Insolvency in air and space and the Cape Town Convention

The High Court of Australia is set to decide on an issue of interpretation of a clause applicable to secured transactions involving international transactions re aircraft. This will also have implications for transactions in the space sector.

The Cape Town Convention (the Convention on International Interests in Mobile Equipment) is relevant for secured transactions re Aircraft, Spacecraft etc. Since airline insolvencies are unfortunately a reality in the aftermath of Covid, the Cape Town Convention has become more relevant than in the past. With corporate activity in space heating up, it is likely to become relevant in the space sector as well. The experience of the use of the Cape Town Convention in the airline industry will be instructive.

Aircraft protocol

The Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment (Aircraft Protocol) has been in the news thanks to the Virgin Australia insolvency. The Federal Court of Australia (FCA) in Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) interpreted Article XI of the Protocol and the appeal is currently being heard in the High Court of Australia (HCA).

The Convention and Protocol establish an international legal system for security interests in aircraft equipment. In a forthcoming book chapter (Airline Insolvencies in India) Hitoishi Sarkar and I discussed Article 3(1) of the Convention which provides that the Convention is applicable if the debtor is situated in a state that is party to the Convention.

We explained Article XI of the Protocol as follows (references omitted; emphasis added):

The most central insolvency provision pertaining to aircraft is provided in Article XI of the Aircraft Protocol which provides contracting States with two alternative provisions. It then provides that contracting States may choose either alternative or choose to adopt neither of the alternatives. If a contracting State elects one of the alternative versions of article XI, then that version will apply when the contracting State is a debtor’s ‘‘primary insolvency jurisdiction.”

Under Alternative A to Article XI of the Aircraft Protocol, the debtor’s ‘‘insolvency administrator’’ or the debtor must give possession of the relevant aircraft object to the creditor holding an international interest in the object before the expiration of a stipulated waiting period. The alternative permits a Contracting State, in its declaration with respect to that article, to specify the applicable waiting period’ that will apply when the Contracting State is a debtor’s primary insolvency jurisdiction.

Under Alternative B, the insolvency administrator or debtor, on a creditor’s request, is merely required to give the creditor notice whether the administrator or debtor “will cure defaults and perform future obligations or permit the creditor to take possession of the aircraft object. This alternative does not provide a creditor with any right to obtain possession of an aircraft object in insolvency proceedings.

Since Australia has opted for Alternative A, “give possession” was being interpreted by the FCA. In the court’s view “give possession” does not include redelivery and so it is up to the creditor to “come and get it“. (There is an excellent article on this by Professor David Brown “Give” and “Take”: Virgin Australia, the Cape Town Convention and Aircraft Protocol (2021) 21(1&2) INSLB 21 where he endorses this interpretation and also discusses further about the “commercial sense” of the court’s interpretation.) This is currently being heard in the High Court of Australia (as Michael Murray reports over at his blog) so we will have to watch how this goes down.

Space protocol

The Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets (Space Protocol) which is not yet in force has a similarly worded provision.

Alternative A under Article XXI also states as follows (emphasis added):

Upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor, as applicable, shall, subject to paragraph 8 and to Article XXVI(2) of this Protocol, give possession of or control over the space asset to the creditor no later than the earlier of:

(a) the end of the waiting period; and

(b) the date on which the creditor would be entitled to possession of or control over the space asset if this Article did not apply.

Thus, the interpretation of the HCA is likely to be relevant to insolvencies in the space sector as well.

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