This article deals with two recent developments which are relevant to aircraft finance in the Netherlands: the accession of the European Community to the Cape Town Convention in 2009, and the entry into force of the Dutch Act on Conflict of Property Laws in 2008.
ACCESSION OF THE EC TO THE CAPE TOWN CONVENTION
On 28 April 2009 the European Community (“the Community”) deposited an instrument of accession to the Convention on International Interests in Mobile Equipment (“the Convention”) and the Protocol thereto on Matters Specific to Aviation Equipment (“the Protocol”; collectively, “the Cape Town Convention”) with the depositary of the Cape Town Convention. In view of article 49 of the Cape Town Convention, it entered into force for the Community on 1 August 2009.
The question is: what are the implications for transactions involving community carriers or lessors resident in an EU member state (other than Ireland and Luxembourg, who have separately ratified the Cape Town Convention, and Denmark, to which the Community decision to accede does not apply)?
Pursuant to article 64 of the Cape Town Convention, a regional economic integration organisation (REIO) may accede to the Cape Town Convention and shall have the rights and obligations of a contracting state, to the extent of its competence over matters governed by the Cape Town Convention.
As required for REIOs, the Community lodged a declaration stating that the member states have transferred their competence to the Community regarding matters which affect Regulation (EC) No. 44/2001 on jurisdiction, and the recognition and enforcement of judgments in civil and commercial matters (“the Brussels I Regulation”), Regulation (EC) No. 1346/2000 on insolvency proceedings (“the Insolvency Regulation”) and Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (“the Rome I Regulation”). The declaration explicitly states that the member states keep their competence concerning the rules of substantive law as regards insolvency.
The Community only made declarations concerning article 55 of the Convention and article XXI of the Protocol. The first declaration deals with the interaction between articles 13 and 43 of the Convention and article 31 of the Brussels I Regulation. With respect to article XXI of the Protocol, the Community has filed a declaration that this article – which provides that a court of a Contracting State shall also have jurisdiction where the helicopter or airframe is registered in that State – will not apply within the Community; the Brussels I Regulation will apply to this matter for member states bound by that regulation.
As the Cape Town Convention only applies to Community member states to the extent that it has (exclusive) competence, and given the scope of the Community competence, international interests under the Cape Town Convention cannot be created by debtors situated anywhere within the Community, but only where the debtor is situated (pursuant to article 4 of the Cape Town Convention), or, in the case of aircraft objects, the aircraft is registered in a member state that has (individually) ratified the Cape Town Convention.
The practical consequences of the Community’s accession appear to be limited: the Convention will apply to matters which fall within the Brussels I Regulation, the Insolvency Regulation and the Rome I Regulation, but will not override these regulations. The Community’s accession to the Cape Town Convention is to be seen primarily as paving the way for member states to accede themselves, rather than extending the scope of the Cape Town Convention to the Community and all its member states. Ratification or accession by the member states is required in order for the Cape Town Convention to have its desired effect in such member states.
In connection with the Community’s accession, the Dutch Minister of Justice has indicated, in a letter to the Dutch parliament dated 27 March 2009, that the scope of the (direct) applicability of the Cape Town Convention will be limited. The Minister of Justice also indicated that, as yet, it is not intended that the Netherlands will ratify the Cape Town Convention, and noted that the convention is mainly geared to the needs of developing countries which have difficulties attracting funding. The Minister added that the Cape Town Convention is primarily aimed at significantly improving the position of financiers, which may well be onerous in respect of debtors.
THE 2008 CONFLICT OF LAWS ACT: ITS IMPLICATIONS FOR AIRCRAFT FINANCE TRANSACTIONS
The entry into force of the Dutch Act on conflicts of property laws (Wet Conflictenrecht Goederenrecht; “the Conflict of Laws Act”) on 1 May 2008 has important implications for aircraft finance transactions involving Dutch lessees or Dutch registered aircraft.
The Conflict of Laws Act codifies rules of Dutch private international law on conflicts of property laws, and determines which property regime applies to tangible property, claims, shares and securities. With respect to property generally, the lex rei sitae applies. However, article 2(3) of the Conflict of Laws Act provides that the property regime in respect of aircraft shall be determined by the lex registrii, ie, the laws of the jurisdiction where such aircraft is registered. Such laws will determine, inter alia, the accession rules, what requirements apply to the transfer of title and the creation of security rights, what rights can encumber an aircraft and what the nature and content of such rights are, the way such rights can be amended, transferred and terminated and what their ranking intra se is.
With respect to the question of whether Dutch courts will recognise foreign law security rights in aircraft, and allow the enforcement thereof in the Netherlands, a distinction has to be made between aircraft registered in a public register maintained pursuant to the 1948 Geneva Convention, and aircraft not thus registered. With respect to the first category of aircraft, recognition subject to and in accordance with the terms of the Geneva Convention is a given. With respect to aircraft registered in a state which is not a party to the Geneva Convention, Dutch courts will first of all determine, on the basis of article 2(3) of the Conflict of Laws Act, whether the security right was validly created under the laws of the jurisdiction where the aircraft was registered at the time of the creation of the relevant security right. If that is the case, Dutch courts will recognise the foreign law security right. The enforcement in the Netherlands of foreign law security rights recognised by a Dutch court, may, however, be restricted in the sense that the grantee of the security right may only exercise rights and remedies which would be available to the beneficiary of the comparable Dutch law security right, ie, the mortgage or the pledge. As such, article 5 of the Conflict of Laws Act is important as it provides that security rights constituted under the applicable law pursuant to the same Act cannot be enforced in a way that is contrary to the law of the state on whose territory the asset is located at the time of enforcement. Although it is not entirely clear from the wording and the legislative history of article 2(3) of the Conflict of Laws Act whether the term “property regime” also covers enforcement in the Netherlands, it is likely that article 5 of the same Act does apply to aircraft which are not registered in a state that is party to the Geneva Convention. This means that the foreign law security interest on such aircraft – provided that it has been validly constituted under the law of the state where the aircraft is registered – will be recognised and can be enforced in the Netherlands, provided that enforcement is not contrary to Dutch law. In practice, this means that a Dutch court will seek harmonisation with Dutch law regarding enforcement of the foreign law security interest, and it will allow the same remedies available to a grantee of a Dutch law mortgage or pledge. In 2002 (before the Conflict of Laws Act entered into force), the Dutch Supreme Court held that, for the application of Dutch rules regarding enforcement, it should be determined whether the foreign law security right, in view of its contents and purpose, could be considered equivalent to a Dutch security interest. Any remedy under a foreign law security right that is contrary to Dutch law, such as repossession without court approval, will therefore not be allowed by the Dutch courts.
It is noted that the Conflict of Laws Act states, in article 1(3), that reference to the laws of a certain state is reference to that state’s substantive laws, with the explicit exclusion of rules of private international law. This will prevent renvoi.
The Conflict of Laws Act also determines which laws apply to the assignment of receivables and the creation of a security interest on receivables. The law applicable to the receivable determines whether such receivable can be transferred or encumbered, and governs the relationship between the transferee or grantee and the debtor of the receivable. Other than that, the property regime of a receivable is determined by the law governing the agreement that contains the obligation to transfer or encumber the receivable. So in a transaction involving the lease of an aircraft to a Dutch lessee, pursuant to a lease agreement governed by California law, it is California law that will determine whether or not the lease receivables can be assigned to the lender. If the lessor and the lender have agreed to a security assignment in, for example, a loan agreement governed by New York law, a New York law security right would be appropriate. Such security right would be recognised by the Dutch courts, and enforcement in the Netherlands will be permitted on the same basis as the comparable Dutch law security right.