Kobe University Summer Schoolof Asian Law and Dispute Management 2014	

Aircraft Financing Under Schemeof the Cape Town Convention
August 19, 2014

Ikumi SATO
Assistant Professor, Kyoto Sangyo University	

1

Table of Contents
3. Leveraged Lease
4. Geneva Convention 1948
5. Problem of the Geneva Convention 1:
Limit of Conflict of Laws Resolution
6. Problem of the Geneva Convention 2:
Inefficient Domestic Registration
System

15. Jurisdiction: Choice of Forum (Art.
42)
16. Jurisdiction on the Relief Pending
Final Determination (Art.43)
17. Jurisdiction to Make Orders Against
the Registrar (Art.44)

7. Cape Town Convention and AircraftProtocol8. Intl Interest and Intl Registry
9. Registration
10. Connecting Factor
11. Interests Registrable in the IntlRegistry
12. Sale
13. Assignment of Intl Interests
14. Protection of the Whole Transaction	

19. Conclusion

18. Discount and Compliance	

21

Leveraged Lease	＊Based mainly on Roy Goode, Commercial Law (2010) p. 779.	

Supplier(Manufacturer)

Lender(Bank)	

Non-recourse
loan
Assignment 	

Sale	

Security

Mortgage	Lessor(Leasing co)	Lease	

Ownership

Lessee(Airline)	
Possession
3Geneva Convention 1948	
Data
Requirements of recognition (Art.1(1))
Such rightsl Name: Convention on the International(i) have been constituted in accordance
Recognition of Rights in Aircraftwith the law of the contracting state inl Drafting agency: ICAO
which the aircraft was registered as tol Adoption: 1948
nationality, andl Parties: 89(ii) are recorded in a public record of that
Objective: Construction of international
state.
recognition framework of rights
Sphere of application (Art.11(1)): In eachconcerning aircraft
contracting state, the Convention isKinds of right to be recognized (Art.
applied to all aircraft registered as to1(1))
nationality in another contracting state.
(a) Rights of property in aircraft(b) Rights to acquire aircraft by purchaseState A	State B	
coupled with possession of the aircraft(c) Rights to possession of aircraft underleases of six months or moreState X	(d) Mortgages, hypotheques and similar
rights in aircraft
represents a contracting state, and	represents a non contracting state.	
represents that the country is governed by the Convention.	

42

Problem of the Geneva Convention 1- Limit of Conflict of Laws Resolution	
(1) Research costs on foreign law
In a normal situation that aircraft has
the nationality of country whereairline is located, that costs
inevitably occur.
(2) Mosaic of governing laws
The Convention doesn’t prescribe forassignment of secured obligationand treatment in the case ofinsolvency.
→ It must expand research into otherthan the law of aircraft’snationality.

(3) Blank zone of applicationl In the country of aircraft’snationality (≒ airline locatedcountry), the Convention doesn’tapply.
→ Any care is not paid to therecovery of aircraft in that country.
⇩l In practice, in order to cope withthe country risk of the country,
export credit guarantee or aircraft
repossession insurance have beenused.
→ Airlines located in developing
countries must bear the high risk
premiums. It has prevented
5efficient transactions.	

Problem of the Geneva Convention 2- Inefficient Domestic Registration System(1) Registration system of chattel mortgage in past Perul Registrar’s staffs had authority to review applications of registrationand to permit third parties to browse the data of registry.
→ It interfered with smooth registration and browse.
l As to browse, even a person who received a permission was notfree to browse all data.
→ Understanding priority exactly was difficult.
l Possible corruptions(2) Registration system of aircraft in JapanAs registration fee is 3/1000 of secured loan, the majority of aircraft
mortgage effectively constituted are not registered.
⇩Registration systems are often useless.
63Cape Town Convention and Aircraft Protocol	
Datal Name
◉Convention on International Interests
in Mobile Equipment◉Protocol to the Convention onInternational Interests in Mobile
Equipment on Matters Specific toAircraft Equipmentl Drafting agency: UNIDROITl Adoption: 2001l Parties： Convention 60; Protocol 54
Objectivel Facilitating asset-based financing
and leasing of high-value mobile
equipment in an efficient mannerl The Convention establishes aninternational legal regimen of security
interests in relation to transactions
involving that equipment.

