Where next for mobile equipment?
21 April 1998
The need for truly international regulations for the rights of owners of high-value movable assets such as aircraft, when that asset is located in a country other than one in which its ownership was established, has never been greater.
The aviation industry alone has estimated the likely acquisition cost of aircraft and aircraft engines over the next two decades to be in the region of US$900bn to US$1 trillion.
However, current international security laws do not provide either certainty or fairness and as such are a deterrent for would-be buyers and investors.
The market for other high-value mobile equipment regularly crossing international frontiers is vast and growing. While aircraft and ships are the most obvious examples, oil rigs, railway rolling stock and satellites are also constant international travellers.
Under the chairmanship of Professor Roy Goode, a study group sponsored by Unidroit (The International Institute for the Unification of Private Law) has prepared a draft multilateral convention which, if implemented, will create a new international interest in a limited class of high-value mobile equipment regularly moving from state to state in the ordinary course of business.
I became involved with the study group on the subject on being invited by the International Association of Young Lawyers (AIJA) to represent them at the study group's meetings in Rome.
Approaching the problems from the viewpoint of an English lawyer, I was sceptical at first. I experienced a Pauline conversion after my first session at the study group in Rome and in particular after discussing the matter with US and Canadian lawyers.
It quickly became apparent that we would benefit enormously if the many different types of security instruments that we currently have in Europe (often contradictory and ineffective) could be replaced by something as effective as the draft convention.
The English Common law approach is to treat a foreign mortgage as valid under the laws of England if it is valid according to the laws of the country in which the asset was bought by the owner.
So wait until your aircraft is flying over a friendly country, or force it to land in one before you sign the mortgage. In contrast, under French law (and most civil law countries), the ranking and priority of a foreign charge is decided by the law where the asset is currently situated (the lex situs rule).
The lack of a fair and truly international system for taking security has significantly limited the willingness of banks and financial institutions to extend secured financing facilities to individuals wanting to buy high-value moveable assets.
The Unidroit-sponsored draft convention will not only cover international interests granted under security agreements but, significantly, will also cover international interests under title reservation agreements and leasing agreements.
It will cover airframes, aircraft engines, helicopters, oil rigs, containers, railway rolling stock, space property, possibly ships, and other objects which will be uniquely identifiable.
An interest will constitute an international interest (article 8) where the agreement creating the interest:
is in writing;
relates to an object in respect of which the chargor, seller or lessor has power to enter into the agreement;
enables the object to be identified in conformity with the protocol relating to that title of object (each type of equipment (e.g. aircraft) will be covered by a separate protocol); and
in the case of a security agreement, enables the secured obligations to be identified.
In the event of default in the performance of the secure obligation, the bank or finance house will be able to take possession or control of the object, sell or grant a release in relation to it, collect or receive any income or profits arising from the management of it, or apply for a court order authorising or directing any of the above acts.
The draft treaty provides for the establishment of an International Registry. The registry will operate worldwide 24 hours a day and be instantly accessible both for searches and registrations.
A registry (or registries it is possible that each separate protocol will give rise to its own registry) will be established for the registration of international interests, prospective international interests and the assignment and the prospective assign ment of international interests.
Contrary to the current position of registration under the Companies Act, registration under the draft convention will grant priority over any other interests subsequently registered and over any unregistered interests.
Also, uniquely, any priority given by the draft convention would also extend to the insurance proceeds payable in respect of the loss or physical destruction of the secured object.
As you would expect, international interests will be valid against the trustee in bankruptcy of the company or the obligor if, prior to commencement of bankruptcy, that interest was registered in conformity with the draft convention.
The net effect would be a simple, certain, transparent and efficient way of registering a security interest and ensuring its priority.