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What does the Cape Town Convention mean for the UAE?

International Interests

The Convention on International Interests in Mobile Equipment and its Protocol on Matters Specific to Aircraft Equipment, each dated 16 November 2001 (together the Cape Town Convention), were intended to standardise aviation finance transactions. To achieve this objective, the Cape Town Convention created the concept of "international interests" which are recognised in all states which have ratified the Cape Town Convention.

The creation of an international interest is central to the application of the Cape Town Convention. An international interest is an interest in an individually identifiable aircraft object. Aircraft objects are in general, airframes, aircraft engines and helicopters. Pursuant to the Cape Town Convention, the International Registry of Mobile Assets (the International Registry) was created. The International Registry is an electronic register of all international interests in respect of aircraft objects and can be searched by any person

Registration of an international interest with the International Registry is important as it is a valid means of giving notice of the international interest to third parties. Registration with the International Registry also ensures the effectiveness of an international interest during insolvency proceedings and preserves priority over other registered or unregistered interests.

So what does this mean for the UAE?

The Cape Town Convention became effective in the UAE on 1 August 2008. Historically, the effectiveness of mortgages in the UAE has been somewhat problematic. This stems from the fact that an aircraft is considered a moveable asset. Accordingly, under UAE law, the appropriate form of security over a moveable asset is a possessory pledge. As the name suggests, perfecting this type of security interest is by way of possession. Possession can be demonstrated in two ways.

The first is by way of actual possession. In an aircraft financing context, this would involve the bank taking physical possession of the aircraft. This is clearly impractical.

The second is by way of constructive possession. While it is not particularly clear from the relevant legislation what constitutes constructive possession, the underlying feature is that third parties should be aware of the interests of the bank. The most obvious way of doing this is to register the mortgage on a central register that is capable of being searched by third parties. In most jurisdictions, the authority responsible for registering aircraft will maintain a central mortgage register. This register is usually capable of being searched by third parties.

Accordingly, any prudent purchaser or potential mortgagee of an aircraft can search the relevant register as part of their due diligence process. However, the UAE general civil aviation authority (the GCAA) does not maintain such a register. Whilst as a matter of practice the GCAA will note the interests of a mortgage on the aircraft's certificate of registration, the certificate of registration is not a public document.

Solving the issue

The Cape Town Convention has gone some way in solving this issue - any prudent financier can register the international interest created by a mortgage with the International Registry which can then be freely searched by third parties. However, one quirk of the Cape Town Convention is that whilst it notes what international interests have been registered, it does not specify if the international interest relates to a mortgage.

So, is this sufficient to demonstrate that the bank has constructive possession? In itself, the answer is perhaps not. However, in most aircraft financing transactions, the financier will usually insist that the aircraft contains a plaque stating that the aircraft is subject to the mortgage. In addition and as mentioned before, the GCAA will also note the interests of the mortgage on the aircraft's certificate of registration.

The combination of the above creates a compelling argument that third parties have been put on notice that a mortgage has been registered against the aircraft.

IDERA

There has always been some uncertainty as a matter of UAE law as to whether a deregistration power of attorney can be expressed to be irrevocable. If an airline can cancel the effects of a deregistration power of attorney by simply revoking it, this defeats the primary purpose of having it in the first place. However, the Cape Town Convention addressed this by creating an irrevocable deregistration and export request authority. This is commonly referred to as an IDERA.

The UAE has amended its civil aviation regulations to standardise the process for recording and enforcing rights pursuant to an IDERA. The IDERA, together with an application for lodging, must be submitted to the GCAA in accordance with the civil aviation regulations. Upon satisfactory review of the application, the GCAA will stamp, date and countersign the IDERA and will hold one original IDERA on the aircraft's file. By way of recordation of the IDERA with the GCAA, the GCAA acknowledges that the beneficiary of an IDERA is the sole person entitled to procure the deregistration of the aircraft from the registry of civil aircraft of the UAE, and to export and physically transfer the aircraft from the UAE.

Further to this, the UAE has declared that it will apply Article 25 of the Cape Town Convention. This provides, amongst other things, that the GCAA must expeditiously co-operate with and assist the relevant authorised party under the IDERA in the exercise of any remedies specified in Article 15 of the Cape Town Convention. This includes the deregistration and physical export of the subject aircraft.

Conclusion

In conclusion, whilst UAE law does not offer the certainty of some other jurisdictions, the implementation of the Cape Town Convention in the UAE has sent a clear signal to the banking community that the UAE recognises the need to protect the interests of banks.