Enforcement of Security Interests and Repossession of Aircraft in Scandinavia – A Brief Practical Note
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The aviation industry came to a standstill this month due to the outbreak of the Covid-19 virus, and this has hit the airlines worldwide. With the majority of the fleet on the tarmac, we could potentially see a number of airlines defaulting on their lease agreements and loan facilities. The question of how to enforce security or repossess an aircraft could sadly turn out to be something the lessors and the lenders would have to look into more closely in the time to come.
The aim of this brief note is to provide comfort to the lessors who are leasing aircraft to airlines operating in the Scandinavian countries and to lenders who have a security interest in such aircraft. In summary, the Scandinavian countries are all fully Cape Town compliant and provide for the necessary legal framework for a quick and rather easy route for enforcement if proven necessary. We are of course hoping that this will not be necessary, and at this very moment, it looks like the governments are establishing different schemes for aid to the airlines based in Scandinavia.
Since 2016, all Scandinavian countries (Norway, Sweden and Denmark) have been parties to the Cape Town Convention on International Interests in Mobile Equipment of 16 November 2001 and its Protocol on Matters Specific to Aircraft Equipment (collectively referred to as the “CTC”).
All three countries have opted for (i) the sixty-day stay period in Alternative A of Article XI of the Protocol and (ii) the system of filing Irrevocable De-registration and Export Request Authorisations (IDERA), authorizing a specified entity to take the necessary steps to deregister an aircraft from its registry.
The mentioned stay period means that in case of insolvency, a liquidator will not be entitled to invoke a stay period of more than sixty days. Under the legal framework, this will be the maximum "waiting period" for any lessor to repossess an aircraft pursuant to a lease agreement registered as an International Interest with the International Registry (the "IR") in accordance with the CTC. The same applies for a lender seeking to enforce a security interest over an aircraft. Having said this, it should be mentioned that at least from a Norwegian law perspective, one would expect a liquidator to act much quicker than this, and the sixty days constitute a maximum waiting period. As we will touch upon below, the lessors and the lenders will normally be able to deregister and export the aircraft regardless of any insolvency proceedings, and it is the practicalities of the repossession itself that potentially needs to be clarified with the liquidator in case of insolvency.
The Scandinavian countries have also opted for the self-help remedy provided for by the CTC. This means that no court decision or approval by any government would be necessary for a lessor or a lender to enforce an International Interest registered with IR. This is an important function of the CTC, which provides for a speedy recovery or enforcement of a security interest in an aircraft.
As the aircraft registries in all Scandinavian countries are owner´s registries (and not operator´s registries like for example in the UK), it is in principle only the registered owner of the aircraft that is entitled to deregister the aircraft. In case of operational leases, the registered owner is normally the lessor itself, and the lessor therefore has full control of the deregistration and repossession process.
For financed aircraft, however, an IDERA in favour of the lenders (often represented by a security trustee) would normally have been filed with the aircraft registry. In order for the security trustee to be able to effectively enforce its security interest and thereby (i) repossess, (ii) deregister and (iii) export an aircraft in any of the Scandinavian countries, the IDERA must be issued by the registered owner and registered with the aircraft registry. This is standard practice for all financed aircraft registered in Scandinavia. However, now is the time for lenders and/or security trustees to check that this is in place.
In case of financed aircraft, we still see from time to time that lenders have registered local law mortgages with the Norwegian aircraft registry, in addition to the International Interest registered with the IR. This is, however, not necessary as a mortgage registered as an International Interest with the IR will take precedence over any local law filings.
The registration of a local law mortgage may also turn out to be the very factor that complicates and slows down the process of enforcing a security interest. Under Norwegian law, an aircraft may not be deregistered before such local law mortgage has been discharged. In order for this to take place, the secured party needs to deliver the physical mortgage deed in original to the aircraft registry, together with an application for discharge. As it may take some time to locate the original mortgage deed and courier this to the aircraft registry, this may delay the enforcement of the security interest. We have more than once experienced that the security trustee is not able to locate the original mortgage deed. If this turns out to be the case, this could severely slow down the process. It might therefore be useful for the lenders to check whether they have registered any local law mortgages, and make sure that they know where all original mortgage deeds are located.
It should also be noted that in order for a lessor or a security trustee to deregister an aircraft in Scandinavia, an application from the lessor, or the beneficiary under an IDERA, must be produced to the aircraft registry in original, duly notarised and apostilled. It may therefore be a good advice to any lessor or lender considering the possibility of taking steps to prepare for the eventuality of such process to provide its local counsel with a Power of Attorney to file the necessary applications on its behalf.
We therefore believe that lessors and lenders with aircraft operating in Scandinavia are as well protected as possible in the present circumstances, not at least due to all Scandinavian countries having ratified the CTC in the mot "creditor friendly" manner. At present stage, we believe that lessors and lenders should closely monitor the situation and take the preparatory steps mentioned above, enabling them to act quickly if needed in the time to come.
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