MARCH 2016 C A P E T O W N C O N V E N T I O N N O W L A W I N A U S T R A L I A - 6 M O N T H S O N The International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth), brought the Cape Town Convention into effect in Australia from 1 September 2015. Compliance with the requirements of the Cape Town Convention is essential to ensure you have a valid interest in or title to an aircraft or engine to which the Convention applies. This Newsflash is intended to give a practical outline of how the Cape Town Convention works in Australia and what parties that use or have interests in aircraft or engines need to be doing. We do not in this Newsflash try to cover insolvency and enforcement rights under the Cape Town Convention. The Cape Town Convention applies in parallel with the Australian Personal Properties Securities Register and this Newsflash will also outline in general terms how the two registers co-exist. The International Registry Pursuant to the Cape Town Convention, certain interests in aircraft and engines must now be registered on the International Registry of Mobile Assets. Failure to register those interests will render them invalid. The International Registry is publically accessible online and is available 24 hours a day, 365 days a year at https://www.internationalregistry.aero/ir-web/. When does the Cape Town Convention Apply? In order to determine the application of the Cape Town Convention, the following questions must be answered: 1. Location of the Asset and the Parties The Cape Town Convention applies when a party (a debtor or seller) concludes an agreement to grant an interest in aircraft assets to which the Convention applies and that party and the aircraft asset are both situated in Australia (or another Convention Country). 2. Do the specific aircraft assets constitute aircraft objects pursuant to the Cape Town Convention? The Cape Town Convention applies to aircraft engines, airframes and helicopters as defined in the Cape Town Convention as follows: Aircraft Engine: means aircraft engines that have at least 1750lb of thrust (for jet propulsion) or have at least 550 rated take-off shaft horsepower (for turbine or piston engines).
Airframe: means fixed wing aircraft type certified with a carrying capacity of more than 8 persons (including crew) or goods in excess of 2,750kg. Helicopter: means helicopters type certified with a carrying capacity of more than 5 persons (including crew) or goods in excess of 450kg. Each aircraft object must fall under these strict criteria and it is important to note that propellers, spares and intangibles (such as rights under insurances) are not separately registerable on the International Registry but would instead need to be registered on the Personal Property Securities Register. Aircraft engines (other than helicopter engines) are treated as distinct aircraft objects separate from the airframes. As such, interests in aircraft engines shall not be affected by their installation or removal on an airframe. Helicopter engines, on the other hand, will only constitute an aircraft object when not installed on a helicopter. Consideration needs to be given to whether an airframe or aircraft engine qualifies as an aircraft object. Below is a table which sets out some examples of qualifying and non-qualifying aircraft objects. Qualifying Aircraft Engines and Airframes Cessna Citation 500 series and above (for serial numbers 500-027 and above) King Air B90/200/300 Cessna Caravan 208 Non-Qualifying Aircraft Engines and Airframes Cessna Mustang 6 POB and engines have 1460lb of thrust Qualifying Aircraft Engines or Airframes (not both) Cessna 402 airframe but not engines (Continental TSIO-520- VB - 325 rated take-off shaft horsepower) 3. Does the transaction create an interest covered by the Cape Town Convention? An international interest is determined by reference to the Cape Town Convention and not pursuant to national law. For the purposes of the Cape Town Convention, the following will constitute an international interest : An interest granted by the chargor under a security agreement, covering for instance, finance of an aircraft. An interest vested in a conditional seller under a sale agreement by which title is reserved. An interest vested in a lessor under a leasing agreement. While a contract of sale is not included in the definition of a security interest for the purposes of the Cape
Town Convention, certain provisions of the Cape Town Convention have been extended to outright sales so that buyers can register their interests in qualifying aircraft objects on the International Registry. It is important to note that a contract of sale must immediately effect the sale of the aircraft object, for instance a bill of sale. The registration of aircraft sales on the International Registry should allow a party to search for title transfers throughout the course of an aircraft s life. In addition, prospective international interests which are interests that come into effect at a future time, such as a letter of intent to purchase a specified aircraft, may be registered on the International Registry whether or not the occurrence of the event is certain. The initially registered prospective international interest will become an international interest if the stated event occurs and will be treated as having been registered from the time of registration of the prospective international interest. An agreement to sell although not constituting a contract of sale pursuant to the Convention, may be registered as a prospective international interest on the International Registry. 