Australia: Personal Property Securities Act: Australian Government considering its options regarding aircraft equipment

Aviation has been recognised as one of the fastest growing sectors of the Australian economy. International scheduled passenger traffic in the year ending October 2011 was 27.946 million compared to 26.792 million in 2010, an increase of 5.5 per cent¹ and domestic passenger traffic in the year ending October 2011 was 54.75 million, an increase of 5.8 per cent². As a consequence it is expected that airline growth to accommodate the increasing passenger lists will grow exponentially over the next decade³.

The Australian Government has recently introduced far reaching legislation at a national level that will affect personal property, including aircraft. The Personal Property Securities Act 2009 (PPSA) was passed on 18 December 2009 with operational commencement on 30 January 2012. The Australian Government is also considering whether it should accede to the Convention on International Interests in Mobile Equipment (Convention) and the related Protocol on Matters Specific to Aircraft Equipment (Protocol) (together more commonly known as the CTC) that applies to "aircraft objects". Should the government ratify the CTC, security interests in all aircraft objects (other than smaller aircraft objects falling outside of the CTC definition of aircraft objects) will be regulated by the CTC.

For aircraft registered in Australia, this will mean that Australian financiers and lessors will obtain significant benefits. Australia will at last be propelled into the international arena, when dealing with those other jurisdictions that have already ratified the CTC. Another benefit will be derived from the 2011 Sector Understanding on Export Credits for Civil Aviation (ASU) which took effect on 1 February 2011. On accession it will provide immediate discounts on minimum premium rates to borrowers in jurisdictions that have acceded to the CTC. In addition if Alternative A of the ASU qualifying declarations is made, there will be a reduction of risk associated with financing. Alternative A (which applies on insolvency) introduces legal predictability and eliminates risk of further delays and this in turn will reduce loss given default. At the same time, regulatory reserves under Basel II will be reduced (and when Basel III commences if reserve requirements are higher than Basel II the loss given default will become more valuable to financiers).

The CTC allows creditors to register international, national and prospective interests on the international register. Standard remedies will be available to all jurisdictions that have acceded to the CTC. As a consequence, financiers in the aviation industry will have confidence to provide risk capital, leading to a reduction in costs. Debtors will also gain an advantage by obtaining protection against seizure and detention of aircraft objects if they have maintained their financial obligations.

Under the PPSA, whilst a creditor has the right to seize and detain aircraft in the context of default and in the exercise of its enforcement remedies, there is no provision to assist the creditor with deregistration and export of the aircraft from the Civil Aviation Register. The CTC, on the other hand, establishes clear rules to enable the creditor to seek deregistration and export in the form of an irrevocable deregistration and export request authorisation once the applicable CTC declarations have been made.

The Australian Government recognises that aviation is central to its economy and has undertaken extensive consultation with stakeholders in the aviation industry. Support by aviation participants for accession to the CTC has been provided to the government which is currently working through the legislative changes required should it take that step. We expect the government to provide its response later this year.

Footnotes

¹International airline activity
²Aviation - Domestic airline activity: Annual 2010 - 2011
³Qantas has recently placed the biggest order in Australian history for 110 A320 Airbus carriers

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.