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The Issue of the Non-consensual Rights That Frustrate the Finance and Lease of Aircraft and Engines

The legal systems of most countries make a distinction between the consensual interests and non-consensual interests which can be established in aircraft objects. The former type of interests is voluntarily created by the parties of the contract, while the latter group is constituted by operation of law. For example, national security interests, charges, mortgages, pledges and hypotheques are based on agreements which have been entered into by the parties. Some non-contractually created rights which are applicable in many countries are airport fees, repairmen liens, taxes, other governmental fees and crew salaries. In India[1] and other countries such involuntarily established rights have led to undesirable expensive and timeconsuming Court cases.[2] In India the aviation authorities demanded on several occasions that financiers and lessors would pay for the outstanding tax-related and other debts of the defaulting operators of commercial and private aircraft. These actions are unconscionable as legally the financiers and lessors (owners) were not the debtors of the substantial duties at hand. Even in the event that such demands arguably have a basis in Indian national law, the real reason for impeding the valid rights of the financiers and lessors may be based on ulterior motives. For instance, the government intends to protect the local airlines or favour other interested parties. These actions impose significant hardship on the financiers as due to undesirable and lengthy litigation the aircraft may be grounded for more than 6 years. Such practices may result in cannibalism of the aircraft and a substantial loss of its value. In addition, it means that the lessor is damaged as no lease rentals will be paid when the aircraft is grounded for a very long time.

An extraordinary and controversial non-consensual right concerns the navigation charges of the European Organisation for the Safety of Air Navigation

(EUROCONTROL).[3] In Western Europe, only the United Kingdom[4] (UK) and Ireland[5] have offered EUROCONTROL extensive non-contractual rights in aircraft. In the UK, the Civil Aviation Authority (CAA) has the power to arrest an aircraft on behalf of EUROCONTROL until all the overdue air navigation charges have been fully satisfied. In addition, EUROCONTROL/CAA may at any time detain the aircraft in respect of which the debt was incurred, or any other aircraft which is operated by the same debtor. In practice, this right is called a ‘fleet lien’ as it covers all the aircraft of the local or foreign commercial or private operator. The attachment can only be circumvented if the lessor (owner) terminates the lease agreement when the lessee is defaulting. However, the termination must take place before the aircraft enters the United Kingdom and it is arrested. In addition, the debt may be incurred by flying to and from countries outside the United Kingdom where EUROCONTROL does not have similar non-consensual rights. Besides, the EUROCONTROL liens have priority over the consensual interests of the financiers, owners and lessors of national and foreign aircraft.[6] The leading financiers, lessors and manufacturers of aircraft objects are members of the Aviation Working Group (AWG)[7] which organisation intends to safeguard their interests. In respect to a certain Court case the AWG stated: “... putting it generally, ... the exercise of the power in the U.K. ‘leaves a financier or lessor of an aircraft with a significant risk which is difficult (if not impossible) to manage effectively’. The UK has ratified the Cape Town Convention on 27 July, 2015. To more or less extent, the Convention and Protocol also apply in the Crown-dependencies Gibraltar, the Cayman Islands and Guernsey. The generally phrased formal Declaration regarding article 39 Convention implies that in the UK the excessive EUROCONTROL liens still apply.[8] The Western Continental European states have not provided EUROCONTROL with extraordinary non-consensual rights in aircraft. As this organisation does not have privileges which are similar to the ones existing in the United Kingdom and Ireland, it cannot easily collect the outstanding air navigation charges in these jurisdictions.

