When is it advisable to transfer the right to clear an international interest registration off the Cape Town registry?
It is possible for parties to an aircraft financing who register international interests in the aircraft (or its engines) at the Cape Town International Registry (IR) to transfer to somebody else the right to clear those registrations off the IR. This is known as transferring the right to discharge an international interest. Sometimes it is advisable to arrange for this transfer on an aircraft financing. Matthew Harvey and Sarah Dyke look at when and why this is the case.
It is possible to transfer the right to discharge an international interest by a lease, conditional sale, hire purchase or mortgage, charge or security agreement of an aircraft or its engines. It is not possible to transfer the right to discharge an outright sale registration.
Here is an example of when it would be prudent to transfer the right to discharge an IR registration. A lessor and lessee enter into a lease of an aircraft on the basis the lessee will sublease it. The proposed sublessee is incorporated in a state that has ratified and implemented the Cape Town Convention and its Aircraft Equipment Protocol (together Cape Town). So the proposed sublease would create a Cape Town international interest in the aircraft and its engines registerable at the IR.
The head lessor agrees to the subleasing provided the sublessor assigns its sublease rights to the head lessor by way of security, and the parties do the following Cape Town registrations at the IR:
- The sublessor and the sublessee register the international interests created by the sublease (the sublease registration); and
- The sublessor and the head lessor register the security assignment of the sublease from the sublessor to the head lessor (the sublease assignment registration).
Time passes. Both leases go into default. The sublessor and the sublessee go into insolvent liquidation, are dissolved and struck off their respective corporate registries. The head lessor repossesses the aircraft and is negotiating its sale. The prospective buyer is concerned about the IR registrations against the aircraft.
The head lessor tries persuasion. The IR is not a title register. Nor does IR registration establish that a registered interest is valid. IR registration only goes to the priority of any international interest otherwise proved to be valid. The sublessor and sublessee are long gone. What could go wrong?
Nevertheless, the prospective buyer wants the Cape Town registrations cleared off the IR. Failing that, it wants an indemnity from the head lessor/seller and or title insurance against possible claims from persons somehow claiming through the sublessor and sublessee. The head lessor/seller strongly doubts there could be any claims, but can’t prove a negative.
Given the sublessor and sublessee no longer exist, can the head lessor/seller clear the sublease registration and the sublease assignment registration off the IR? The answers are “no” and “yes” respectively. For, under the IR rules:
- The entity entitled to discharge the sublease registration is the sublessor; and
- The entity entitled to discharge the sublease assignment registration is the head lessor.
Even though the head lessor owns sublessor’s rights under the sublease that were assigned to it in the sublease assignment, it is not entitled to discharge the sublease registration. Nor does the fact the head lease and sublease have been terminated, and the debtors under each document no longer exist, change that.
Among the situations where it is worth seeking a transfer of the right to clean a registration off the IR are:
- (As above) there is a chain of leases and you are, or act for, the creditor at the top of that chain; and
- The aircraft is on the N register, with its title held under an FAA-permitted owner trust and you are, or act for, the beneficiary of that trust.
Of course, the fact that a party asks for a transfer of the right to discharge does not mean its request will be granted. Even though the ability to transfer the right to discharge an IR registration has been available since August 2010, no settled market practice regarding these transfers has emerged – even in financings of large commercial aircraft.
A possible reason for this is that parties may wrongly assume an assignee of an international interest can discharge the assigned interest without any co-operation from the assignor. This is not an assumption the IR’s rules go out of their way to correct.
Where parties do agree on a transfer, the process is straightforward. It is done electronically on the IR site (though there should be a right to make the transfer under the transaction documents) and it should not add significantly to the cost and time of the Cape Town registrations on a corporate jet transaction.