Home Law Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions
Effectiveness in Insolvency Proceedings
Cape Town Convention The provisions on the effectiveness of creditor’s rights in debtor’s insolvency are at the core of the Cape Town Convention system. A prior-intime registered creditor enjoys a very strong position and may exercise all its default remedies as against the insolvency administrator of the debtor.
There are some provisions in the Convention that operate as a balance and take into account the possible existence of other interests that a State may wish to protect. Thus, the Convention does not affect the domestic law rules on avoidance of a transaction as a preference or a transfer in fraud of creditors (Art. 30(3) Conv.). Moreover, States are permitted to declare in advance which (already existing) domestic non-consensual rights will preempt the creditor’s interest (Art. 39 Conv.), and which domestic preferential claims can be filed in the international registry to obtain priority over later-in-time international interests (Art. 40 Conv.). In the absence of such declarations, all national rights or liens will be preempted by the international interest.
The Convention contains a further exception for rescue or similar proceedings, where the administrator has the power to limit or delay the enforcement rights of secured creditors. The rationale of such an exception is not to interfere with the policies pursued by national legislators in this field. The Protocols, however, deviate from the Convention on this point, introducing a set of alternative provisions left to the choice of the contracting State of the primary insolvency jurisdiction. The first option gives the creditor the greatest protection, reducing any powers of an insolvency administrator to stay or limit creditor’s rights of enforcement on the collateral, be it during liquidation, rescue proceedings or even prior to insolvency, during a fixed period of time indicated in a State’s declaration. The second option substantially leaves it to courts to decide what is appropriate in each circumstance, unless the debtor gives notice that it will either cure all defaults or give the creditor the opportunity to take possession of the equipment in accordance with the applicable law. If no declaration is made, the domestic insolvency law will apply.
It is important to note, from an economic perspective, that the aviation industry expressed a strong preference for Alternative A that was included in the list of so-called ‘Qualified Declarations’ under the OECD Aircraft Sector Understanding on Export Credits for Civil Aircraft (1 September 2011). According to this agreement, States that comply with the required declarations will be eligible for officially supported export credits for the sale or lease of aircraft and related materials at a discount rate.
Italian Law The rules on the effectiveness of financier’s rights in insolvency proceedings vary, in Italian law, according to whether the financier is a chattel mortgagee, a chargee with a non-possessory security over the equipment (in particular, an Art. 46 chargee), a seller under a retention agreement or a lessee under a financial lease.
A chattel aircraft mortgagee is satisfied with priority on the proceeds from the sale of the collateral, but is preempted by a (limited) number of specific nonconsensual liens pertaining to the aircraft and its operation (such as the ones in favour of recovery of the costs of the execution proceedings, unpaid taxes and duties, employees’ wages and social security payments, salvage costs, etc.).
The Art. 46 Bank Charge is expressly given the rank of a lien under Art. 2777 of the Civil Code. This means that the bank will be satisfied on the proceeds of the sale of the collateral but will be postponed to a number of preferred claims that enjoy a special priority. Moreover, recent Insolvency Law reforms added other categories of super-priority that take precedence even over the afore-mentioned preferred claims, including, among other, costs relating to the insolvency administration when provisional operation is authorized within a liquidation procedure and claims deriving from post-commencement financing.
The above-mentioned regime is modified when an alternative procedure to the traditional liquidation is opened (such as in the case of the extraordinary receivership arrangement which can be used by (relatively) large firms) or when other “rescue” procedures are initiated (voluntary arrangements entered into before or during insolvency). A recent reform of the latter procedures (that seem to be the object of continuous adjustments by the legislator), reinforced the insolvency administrator’s powers towards creditors secured by a lien, a mortgage or a pledge in the interest of reaching a viable rescue plan.
In the case of buyer’s insolvency, a seller with retention of title prevails if the conditions for opposability to conflicting creditors are satisfied (see above, para. 4.2). According to Art. 73(1) Insolvency Law, the insolvency administrator has the option of either keeping the contract (in which event the seller has the right to ask for the setting aside of a sum for future payment of the price unless the sum is immediately liquidated) or terminating it (in which event the seller may repossess the asset with no obligation to account for any excess of value).
The position of the lessor in the lessee’s insolvency is expressly regulated in Art. 72-quater of the Insolvency Law. The insolvency administrator may decide whether to continue the contract or terminate it. In the event of termination the lessor has the right to retake the asset and must pay over to the insolvency administrator any monies exceeding the unpaid rent that derive from the sale or other use of the asset.
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