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Registration or Registrations?

Professor McKendrick gave a critical snapshot of the registration system under English law:

[t]he present position with respect to registration/filing as a method of perfection is profoundly unsatisfactory on account of the multiplicity of registers, the varying, and sometimes uncertain effects of registration, and the lack of rational policy underlying the sanctions for non-registration. Several of the registers attract their own priority rules; and certain types of security interest are registrable in more than one register.[1]

Holders of security interests over aircraft are no strangers to the problems described by Professor McKendrick. Their source is the dual-registration requirement under both the Register of Aircraft Mortgages and the Register of Company Charges, the former being a specialist register of assets and the latter a register of debtors.

The UK Register of Aircraft Mortgages was created by the Mortgaging of Aircraft Order 1972.[2] It came into force on 1st October 1972 and since then the UK Civil Aviation Authority (CAA) administers it. The Order provides that only UK-registered aircraft together with their spare parts can be made security for a loan or other valuable consideration that is eligible for registration.[3] However, this broad statement is misleading, since the Order restricts the security interests over aircraft that are eligible for registration: it limits the ambit of the Register to (legal and equitable) mortgages over aircraft together with their spare parts, as well as to fixed charges over the same, while explicitly excluding floating charges over them.[4] In effect, this means that a mortgage covering spare engines or other spare parts alone is not eligible for registration. Having said that, it is arguable that “where the charge is over both a registered aircraft and a stock of spares of it, the charge is within the scheme even though the provisions that relate to the spares create a floating charge over them”.[5] Opinion suggesting the contrary exists.[6]

The effects of registration of a mortgage at the Register of Aircraft Mortgages have been succinctly described as follows: first, the registered aircraft mortgage will take priority over all other mortgages and charges save for prior registered mortgages (or priority notices current in respect of them).. .;second, all persons are deemed to have express notice of all facts appearing on the register although the registration of a mortgage does not contribute evidence of its validity; third, registered mortgages are not affected by or subject to the terms of the Bill of Sales Act 1878 and 1882; last, the CAA will indemnify any person suffering loss by reason of any error or omission on the register or of any inaccuracy in the copy of an entry in the register..[7]

In that respect, the following considerations are relevant to our report:

  • 1. entering the mortgage in the Register of Aircraft Mortgages gives notice of the interest and preserves its priority[8];
  • 2. the said entry is not an element of its constitution, since the Order expressly provides that “the registration of a mortgage shall not be evidence of its validity”. [9] This further means that any buyer of the aircraft “will not be able to take free of an equitable mortgage or charge over it as the bona fide purchaser of a legal estate for value and without notice”; [10]
  • 3. the registrar does not guarantee that the registered information reflects the true state of the titles. Furthermore, the Order provides that any person who “makes any statement which he knows to be false in a material particular, or recklessly makes any statement which is false in a material particular” is guilty of a criminal offence.[11] However, the registrar is responsible for its own errors. The Order provides that the registrar will indemnify anyone who suffers loss as a result of an “error or omission in the Register or of any inaccuracy in a copy of an entry in the Register”,[12] unless she/he has contributed to the loss fraudulently or “has derived title from a person so committing fraud”.[13]

With respect to priorities, the Order creates the following rules:

  • 1. A registered mortgage enjoys priority over any unregistered mortgage or charge on the same aircraft[8];
  • 2. Priority between two (or more) registered mortgages on the same aircraft is determined on a first come, first served basis: it will depend on “the times at which they were respectively entered in the Register”[15];
  • 3. Priority notices are registrable in the Register,[16] with the Order providing for a period of 14 days for them to be converted into proper mortgages and to be registered.[17] This registered mortgage will take priority retrospectively from the date of registration of the priority notice[17];
  • 4. A mortgage that is registered in the knowledge that there is an earlier unregistered mortgage enjoys priority over the earlier one as per the rules above.[19]
  • 5. The Order creates an exception to the aforementioned priority rules: possessory liens for unpaid work undertaken on the aircraft, as well as rights of detention of the aircraft deriving from an Act of Parliament,[20] enjoy priority over any registered mortgages or charges that are created or registered either before or after them.[21] It is noted that possessory liens and rights of detention are not registrable under this scheme.

