Australia: Ready for take-off: Creating a more creditor-friendly insolvency regime for Australian aviation finance

Australia has signed on to a new framework that will standardise aircraft financing transactions the world over. It's positive news for those in Australia's aviation industry and should lead to cheaper and easier financing of aircraft. However, in exchange, the industry may have to forego some of the benefits of Australia's current debtor-friendly voluntary administration regime.

It also means any contracts for the purchase, operation or lease of aircraft or engines that extend beyond 2014 should be reviewed before the law changes.

WHAT IS THE CONVENTION AND WHY IS IT IMPORTANT?

Last year, Australia ratified the Cape Town Convention (the Convention on International Interests in Mobile Equipment) and its Aircraft Protocol (the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment) (together, the Convention). The Convention was tabled in the Senate last November and is expected to become part of domestic law by 2014.

The Convention creates an international legal framework to standardise and govern aircraft financing transactions. A fundamental feature of this framework is an International Register where creditors can register their security interests in aircraft, helicopters and engines (in each case, of a minimum size). This International Register is similar to the Personal Property Securities Register, but for aircraft equipment only.

Correct implementation of the Convention could potentially give the Australian aviation industry access to cheaper financing. This is for two primary reasons.

First, the protections and remedies that are provided to creditors under the Convention (such as the ability to request deregistration and export of an aircraft) increase the security of creditors and reduce their risk of being unable to seize an aircraft from a defaulting debtor. These measures may lead to cheaper and more accessible terms for airlines when it comes to financing or leasing.

Second, and more significantly, Australian airlines could benefit from a fee discount from various Export Credit Agencies for the purchase of aircraft and aircraft objects under the OECD's Aircraft Sector Understanding (ASU). The ASU provides a common framework under which ECAs from the EU, US, Japan, Brazil and Canada can provide export credit finance for the purchase of airframes and engines.

However, Australian airlines will only qualify for this fee discount if the government implements the Convention and makes certain "qualifying declarations". Without making these declarations, the benefits for Australia would be limited to enhancing the protection of security interests of creditors.

QUALIFICATION FOR THE ASU FEE DISCOUNT: A NEW INSOLVENCY REGIME FOR AIRLINES

One of these qualifying declarations is adherence to the Convention's "Alternative A" insolvency regime. Under this regime, a secured creditor, lessor or owner will be entitled to enforce its security or rights after 60 calendar days, without any court interference. The courts would have no power to delay or prevent the enforcement of this remedy.

This could have significant consequences for a company which enters into voluntary administration, in accordance with Part 5.3A of the Corporations Act.

Voluntary administration under Part 5.3A provides a reasonably short period of time for administrators to consider what to do with the company and for creditors to decide whether to:

  • enter into a deed of company arrangement (DOCA); 1
  • end the administration; or
  • wind up the company.

Under the Corporations Act, an administration runs for approximately 25 business days. However, in practice, the courts often extend the administration period where the company's business is complex or large. Extensions of six months or more are common in large administrations, for instance, in the case of Ansett Airlines.

During the administration period, secured creditors over individual assets, owners and lessors are generally prohibited from exercising their rights to enforce their security or rights. This is a fundamental feature of Australia's voluntary administration regime. It seeks to avoid a disorderly and distracting grab for a company's assets, which could prejudice the interests of the creditors as a whole and jeopardise the possibility that the company's business might continue under a DOCA or otherwise with the support of creditors. 2

Keep in mind that, while the voluntary administration regime prevents owners and lessors of aircraft from recovering their aircraft, 3 in many cases administrators decide to return aircraft well before the administration ends. Administrators are personally liable for rental payments under an aircraft lease after the seventh day of an administration if they continue to operate the aircraft. 4 As a result, they must decide quickly whether to continue to operate an aircraft and pay rental payments or "disclaim" the lease which has the effect of handing the aircraft back to its owners or lessors. 5

WHAT WOULD THIS NEW INSOLVENCY REGIME MEAN?

Implementation of the Alternative A insolvency regime will mean that, in some circumstances, companies that enter voluntary administration will lose the debtor-friendly arrangements under the Corporations Act.

Giving secured creditors, owners or lessors the ability to enforce their security or rights during voluntary administration undoubtedly lowers the prospects of a company with aircraft assets being reorganised successfully. This clashes with the intention of Part 5.3A, which the courts have stringently defended.

During the Ansett Airlines voluntary administration, the owners and lessors of a Boeing 727-227F aircraft attempted to repossess their aircraft. The Federal Court 6 granted their application. However, their leave to obtain possession of the aircraft was both temporary and limited to the sole purpose of enabling it to continue freight operations which it had previously been carrying out in conjunction with Ansett. Despite their interest, the Court refused to give the owners and lessors full and unconditional possession of the aircraft, so as not to prejudice the negotiations which the administrators were undertaking, or undermine Part 5.3A.

The Federal Government has not yet confirmed how it will implement the Convention, or whether it will make all of the qualifications necessary to qualify for the ASU fee discount. However, in its 2010 Consultation Paper, the Government indicated the simplest model of implementation would be to give the Convention the force of law and have it prevail over domestic law wherever inconsistencies arise.

WHAT SHOULD YOU BE DOING?

If you have contracts for the purchase, operation or lease of aircraft, helicopters or engines whose term will span beyond 2014, ensure they contain the right provisions to preserve your interests once this change in law occurs.

Footnotes

1 A DOCA is a restructure document that binds all unsecured creditors. Secured creditors can also be bound, if they vote in favour of the DOCA.

2 Re Java Pty Limited (administrator appointed) (1999) 32 ACSR 507 at 514.

3 Sections 440B of the Corporations Act

4 Section 443B of the Corporations Act

5 See section 444B of the Corporations Act for an Administrators ability to "disclaim" a lease.

6 Re Ansett Australia Ltd (administrator appointed); Intrepid Aviation Partners VII LLC v Ansett Australia Ltd (administrator appointed) and Others (2001) 39 ACSR 255

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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