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2010-2011-2012-2013
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT (CAPE TOWN
CONVENTION) (CONSEQUENTIAL AMENDMENTS) BILL 2013
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Infrastructure and Transport
the Honourable Anthony Albanese, MP)
INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT (CAPE TOWN
CONVENTION) (CONSEQUENTIAL AMENDMENTS) BILL 2013
OUTLINE
The Bill supplements the International Interests in Mobile Equipment (Cape Town
Convention) Bill 2013 by way of amending the Air Services Act 1995, Civil Aviation Act 1988
and Personal Property Securities Act 2009 to provide for the Convention on International
Interests in Mobile Equipment (Convention) and Protocol to the Convention on International
Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol) to
complement and operate in harmony with Australian law.
Changes to the Air Services Act 1995
The Air Services Act 1995 provides for the priority ranking of statutory liens included in the
Register of Statutory Liens maintained as required by that Act. Statutory liens, vested in
Airservices Australia, may arise in relation to unpaid service charges.
The Bill would expressly recognise that a statutory lien would have priority over security
interests in aircraft registered in the International Registry, provided that the statutory liens
were registered in accordance with the Air Services Act 1995 prior to the security interest
being registered on the International Registry. This is because the Convention allows a
Contracting State to nominate 'non-consensual interests' that have priority over any other
registered interest in an aircraft asset. The notation to the Air Services Act 1995 also clarifies
that the statutory liens for service charges provided for under that Act may take effect as a
`non-consensual interest' under the Convention.
Changes to the Civil Aviation Act 1988
One of the remedies available to creditors under the Convention and the Protocol is
deregistration and export of an aircraft object. This provides greater security to creditors by
allowing them to more easily recover assets in the event of a default. To facilitate this
remedy, debtors would be able to submit an Irrevocable Deregistration and Export Request
Authorisation (IDERA) to the Civil Aviation Safety Authority (CASA) indicating that the
authorised party (the creditor) has the right to deregister and export a specified aircraft object.
The Bill amends the Civil Aviation Act 1988 to allow functions to be conferred on CASA
under the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 or
rules made under that Act. This would allow rules to be made under that Act to enable CASA
to record, remove and exercise an IDERA.
Changes to the Personal Property and Securities Act 2009 (PPS Act)
The Bill amends the PPS Act to make it clear that if any inconsistency arises between the PPS
Act and the provisions of the Convention and the Protocol (as the case may be), the
Convention and the Protocol (as the case may be) would prevail. Although the PPS Act (on
the one hand) and the Convention and the Protocol (on the other hand) are similar in their
application, the domestic regime cannot adequately support the peculiarities associated with
aviation finance law, such as the mobile nature of aircraft assets (that frequently move across
jurisdictions). The Bill does not preclude the PPS Act from its full application in the absence
of any such inconsistency.
FINANCIAL IMPACT STATEMENT
This Bill has no financial implications.
REGULATION IMPACT STATEMENT
1. Problem
1.1 International financiers (creditors) of mobile equipment such as aircraft objects are
currently subject to a fractured international legal framework for the protection of their
security interests. As aircraft objects frequently move across borders, the rights of and
protection available to creditors may be subject to a variety of (including foreign) laws
at any given time, which is inherently risky. Where a debtor defaults on their loan or
lease, creditors will likely have to undertake an exhaustive legal process to repossess
their property, possibly involving a number of different jurisdictions. For this reason,
creditors charge a premium for lending to protect themselves against the substantial
risks and uncertainty involved.
Creditor security
1.2 For financiers, the collapse of Ansett in 2001 demonstrated that Australia's existing
insolvency measures for personal property securities may benefit from the
implementation of a more rigorous and uniform securities framework. As a result of
this event, international financiers have indicated a lack of confidence in the current
system, suggesting it could be more efficient and expeditious.
1.3 The mobile and highly depreciative nature of commercial aircraft objects emphasizes
the importance of ensuring such assets can be quickly repossessed upon insolvency.
The greater the amount of time between debtor default and repossession, the greater
the risk exposure of the creditor, which leads to higher costs for airlines (to balance
these risks).
2
Aircraft object financing
1.4 The global financial crisis has placed participants in Australia's aviation industry
under significant pressure to find cost savings wherever possible and to reassess their
approach to financing the purchase of aircraft objects. This has led Australian-based
airlines to increasingly look to international finance as a source of credit.
1.5 The need to access alternative funding sources has come at a critical time for the
industry. The global aviation sector is predicted to grow significantly over the next
20 years, and demand for new, environmentally friendly airframes is estimated to
increase significantly. To allow Australian industry to keep up with this expected
growth, Australia needs to ensure its financial infrastructure is consistent with global
standards as well as provide Australian airlines access to more sources of finance than
currently available. Without these measures, Australia risks losing its competitive
edge in the global aviation market as providers of air services.
Cape Town Convention
1.6 The Convention on International Interests in Mobile Equipment (the Convention) and
the Protocol to the Convention on International Interests in Mobile Equipment on
Matters Specific to Aircraft Equipment (the Protocol) were established in November
2001 under the auspices of the International Institute for the Unification of Private
Law (UNIDROIT) and the International Civil Aviation Organization (ICAO).
Australia participated in the development of these two instruments (collectively known
as the `Cape Town Convention') but did not sign the treaty.
1.7 The Convention creates a uniform international legal framework to protect investors in
aircraft objects. It provides an International Register for creditors to register their
security interests (similar to the land titles system for real property), and creates a set
of basic remedies in the event of debtor default. The Protocol complements the
Convention and adapts its provisions to meet the particular requirements of financing
mobile equipment such as aircraft. For example, it provides additional remedies for
creditors, such as the ability to request the deregistration and export of an aircraft
object from the national civil aircraft register. These measures increase the security of
creditors and reduce their risks, which may lead to cheaper and more accessible
financing of aircraft objects for those countries that are party to the Cape Town
Convention.