Registration of the mortgage at the Register of Aircraft Mortgages is not the end of the story. So long as the mortgage or the charge is created by a company or a limited liability partnership, registration of the interest at the Register of Companies Charges under the Companies Act 2006 is also required. The Register of Company Charges, unlike the Register of Aircraft Mortgages, is a debtor-based registration scheme. The scheme went through a major amendment in 2013 (with effect from 6 April 2013) and as a result references to both the new (post-2013 scheme) and the old regime (pre-2013 scheme) are made where appropriate.[22] Under both regimes a charge on an aircraft created by a company registered in England, Wales or Northern Ireland (under the pre-2013 scheme) or created by a company registered in the UK (under the post-2013 scheme) requires registration, otherwise it is void against a liquidator, an administrator or a debtor of the company.[23] The term charge as used in both the pre-2013 and the post-2013 schemes of the Companies Act 2006 is wide enough to encompass mortgages and charges that are registrable in the Register of Aircraft Mortgages. The pre-2013 scheme contains a list of charges that shall be registered, which it expressly refers to charges on aircraft, while including floating charges that are expressly excluded from the Register of Aircraft Mortgages.[24] The post-2013 scheme does not contain a list. Instead, it provides that all charges,[25] as defined by the Act,[26] created by a company in the UK shall be registered, subject to three exceptions.[27]

Under the pre-2013 scheme it was the duty of the company/debtor to register the charge within 21 days beginning with the day after the date of creation of the charge.[28] Any failure to do so, opened up the company and its officers, who were in default, to criminal liability.[29] Most importantly for the purposes of this report, the failure to register the charge rendered it void vis-a-vis the liquidator or the administrator of the company, as well as a creditor of the company.[30] As such, “if a charge has not been registered in time.. .and the company becomes insolvent, the liquidator may take the property that would been subject to the charge for the benefit of the creditors generally”.[31]

Under the post-2013 scheme the company/debtor is under no duty to register the charge, as the threat of criminal liability has been eliminated. However, failure to register the charge within 21 days of the date of its creation renders it void vis-a-vis the liquidator, the administrator or the creditor of the company, as per the pre-2013 regime. Essentially, non-registration of the charge converts its holder to an unsecured creditor.[32]

Under both schemes, failure to register the mortgage with the Register of Company Charges has a detrimental effect on its registration in the Register of Aircraft Mortgages. Registering a mortgage over an aircraft in the Register of

Aircraft Mortgages but not in the Register of Company Charges will render the mortgage void vis-a-vis any creditor, liquidator or administrator of the company. This omission will detrimentally affect its priority:

if a first mortgage was duly registered at Companies House but the second one is not.. .the second mortgage will be void against the first creditor. If a first one was not duly registered at Companies House but only on the aircraft mortgage register, it will be void against the second mortgage provided that the second one was duly registered at Companies House. When neither has been registered in time, it seems likely that priority will depend on the date of registration on the aircraft mortgage register.[33]

At the same time, registration of the mortgage in both registers gives priority over floating charges even when they contain a negative pledge clause that is known to the subsequent mortgagee (floating charges are not registrable in the aircraft register, but they are to be registered in the companies register).[34] Considering that floating charges (or mortgages) over spare parts alone are not registrable in the Register of Aircraft Mortgages, any mortgage over this aircraft and its spare parts (which are registrable) would take priority over the floating charge.[35]

The ratification of the Cape Town Convention increases the transparency of English law because it creates a focal point for registrations and the ascertainment of priorities: (i) both security and “quasi-security” interests over aircraft and engines (alone) are registrable; and (ii) the existence of a single register simplifies the priority rules increasing the confidence of financiers and buyers in the quality of the transaction in question. There have been arguments in England that the pre-Cape Town system of registration of mortgages over aircraft works well and as such there is no need to change it.[36] It is true that overall the system works, but this is mostly the result of the sophistication and experience of the parties and their lawyers. However, it is submitted that its structure and organisation is complicated and not all-embracing with ample space for the Cape Town Convention to improve it.

