Capetown: Aviation's bright spot

LEGAL EYE

Tomorrow is the day "� India's accession to the Capetown Convention will come into force. Aiming at providing greater certainty to the financing of highly mobile assets the Convention is the outcome of a high-level diplomatic conference held in 2001 and comprises two instruments, the overall treaty framework i.e. the Convention itself and the Aircraft Protocol, which is aviation industry specific and effective from March 1, 2006.

The Capetown Convention (Capetown) read with the Protocol is an international treaty designed to facilitate asset-based financing and leasing of aircrafts and includes air frames and aircraft engines.

Capetown seeks to create a realistic and commercially oriented legal framework addressing transaction issues such as perfection of ownership, security interests, possessory rights, particularly in situations of default and insolvency, and establishing a mechanism for protection of the financier's rights and security interests by way of an international registration process.

This International Registry of Mobile Assets, which is web based and accessible round-the-clock, subjects the registrations to a simple priority regime "� i.e registered interests prevail over unregistered, earlier registrations beat later registrations, and priorities may be varied by registering subordination arrangements. Creditors will therefore be able to record their interest and search for pre-existing liens in one domain.

This is expected to reduce compliance costs, costs in assessing borrowers' creditworthiness, enhance clarity as to legal rights, obligations and enforcement, which will eventually promote competition and benefit airlines, manufacturers, passengers and investors. Other than recognition of rights, Capetown seeks to provide uniform repossession and enforcement rights, enabling repossession in any jurisdiction without a Court order, provided of course, the object is located in a Contracting State.

In order to be effective, Contracting States have to ensure that the Protocol provisions are applicable and enforceable. Capetown applies to aircraft leases, aircraft mortgages, security assignments, hire purchases conditional sales etc., in jurisdictions where the aircraft is operated, registered, or the debtor is incorporated or has its place of business. Capetown does not affect pre-existing rights, unless a State specifically makes a declaration to that effect "� so far no State has done so.

What is critical in making Capetown effective is the reconciliation of the domestic laws of the Contracting State with the existing laws governing security interest.

International treaties once ratified do have the force of law and don't necessarily have to be propped up by legislation. The doctrine of incorporation recognises the rules of international law to be incorporated in and considered part of national law unless in conflict, in which case, the Indian Courts have held, that domestic laws will prevail. There are areas of potential conflict with domestic laws.

There are grey areas in certain Cape Town Declarations, for example Article 8, which entitles a charge holder to take possession or control of any charged asset, sell or grant a lease thereof, collect or receive any income or profits from its management and use.

The above envisages a high degree of self help that was accorded only recently to banks and financial institutions in India under the SARFAESI Act and that too after a protracted legal battle all the way upto the Supreme Court, with concessions on circumstances of waiver, a month's notice giving opportunity to the debtor for curing the default, procedures and safeguards for repossession and sale including supervision by Magistrates.

SARFAESI however does not apply to security interest in aircrafts. The Supreme Court has on several occasions deprecated the use of muscle power in repossession and recoveries. Reserve Bank of India Guidelines on Engagement of Recovery Agents has ruled out self help recourse by creditor banks as being unlawful

While there is no direct conflict with any law, in which case the implementation and enforcement of Capetown by Courts ought, not to require express legislation, there could be potential conflict , particularly in insolvency and bankruptcy situations.

Article 11 of the Aircraft Protocol provides two alternative default remedies. The "hard" regime which India has adopted states that if the insolvency administrator is unable to cure defaults and perform future obligations within the waiting period, the Creditor can regain the aircraft, and Courts cannot stay such enforcement.

Accordingly, the provisions for moratorium in SICA and perhaps even overriding and other preferential payments in the Companies Act may have to be re-aligned, and appropriate exceptions carved out in the Transfer of Property Act India's track record in making domestic laws compliant with global regimes being good, Capetown promises a bright sky in India for the aviation industry.

Kumkum Sen is a Partner in Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com