1.8 On its own, the Convention will have no impact on Australian business generally.
This is because the Convention can only come into effect in relation to a category of
objects to which a Protocol applies (aircraft objects in this instance). It follows that
the Convention will only apply in accordance with the terms of that Protocol.
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1.9 The Cape Town Convention entered into force on 1 March 2006. As at 20 December
2010, 34 States and one Regional Organisation (the European Union) had become
party to it. Parties to the Convention include the United States, New Zealand, China
and Singapore.
1.10 In 2007 the Organisation for Economic Co-operation and Development (OECD)
developed a new `Sector Understanding on Export Credits for Civil Aircraft' (ASU),
to which Australia is a participant. The ASU provides a common framework under
which Export Credit Agencies (ECAs) of the EU, the US, Japan, Brazil and Canada
can provide export credit finance for the purchase of airframes and engines. It offers a
fee discount for airlines from countries that have ratified the Cape Town Convention
and have made specified `qualifying declarations' as part of this process.1
1.11 The Convention is expected to complement and go beyond the recently introduced
Personal Property Securities Act 2009 (PPS Act) to protect creditors of aircraft
objects.
Main features of the Convention
International Framework
1.12 Article 7 of the Convention establishes a comprehensive international securities
framework by creating an international interest in aircraft objects. This interest is
registered on an International Registry and will be prioritised based on a `first-to-file'
priority rule. The Registry, based in Ireland, is currently in operation and can be
searched by anyone for a small fee.
1.13 Article 42 of the Convention allows Contracting States to negotiate which court will
have jurisdiction in relation to claims brought under the Convention.
Application
1.14 The Cape Town Convention applies to transactions involving an aircraft object where
the following three requirements are met:
a) where the aircraft object meets specified size/power requirements;
b) where an `international interest' or prospective international interest is created
by the transaction; and
c) when the transaction is concluded, the aircraft object is registered in or the
debtor is located in a Contracting State.
1
The ASU is updated periodically and was last updated in 2011.
4
1.15 Article I of the Protocol specifies minimum aircraft object size/power requirements.
The Cape Town Convention will apply to:
a) Airframes that can transport -
at least 8 person (including crew); or
goods in excess of 2750kgs;
b) Helicopters that can transport -
at least 5 persons (including crew); or
goods in excess of 450 kilograms;
c) Aircraft engines that have at least 1750lb of thrust.
1.16 Under Article VIII of the Protocol, parties to the Cape Town Convention may agree as
to which laws will govern their contractual rights in the event of debtor default. For
interim remedies including possession, control and immobilisation, Article 43 of the
Convention determines that both the court chosen by the parties and the courts of the
Contracting State where the aircraft object is located may make orders in relation to
the aircraft object. With regard to the lease and management of the aircraft object,
including related income (as an interim remedy), jurisdiction will lie either with the
courts agreed by the parties or by the courts of the Contracting State where the debtor
is situated.
Qualifying declarations
1.17 Annex 1 of the ASU specifies the qualifying declarations Australia must make when
acceding to the Convention. Making the correct declarations is critical in order for
Australian airlines to qualify for a fee discount from international ECAs in accordance
with the ASU. The relevant declarations are as follows:
a. Insolvency - the Contracting State must apply Alternative A under Article XI of
the Protocol in the event of insolvency, which requires the debtor to automatically
transfer possession of the aircraft object to the creditor after a waiting period of a
maximum 60 days; and
b. Deregistration - under Article XIII, the Registry Authority - the Civil Aviation
Safety Authority (CASA) in this instance - must record and assist the exercise of a
request to deregister and export an aircraft object by the debtor; and
c. Choice of Law - Article VIII provides that the parties to the transaction may agree
as to which jurisdiction shall apply to the contract; and
d. Exercising remedies without leave of court - Under Article 54(2), Convention
remedies that do not require application to a court may be exercised without leave
of the court; or
e. Timely interim remedies - Article X allows for the `sale and application of sale
proceeds' as an interim remedy and together with the ASU, establishes a time limit
for courts to make decisions in relation to interim remedies (10 days for
immobilisation, preservation and possession; and 30 days for lease, sale and
proceeds).
5
1.18 In addition, Alternative A requires Australia not to make a declaration in relation to
Article 55 (applicability of interim remedies); Article XXXII (applying Article XXIV
- precedence of Rome Convention); and Article 54(1) (preventing lease as a remedy).
Remedies
1.19 Quiet possession rights are generally granted to debtors under the Convention.
However, in the event of debtor default, a number of remedies are available to
creditors under Chapter III. Remedies include re-possession, deregistration and export,
the sale of or grant of a lease over an asset and the rights to any proceeds derived from
an asset with a security interest attached. Australian courts will be required to observe
the `self-help' nature of the remedies - particularly if the Article 54(2) declaration
(exercise remedies without leave of the court) is made - and may be called upon to
ensure these remedies are made available to creditors in the event a debtor becomes
insolvent. The remedies must be exercised in a `commercially reasonable manner'.
Existing regulation
1.20 The Australian Government recently introduced the PPS Act, which will overhaul the
domestic regulation of personal property securities. The PPS Act is expected to
commence in 2011.2
1.21 The PPS Act will provide a comprehensive national PPS framework covering all
personal property, including aircraft objects. It reconciles over 70 pieces of
Commonwealth, State and Territory legislation and will provide:
a domestic PPS register;
clear priority rules for security interests; and
a set of basic remedies in the event of debtor default.