Having said that, the UK Register of Aircraft Mortgages will remain open following the implementation of the Cape Town Convention into English law. Firstly, there is no compulsory requirement to register an international interest and parties might still opt for the domestic solution.[37] Secondly, Reg. 23 of the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 provides that “[a]ny additional remedies available in accordance with the applicable law.. .may be exercised to the extent that they are not inconsistent with provisions... under these Regulations or the Cape Town Convention”. In that respect, retaining the UK Register is essential “if creditors wish to have access to remedies which are available under domestic UK law for domestic interests (which may or may not also be international interests under the Cape Town Convention), domestic law requirements in connection with those interests (including perfection and/or registration requirements) need to continue to be satisfied”.[38] Furthermore, the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 provide that s. 859A of the Companies Act 2006 on the Register of Companies Charges “is not to apply to a charge which is an international interest”, releasing prima facie the parties from the said additional domestic registration. However, a note of caution has already been raised: “if the security agreement creates a charge which would usually have been registrable under section 859A in any case, that charge should continue to be registered with Companies House in the usual way irrespective of whether or not it is also an international interest. This is important for two reasons: (a) failure to register a registrable charge with Companies House means not only that the charge is void as against an insolvency officer as a matter of domestic English law but it also means that the underlying debt secured by that charge becomes immediately repayable and (b) dual registration enables the chargee to have access to both Cape Town Convention remedies and any applicable domestic UK law remedies”.[39]

