Aruba and the Netherlands:

The legal impact of the Cape Town Convention and Aircraft Equipment Protocol in non-Contracting States in relation to the financing and leasing of aircraft engines.

Author: B. Patrick Honnebier*, Gomez & Bikker

June 12^th, 2006

The Cape Town Convention and Aircraft Equipment Protocol

The Convention on International Interests in Mobile Equipment (Convention or CIME) and the Aircraft Equipment Protocol (Protocol or AEP) are effective as from 1 March 2006. The main objective of these instruments is to facilitate the asset-based financing and leasing of aircraft objects. Under the Convention and Protocol the term aircraft objects means aircraft frames, aircraft engines and helicopters. The international interests that have been vested in these objects may be registered in the International registry, which is considered below. The CIME and AEP were realized in Cape Town, South Africa, on 16 November, 2001 at the conclusion of a Diplomatic Conference. At this moment in time Angola, Ethiopia, Ireland, Malaysia, Nigeria, Oman, Panama, Pakistan, Senegal and the United States have already ratified the CIME and AEP or have acceded to these instruments. Many other States are currently involved in ratification procedures with regard to adopting these instruments. In addition, the Commission of the European Union has put the acceptance of the CIME and AEP on its agenda.

The legal impact of the Convention and Protocol in non-Contracting States

Evidently, the Courts of the Contracting States to the Convention and Protocol must apply its regime. It is interesting to note, however, that the courts of some states that not yet have accepted the CIME/AEP also apply these instruments. For example, in 2003 the Court of First Instance of Aruba, which is an autonomous part of the Kingdom of the Netherlands[1] and has its own air law, ruled that the general Aruba property law doctrine of ‘Accession’ does not apply to aircraft engines that are attached to small aircraft frames. Engines are not considered parts of the airframe to which they are attached and they can be the objects of separate security interests[2]. The Aviation Finance Group of Gomez & Bikker proudly represented the winning engine-lessor in this break-through aviation finance case. In addition, in 2002 a Court of Appeal in the Netherlands decided the same as the Aruba court in relation to large aircraft and engines[3]. These important rulings have been influenced by, and they are entirely in line with, the Convention of Cape Town and Aircraft Equipment Protocol. Under the new regime engines are regarded as distinct aircraft objects which can be financed and registered separately. Nonetheless, both decisions are completely in conflict with the controversial Dutch view that in all circumstances the ownership of an engine passes to the owner of an airframe as soon as it is attached to it. The aforementioned courts decided that this assumption is incorrect. In Aruba and the Netherlands the substantive property law governing aircraft and engines is regarded as a lex specialis. Most other civil law states concur in that respect. These objects occupy an exceptional position in the property law systems of these jurisdictions, both in dogmatic and conceptual terms. The general rules of property law are not fully applicable. Under the present special rules of air law, engines are generally not considered as integral and indispensable parts of the airframe. The reason for this is, that most engines are not intended for use on a specific airframe[4]. On the contrary, most frequently engines are temporarily or coincidentally used, leased or exchanged based on engine-pooling arrangements and engine interchange agreements. Therefore, they are intended for use on any aircraft that quickly needs an engine. Besides, currently engines can easily be attached to or detached from an airframe, without damaging the airframe or the engines.

The International Registry

The establishment of the International Registry has its roots in the Convention and Protocol. The International Registry for the recording of international interests in aircraft objects is established in Shannon, Ireland[5]. This international registration system is operated by the ‘Registrar’ under the watchful eye of the ‘Supervisory Authority’. The Irish company Aviareto operates the International Registry[6], while the International Civil Aviation Organization (ICAO) supervises it. The international creditors will be provided with a secure registry to record their international interests in aircraft objects and to establish the priority of their interests vis-à-vis competing creditors within and outside the insolvency of the debtor.

The international registration system is an electronic, internet-based service. It will be available on-line twenty-four hours a day, seven days a week. Access to the International Registry is open to all parties that comply with the registration requirements, regardless of whether they are situated in Contracting States or non-Contracting States. This process will not require human involvement. The international interests and other registrable rights may be entered in the International Registry. The registration of an interest has effect from the moment that the registration is searchable.

The International Registry is based on the property law principle of ‘notice filing’. This means that the recorded data give notice to third parties that an international interest has been vested in a specific aircraft object. If a party needs further information it must make enquiries with the registrant. Therefore, the international registration system is not based on the property law principle of ‘deed registration’. It does not require the filing of specific deeds or other documents. Furthermore, the International Registry is based upon a strict ‘first-in-time’ registration. Accordingly, the international registration system will enable the holders of registered international interests to preserve their priority with regard to subsequently registered interests, unregistered interests and the administrator in the insolvency proceedings of the debtor.

The International Registry is able to function at very low cost, given the fact that it is operated electronically. For the applicable fees and other pertinent information see the ICAO website[7].

The objective and structure of the Convention and Protocol

Personal property security law governing aircraft equipment financing has been, since the beginning of the aviation industry, an unstable body of law. This particular kind of law reached the state of intolerable complexity and insecurity toward the last quarter of the twentieth century.

The principal objective of the Convention is the efficient financing of mobile equipment. In general, the term mobile equipment encompasses objects which by their very nature are used internationally. Examples of such objects are aircraft, satellites, trains, ships, movable oil-rigs and containers. The Convention itself, however, is not equipment-specific. The Diplomatic Conference decided on a two-instruments approach. The CIME is a framework Convention incorporating general provisions. The regime relates only to certain categories of mobile equipment, which are defined in separate Protocols. It applies through separate Protocols to three different categories of mobile equipment: a) airframes, aircraft engines and helicopters; b) railway rolling stock; and c) space assets. The AEP is the first Protocol that has been completed.

The Convention and Protocol resolve the problems that currently exist