1.22 By clarifying the rights and obligations of secured creditors and debtors and creating a
single national securities regulatory framework, the PPS Act reduces the costs and
risks to financiers, which in turn opens-up the availability of credit for borrowers.
1.23 While the PPS Act will cover mobile equipment such as aircraft objects, it has been
suggested that the unique requirements associated with financing airframes -
particularly large, commercial airframes - cannot be fully met by legislation such as
the PPS Act, which is quite broad in its application. More specifically, industry has
identified the existing `conflict of laws' provisions in the PPS Act as being inadequate
and unsuitable in the aviation context.
2
Since preparation of this RIS, the PPS Act has commenced.
6
1.24 This being the case, the aviation industry (including financiers of aircraft objects) has
indicated its preference to deal with an overarching securities system tailored to
aviation interests, notwithstanding the success and effectiveness of the PPS regime for
domestic purposes.
1.25 Although the PPS Act and the Cape Town Convention are very similar in their
application, concerns exist within the aviation community that the domestic regime
cannot adequately support the peculiarities associated with aviation finance law, such
as the mobile nature of aircraft assets (which frequently move across jurisdictions),
inconsistent regulation and the associated uncertainty around the protections
applicable to creditors of aircraft equipment.
1.26 One example of the disparity between the two regimes is demonstrated by the relevant
governing law provisions of each. Within the PPS Act, the `conflict of laws' section
generally considers the location of the collateral as determining the law that governs
proprietary rights. An exception to this rule provides that for mobile assets, the
applicable law is determined by the jurisdiction in which the grantor is located when
the security interest attaches to the asset. Notwithstanding this exception, the Cape
Town Convention provides further certainty and flexibility in relation to the laws
governing security interests in highly mobile assets which does not depend on national
legislation that tends to vary between jurisdictions. As discussed above, parties can
agree as to which laws will govern a securities transaction.
1.27 Another difference is the ambit of each regime. While the PPS Act applies to all
aircraft objects regardless of size and type, the Cape Town Convention is more limited
in its application. The Cape Town Convention only applies to airframes that can carry
8 or more passengers or in excess of 2750 kilograms of goods (5 passengers or 450
kilograms for helicopters) and aircraft engines with at least 1760 pounds of thrust. For
many smaller, recreational fliers, the targeted scope of the Cape Town Convention is a
positive feature as the benefits of the Convention may not necessarily outweigh the
costs for this segment of the aviation industry.
1.28 In terms of remedies, the PPS Act appears to be broader in its application as it contains
a broader definition of `proceeds' when compared to the Cape Town Convention. The
PPS Act extends rights over proceeds from the sale of an aircraft object to `identifiable
or traceable property' which will allow property to be identified where it is different to
the property originally received by the debtor as proceeds.
1.29 With regard to sources of finance for the purchase of new aircraft, the Cape Town
Convention facilitates increased access to cross-border financing. In addition, the
Convention also acts as protection for Australian carriers, in the event locally-based
finance becomes interrupted or unsustainable.
7
1.30 Financiers have indicated a trend towards ratification of the Cape Town Convention
becoming the `rule rather than the exception', when it comes to aircraft financing. To
this end, they have suggested that in the future, financiers may look to provide more
favourable terms to airlines of those countries that have ratified the Convention. In
addition, ECAs may increase their base fee in the medium to long-term which will
further increase pressure on countries to the need to accede to the Cape Town
Convention. This global shift towards the Cape Town Convention is something that
Australia will inevitably need to confront. By taking action now, the Government will
be able to better align accession with the commencement of the PPS Act in 2011.
1.31 For industry, a key incentive to accede (and where the treaty differs significantly from
the PPS Act) concerns the significant cost savings available to airlines under the Cape
Town Convention when purchasing or leasing new aircraft (see paragraph 1.10). This
is particularly important for Australian airlines in the current economic environment,
which is seeing airlines across the globe invest in new aircraft as the aviation industry
recovers from the global financial crisis.
2. Objectives
Objective of government action
2.1 The objective is to provide:
the Australian aviation industry with increased access to cheaper asset financing
and sources of finance external to the local market; and
financiers with more certainty around Australia's insolvency laws in relation to
aircraft objects.
2.2 In 2010, the Hon Anthony Albanese MP and the Hon Robert McClelland MP,
Attorney-General, formally agreed for their respective Departments to work together
to progress accession to the Cape Town Convention.
3. Options
Option 1: Implement the Cape Town Convention making all qualifications necessary to
qualify for the financing discount
3.1 This involves acceding to the Convention and making the declarations discussed at
paragraph 1.17 to ensure Australian airlines qualify for a fee discount from ECAs in
accordance with the ASU.
3.2 Without making these declarations, the benefits of accession for Australia would be
somewhat limited. More specifically, any gains would be confined to enhancing the
protection of security interests of creditors.
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Option 2: Take no action
3.3 This option involves maintaining the status quo and restricting the registration of
securities interests in aircraft objects to the domestic PPS register.
3.4 As discussed above, the PPS regime provides a domestic securities framework for the
protection of creditor interests. While comprehensive and effective for domestic
purposes, this framework does not adequately provide for the complexities associated
with aviation law and the existing needs of Australia's aviation industry, which
requires access to a homogenous securities regime for highly mobile assets. For
example, it is less prescriptive in terms of the remedies it can offer for securities
interests in highly mobile equipment (the PPS Act is silent is relation to the
deregistration and export of aircraft objects whereas the Cape Town Convention
specifically provides for this remedy).
Option 3: Implement the Cape Town Convention without making all declarations
necessary to qualify for a financial discount
3.5 Option 3 involves implementing the Cape Town Convention in a way that may
prevent the Australian industry from accessing the financial benefits available under
the Convention.