  • [1] E McKendrick, Goode on Commercial Law (4th edn, 2010), pp. 692-693 with notes omitted.
  • [2] See Arts 1 and 4 of the Mortgaging of Aircraft Order 1972, SI 1972/1268.
  • [3] Art. 3. Registration of a mortgage under the Order is not compulsory. Yet, the draconian effect ofnon-registration on its priority makes registration de facto compulsory. A mortgage over a non-UKregistered aircraft “remains possible in law”, yet it will not be subject to the Order that will inevitably impair its priority in D Mcclean (ed), Shawcross and Beaumont on Air law (2015), at IV[46].
  • [4] Art. 2(2) and 4(1). The term “charge” in the Order is used to “include charge ‘within mortgage’”in H Beale, M Bridge, L Gullifer, E Lomnicka, The Law of Security and Title-Based Financing(2nd edn, 2012), at [14-51].
  • [5] H Beale, M Bridge, L Gullifer, E Lomnicka, The Law of Security and Title-Based Financing (2ndedn, 2012), at [14-51].
  • [6] J Edmunds, “Mortgages of Aircraft” in I Davies (ed), Security Interests in Mobile Equipment(2002), p. 145, 148.
  • [7] Ibid., p. 152.
  • [8] Art. 14(1).
  • [9] Art. 13.
  • [10] H Beale, M Bridge, L Gullifer, E Lomnicka, The Law of Security and Title-Based Financing (2ndedn, 2012), at [14-59].
  • [11] Art. 17.
  • [12] Art. 18(1).
  • [13] Art. 18(2)(a).
  • [14] Art. 14(1).
  • [15] Art. 14(2).
  • [16] Art. 5(1).
  • [17] Art. 14(2)(ii).
  • [18] Art. 14(2)(ii).
  • [19] Art. 14(4).
  • [20] Such as the fleet liens the CAA enjoys for unpaid route charges under s. 83 of the Transport Act2000 and certain airports enjoy for unpaid charges under s. 88 of the Civil Aviation Act 1982. Seealso Global Knafaim Leasing Ltd v Civil Aviation Authority [2010] EWHC 1348 (Admin), [2011]1 Lloyd’s Rep. 324.
  • [21] Art. 14(5).
  • [22] The Companies Act 2006 (Amendment of Part 25) Regulations 2013, SI 2013/600, repealed ss.860 to 892 of the Companies Act 2006 and replaced them with ss. 859A to 859Q. Relevant interests created on or after 1 April 2013 are governed by the new regime, with interests created beforethat day governed by the old regime.
  • [23] s. 859H(3) of the post-2013 registration scheme and s. 874 of the pre-2013 registration scheme.
  • [24] For the list of charges see s. 860(7) Companies Act 2006 which includes the following: (a) acharge on land or any interest in land, other than a charge for any rent or other periodical sum issuing out of land; (b)a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale; (c)a charge for the purposes of securing anyissue of debentures; (d)a charge on uncalled share capital of the company;(e)a charge on callsmade but not paid; (f)a charge on book debts of the company; (g)a floating charge on the company’s property or undertaking; (h)a charge on a ship or aircraft, or any share in a ship [emphasisadded]; (i)a charge on goodwill or on any intellectual property.
  • [25] s. 859A (1) Companies Act 2006.
  • [26] s. 859A (7) Companies Act 2006 provides that a “charge includes a mortgage; a standard security; assignation in security, and any other right in security constituted under the law of Scotland,including any heritable security, but not including a pledge”.
  • [27] The exceptions in s. 859A(6) are the following: a charge in favour of a landlord on a cash depositgiven as a security in connection with the lease of land; a charge created by a member of Lloyd’s[within the meaning of the Lloyd’s Act 1982(3)] to secure its obligations in connection with itsunderwriting business at Lloyd’s; and a charge excluded from the application of this section by orunder any other Act.
  • [28] s. 870 Companies Act 2006.
  • [29] s. 860 (4) - (6) Companies Act 2006.
  • [30] s. 874 Companies Act 2006.
  • [31] H Beale, M Bridge, L Gullifer, E Lomnicka, The Law of Security and Title-Based Financing (2ndedn, 2012), at [10-32].
  • [32] M Bridge, L Gullifer, G McMeel, S Worthington, The Law of Personal Property (2013), at[14-090].
  • [33] H Beale, M Bridge, L Gullifer, E Lomnicka, The Law of Security and Title-Based Financing (2ndedn, 2012), at [14-57]. The provisions of the Companies Act on the Register of CompaniesCharges, unlike the Mortgaging of Aircraft Order 1972, do not contain an express provision onconstructive notice. In a case where the interest is registered in the Register of Companies Chargesbut not in the Register of Aircraft Mortgages the answer to the question whether a bona fide buyerof the aircraft is bound by the interest depends on the effect of registration: does the registrationprovide constructive notice to all the world or only to those who were reasonably expected tosearch the Register of Companies Charges. The prevailing view is the latter which means that theanswer will depend on whether it is expected from the buyer in question to search the Register ofCompanies Charges. For a thorough analysis of constructive notice in the context of the Registerof Companies Charges see H Beale, M Bridge, L Gullifer, E Lomnicka, The Law of Security andTitle-Based Financing (2nd edn, 2012), at [12.04]ff. For the position under the Register of AircraftMortgages see above note 33.
  • [34] Ibid, at [14.58].
  • [35] Ibid.
  • [36] See Department for Business, Innovation and Skills, “Call for evidence: full list of responses.Convention on International Interests in Mobile Equipment and Protocol thereto on MattersSpecific to Aircraft Equipment” (2010), especially the response of Machins Solicitors.
  • [37] Department for Business, Innovation and Skills, “The International Interests in AircraftEquipment (Cape Town Convention) Regulations 2015. Draft Guidance” (2015), at [25].
  • [38] White & Case, “UK Ratification of the Cape Town Convention” (2015) available at http://www.whitecase.com/publications/article/uk-ratification-cape-town-convention (last accessed 23 March2016).
  • [39] Ibid.
 
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