Russia passes Accession Law to accede to Cape Town Convention

Russia is expected to accede to the Cape Town Convention later this year, following its recent enactment of an Accession Law. Russia’s accession to the Cape Town Convention will be good news for international creditors and financiers. The Accession Law can, however, be seen as a missed opportunity to improve access to export credit financing for Russian airlines. We explain why.

The Convention on International Interests in Mobile Equipment – the Convention – and the associated Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment – the Protocol – are designed to facilitate aircraft financing and leasing of aircraft and to reduce the risks involved by providing a method for the creation, recognition and enforcement of certain international interests in aircraft objects, and their registration and priority in an International Registry.

The Convention applies to transactions creating international interests if the aircraft is registered in a contracting state, or if the debtor (as defined in the Convention) is situated in a contracting state.

The Convention and the Protocol came into force on 1 March 2006. There are currently 35 contracting states.

On 23 December 2010, Russian President Medvedev signed the Accession Law (Federal Law No. 361-FZ).

Although the Accession Law took effect in Russia on 1 January 2011, the Convention and the Protocol have not yet entered into force. Under article 49 of the Convention, this happens on “the first day of the month following the expiration of three months” after Russia deposits its instrument of accession with UNIDROIT (the International Institute for the Unification of Private Law).

At the moment no deposit of the instrument of accession has been made with UNIDROIT by Russia. If this takes place in February of this year, the Convention and the Protocol would take effect in Russia on 1 June.

The Accession Law provides for Russia’s accession to the Convention and the Protocol with declarations under article 39(1) (a), article 39(1) (b), article 53 and article 54(2) of the Convention; and article XXX(3) of the Protocol.

See below for an English translation (unofficial) of the declarations.

Russia has nominated its state arbitrazh courts (commercial courts in Russia) as relevant courts for disputes involving the Convention and the Protocol.

International aircraft financiers and lessors will welcome Russia’s declarations permitting self-help remedies (article 54(2)), and electing Alternative A for all types of insolvency proceeding (for the purpose of article XI of the Protocol) and providing for 60 days’ waiting period (article XXX(3) of the Protocol). However, Russia has failed to make a number of other key declarations.

Russia has failed to make a declaration (article XXX(1) of the Protocol) concerning article XIII of the Protocol on de-registration and export request authorisations.

Russia has also failed to make a declaration (article XXX(1)) concerning article VIII of the Protocol on choice of law.

Without these additional declarations, the Accession Law fails to comply with the requirements in the OECD Aircraft Sector understanding for a reduced premium to apply for export credit financing. The Accession Law can be seen, therefore, as a missed opportunity to improve access to export credit financing for Russian airlines.

It remains to be seen whether Russia will make further declarations or change its Accession Law in the future.

Other than the missed opportunity to comply with the OECD requirements, Russia’s failure to make these declarations will have little, if any, negative impact on Russian airlines. In practice, each of the above two declarations would be relevant primarily to transactions with aircraft registered in the contracting state – whereas most aircraft operated by Russian airlines are held through offshore companies and are registered outside Russia (in Bermuda, for example). We do not expect that practice to change as a result of Russia acceding to the Convention and the Protocol.

One declaration made by Russia – under article 39(1)(a) – is ambiguous.

The declaration refers to the different types of monetary claim which have priority over “international interests” on insolvency. The ambiguity arises because “international interests”, as defined in the Convention, represent interests in the objects specified in the Convention rather than monetary claims. Since article 39(1)(a) is intended to regulate the priority of different interests rather than monetary claims, the likely interpretation of this declaration will be that any interests securing those types of claim referred to in that declaration made by Russia will have priority over “international interests” in Russia.

Other interpretations are possible; we shall have to wait for any amendment to the Accession Law or for court practice to develop in order to clarify the meaning of this declaration.

After the Convention and the Protocol enter into force in Russia, Russian airlines’ international creditors will benefit from a much clearer and more predictable priority regime for “international interests” in Russia (established by the Convention and the Protocol). Lessors and financiers will welcome the recognition of “self help” remedies and take comfort from the right to the return of aircraft in insolvency proceedings.

However, unless Russia undertakes significant reform of its aircraft registration and import regime, or makes further changes to its declarations or Accession Law, we do not expect the accession to result in an increase in the number of locally registered aircraft. Neither do we anticipate any major changes to current financing structures for Russian-operated aircraft.

Article 39(1)(a) of the Convention:

The Russian Federation declares pursuant to Article 39(1)(a) of the Convention that the following claims of creditors settled during insolvency proceedings shall have priority in the territory of the Russian Federation over international interests registered in the International Registry:

• current claims of creditors;
• claims to cover costs on implementation of measures for prevention of industrial and (or) environmental disasters or loss of life in the event when termination of activities of the debtor’s organisation or its structural subdivisions may lead to industrial and (or) environmental disasters or loss of life;
• claims of citizens to whom the debtor is responsible for causing damage to life or health, which are settled by means of capitalisation of relevant periodic allowances, and claims for compensation of moral damage;
• claims for severance payments and payment of salary to the current or former employees working under employment contract and royalties.

Article 39(1)(b) of the Convention:

The Russian Federation declares pursuant to Article 39(1)(b) of the Convention that nothing in the Convention shall affect the right of the Russian Federation or state organisation, intergovernmental organisation or other private provider of public services to arrest or detain an object under the laws of the Russian Federation for payment of amounts owed to such organisation or provider directly relating to those services in respect of an aircraft object.

Article 53 of the Convention:

The Russian Federation declares pursuant to Article 53 of the Convention that any dispute relating to the Convention and the Protocol shall be settled in arbitrazh courts of the Russian Federation.

Article 54(2) of the Convention:

The Russian Federation declares pursuant to Article 54(2) of the Convention that any remedy available to a creditor under any provision of the Convention which is not there expressed to require application to the court may be exercised out of court.

Article XXX(3) of the Protocol:

The Russian Federation declares pursuant to Article XXX(3) of the Protocol that it will apply Alternative A of Article XI of the Protocol in full in the course of all types of insolvency proceedings. The waiting period shall be 60 calendar days.