3.6 By refraining from making the necessary declarations (as specified in the ASU) when
acceding to the Cape Town Convention and consequently precluding Australian
airlines from receiving any associated financial benefits, one of the primary purposes
behind ratification is essentially undermined. The financial benefits available under
the Convention are an important and strong consideration for Australia in determining
whether or not to accede.
4. Impact analysis
Who will be affected?
4.1 The problem affects the Australian aviation industry, including airlines, and
manufacturers of aircraft objects, as well as financiers of aircraft equipment.
Option 1: Implement the Cape Town Convention making all qualifications necessary to
qualify for the financing discount
Benefits
4.2 The global financial crisis has prompted industry to reconsider financing beyond
traditional domestic sources and to seek cost savings wherever possible.
9
4.3 By reducing the risk associated with asset-based financing and leasing, the Cape Town
Convention will increase the availability of and reduce the costs associated with
aviation finance. In turn, this will broaden the sources of funding currently available
to airlines.
4.4 Financiers suggest that in addition to reducing risks to creditors by ensuring creditor
access to and the expeditious recovery of assets in the event of default, accession to
the Convention will develop a new global infrastructure to attract capital finance,
leading to increased liquidity in aviation markets. This would improve the confidence
of international creditors in financing future purchases of aircraft objects by Australian
airlines.
4.5 Airlines have indicated the Cape Town Convention will greatly assist them in reducing
their financing costs in the short-term. In the medium to long-term, the Convention
will help airlines in fleet planning by providing more options to source aircraft
finance. This may result in increased operating efficiency and profitability, which
may flow through to passengers by way of reduced ticket prices and improved
serviceability.
4.6 An example of the immediate direct benefits of accession can be seen in the context of
Qantas and Virgin Blue's future plans. Qantas has announced it has around 65 Boeing
787-8 aircraft on order for delivery from 2013 onwards.
4.7 The Virgin Blue Group has announced intentions to purchase 23 Boeing 737 MAX
aircraft over a three-year period to facilitate these plans. The new airframes are
scheduled for delivery between 2013 and 2016.
4.8 Manufacturers will benefit in the long-term through increased sales of new aircraft
objects. In turn, this will lead to increased employment, higher output and market
expansion.
4.9 The OECD ASU allows for participants to the agreement to access fee discounts from
ECAs provided the participant-country has ratified the Cape Town Convention and
made all requisite `qualifying declarations'. It currently offers a reduction in the base
premium charged by ECAs for export credit financing. Under this arrangement, the
base premium established for each risk category would be reduced by 10 per cent.3
4.10 As mentioned above in paragraph 1.8, accession to the Convention independent of the
Protocol will have no impact on broader business. The Convention can only operate
in relation to a category of objects that are covered by a Protocol.
3
Conditions and minimum premium rates are updated periodically and published by the OECD. These rates
vary according to the risk category of the debtor.
10
Costs
4.11 Airlines that choose to register their interests in accordance with the Convention will
be subject to a small administrative fee. For example, a business registering an
interest in the International Registry for the first time will be charged a one-off fee of
US$200. Registration and search fees range from US$35-100. It is expected that
these low compliance costs will be offset by the broad benefits available under the
Convention.
4.12 Registration options and associated costs are being considered by the Attorney-
General's Department (AGD), which is also separately examining implementing
legislation issues (discussed at paragraph 4.28, below).
4.13 If `dual registration' is applied, airlines will also be subject to registration fees when
registering an interest in the domestic PPS register. Advice provided from AGD to
date indicates that while this cost is yet to be determined, it is expected to be low.
4.14 If `deemed registration' is pursued, airlines may only be subject to the administrative
fees associated with the Cape Town Convention (that is, the PPS registration fees may
not apply).
4.15 For smaller operators, there is a risk the Cape Town Convention may be of little
practical use to their operations. For example, smaller operators may not be interested
in seeking finance overseas and therefore may have no interest in accessing financial
discounts under the Convention or registering their securities interests at a cost. The
voluntary nature of the Convention allows for this scenario in that industry participants
are not obliged to register their interests on the International Register.
4.16 On the other hand, there is a possibility that financiers may begin to mandate
registration on the International Register as a prerequisite for the provision of credit in
the future. This scenario is largely speculative, however, and largely depends on how
the relationship between the aviation industry and financiers evolves over time.
Furthermore, the relatively minor registration costs associated with registration mean
that small operators should have little incentive not to use the system. For the time
being, the securities benefits available under the Convention remain open for the use
of all industry participants in considering financing options.
4.17 Administrative fees may also apply where a debtor issues an irrevocable de-
registration and export request authorisation (IDERA) to CASA (further discussed in
paragraph 4.27, below). If costs are deemed applicable, they are not expected to be
onerous.
11
4.18 While accession may result in cheaper access to finance, it would also have a
corresponding effect on the ability of an airline in financial distress to manage any
potential restructure effectively.
4.19 It should be noted that upon accession, secured creditors will not obtain any greater
preference than they otherwise would - i.e. their order of priority is not changed. If
their priority was improved relative to other creditors, the other creditors would be
expected to increase risk premiums or to restrict supply of credit.
4.20 The impact of the Convention is on the timing of secured creditor's ability to enforce
their claims. Delays in enforcement may negatively impact on rates of recovery. The
measure will therefore be expected to reduce risk premiums charged by secured
creditors.
4.21 By expediting secured creditors' rights to enforce their security, the period in which a
debtor company has to put in place a proposal - such as a Deed of Company
Arrangement (Deed) - to rescue a company may be reduced. The extent to which this
might be the case is not known; nor is the extent to which losses to unsecured creditors
would be expected to increase as a result of any possible reduction in business rescues.
