Insights

On the 22 June 2010, Parliament approved and published the Aircraft Registration Act, which came into force on 1 October 2010. This means that it has already been a decade since a decision was taken and duly actioned to overhaul the aviation laws in Malta in relation to the registration of aircraft and security interests and, more significantly, to implement the Cape Town Convention and its Aircraft Protocol. This anniversary, ironically, coincides with one of the most difficult years for the aviation industry. Nonetheless it seems fitting to analyse the success or otherwise of this Act and, even more significantly, the challenges which lie ahead.

One might easily be tempted to base such an analysis solely on the number of aircraft registered in Malta or the number of operators who hold an Air Operator Certificate issued by Transport Malta. It is undeniable that these registrations have risen gradually over the past few years, and there are many factors which have contributed to this, not least, the positive approach that the personnel at the Civil Aviation Directorate have towards operators who have entrusted Malta. In fact, Malta has managed to attract a healthy variety of aircraft operators including business jet and ACMI operators, and established commercial airlines.

This significant increase in registrations would have been difficult to achieve if, at the time of overhauling the aviation laws, Malta had not become a party to the Cape Town Convention and its Aircraft Protocol. The main purpose of this Convention is to protect the interests of, amongst others, creditors and lessors through the creation of an international registry and establishing a clear universal legal framework which would facilitate the financing of the acquisition or leasing of high-value aviation assets which, by their very nature, have no fixed location. By acceding to the Cape Town Convention, several other amendments had to be made to other laws, such as the Civil Code, whereby the concept of an irrevocable mandate by way of security was introduced, as well as the introduction of specific self-help remedies in the Aircraft Registration Act. The importance, and relevance, of the Cape Town Convention and these amendments is highlighted in unfortunate situations when there are events of defaults under loan or lease agreements, or when the operator becomes insolvent and the financier or lessor would want to re-possess the aircraft.

Over the past few years there have been quite a few high-profile insolvencies in aviation, such as Monarch Airlines and Air Berlin in 2017, Primera Airlines in 2018 and Thomas Cook in 2019. During this year, other airlines which have stopped operating include Virgin Australia and Flybe. Unfortunately, due to the COVID-19 pandemic, it is only logical to expect more airlines to become insolvent and, due to Malta’s success in managing to attract aircraft operators, it may only be a matter of time before one of these operators becomes insolvent and Malta’s Aircraft Registration Act and its aviation insolvency regime is put to the test. The outcome of such a scenario might be a more accurate measure as to whether the Aircraft Registration Act is a success or not.

In order to appreciate the importance of the Cape Town Convention and its proper implementation, it would be prudent to examine the Avianca Brazil case. Avianca Brazil, also known as OceanAir, was for many years one of the largest airlines in Brazil, leasing several aircraft from various lessors. In 2018, the company was facing financial turmoil and filed for bankruptcy in December 2018. Since Brazil is also a party to the Cape Town Convention, once the airline filed for bankruptcy the lessors could, according to the Convention, terminate the lease and re-possess the aircraft. However, the courts in Brazil had a different view, and although some of the leases were terminated and aircraft were re-possessed before the filing of bankruptcy, once the company filed for bankruptcy, the courts granted relief periods from lessors taking action and therefore effectively, the lessors were not able to re-possess and export their aircraft. Naturally, lessors were disappointed with how the process in the Avianca case was implemented and this case will certainly have a negative impact on Brazil’s aviation industry which could lead to higher costs for Brazilian airlines when leasing aircraft.

Our Companies Act does provide for a company recovery procedure, whereby, if a company is insolvent i.e. it is unable to pay its debts or is imminently likely to become unable to pay its debts, a company recovery application may be made to the Court requesting the Court to place the company under the company recovery procedure and to appoint a special controller to take over, manage and administer the business of the company for a period to be specified by the Court. The effect of such a company recovery order might hinder the termination of the leases and re-possession of the aircraft, since no warrants can be issued against the company or the property of the company and no judicial proceedings can be instituted or continued against the company or its property except with the leave of the Court.  However, a specific provision has been included in our Aircraft Registration Act whereby the company recovery procedure has been excluded for companies whose main object or function is to own, hold, operate, charter, manage or lease any aircraft or aircraft engine. Therefore, should an operator incorporated in Malta become insolvent, then such an operator would not be able to apply for a company recovery procedure and hinder the re-possession of aircraft by the lessors.

Furthermore, the Aircraft Registration Act specifies that should there be an insolvency-related event, the insolvency administrator or the debtor shall give possession of the aircraft to the creditor, no later than the earlier of the end of the waiting period, which is 30 days, or the date on which the creditor would be entitled to take possession of the aircraft, if there was no insolvency-related event. The registry authority and any administrative authority is bound to expeditiously co-operate and assist the creditor with the de-registration and export of the aircraft, and the exercise of these remedies cannot be prevented or delayed.

In the Kingfisher case in India in 2012, these remedies were not adhered to, even though India had been a party to the Cape Town Convention since 2008. Kingfisher Airlines had ceased operations and as expected, the lessors proceeded to take possession of their aircraft, de-register same and export the aircraft. Nonetheless, some of the lessors faced various difficulties to re-possess their aircraft, such as claims by airports for landing fees, who under Indian municipal law had a right to keep possession of such aircraft until all the debts incurred through the operation of such an aircraft were settled. This once again led to lessors demanding higher premia in order to cover the risk in leasing aircraft to Indian airline operators.

After the Kingfisher and Avianca Brazil cases, the lessors and the financiers mitigated their risks by demanding higher deposits on lease agreements and, in a few cases, seeking government guarantees. However, unlike Malta, both Brazil and India have a considerable large local aviation industry and lessors will keep leasing their aircraft to airlines in Brazil and India, albeit with possibly increased rates. Should the Malta Aircraft Registration Act not be interpreted and implemented correctly, then the repercussions could potentially be quite catastrophic for Malta and end up dismantling the current legal structures, procedures and achievements. It is therefore essential that when analysing the success or otherwise of the Aircraft Registration Act, it is important to also consider the mechanisms designed for the efficient re-possession, de-registration and export of aircraft and hopefully their correct implementation.

This article was first published in the Times of Malta, 7 December 2020.