One of the biggest changes in aircraft finance in the last few years has been the coming into effect of the Cape Town Convention in November 2001 and the subsequent adoption of the Convention by 52 states around the world. The widespread adoption has been assisted by US Exim, a main source of new aircraft finance, offering a reduction of up to a third on the financing costs it charges to airlines in countries which adopt and implement the treaty.

A primary effect is to provide a public register of airframes, helicopters and aircraft engines bought or financed in Contracting States – and that seems to work well. The ability to search before a purchase or a financing and discover the registry history is a useful due diligence. For registered assets priority between competing interests is also governed by the registry so again a simple search will reveal the relative rankings of, for instance, two secured creditors.

The Convention, however, went further. It provided certain options to introduce or confirm within the domestic law of the Contracting State certain remedies on default and insolvency. Where reduced Exim fees are a motivation for adoption, the Contracting State is required to opt for these additional remedies.

The idea was to create certainty on creditor’s rights in an enforcement situation based predominantly on the rights one might expect under US law. This includes introduction of "self-help" remedies on enforcement of leases and mortgages – provisions designed to give a creditor a certain timeframe to work with. For example, Chapter 11-style "waiting period" on insolvency, after which the insolvency official must either have adopted an existing lease arrangement and perform under it or rejected it. Generally these rights are rare outside common law countries.

The difficulty which is emerging is that some countries have made the correct elections when adopting the Convention as a matter of international law without following through in their domestic law so that either the Treaty is inconsistent with domestic law or the domestic law is simply silent leaving uncertainty.

By way of example one wealthy Middle East state has adopted the required parts of the Convention in theory but has not made any change to domestic law.

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Some of the concepts are very different to actual practice in the local courts. Advice from local counsel is that there is a very strong likelihood that a local court will, in the absence of new guiding legislation, simply decide any case before it on the basis of local law, ignoring the treaty.

Particularly in the US there is a belief that the Convention being adopted in a country is a panacea and provides a US-like creditor environment. Unfortunately the reality is currently different and it is still necessary to do proper country due diligence on a new deal. US Exim is heavily invested in the aircraft sector so it is reasonable to expect the position will gradually improve but right now all that glisters is not gold.

Keith Wilson is a partner with Berwin Leighton Paisner’s asset finance department