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The Emphasis of the Policy Intent

The unique features of the Cape Town Convention discussed above resulted from the approach to drafting which is much different from traditional uniform law instruments. The Cape Town Convention does not aim at merely unifying the laws of various jurisdictions by choosing one of the existing domestic laws or creating a “middle ground” rule among them. Rather, the drafters had the clear goal of establishing a legal framework conducive to asset based financing that will bring about the economic benefit from larger availability of financing to the State Party.[1] It was recognised that three principles were needed to achieve this goal, namely: (1) transparency in the priority among secured interests, (2) the prompt enforcement of secured interests in case of default by the debtor, including the admissibility of private enforcement, and (3) the enforcement of the secured interests without being qualified or modified under the insolvency proceedings.[2]

This approach reflects the evaluations by the market for enhanced equipment trust certificates (EETCs). EETCs are securities to finance acquisition of equipment from the capital market. Since the latter half of the nineteenth Century, railway companies in the United States have developed a scheme of equipment trust of railway rolling stock that enabled the issuance of equipment trust certificates (ETCs) to the capital market. Originally it was bailment with purchase option of rolling stock held by the trustee, but later the conditional sale agreement appeared, followed by the leasing agreement.[3] After the Second World War, the scheme started to be used for aircraft financing. Now, a scheme of “enhanced” equipment trust certificates, distinguishing several tranches and introducing cross subordination, is commonly


As bankruptcy procedure was gradually formed in the United States since the end of the nineteenth Century, the status of equipment trust in the procedure began to be questioned. The concerns from the market resulted in the amendment of 1935 to the Bankruptcy Act of 1898, adding a paragraph to the provision on bankruptcy of railway operators that allowed the owner of conditionally sold or leased railway rolling stock to take possession of the collateral even after the commencement of the reorganisation procedure.[5] The provision is currently codified in section 1168 of the 1978 Bankruptcy Code of the United States,[6] and a similar provision exists with regard to aircraft and ships as section 1110.[7] The latter provision has been considered as “one of the linchpins of EETCs, and indeed all U.S. aircraft, financings.”[8] If one compares the texts of section 1110 and Article XI of the Aircraft Protocol, it is easy to see that Alternative A of the latter provision intended to replicate the former, expecting the economic benefit realised by sections 1110 and 1168 to become available to borrowers outside the United States.

Because the policy intent was so strong, it was feared that a compromise on the text would mitigate the expected economic benefit. For this reason, when the negotiations on the text encountered difficulties, it was preferred to incorporate options. As a result, the Cape Town Convention has options (possibilities to opt in and opt out) in various provisions. The strategy was to accommodate conflicting views on the policies at the stage of negotiations, and to postpone the decisions on which policy to choose until the time when states ratify the Cape Town Convention and decide whether or not to make declarations on opt-in’s and opt-out’s.[9] Under this mechanism, the economic benefit to be achieved will vary, depending on the set of rules opted by the ratifying states. To give guidance on the combination of options acceptable to the market, the Aviation Working Group (AWG) and the Rail Working Group (RWG) have prepared “a matrix of recommended declarations”.[10] For the Aircraft Protocol, almost identical set of declarations is treated as “qualifying declarations” in the Aircraft Sector Understanding (ASU) of the OECD (Organisation for Economic Cooperation and Developments). It is one of the conditions for the discount in premium rate to be applicable (see Sect.

  • [1] Jeffrey Wool, The case for a commercial orientation to the proposed Unidroit Convention asapplied to aircraft equipment, [1999] Uniform Law Review p.289.
  • [2] Anthony Saunders, Anand Srinivasan, Ingo Walter & Jeffrey Wool, The Economic Implicationsof International Secured Transactions Law Reform: A Case Study, The University of PennsylvaniaJournal of International Economic Law, vol. 20, p.309, at p. 324 (1999).
  • [3] Michael Downey Rice, Railroad Equipment Financing, Transportation Law Journal, Vol.18,p.85 (1989); For the detailed history of the development of ETCs of railway rolling stock, seeFrancis Rawle, Car Trust Securities, Annual Report of the American Bar Association, p.277(1885).
  • [4] Ronald Scheinberg, Enhanced Equipment Trust Certificates in the Downturn: An Assessment forBanks, Banking Law Journal, Vol.121, p.108 (2004).
  • [5] See Gregory Ripple, Note, special Protection in the air[line Industry]: The Historical Developmentof Section 1110 of the Bankruptcy Code, Notre Dame Law Review, Vol.78, p.281, at pp.287-288(2002); On the background of the amendments, Max Lowenthal, The Railroad Reorganization Act,Harvard Law Review, Vol.47, p.18 (1933).
  • [6] 11 USC §1168.
  • [7] 11 USC §1110.
  • [8] Scheinberg, supra note 55, p.114.
  • [9] Ikumi Sato & Yoshinobu Zasu, Beyond Conflict of Interest: Lessons from the Cape TownConvention, Asian Journal of Law and Economics, Vol.1, Issue 1, p.1 (2010).
  • [10]
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