Any increases in losses would result in increased costs and reduced access to
unsecured credit, with a negative impact on companies. The support of the industry
for the measure is indicative that any such negative impact is not expected to exceed
the positive effects of the expected impacts on costs and access to secured credit.
4.22 Following accession, a secured creditor would be able to enforce their security after
60 days regardless of whether the company is under voluntary administration and the
non-consensual stay of proceedings is continuing. Currently, a secured creditor is
prohibited from enforcing its security once a company enters into voluntary
administration until a Deed is put in place or a decision is made to wind up the
company. While this period is usually only 25 days, the Court is empowered to extend
that period, and given the size and complexity of the majority of industry participants
this would not be unlikely. Accession to the Convention will put new pressure on
creditors to obtain agreement on a potentially extremely complex Deed within the
60 day period.
Effect on existing regulation
4.23 Implementation of the Cape Town Convention would likely require amendment of the
PPS Act to ensure the international and domestic securities frameworks do not
conflict. In this way, effective implementation will enable parties to securities
transactions involving aircraft objects to access the protection and benefits available
under both systems.
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4.24 The Air Navigation Act 1920 (ANA) may need to be amended to give the Cape Town
Convention force of law in Australia. Noting the declarations power contained in the
Convention, the ANA could be amended to empower the Government to apply
relevant provisions of the Convention domestically, including any declarations
Australia may make when acceding to the Convention or after accession is complete.
4.25 In order to make the required insolvency declarations under the Protocol (known as
the `Alternative A' regime) and qualify for corresponding financial discounts from
financiers, the Australian courts would be restrained from exercising jurisdiction in
relation to securities remedies that are subject to the Convention, in favour of relevant
`self-help' provisions. Article XI of the Protocol provides that after a nominated
waiting period (60 days), the creditor automatically gains the right to repossess the
aircraft object. The courts would have no powers to delay or prevent the enforcement
of this remedy, however they would continue to have jurisdiction in relation to other
aspects of the securities matter, such as the validity of the claim over a security
interest.
4.26 To this end, the Corporations Act 2001 may require amendment to allow for
Alternative A to prevail over existing insolvency laws where aircraft objects are
concerned.
4.27 The Civil Aviation Safety Regulations 1998 (CASRs) would likely require amendment
to allow for the deregistration and export of aircraft objects (and/or the cancellation or
transfer of ownership in accordance with Article IX and Article XIII of the Protocol).
Under Article XIII and in the event of debtor default, where a debtor has provided the
registry authority (CASA) with an IDERA, this must be recorded and facilitated by
CASA (as discussed at sub-paragraph 1.17(b), above) within the stipulated time frame.
Costs associated with such transactions (if any) would also need to be determined and
outlined in the relevant CASA schedule.
Implementation Models
4.28 AGD have explored three possible implementation models to implement the Cape
Town Convention in Australia (applicable to Options 1 and 3), which include:
a) giving the Cape Town Convention force of law in Australia, and provide for the
Convention to prevail over the PPS Act where inconsistencies arise;
b) amending the PPS Act to incorporate the rules of the Cape Town Convention; and
c) combining the abovementioned models and enacting parts of the Cape Town
Convention, while implementing the rest by amending the PPS Act.
4.29 Model (a) (give the Cape Town Convention force of law in Australia, and provide for
the Convention to prevail over the PPS Act where inconsistencies arise), may result in
simpler legislation and certainty around qualification for a fee discount from ECAs.
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4.30 This model has been recently been adopted by New Zealand upon acceding to the
treaty. Considering that Australia's PPS Act is based on the New Zealand PPS Act,
and in light of the both Australia and New Zealand's commitment to regulatory
harmonisation and alignment between the two countries,4 the adoption of Model (a) is
commendable. Additionally, legal and financial practitioners across both jurisdictions
would find it easier to work within similar aviation financing regimes.
4.31 On the other hand, Model (a) may attract complexities for stakeholders in interpreting
legislation and Convention provisions. That is, in practice, Model (a) may make it
difficult for stakeholders to understand their rights and obligations in relation to the
PPS Act and the Cape Town Convention.
4.32 In the first instance, Model (a) will require stakeholders to gain a strong understanding
of the operation of both the PPS Act and the Cape Town Convention and identify
where inconsistencies arise between the two instruments to determine their rights and
obligations. For example, the enforcement provisions of each system differ in some
respects, and the responsibility for determining which enforcement mechanisms will
apply will lie with the aviation industry and by extension, the courts. As a
consequence, and in an effort to circumvent this issue, it follows that the aviation
industry may need to engage legal expertise to better understand their rights and
obligations. As the main beneficiaries of accession, it would not be unreasonable for
industry to incur some of the costs associated with operating under and within the two
schemes. Furthermore, parties to aviation finance transactions are quite sophisticated
by nature, and would generally seek legal expertise prior to entering into these
transactions in any event.
4.33 Model (b) (amend the PPS Act to incorporate the rules of the Cape Town Convention)
would provide stakeholders with more clarity as to their rights and responsibilities
when compared to Model (a). This will be achieved by making detailed amendments
to the PPS Act to adapt the Convention rules into the existing legislative framework
around PPS interests.
4.34 While the detailed analysis and redrafting of the PPS Act required for this option to
work will prove challenging for Government, it would mean that industry would only
need to be familiar with the PPS Act in relation to their interests in aircraft objects.
On the other hand, in the event industry needs to distinguish between Convention and
non-Convention issues to determine where their interests sit, they may find themselves
subject to the same interpretation complexities that apply to Models (a) and (c).
