RBG Lawyers / News / September 17,2015

The Australian Government, through the Department of Infrastructure and Regional Development (the Department), has given its clearest indication to date that it is in the process of finalising the necessary legislative and policy based reform to formally accede to the Cape Town Convention.

Between 2013 and 2014, the Department introduced the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) (Cape Town Convention Act), along with legislative rules designed to deal with the registration of irrevocable Deregistration Export Request Authorisations, among other things. The public consultation period closed earlier this year and the final instrument of accession was lodged with the International Institute for the Unification of Private Law (UNIDROIT) on 26 May 2015. The enabling legislation will take effect in Australia on 1 September 2015.

What is the Cape Town Convention and how does it relate to the PPSA?

The Cape Town Convention seeks to internationally recognise and regulate the financing of aircraft through a standardised securities framework regulating secured creditors with interest in, among other things, aircraft that:

  1. provides internationally recognised rights in the event of a debtor’s insolvency or default; and
  2. permits creditors to register their interests in an internationally recognised register to guarantee and secure the priority of their claim against other parties.

By its very nature, the Cape Town Convention creates a tension between its effect and the existing operations of the Personal Property Securities Register (PPSR) created pursuant to the Personal Property Securities Act 2009 (Cth). To ensure interests are properly protected and perfected going forward, it is essential to understand the interaction and overlap between the PPSR and the Cape Town Convention.

The International Interests in Mobile Equipment (Cape Town Convention) (Consequential Amendments) Act 2013 (Cth) amends section 256 of the PPSA to expressly set out that the requirements from the Cape Town Convention Act will prevail over the PPSA to the extent of any inconsistency. A mirroring provision also exists in section 8 of the Cape Town Convention Act reflecting its priority in interpreting any inconsistency.

By comparison, when New Zealand acceded to the Cape Town Convention, it formulated the domestic legislative implementation in such a way as to ‘exclude’ the operation of New Zealand’s Personal Property Securities Act 1999 (NZ) to the extent that the Cape Town Convention applied.

Coverage

The Cape Town Convention, and its associated Aircraft Protocol, only applies to aircraft objects as follows:

  1. airframes that can transport at least eight persons (including crew) or goods in excess of 2,750 kilograms;
  2. helicopters that can transport at least five persons (including crew) or goods in excess of 450 kilograms; and
  3. aircraft engines that have at least 1750lb of thrust.

Accordingly, if an aircraft object does not fall within any of these definitions then it will continue to be governed by the PPSA.

The Cape Town Convention was adopted to create a system for the protection of interests of secured parties under a security agreement, the interest of a conditional seller under a conditional sale agreement (otherwise known as a retention of title agreement) and the interests of a lessor under a leasing agreement.

Tricky Issues – Cape Town Convention vs PPSA

Australia’s adopted course of action to implement the Cape Town Convention creates some potential tricky issues which may require further consideration and possible legislative intervention to avoid uncertainty between the scope and applicability of the PPSA and Cape Town Convention Registers. A brief discussion of some of those issues is set out below:

Subleasing

  1. Lease agreements are often characterised as a security interest under the PPSA as well as under the Cape Town Convention. Because disposal restrictions contained in a lease agreement are unenforceable against third parties the complications caused by a failure to register a security interest are multiplied each time an aircraft is subleased. Secured parties should continue to ensure that interests arising under subleases are registered by each sublessor of the aircraft to minimise the risk of extinguishment rules applying and loss of priority to competing creditors or a subsequent purchaser, even where the party has actual knowledge of the interest.
  2. The Cape Town Convention does not provide for registration of security interests in other forms of personal property that may otherwise be caught by the PPSA. Examples of personal property not registrable under the Cape Town Convention include rights under manufacturer’s warranties, small aircraft, interests in proceeds from subleasing the aircraft and maintenance reserves. It is important that secured parties ensure that all sublessors of the aircraft they have financed or leased register a security interest on the PPS Register in respect of these rights. ‘All present and after acquired property – except’ would be an appropriate collateral class for such a registration.
  3. It is best practice for financiers and lessors of aircraft to include provisions in the security agreement to require any sublessee to provide a deed poll acknowledging that its interest is subordinate to the rights of the financier/lessor.

Engine pooling

  1. It is common for an airline to request that it be permitted to submit its engines to pooling arrangements with its alliance partners. Such pooling arrangements may be considered a PPS Lease on the basis that the pooling arrangement involves a bailment of an indefinite duration. It is recommended that security interests in aircraft engines subject to a pooling arrangement continue to be registered over the bailee by serial number on the PPS Register as the Cape Town Convention may not apply to bailment arrangements in situations where the bailee does not make rental or payments to the bailor.
  2. The exclusion of pooling arrangements from the definition of a PPS Lease pursuant to regulation 1.9 of the PPS Regulations is unlikely to apply to many engine pooling arrangements as the exclusion only applies where the bailed goods are fungible.

Lease signed before MSN allocated

  1. The Cape Town Convention applies to uniquely identifiable aircraft objects. In order for an aircraft object to be uniquely identifiable, the description of an aircraft object recorded on the Cape Town Convention Registers must contain, among other things, the manufacturer’s serial number (MSN).
  2. If an aircraft object has not yet been allocated a MSN the secured parties will have to register a security interest on the PPS Register in respect of the aircraft pending the allocation of the MSN. This is required due to the vesting rules in the PPSA and section 588FL of the Corporations Act 2001 (Cth). As outlined above secured parties should be registering a security interest in the ‘All present and after acquired property – except’ collateral class to cover aircraft parts that are not caught by the Cape Town Convention and such a security interest could also apply to aircraft objects prior to being issued a MSN.
  3. It should be noted that section 166 of the PPSA gives temporary perfection for 5 business days after secured party becomes aware of the MSN to amend its registration to record the correct serial number. However, once the MSN is allocated to the aircraft object it is likely to fall within the scope of the Cape Town Convention and therefore outside of the scope of the PPSA to the extent the Cape Town Convention is inconsistent.

Notwithstanding the issues discussed above, one thing remains certain – further work and thought is required with respect to ensuring a successful and problem free integration of the Cape Town Convention with Australian domestic law.

We are available to discuss the changes with aircraft financiers and lessors to ensure their business are ready for the changes when they come into force on 1 September 2015.

If you have any queries in relation to this article, please contact the writers on (07) 3009 9300.

Scott Hazell & Patrick Spelman

Rodgers Barnes & Green

Brisbane