Electronic closing rooms in aviation finance – something for the shipping industry?
1. The Cape Town Convention and the International Registry
The Cape Town Convention on International Interests in Mobile Equipment of 16 November 2001 sets out general rules for security in mobile assets, whilst its Protocol on Matters Specific to Aircraft Equipment sets out specific rules for aircraft assets. The Cape Town Convention and the Protocol (together the “CTC”) is applicable for the majority of aviation transactions taking place today. More than 70 countries have ratified or acceded to the convention, and this includes most countries generally involved in larger aviation finance transactions. The CTC is currently not applicable to ships or offshore units, and the aim of this article is to provide a brief presentation of the CTC and focus on how this new international regime has modernised the aviation finance industry and simplified the process of closing transactions without the need for physical meetings where documents are being tabled. In some form, we believe that this will be the future in the shipping industry as well, and the CTC may perhaps be the tool for future development of this industry.
The International Registry of Mobile Assets (the “IR”) is an electronic register for securities in mobile assets based on the CTC. The IR is established and operated by Aviareto Ltd. in Dublin, and has been in operation since 2006. Registrations in the IR are made electronically by the parties to a transaction, and as such, timing for the registration is not conditional upon a register’s opening hours or availability of officers at a specific register, nor is it affected by any time difference between the jurisdictions involved in the transaction. The IR makes it possible to establish the priority of rights (identified as “interests” under the CTC) in airframes, aircraft engines and helicopters without submitting any documentation. The parties in an aviation finance transaction can register security in aircraft assets by using the manufacturer name, the generic model and the manufacturer serial number. The IR records the registered interests over the aircraft objects on a priority basis.
The IR is subject to the CTC, which sets out the rules for registration and protection of rights recognised by all contracting states. Additionally, the CTC includes detailed regulations of the enforcement regime applicable to any security registered with the IR in accordance with the CTC. The clear advantage to the CTC is that any such security is enforceable in all countries that have ratified the convention. In Norway, where it is still possible to register security interests over an aircraft with the national aircraft registry, filings with the IR will take precedence over any such national registrations.
2. Registration of the parties’ rights under security documents by using the IR closing room
Registration of interests relating to aircraft objects is essential for the purpose of the CTC. Rights created by security documents are examples of what the parties may register with the IR, using the IR’s website for electronic registrations. The system is user friendly with guidelines/tutorials easily available on the website, and a helpdesk service that responds quickly to all types of enquiries.
2. 1 The IR closing room
The IR registration website contains a virtual closing room, which allows one entity (the “coordinating entity”) to gather the information required to prepare proposed registrations in advance of closing. Any person that has an approved IR user account may create such closing room.
The parties in aviation transactions often agree on one party, or its law firm, to act as IR filing counsel on behalf of all parties. It is important to note that IR registrations cannot be completed until electronic consents are provided by all parties involved, regardless of whether a closing room is established or not. However, choosing the closing room feature with the filing counsel acting as coordinating entity is the most secure and practical way to prepare registrations for closing, especially in large-scale transactions that involve several parties and multiple registrations on each aircraft object.
2.2 How to preposition registrations in the IR closing room
Having logged on to the IR website and established a closing room, the coordinating entity will select the type of interest to be included as a prepositioned registration in the closing room, and thereafter select the aircraft objects and other details required in order to identify the relevant parties’ interests therein.
Rights in objects constituted by mortgages and lease agreements are examples of common registrations. If a mortgage and one or more lease agreements are registered on one object, the interest constituted by the mortgage should have first priority followed by that in respect of the lease agreement. The entity carrying out the registrations is responsible for ensuring that the order of priority is correctly registered. However, by using the closing room, all parties and their counsels will be able to check and approve the prepositioned registrations and their order of priority in advance of closing.
The coordinating entity can add participants to the closing room so that they may enter the room and control the actions made. Another commonly used and practical feature is the “pre-registration report”. The coordinating entity will usually download a draft pre-registration report after all registrations have been prepositioned, prior to the closing room being locked and finalised. Provided as a PDF document, the report shows all prepositioned registrations and their order of priority. After all parties have confirmed that the pre-registration report is in order, the coordinating entity will lock the closing room. Once the room has been locked, all parties to the prepositioned registrations will become participants to the closing room, and a final pre-registration report will be emailed automatically to such participants.
2.3 The parties’ consents to and release of the IR closing room
The coordinating entity will be able to consent to all registrations it is authorised to consent to at the same time. Transaction parties that have not authorised the coordinating entity to consent on their behalf must consent to the specific prepositioned registrations to which they are a party in order for such registration to become effective.
Once all prepositioned registrations are finalised, the coordinating entity will be ready to release and effect the prepositioned registrations upon closing of the transaction. At closing the coordinating entity will “push the release button” in the closing room and pay the registration fee. All filings will then become effective.
2.4 Evidence of rights and order of priority
Following release of the closing room, the coordinating entity will immediately obtain transcripts from the registry (“priority search certificates”) relating to the objects, and circulate these to the parties. All parties with an IR account may acquire such priority search certificates for the objects directly from the IR website.
The priority search certificate evidences the parties’ registered securities over the object. It shows all registrations made on the object, their order of priority, and the debtor/creditor or assignor/assignee under each registration, as well as any historic registrations. Further, the certificate will confirm which entity holds the right to discharge each of the registrations. The creditor/assignee of an interest will automatically be registered as the “right to discharge holder” with the IR. However, the IR allows for transfer of such right to another entity.
2.5 Could a similar system be useful for the shipping industry?
Our law firm has a large transaction practice within both the shipping sector and the aviation sector. Based on our experience with the CTC and the possibilities this has introduced, we believe that the shipping industry would benefit from looking towards the CTC. Not only would the CTC provide for a unified international regime of recognition and enforcement of security interests in ships, but it could also simplify and modernise how transactions are being handled. In particular, we believe that the possibility of an electronic registry with the option to use a virtual closing room as addressed in this brief article could be helpful. Currently, the ship finance industry is to a large extend “old-fashioned” when it comes to how finance transactions are being structured and managed, and it is still common with physical closings with transaction documents being tabled.
We do see a change towards more complex structured financings with capital market financings and leasing structures being increasingly more common in shipping, and we believe that the shipping community would at some stage be looking at the possibility of adapting the CTC. Traditionally, new international shipping legislation has come from within the shipping community. Organisations like CMI (Comité Maritime International) have worked on drafting new legislation on its own, rather than adopting existing conventions. CMI has established a working group that is considering the CTC. The first papers from this working group is somewhat sceptical towards implementing the convention on ships. This is likely due to legal challenges with co-ordinating the Cape Town Convention with existing conventions and domestic legislation on maritime liens. However, the shipping community might see a demand for a new international regime on recognition and enforcement of security interests in the future, which could lead to the adoption of the Cape Town Convention to ships and offshore units.