The fundamental difference between the consensually and non-consensually established interests is incorporated in the regime of the Cape Town Convention.[9] The latter category finds protection under the treaty, provided that a Contracting state has made a special Declaration which addresses this matter. More precisely, article 39 of this instrument permits the creation of ‘non-registrable’ liens and ‘retention’ or ‘detention’ rights. In addition, article 40 allows non-consensual interests which must be ‘registered’ at the International Registry. The problem exists that several Contracting States have made the Declaration that many types of local liens have priority over registered international interests. Consequently, the rights of the financiers, lessors and operators are not guaranteed in these countries. For example, when the United States adopted the Convention and Protocol in 2006 it made a brief and broadly phrased Declaration regarding article 39 Convention.[10] However, in essence it has declared that a large amount of differing (forthcoming) non-consensual interests and detention rights have priority over the registered international interests of the financiers, lessors and operators. For instance, it was presented at a meeting of the American Bar Association, Aircraft Financing Subcommittee[11] that also aircraft fuel liens may have priority over the consensually created rights. While Ireland no longer offers EUROCONTROL the same extensive rights as the UK, it still provides this organisation special non-consensual rights. Irish law states that an aircraft can easily be sold when the operator does not pay the incurred Irish ‘airport charges’. After these fees have been deducted from the sale proceeds of the forced execution, the total amount of the outstanding EUROCONTROL charges are paid as they have priority over the other debts of the operator. The non-contractual rights which the UK and Ireland have given to EUROCONTROL are of major concern to the financiers and lessors of aircraft. This is because they permit EUROCONTROL to hold them accountable for unpaid air navigation fees, while these debts are incurred by the operators of the aircraft. These debts may have run up to millions of US $. The Irish EUROCONTROL charges fall under the regime of the Cape Town Convention.[12] As is mentioned in Sect. 21.2 of this article, anecdotal evidence shows the following. It affirms that not all the stakeholders of the global aviation finance and lease practice know that the due to the controversial Declarations made by some Contracting States under the articles 39 and 40 Cape Town Convention the local non-consensual liens have priority over their international interests.

  • [1] Particularly India is notorious for the amount of unnecessary Court cases which have recentlyoccurred. See for example the SpiceJet cases, Court Asks DGCA Not to De-register SpiceJetPlanes till April 6 (March 26, 2015), http://profit.ndtv.com/news/industries/article-court-asks-dgca-not-to-de-register-spicejet-planes-till-april-6-7495452015; Corporate Aircraft Funding v. Unionof India & ORS, W.P. (C) 792/2012, March 14, 2013; Directorate of Revenue Intelligence v.Corporate Air Craft Funding Co., LPA 226/2013 5 22 (May 10, 2013) (Del.) [India] which concerned a private aircraft which was grounded for four years; Kingfisher Airlines cases DVBAviation Finance Asia PTE Ltd v. Directorate General of Civil Aviation, et al., WP (C) 7661/2012and CM No. 4208/2013 (8 April 2013)., 2013. All these cases, and more, which involved governmental agencies of India.
  • [2] N. Downs, Taking Flight from Cape Town: Increasing Access to Aircraft Financing, Universityof Pennsylvania Journal of International Law, 2014-4, p 863; D.N. Gerber and D.R. Walton,De-registration and Export Remedies under the Cape Town Convention, Cape Town ConventionJournal, November 2014, p. 49.
  • [3] B.P. Honnebier, Collecting EUROCONTROL air navigation charges by precautionary arrestingthe aviation fuel of aircraft in the European Netherlands, JLR, 2013, no. 2-3, p. 33.
  • [4] Reg. 4 Civil Aviation (Chargeable Air Services Detention and Sale of Aircraft forEUROCONTROL) Regulations 2001.
  • [5] See the Irish Air Navigation and Transport (Amendment) Act 1998.
  • [6] See for example the unreported English case Irish Aerospace (Belgium) N.V. v. EUROCONTROLand CAA, Queens Bench Division, Commercial Court, 10 June 1991. For a more detailed reviewof EUROCONTROL liens and this case see T. Christopher and J.H. Bax, Air Law, 1992-1, p. 2.
  • [7] The primary goal of the AWG is to facilitate aviation financing and leasing and to address issueswhich hinder this intent. www.aero.com
  • [8] See www.unidroit.org/status-2001capetown?id=1887
  • [9] J.F. Pritchard and D.L. Lloyd, Analysis of Non-Consensual Rights and Interests under Article 39of the Cape Town Convention, 2013; M. Scott, Liens in aircraft: priorities, JALC, 1958, VolumeXXV, p. 193; B.P. Honnebier, JLR, 2014-3, p. 29.
  • [10] For the United States Declaration under article 39 Convention see the UNIDROIT website www.unidroit.org.
  • [11] ABA, Annual Meeting, Aircraft Financing Subcommittee, FATCA, Ex-Im Bank Reauthorizationand Fuel Liens, presented by Chubbuck and Draz, Chicago,12 September 2014.
  • [12] See www.unidroit.org/status-2001capetown7id = 1584
 
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