4
See `Memorandum of Understanding on Coordination of Business Law' at
14
4.35 This issue also extends to the reinterpretation of conceptual differences that exist
between the PPS Act and the Cape Town Convention (i.e. differences in the scope of
key terms such as `security interest' or `proceeds'). The adoption of Model (b) would
require major concepts in the PPS Act to be redefined in order for Convention rules to
be incorporated. This may have flow on effects for the rest of the PPS Act, which
could affect other industries. Such extensive changes would require further rigorous
consultation to be undertaken with uncertain benefits to be realised.
4.36 In addition, by restating the Cape Town Convention rules in the PPS Act (as opposed
to adopting the treaty in its original form), Australia risks failing to qualify for the fee
discount in the ASU - a considerable risk and drawback associated with Model (b).
This scenario is not uncommon, with countries such as Singapore and Indonesia being
required to amend their laws after implementing the treaty to meet strict qualification
requirements, causing unnecessary delay and costs. For this reason, stakeholders may
prefer to accede to the Cape Town Convention in its original form (Model (a)) to
avoid any uncertainty around receiving intended financial benefits from accession.
4.37 Model (c) (combination of Models (a) and (b)) balances the two approaches by giving
parts of the Cape Town Convention force of law and implementing the balance
through amendments to the PPS Act. As with Model (a), stakeholders will be required
to navigate the PPS Act and Convention in the first instance. In practice, this
complexity is somewhat heightened for Model (c) as it may unclear to stakeholders as
to which instrument provides the relevant rule at any given time.
4.38 AGD is continuing to explore the benefits and costs of each model in consultation with
the Department of Infrastructure and Transport (Infrastructure) and the Office of
Parliamentary Counsel (OPC) before deciding on a preferred approach. Advice from
OPC to date suggests that legislative complexity issues and the need for industry to
take positive action to understand the relationship between and the operation of the
PPS Act and the Cape Town Convention will be inevitable. This being the case, the
objective of Government in evaluating implementation issues will be to ensure the
Convention is implemented in a way that balances the needs of industry and is no
more complex than is necessary.
Option 2: Take no action
Benefits
4.39 Option 2 involves not implementing the Convention and focussing on preparing
industry for the introduction of the domestic PPS reforms. By restricting the
protection of securities interests in highly mobile equipment to a purely domestic
securities framework, the Australian Courts may have more flexibility to oversee
decisions in relation to insolvency remedies, to the extent that the existing PPS
framework allows for court intervention in securities insolvency matters.
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4.40 Under this option, the administrative process for secured creditors would remain
relatively straightforward and simple. Interests would only be required to be
registered in one Australian-based PPS register, as opposed to two registers which is
highly likely if the Convention is implemented and `dual registration' is pursued.
4.41 The PPS has been a positive development for holders of securities interests, as it has
created a uniform scheme. Its introduction in 2011 will ensure secured creditors of
aircraft objects benefit from a centralised and consistent system of registering their
interests, which previously did not exist in Australia. In turn, this may reduce the cost
and increase the availability of credit available to the Australian airline industry.
Costs
4.42 Option 2 could result in the Australian aviation industry becoming more isolated from
the rest of the world - and therefore less competitive in the global market - in relation
to financing and securities interests. As previously discussed, the PPS reforms, while
beneficial for security interests in personal property in general, do not necessarily cater
for the specialised nature of the aviation industry when compared to the Cape Town
Convention. Distinguishing features of the aviation industry include highly mobile
and expensive equipment, complex and sophisticated financing techniques and cross-
border regulations.
4.43 In addition, a domestic securities framework may over-expose Australian airlines to
the risks associated with sourcing export credit finance internally. That is, airlines
may continue to rely on local market financing and its associated limitations, with
relatively restricted options for contingency finance.
Option 3: Implement the Cape Town Convention without making all declarations
necessary to qualify for a financial discount
Benefits
4.44 Option 3 would allow Australia to accede to the Cape Town Convention without
disrupting its existing securities and insolvency framework. Secured creditors of
aircraft objects would receive increased protection in relation to their registered
interests (when compared with the PPS system); however, the protection would be less
than that afforded under Option 1.
4.45 Although legislation will still be required to implement the Convention, the impact on
Australian courts, the PPS reforms, the CASRs and the Corporations Act 2001 will be
significantly reduced when compared to Option 1. For example, by not enforcing
Alternative A, the Australian courts may have more powers in enforcing remedies
under the Convention. It follows that Option 3 would likely be more efficient and less
complex than Option 1, and ratification would ensure Australia remains aware and
supportive of international efforts to reduce risk in asset-based financing.
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Costs
4.46 Under Option 3, airlines would not be eligible to receive a fee discount in accordance
with the ASU. As the financial incentives offered under the Convention (as
supplemented by the ASU) represent a significant driver for accession,
implementation that omits this benefit will be a counter-productive and costly process.
4.47 In addition, this form of implementation would be out-of-step with international
practice, with 34 countries having already ratified the Cape Town Convention (the
majority of which made the required ASU declarations). The long-term benefits to be
derived from the Convention for airlines and the broader Australian aviation industry
(e.g. access to international financiers, more efficient and cost-effective fleet planning,
and remaining competitive in an expanding international market) will be lost if the
instrument is not implemented as recommended.
4.48 If Australia pursued this option and decided to make subsequent declarations to meet
ASU requirements, it would be an expensive, time-consuming and somewhat
cumbersome exercise.
5. Consultation
5.1 AGD initially consulted industry about whether or not Australia should sign the Cape
Town Convention in 2003. This round attracted a limited response, with only three
submissions received from stakeholders.
