Financial Services Update: Ireland Adopts ‘Alternative A’
07 September 2017
In May 2017, the Irish Government signed a commencement order giving immediate effect to the ‘Alternative A’ insolvency remedy of the Aircraft Protocol to the Cape Town Convention on International Interests in Mobile Equipment (the Convention). The long-awaited implementation of ‘Alternative A’ gives force of law in Ireland to a regime which is similar to the insolvency regime in the USA, known as Chapter 11 “reorganisation” bankruptcy. The insolvency remedies in the Convention were designed to strengthen creditor’s positions. The implementation of ‘Alternative A' has the effect of giving greater uniformity and consistency of insolvency remedies in Ireland comparable with other major aviation and debt capital markets jurisdictions.
What is ‘Alternative A’?
‘Alternative A’ was designed to provide a protective regime for aircraft financiers and creditors in insolvency proceedings. “Insolvency proceedings” in this context covers debtor bankruptcy and liquidation. It also includes interim proceedings in which the assets and affairs of a debtor are subject to control or supervision by a court for the purpose of reorganisation or liquidation of a debtor. In Ireland, this regime is called ‘examinership’ and is provided for in the Companies Act 2014. In other jurisdictions, these interim proceedings may be referred to as administration, court receivership or reorganisation. With the introduction into Irish law of Alternative A, an examiner and examinership may not have jurisdiction over certain aircraft assets of Irish debtors and may be subject to the provisions set out in Alternative A for these aircraft assets.
The ‘Alternative A’ regime applies to aircraft objects that are the subject of a security agreement, a lease or a conditional sale agreement which are registered on the International Registry (IR). Creditor rights are registered as an ‘international interest’ in the IR. On the occurrence of an insolvency-related event as defined in the Aircraft Protocol, the debtor or insolvency administrator is required to either (a) give up possession of the aircraft object to the creditor, or (b) cure all defaults and agree to perform all future obligations under the relevant transaction documents. This must be done in each case, by the earlier of, the end of the specified waiting period (60 days for Ireland) or, the date on which the creditor would otherwise be entitled to possession of the aircraft object if the Cape Town Convention did not apply.
The 60 day period is sometimes referred to as a moratorium or automatic stay. Typically, during this waiting period, no action or enforcement is permitted against the debtor to enable it to propose and/or implement a plan of reorganisation.
What are the benefits of ‘Alternative A’?
With ‘Alternative A’ the creditor position is arguably improved in Ireland. Either, the debtor resolves all defaults or it gives up possession of the aircraft asset within the 60 day period. The creditor cannot be compelled to participate in a reorganisation. In addition, the debtor is not entitled to a stay or extension of time, without creditor consent which the creditor is entitled to refuse in the exercise of its discretion. Once possession has been obtained, the creditor has the right to deregister and export the aircraft from the relevant aircraft registry. In Ireland, the Irish Aviation Authority must make these remedies available to the creditor.
“Alternative A” imposes an obligation on a debtor or insolvency administrator to preserve the aircraft asset and maintain its value until such time as the creditor obtains possession. Typically security agreements, leases and conditional sale agreements impose contractual covenants and obligations on the debtor. An insolvency administrator’s role is to minimise costs and expenses of the insolvent debtor. Insolvency administrators tend to focus on the debtor assets which are available for the general pool of creditors rather than on secured assets. ‘Alternative A’ enhances creditor protections by imposing a statutory obligation on the insolvency administrator similar to the contractual obligation on the debtor.
At the end of the waiting period, no court permission or judicial order is required by the creditor to obtain possession of the aircraft assets. As a result of ‘Alternative A’ being given force of law, aircraft financiers can now predictably rely, in an insolvency context, on strict and efficient remedies in the event of default or insolvency of the debtor.
Creditor rights are determined based on priority of recordings of registered interests at the International Registry. No rights or interests, except for non-consensual rights or interests of a category covered by a declaration under Article 39 (1) have priority over registered interests. Accordingly, the rules of insolvency law cannot be applied to displace the priority of a registered international interest in favour of other domestic unsecured creditors including preferential creditors.
Other practical benefits of 'Alternative A'
Implementation of ‘Alternative A’ into Irish law is a pre-condition to access to certain Export Credit Agency related discounts to financing costs. Following its introduction Irish-based airlines and leasing companies may qualify for and avail of such discounts.
By virtue of the protections afforded to creditors under the ‘Alternative A’ insolvency regime in Ireland, its equivalence to reorganisation remedies and time periods in other major jurisdictions, this should reduce any residual jurisdictional issues for international financiers and credit rating agencies and arrangers participating in structured financing transactions.
The adoption of ‘Alternative A’ into Irish law serves to continue to enhance and support Ireland’s aircraft financing and leasing industry. Creditors will benefit from a greater degree of legal certainty, predictability and access to remedies when faced with distressed and insolvent debtors. ‘Alternative A’ brings Ireland’s insolvency regime applicable to international interests for aircraft objects into line with other jurisdictions. It greatly assists in maintaining the attractiveness and competitiveness of Ireland as a jurisdiction for financing structures due to the equivalent and harmonised insolvency remedies with other major jurisdictions.
The content of this article is provided for information purposes only and does not constitute legal or other advice.