in relation to enforcement as the Cape Town remedies and protection will be available. 

But a difficult point was raised at the conference: failure to register under part 25 would mean that, under section 859H, the money secured by the charge immediately becomes payable.  This provision is to provide an incentive on the debtor to grant the creditor a new charge if the charge isn’t registered in time, and therefore to avoid the creditor having to apply for leave to register late.  It does not technically prevent the Cape Town remedies being available, but commercially it would have drastic effect on the transaction, if the creditor were to rely on it.