This content is from: Local Insights

Belgium

The bankruptcies of Sabena, Belgium's ex-flag carrier, Citybird and more recently Delsey Airlines have demonstrated the economically weak position of airlines in the country. This has a general impact on the creditworthiness of the transport sector in Belgium.

The question then arises: would the ratification and implementation of the Convention of Cape Town be of any help for financing the troubled transport industry?

The Convention of Cape Town

Aircraft, rolling stock, satellites and ships are by definition mobile equipment. Most financing of such equipment is asset backed, that is, the equipment serves as collateral for the reimbursement of the financing. Financers and lessors have faced four key issues over the years:

  • recognition of ownership rights;
  • recognition of security interest;
  • repossession; and
  • enforcement of security rights.

In 1948, the Convention of Geneva on the international recognition of rights in aircraft attempted to settle the first two issues. But the Convention of Geneva is only valuable if all states have ratified and implemented it, and some key nations, such as Russia and Japan, have not. Although Belgium has ratified the Geneva Convention it has failed to introduce a law allowing the creation of a mortgage over an aircraft.

Facing this reality, the aircraft leasing and financing community was in great need of having one international interest over aircraft registered in a central register and a uniform repossession and enforcement right. The Convention on International Interests in Mobile Equipment of November 16 2001 (Cape Town Convention) and more particularly the Aircraft Equipment Protocol, set out to tackle these issues.

There are at present two opposing legal systems: the common law and the civil law. The common law system has a more regulated self-help system, while the civil law countries do not allow any form of self-help and have the concept of concursus creditorum in the event of enforcement procedure, which is an unknown concept in common law countries.

The Cape Town Convention is based on common law, but allows civil law countries to make a declaration excluding extra-juridical remedies and to require the creditor to obtain leave of court.

The Cape Town Convention together with the protocols thereto is intended, once ratified, to be directly applicable and as such to supersede national laws.

If Belgium, which has still not signed the Convention, intends to ratify and implement it, the country will probably have to make substantial changes to the current legal system in addition to the declaration.

The Cape Town Convention has also to be seen in the light of the draft New Basel Capital Accord where new risk weightings are introduced for different types of collateral. The risk weighting of security interests over mobile equipment will depend on the ability to liquidate the collateral for cash. This is one of the reasons for introducing in the Cape Town Convention minimum default remedies and time and limits for courts allowing such remedies.

International interest

An international interest is created if (i) a security agreement, (ii) a conditional sale agreement with reservation of title or (iii) a lease agreement is in place.

The international interest relates to airframes, aircraft engines, helicopters, railway rolling stock and space property.

The Cape Town Convention does not specify pursuant to which laws the security agreements need to be validly created and perfected and leaves this to the competent courts, as such allowing forum shopping. The international private laws of most of the countries refer to the state where the mobile good is presumed to be situated. For an aircraft, registration in a country is most of the time considered the element of attachment. This means that the valid security over an aircraft, registered in Belgium, is an aircraft pledge. The aircraft pledge would constitute an international interest, in case the debtor is situated in a state that has ratified the convention. The question then is how the Cape Town Convention will impact the given set of Belgian laws with respect to the rights of secured creditors under such an aircraft pledge.

Default remedies

The Cape Town Convention provides for either : (i) a self help system allowing repossession, leasing or sale of the collateral or the right to collect income on profits arising from such collateral or (ii) a court order authorizing such acts. In Belgium no self-help exists. A secured creditor is only entitled to receive proceeds out of a public sale of the collateral or to acquire the collateral provided the value of the collateral equals the outstanding debt and the same is confirmed by independent appraisers.

A lessor can only take repossession upon a court order. The Cape Town Convention will supersede Belgian internal law and courts will have to allow remedies to secured creditors that are not available to them under the current applicable laws relating to pledges. It is therefore advisable that Belgium (i) amends the current provisions of the civil code implementing the default remedies provided by the Convention under court supervision and (ii) makes an article 52 declaration requiring court orders with respect to the default remedies. If the Convention does not deal with the concursus creditorum concept any new default remedy rules need to include rights of other creditors with claims to participate in the proceeds on a second ranking basis.

International interest registrar

A central register will be created to register the international interests. The main effect of this is the priority over subsequently registered and unregistered interests.

This is a major tool of the Cape Town Convention. It creates the legal certainty that is needed in this industry. But it ignores the rules on priorities set out in the current bankruptcy, mortgage and privilege rules in Belgium.

The retention rights of repair shops will for example not have any priority over a registered international interest. This is a real issue. The implementation of the Convention in Belgium will therefore require a revision of the current set of priority rules.

Other issues

The Convention also provides for assignment of the international interest or an assignment by way of security without assigning the underlying debt.

This is a completely unknown concept in Belgium where a security interest is always an accessory to the underlying debt and cannot be separately assigned. Furthermore a security assignment of a Belgian law governed security or receivable is not recognized in Belgium.

Conclusion

Belgium cannot ratify the Cape Town Convention without having first amended current legislation on pledges and mortgages and priority rights. Given the nature of the equipment the current set of rules no longer satisfy the needs of the financial community, especially by not allowing leasing as a default remedy. Most creditors therefore seek other ways to structure and secure these financings for example by way of a sale of lease back.

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