5.2 Following the entry into force of the Cape Town Convention in 2006, the Australian
Government revived consideration of the treaty. On 27 February 2008, Infrastructure
issued a consultation paper to industry, inviting submissions about the implications for
Australia if it were to accede to the Cape Town Convention. Infrastructure distributed
the consultation paper by writing to stakeholders (including financiers, airlines and
industry bodies, as well as the States, Territories and Commonwealth Government
agencies) and publishing the paper on its website, where it can still be accessed by the
public.
5.3 The 2008 consultation paper did not generate significant stakeholder interest,
receiving only seven responses. Both industry and Australian Government
stakeholders considered that any action to implement the Convention in Australia must
be consistent with the PPS reform process which at the time, was yet to be finalised.
5.4 The majority of submissions supported accession to the Convention and considered
the international register for security interests in aircraft objects a useful and beneficial
development. One regional aviation organisation recognised that the benefits of the
Convention would extend to regional airlines and would greatly improve borrowing
arrangements. Two major law firms stressed the importance of ensuring the
Convention and the PPS reforms effectively balanced and complemented each other
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and favoured dual registration. Most submissions indicated a preference for the
Alternative A insolvency regime and suggested the Convention be implemented
around the same time as the PPS reforms.
5.5 The only negative response to the consultation paper was received from a non-profit
aviation association. The association considered that accession to the Convention
would expose the Australian aviation industry to `considerable additional costs,
unnecessary documentation and delays in the transfer of ownership of aircraft and
engines'. Further consultation and analysis of the Convention has countered this
argument, indicating that any costs associated with accessing a fee discount under the
Convention and registering interests in the international register are minimal and are
largely outweighed by the financial benefits and security offered under the
Convention. Further, application of the Alternative A insolvency system would
provide for the expedited transfer of ownership and possession of highly mobile assets
when compared to the existing insolvency remedies system in Australia.
5.6 Since this time, the global financial crisis prompted industry to reconsider its options
for sourcing finance for the purchase of aircraft objects. In 2009, a number of industry
stakeholders approached the Government indicating a renewed interest in the Cape
Town Convention. These representations suggested industry had developed a strong
desire to progress the Convention in an effort to source available financial discounts.
Australian airlines are now looking to international financiers to fund the purchase of
new airframes at a time when the industry is trying to recuperate from the effects of
the economic downturn and regrow itself.
5.7 On 16 December 2009, Infrastructure wrote to industry following the release of the
National Aviation White Paper, advising about the Government's consideration of the
Convention. Infrastructure indicated it would be working with AGD to examine
options for implementation of the Convention in a manner that would complement the
new PPS reforms in an administratively sound manner.
5.8 Over the course of 2009 and 2010, the Government continued consultations with a
number of major airlines, law firms, a major airframe manufacturer and international
financing companies about accession. The Tourism and Transport Forum, a peak
industry body, has been actively involved in a number of meetings with aviation
industry stakeholders, to keep abreast of the interactions and outcomes between
industry and the Government. This has also ensured continuous engagement between
government and stakeholders and in turn, ongoing progression of consideration of the
Convention.
5.9 The Government also wrote to small air operators to gauge their views about
implementation and the possible impact of the Convention on their operations. This
letter generated minimal interest from this sector of the industry, with one response
received from a general aviation body, indicating its in-principle support for accession.
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5.10 The Hon Anthony Albanese MP, Minister for Infrastructure and Transport, formally
wrote to the Hon Robert McClelland, Attorney-General, on 10 March 2010 to advise
about a proposed way forward. The Attorney-General responded on 19 April 2010
supporting Australia's accession to the Convention and agreeing to the proposal. To
this end, AGD will continue to provide advice about the interaction between the
Convention and the PPS reforms and possible implementation options.
5.11 On 22 November 2010, Infrastructure released a new consultation paper for
stakeholder consideration, seeking advice about technical accession issues that require
further consideration by industry. It is intended that stakeholder input to this paper
will assist the Government in resolving complexities associated with relevant
`declarations' Australia may make if it decides to accede to the Convention.
5.12 In addition, AGD presented a paper entitled `Australian Personal Property Securities
Reform and Secured Finance in the Aviation Industry' at an Aviation Law Association
of Australia and New Zealand (ALAANZ) conference on 12 March 2009.
Infrastructure also outlined the Government's consideration of the Convention at an
ALAANZ event held in Melbourne on 29 April 2010, as part of a presentation
detailing changes to existing carriers' liability and insurance arrangements.
6. Conclusion and recommended option
6.1 In the current economic climate, Australian airlines are conscious of the need to
update their fleets with more efficient and environmentally-friendly aircraft objects
and balance this with corporate requirements to monitor and control capital spending.
6.2 For international financiers, the ability to offer export credit finance to a fast-
expanding aviation market demands more certainty and security in relation to their
rights and the enforcement of default remedies.
6.3 This scenario affects and involves various other stakeholders in the aviation industry
including airlines, manufacturers of airframes and lawyers, making the Cape Town
Convention relevant for the majority of participants in the Australian aviation industry.
6.4 Option 1 (accede to the Convention by making all declarations specified in the ASU)
attempts to address the various demands associated with cross-border aircraft
financing to create a more stable environment for the financing of aircraft objects.
The provisions of the Cape Town Convention have proven appealing to ECAs to the
extent that a number of financiers have offered a fee reduction for countries that ratify
the Convention in a manner that will provide creditors with strong and robust remedies
in the event of debtor default. In this way, Option 1 affords financiers with the
enhanced security they seek while providing airlines with an opportunity to
significantly reduce their financing costs. In the longer term, it is expected this
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approach to aircraft financing will underpin a healthy and sustainable global aviation
industry.