Targetl Equipment: (a) aircraft (airframe, engine,and helicopter), (b) railway rolling stock,and (c) space assetl Transaction: (a) secured loans, (b) title
reservation, and (c) lease
Structurel Dual instruments structure (see below)l System of Declarations
AircraftProtocol	Framework
Convention	

Railway rollingstock Protocol	

General provisions	Space asset
ProtocolParticular provisions	7Intl Interest and Intl Registry
International Interest= Original right representing collateralinterest for creditor (chargee,conditional seller, lessor)l Formal requirements of theconstitution→ Art.7l Perfection→ Registration in theInternational Registry (Art.29)	

Photo： Sato	International Registry
Datal Name: International Registry ofMobile Assetsl Operating body: Aviareto (joint
venture company of the Irish
Government and SITA)l Location: Dublin
Featurel The system is fully electronic.
l The data base is made up asset byasset. Access for registration isstrictly controlled. Search service
is available to everyone throughonline-issued ”Priority Search
Certificate" ($35).
84

Registration
Leasingco※ Based on Aviation Working Group, Advanced Contract andOpinion Practices Under the Cape Town Convention (2008) p.21.

TUE

Law farm A

PUE(Agent ofleasing co)(Principal)①Input＋Pay

Intl Registry②Transmission
Airline(Principal)③ConsentTUE

Arisingpriority

Law farm B

PUE(Agent ofairline)

Role of registrar’s staff: He/She verifies that(i) entity exists and its contact details are accurate,(ii) administrator and back up contact are contacted at email addresses andphone numbers, and(iii) a certificate nominates the administrator to act on behalf of the entity.
⇒ Staffs do (can) not interfere in registration.

9Connecting Factor	
The Convention applies
1. when, at the time of theconclusion of the agreement
creating the Intl Interest, thedebtor is situated in acontracting state （Art.3）,
2. in relation to a helicopter orairframe, when it has
nationality of a contracting
state （Art.IV）, or
3. in the case of sale, when theseller is situated in acontracting state （Art.III）.

C2
C1
Intl Interest
Intl Interest

DIntl Interest

C3
represents a contracting state, and	represents a non contracting state.	
represents that the country is governedby the Convention.	

105

Interests Registrable in the Intl RegistryArt.16(1), Ⅲ
1.
2.
3.
4.
5.

Intl interests and prospective Intl Interests
Registrable non-consensual rights and interests
Assignments and prospective assignments of Intl Interests
Subordinations of interests
Acquisitions of Intl Interests by legal or contractual subrogations
under the applicable law
6. Notices of national interests
7. Sale and prospective sale

11SaleBuyer B’’	

Manufacturer	
Sale

Buyer A’	

Buyer B’	

Buyer A	

Buyer B	C

Salerepresents a contracting state, and	represents a non contracting state.	

⇒Activation of the used aircraft market	
126

Assignment of Intl Interests	
Requirements of effectto the debtor	

①written notice, ②identification of obligations, and③written consent by debtor (Art.33 and Art.XV)(a) Assignments of two sets of obligations
related to different Intl Interests	

Requirements of effectto the third party	(b) Successive assignments of the same setof obligations arising in relation to a single
Intl Interest	

(a) Priority problem between X and YX	

C1	Z	

Art.31(1): Assignee succeeds the rights of assignor.
Ex.) If C1 registers his “Intl Interest” earlier than C2,→X has priority to Y.

D	(b) Priority problem between X and Z
Art.35: In order of registration
Ex.) If X registers her “assignment” earlier than Z,Y	→ X has priority to Z.	

C2	13

Protection of the Whole Transaction	represents a contracting state, and	Creditor C	

represents a non contracting state.	

