When airframes, engines, and other aircraft parts cross borders, the value and protection of collateral can shift just as quickly. For cross-border financiers and lessors, the assumption that their interests are fully secured can be upended by the complex interplay of international treaties and local laws. The result is a landscape where a security interest that appears robust in one jurisdiction may be vulnerable in another, especially after a default. This DE Insight explores why cross-border aviation collateralization is uniquely challenging, highlighting the legal and practical pitfalls that can jeopardize priority and repossession.
Why Cross-Border Perfection is Challenging
In cross-border aviation finance, securing interests requires careful navigation of both international and domestic legal frameworks. The Cape Town Convention (CTC), which is an international treaty, and its International Registry (IR) provide a system for internationally recognized registration and priority of interests in high-value mobile equipment, such as aircraft, engines, and helicopters. The IR is an online system established by the CTC for recording interests in aircraft objects. Registering an interest in the IR perfects and establishes its priority on an international level among CTC contracting states. It is important to note that, under the CTC, airframes and engines are treated as separate “aircraft objects,” which means that security interests in each must be created and perfected independently, both in the IR and, as discussed below, under relevant domestic law.
A central feature of the CTC’s creditor protections is the Irrevocable Deregistration and Export Request Authorization (IDERA). An IDERA is a specific document lodged with the state of registry that authorizes the aviation authority to deregister and permit export of the aircraft at the request of the secured party without lengthy court proceedings. While IR registration is about establishing and publicizing the existence and priority of a security interest, the IDERA is a practical enforcement tool that streamlines repossession and export in the event of a default. Lodging an IDERA obligates the aviation authority to honor the request, provided certain conditions are met. However, the CTC is not a complete substitute for local law.
- Domestic Law Still Matters: U.S. (UCC) vs. EU/UK Approaches
In the United States, for example, the Uniform Commercial Code (UCC), which provides a comprehensive set of rules for secured transactions within the United States, governs the creation, perfection, and enforcement of security interests in aircraft objects (other than airframes registered with the FAA). To ensure full protection, cross-border financiers and lessors must both register their interests in the IR for international recognition and file a UCC-1 financing statement for domestic perfection and enforceability.
Both regimes are broader than aviation, but their application to aircraft finance is especially significant given the mobility and value of aviation assets. Understanding how these frameworks interact is essential for structuring effective security packages in global aviation finance.
Suppose an Irish lessor finances an aircraft that operates in the United States. The lessor registers its interest in the IR under the CTC, believing this provides comprehensive protection. However, if the lessor does not also file a UCC-1 financing statement in the United States, its security interest is not perfected under U.S. law. This exposes the lessor to significant risks: another creditor who files a UCC-1 could gain priority, and in the event of a default or insolvency, the lessor may be unable to enforce its rights against the aircraft or engine in the United States. The IR registration alone is not enough to protect the lessor’s interest domestically.
One notable example is the fallout from the 2001 bankruptcy of Midway Airlines in the U.S. In that case, several foreign lessors and financiers had registered their interests in the IR (or, for pre-CTC transactions, relied on international documentation), but had not filed UCC-1 financing statements in the U.S. When Midway entered bankruptcy, U.S.-based creditors who had properly filed UCC-1s were able to assert priority over the aircraft and engines, leaving foreign lessors with diminished or unsecured claims. The result was protracted litigation, delayed repossession, and, in some cases, significant financial losses for the foreign parties. This scenario is emblematic of the broader risk: even the most sophisticated international registration can be undermined if local perfection steps are overlooked.
As special as the United States may be, this nuance is not unique to the U.S. Many jurisdictions require compliance with local perfection rules in addition to, or instead of, the IR. For example, in the United Kingdom and Ireland, security interests must be registered at Companies House or the Irish Companies Registration Office (CRO), respectively, within statutory deadlines. In EU civil-law countries, local registries, notarial acts, or other formalities may be required. Failure to comply with these domestic requirements can result in loss of priority or even invalidation of the security interest, regardless of IR registration.
Key takeaway: International registration alone is not enough; local law filings are critical to perfect and enforce security interests within each relevant jurisdiction.
- Non-CTC Jurisdictions: Local Law and Its Pitfalls
Further complicating the landscape, not all countries are signatories to the CTC and its Aircraft Protocol, and in those jurisdictions, the IR does not apply. While the CTC does have broad global adoption, some significant aviation markets have not ratified or implemented the treaty.
In such cases, the perfection, priority, and enforcement of security interests in aircraft and engines are governed exclusively by local law. This means that cross-border financiers and lessors must rely on domestic legal mechanisms, such as local asset registries, notarial acts, or statutory filings, to create and perfect their interests. The process, requirements, and protections can vary widely from one country to another, and there is no harmonized international system to streamline or standardize these steps.
Key takeaway: In countries that have not adopted the CTC, parties must rely solely on local law, which can be unpredictable and less protective of creditor rights.
- India: Before and After CTC Accession
Before India adopted the CTC (effective July 2018), repossessing an aircraft in the event of a lessee default typically required lengthy court proceedings. Lessors often faced delays of six months to over a year, as they had to obtain court orders for deregistration and export, and local airlines could seek injunctions or otherwise contest repossession. The process was unpredictable, with outcomes dependent on local courts’ willingness to enforce contractual rights and on the cooperation of the Directorate General of Civil Aviation (DGCA).
After CTC implementation, the process became significantly more streamlined. The DGCA is now required to honor IDERAs lodged by lessors, and to deregister and permit export of aircraft within five working days of receiving an IDERA request, provided the lessor’s rights are established and there are no outstanding liens for unpaid charges. In practice, this has reduced the timeline for repossession and export from many months (or longer) to as little as one to two weeks, assuming no complicating factors. This is a dramatic improvement, especially for late-life assets where time is critical to preserving value and redeployment opportunities, and highlights the value of the CTC.
Conclusion
Cross-border financiers and lessors cannot rely solely on the CTC’s IR or IDERA to guarantee priority and repossession. As the preceding analysis and real-world examples demonstrate, domestic law continues to govern critical aspects of security creation, recognition, and enforcement. Gaps between international and local regimes can expose parties to loss of priority, costly delays, or even the inability to recover valuable assets. The upshot is clear: a truly effective security package must be designed with both international visibility and local enforceability in mind, tailored to the unique legal landscape of every relevant jurisdiction.
In our next article, we will move from identifying these challenges to providing a practical, step-by-step roadmap for building a “travel-ready” security stack, one that aligns Cape Town registrations with local perfection, enforcement mechanics, and control over all levers of collateral value. By understanding and addressing these cross-border complexities, parties can better safeguard their interests and ensure that their security truly travels with the asset.