6.5 Option 2 (take no action) retains the status quo. While this scenario - upon the
commencement of the PPS Act - will provide for an improved domestic environment
for the protection of securities interests, airlines may continue to struggle for finance
in a limited local market. In turn, this could continue to restrain Australian airlines
from accessing international financing opportunities available to other international
airlines, impacting on their competitiveness in the market.
6.6 Option 3 (accede to the Convention without making all declarations necessary to
qualify for a financial discount), while positive in that it will demonstrate that
Australia is supportive of international efforts to improve certainty around aircraft
object financing, will have little impact on the Australian industry. Omitting to make
critical declarations will be seen by ECAs as failing to ensure enhanced security for
financiers of aircraft objects and will result in no fee reduction being passed onto
Australian airlines. Ultimately, this form of ratification will preclude the availability
of the possible benefits under the Cape Town Convention for all parties, making
ratification a futile and costly exercise.
6.7 For these reasons, Option 1 - namely, accession to the Convention by making all
declarations specified in the ASU - is the recommended option. This option will
produce the most benefits to all industry stakeholders with little cost and is therefore
the most effective option to remedy an otherwise fractured international legal
framework governing the rights of international financiers of aircraft objects and the
costly lending premiums airlines have become subject to as a result. The ongoing
ratification effort by the rest of the international community is indicative of the
increasing influence of the Convention over the international financing of aircraft
objects. If Australia wishes to remain on par with the global aviation industry and
reap the economic and securities benefits of the Cape Town Convention, it must
accede to, and implement the treaty in accordance with Alternative A.
7. Implementation and review
7.1 Infrastructure, together with AGD, will have responsibility for progressing accession
to the Cape Town Convention and administering related legislation and amendments.
To assist in determining which implementation option to adopt, AGD have
commenced analysis of the Cape Town Convention to identify convergence and
divergence between the Convention and PPS Act rules and concepts. Legal
practitioners involved in aviation financing would have the necessary expertise and
would be aware of the vagaries of such transactions, and it is possible that comments
and input from these stakeholders will be sought.
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Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
International Interests in Mobile Equipment (Cape Town Convention) (Consequential
Amendments) Bill 2013
This Bill is compatible with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act
2011.
Overview of the Bill
The Bill complements the International Interests in Mobile Equipment (Cape Town
Convention) Bill 2013.
The main purpose of the Bill is to ensure that the Convention on International Interests in
Mobile Equipment (`the Convention') and Protocol to the Convention on International
Interests in Mobile Equipment on Matters Specific to Aircraft Management (`the Protocol') is
effectively implemented into Australian law.
Human rights implications
This Bill amends the Air Services Act 1995 and Civil Aviation Act 1988 to give effect to
certain aspects of the Convention and Protocol and makes consequential amendments to the
Personal Property and Securities Act 2009 to ensure that the Convention and the Protocol can
operate in tandem with other Australian law.
The amendments do not engage any human rights issues.
Conclusion
The Bill is compatible with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act
2011, as it does not engage any of the applicable rights or freedoms or alter any human rights
safeguards currently in place.
Minister for Infrastructure and Transport, the Honourable Anthony Albanese, MP
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NOTES ON CLAUSES
Clause 1: Short Title
1. This clause is a formal provision specifying the short title of the Bill.
Clause 2: Commencement
2. This clause sets out the commencement dates of the Bill. Sections 1 to 3 of the Bill would
commence on the day on which the Bill receives Royal Assent. Schedule 1 of the Bill
would commence at the same time as section 3 of the International Interests in Mobile
Equipment (Cape Town Convention) Act 2013 commences.
Clause 3: Schedule
3. This clause provides that the Air Services Act 1995, Civil Aviation Act 1988 and Personal
Property Securities Act 2009 are amended as set out in the applicable items in the
schedule to the Bill.
Schedule 1 - Amendments
Air Services Act 1995
Item 1 - At the end of subsection 60(3)
1. Item 1 includes a note that recognises that registered interest within the meaning of the
Convention on International Interests in Mobile Equipment, done at Cape Town on 16
November 2001 is a security interest covered by subsection 60(3) of the Air Services Act
1995. The note also recognises that a statutory lien under the Air Services Act 1995 may
have effect as a non-consensual right or interest under the Convention.
2. According to the terms of s 60(3) of the Air Services Act 1995, any statutory lien vested
in Airservices Australia for unpaid service charges would have priority over a security
interest registered on the International Registry, provided it was registered in accordance
with the Air Services Act 1995 before the security interest was registered on the
International Registry.
Civil Aviation Act 1988
Item 2 - After paragraph 9(3)(cc)
3. Item 2 inserts a provision that recognises that functions may be conferred on CASA
under the International Interests in Mobile Equipment (Cape Town Convention) Act 2013
or rules made under that Act.
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4. This provision would enable CASA to perform functions in connection with one of the
remedies available to creditors under the Convention - deregistration and export of an
aircraft object through an IDERA.
5. It is intended that rules would be made in respect of CASA's obligations in relation to the
recording, removal and operation of an IDERA.
Personal Property Securities Act 2009
Item 3 - At the end of subsection 256
6. Item 3 adds the `International Interests in Mobile Equipment (Cape Town Convention)
Act 2013' to the list of Acts that prevail over the Personal Property Securities Act 2009
to the extent of any inconsistency.
7. The absence of a similar provision in other Acts does not preclude the International
Interests in Mobile Equipment (Cape Town Convention) Act 2013 from prevailing over
any other Act to the extent of any inconsistency.
8. The Personal Property Securities Act 2009 has been specifically amended because it is
considered the codifying legislation for the creation and enforcement of security interests
in personal property. The intention of the provision is to make holders of a security
interest in an aircraft asset aware of the existence and the primacy of the Convention and
Protocol over the Personal Property Securities Act 2009.
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