Supplier(Manufacturer)

Lender(Bank)	
Non-recourse
loanIntl Interest

Sale	
Prospective
assignment

Lessor(Leasing co)	Creditor B	

Lease	
Intl Interest	

Lessee(Airline)	

Creditor A	

147

Jurisdiction: Choice of Forum (Art.42)	
Par.1: Subject to Articles 43 and 44, the courts of aContracting State chosen by the parties to a transaction
have jurisdiction in respect of any claim brought under thisConvention, whether or not the chosen forum has aconnection with the parties or the transaction. Suchjurisdiction shall be exclusive unless otherwise agreed
between the parties.
Par.2: Any such agreement shall be in writing or otherwise
concluded in accordance with the formal requirements of
the law of the chosen forum.	
15

Jurisdiction on the Relief Pending Final
Determination (Art.43)	
Relief pending final determinationl If a creditor adduces evidence ofdefault, he obtains from courts speedy
relief in the form of orders as thecreditor requests, pending final
determination of its claim and to theextent that the debtor has so agreed(Art.13(1)).
l Courts may impose some terms only inthe two events (Art.13(2)).
(a) The creditor fails to perform its
obligations to the debtor under theConvention.
(b) The creditor fails to establish its claimon the final determination.
l However, even these safeguards forthe debtor may be eliminated if agreed
in writing (Art.X(5)).

Jurisdiction on the reliefl Court where object located (Art.43(1))(a) preservation of the object and its
value(b) possession, control or custody of theobject(c) immobilisation of the objectl Court where debtor situated (Art.43(2),X(３))(d) lease, or management of the object
and the income therefrom(e) sale and application of proceeds
therefroml Court chosen by the parties and court
where the object is registered as tonationality （Art.43(１)(2), XXI）
(a) to (e)	168

Jurisdiction to Make Orders Against theRegistrar (Art.44)	
Par.1: The court of the place in which the registrar has its center ofadministration (Irish court) has exclusive jurisdiction to award damages or makeorders against the registrar.
Par.2, 3: Ex.) When a deregistration event of the Intl Interest (such assatisfaction for the secured obligation) occurs and a debtor requests a creditor
to procure discharge of the registration, the creditor fails to respond to thatrequest.
(i) When the creditor has ceased to exist or cannot be found,
Irish court has exclusive jurisdiction, on the application of the debtor, tomake an order directed to the registrar requiring to discharge theregistration.
(ii) In other cases,
Irish court may direct the registrar to take such steps as will give effectto an order of a court having jurisdiction under the Convention.
⇩Irish court takes the guardian role of the data of the Intl Registry.
17Discount and Compliance	Overviewl From July 2007, the ‘Cape Town
Convention Discount’ is operated on thebasis of the OECD’s Sector
Understanding on Export Credits for
Civil Aircraft (ASU). The discount may
reduce the risk premium of export
credits by up to 10%.
l A set of options on default remedy isspecified in ASU. A contracting state isrequired to choose and implement that
set in order for its own airlines to enjoy
the Discount.
Ex. of the specified option(1) Extra-judicial exercise of remedies(2) Hard rules on debtor’s insolvency(3) Deadlines on the Relief Pending Final
Determination
Relief (a)-(c): within 10 days from petition
Relief (d),(e): within 30 days from petition

For the details, see Zasu and Sato, “Providing
Credibility around the World: Effective Devices ofthe Cape Town Convention,” 33(3) European
Journal of Law and Economics 577 (2012).

Featurel Contracting states eligible for theDiscount are placed on a list (20states). The list is disclosed on theOECD’s website.
l When an eligible state breaches theConvention, the OECD countries are
obliged to notify the OECD secretariat.
In response, the secretariat deletes
that state from the list. Then, airlines
located in the state can no longer enjoy
the Discount.
Effectl Growth in the number of contractingstatesl Convergence of option selection
among statesl Share of Information on breach among
the export credit agencies and effective
sanction to the breaching state18→ ensuring compliance

9Conclusionl Legal stability that the Geneva Convention 1948 provides is costly andfragile. The Cape Town Convention 2001 shapes an ultra-national legal
regimen of security interests for aircraft.
l The International Registry achieves economies of scale. In addition, its
System fused with technology succeeds in excluding country risk fromregistration and search service. Moreover, as a result of solving priority
problems including assignment of Intl Interest or sale, the system makes it
possible to protect the whole transaction structure even in international
context.
l Jurisdiction provisions are applied to accomplish both dispute resolution in a
credible court and rapid enforcement of Intl Interest. In addition, they grant
inviolability to the International Registry.
l Involving a sanction mechanism in the discount system may deter
developing countries from breaching the Convention⇩In order not only to establish cooperative relations among states, but also tosecure the commitment of non-interference in transaction from states,
multilateral treaty is applied.
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