4. Other considerations? In addition, certain formalities must be met by the agreement creating the international interest in order for the Cape Town Convention to apply: It must be in writing. It must describe aircraft object by manufacturer serial number, manufacturer and generic model. The chargor / conditional seller / lessor /seller must have power to dispose of such aircraft object. Where there is a security agreement, this must enable the secured obligations to be determined (though does not need to state a sum secured). Priority on the International Registry The key rule is that a registered interest has priority over all other subsequently registered interests and over unregistered interests. Where two or more interests arise in relation to an aircraft object, priority is determined on a first to file basis. As purchasers of aircraft objects take their interests subject to all interests that are registered on the International Registry in those aircraft objects, it is essential to undertake searches on the International Registry and act accordingly to ensure your interests take priority. We have provided some practical actions and considerations later in this paper. Interaction with the Personal Property Securities Act 2009 (Cth) (PPSA) The Cape Town Convention prevails over all national laws (including the PPSA) to the extent that there is an inconsistency and so the Cape Town Convention effectively creates a dual system of registration. This is in contrast to the position in New Zealand where the New Zealand Personal Property Securities
Act is excluded where the Cape Town Convention applies. A security interest in an aircraft object registered on the International Registry will take priority over a security interest that has been registered on the Personal Property Securities Register (PPSR), even if the security registration was registered on the PPSR first. Registration on the International Registry is therefore critical. With regard to pre-existing rights registered on the PPSR, the Cape Town Convention preserves priority of interests prior to the 1 st September 2015, in or on an aircraft object without the need for registration on the International Registry. Practical considerations What do you need to do? Aircraft object searches: As soon as reasonably practicable, parties should conduct searches on the International Registry to ascertain whether any undisclosed registrations have been made against their aircraft objects. Pre-dealing due diligence: Parties should conduct searches on the International Registry at the commencement of dealing to ascertain the position of the aircraft object on the International Registry and what will need to be done to ensure your rights take priority. Pre-closing priority searches: In order to obtain clear title to an aircraft object in a given transaction to which the Cape Town Convention applies, it is critical that pre-closing priority searches be conducted on the relevant aircraft objects. Are objects uploaded to the International Registry? The aircraft objects must be recorded on the International Registry prior to any international interests or sales being registered. Registration of User Entities on the International Registry: All relevant parties must apply to establish an account with the International Registry (which will commonly be as a Transacting User Entity and an individual must be appointed as an administrator) as each party must either initiate a registration or consent to a registration. The establishment of user entities (either a Transacting User Entity or authorising a Professional User Entity which can be a law firm making the registrations on a party s behalf) can take up to a few days to process and so should be considered ahead of the closing of a transaction. Norton White is able to assist in the registration of interests on the IR. User Entities Active? Users must review their accounts annually and must check in good time ahead of the closing of a transaction whether their account is active. Agreed order of registrations? Given that priority arises on a first to file basis the order of filing of registrations is extremely important. Registration of Prospective Interests: Consideration should be given when negotiating acquisitions to the right to register your interests pursuant to a Letter of Intent or a Sale Agreement. However, certain manufacturers refuse to allow registration of prospective interests in connection with new aircraft acquisitions.
PPSR registrations? Remember that there may be some items, such as small aircraft, propellers, security deposits etc. that will not qualify for the International Registry and will need to be registered on the PPSR. We recommend that parties continue to register their security interests on the PPSR even in registrations are made on the International Registry. If in doubt register! If you have any questions or comments about the matters raised in this newsflash please do not hesitate to contact us: Mark Mackrell Ben Martin Laura Evans T: +61 2 9230 9415 T: +61 2 9230 9435 T: +61 2 9230 9420 E:mark.mackrell@nortonwhite.com E:ben.martin@nortonwhite.com E: laura.evans@nortonwhite.com Level 4, 66 Hunter Street, Sydney NSW 2000 phone +61 2 9230 9400 web www.nortonwhite.com