Should Poland ratify the Cape Town Convention?

The Convention on International Interests in Mobile Equipment offers strong protection to sellers, lessors and financers of aircraft. More and more European countries are considering ratification of the convention. Should Poland be one of them?

The Cape Town Convention, signed in 2001 under the auspices of UNIDROIT—the International Institute for the Unification of Private Law—is devoted to legal measures for securing transactions involving equipment which in light of its manner of use may be subject to the law of various different countries at different times, particularly in connection with international transport. It covers three categories of objects: aircraft (“airframes, aircraft engines and helicopters”), railway rolling stock, and “space assets.” For practical reasons the convention’s treatment of the aircraft category carries the greatest significance.

What is the purpose of the convention?

The convention seeks to strengthen the position of creditors, a term referring to a lessor or conditional seller of aircraft or a financing party holding a security interest in the aircraft. Ultimately the convention seeks to ensure that if the debtor does not pay for the aircraft delivered into its possession, the creditor will have the legal means to seize the aircraft and retake possession from the debtor, including when the debtor is in bankruptcy. In essence, the purpose of the convention is to minimise the risk of the insolvency of users of aircraft.

Where is the convention in force?

As of November 2014, the convention had been ratified by over 60 jurisdictions, including the United States, Canada, China, Russia, Brazil and the European Union. However, ratification at the EU level applies only to certain provisions of the convention. Whether the convention actually enters into force with respect to a specific country must be decided by the authorities of that country. Doubts surrounding the proper procedure for ratification by EU member states have only recently been resolved, and consequently most member states have not yet ratified the convention. But work in this direction is well advanced in several member states, including the UK, France and Germany.

What protections does the convention give creditors?

The convention provides for a number of legal measures securing the creditor in the event of the debtor’s insolvency—many of which measures already have equivalents in Polish law. With certain exceptions, the creditor will be entitled to measures available under the convention only if the parties agree to their use in writing.

The specific construction of the Cape Town Convention should first be noted, as it leaves to a ratifying state great latitude in selecting which solutions it wishes to adopt in its own legal system and with what possible restrictions. The convention sometimes provides several alternative versions of the same legal means. Hence ratification of the convention in two different countries may lead to significantly different consequences.

One of the fundamental remedies for protection of the creditor is the right to retake physical possession of the aircraft and then sell or lease it to someone else. Similar results can basically be achieved under Polish law (e.g. by using a voluntary submission to execution), but in no event does Polish law permit involuntary physical seizure of an object from the debtor through self-help, i.e. without the intervention of enforcement authorities, which is permissible under the convention.

Closely connected with this mechanism is the possibility of involuntary deregistration and export of the aircraft by the creditor, which is permitted by a special authorisation by the debtor, commonly known in the industry as an IDERA (Irrevocable Deregistration and Export Request Authorisation). In light of the ownership nature of the Polish aircraft register, under Polish law the debtor’s authorisation for the creditor is necessary to deregister an aircraft if the creditor itself is the owner. Involuntary export of the aircraft is more problematic in the context of Polish law.

The convention also provides—with great leeway for modifications by the signatory states—for a speedy procedure for interim judicial relief to secure the creditor’s claims through an order to ground the aircraft or take possession, control or custody of the object. In theory, similar results could be achieved through an application for interim relief under the Polish Civil Procedure Code, but it is doubtful whether this would be effective and adequate because of the varying speed with which such relief may be obtained in practice as well as the requirement to commence the principal proceedings secured by the interim relief within two weeks after granting of the interim relief.

But undoubtedly the most significant means of protection of creditors under the convention is exclusion of the aircraft from the bankruptcy estate if the debtor enters bankruptcy, and the requirement to return possession of the aircraft to the creditor or else satisfy the debts connected with use of the aircraft—in either case completely avoiding the interests of other creditors. This is an unusually far-reaching and effective privilege, almost completely eliminating the risk associated with the debtor’s potential insolvency. But it could also be highly controversial, as by definition it conflicts with the general principle of the equality of creditors and ignores the hierarchy among creditors provided for in the country’s insolvency regime. Moreover, in practice aircraft will represent a significant and valuable asset of an insolvent air carrier, without which it will typically be impossible to satisfy the other creditors to any acceptable degree. Without denying the soundness of such controversies, it should nonetheless be pointed out that without this privilege, known in the industry as “Alternative A” (as it is designated in Art. XI of the Aviation Protocol to the Cape Town Convention), the fact that a country has joined the convention would be of little importance, and this is how the issue is perceived in the community of the convention’s beneficiaries (banks, manufacturers and leasing companies).

What could be the benefits if Poland ratifies the convention?

Although it may seem paradoxical given the strong protection afforded to creditors under the convention, ratification of the convention lies chiefly in the interest of potential debtors, i.e. air carriers. This is because the fact that a debtor is located in a state which has adopted the convention (with Alternative A) influences the financial terms of transactions offered by sellers, lessors or financers of aircraft. It is obvious that the lower risk from the user’s insolvency justifies lower costs for transactions with that user. It appears that this aspect may be particularly important for the Polish market, characterised by generally weak financial stability of carriers and thus a higher risk of their insolvency.

Therefore there are valid economic considerations speaking in favour of adoption of the Cape Town Convention by Poland. But ratification should be preceded by careful review and possible adaptation of the existing legal solutions which already offer comparable protection to creditors to some extent.

Maciej Zych, Aviation Law Practice, Wardyński & Partners