Special LBN on the application of Cape Town Convention (CTC) in Vietnam
The International Convention on International Interests in Mobile Equipment and the Protocol on Specific Matters Specific to Aircraft Equipment, jointly adopted by the International Civil Aviation Organization (ICAO) and UNIDROIT in 2001, aim to address the issue of obtaining certain and enforceable rights over high-value aeronautical assets such as aircraft airframes, aircraft engines, and helicopters, which have no fixed location. Different approaches of legal systems in relation to securities, reservation of title agreements, and leasing contracts create uncertainty as to the effectiveness of the rights of credit institutions, which impedes the financing of these aeronautical assets and increases borrowing costs.
The Convention and the Protocol offer several advantages, including predictability and enforceability by creating an internationally recognized security interest in all contracting states and establishing an international electronic registration system for such interests. This improves predictability regarding the enforceability of security interests and rights held by sellers of aeronautical assets and reduces significantly the average contract execution time.
As a signatory of the Cape Town Convention (CTC), of which Vietnam is a member, like 85 other contracting states, airlines are provided with the opportunity to obtain more favorable financing rates in exchange for their respective national guarantees. This provision enables financiers to more easily repossess aircraft in the event of payment defaults.
An aviation industry organization has issued a cautionary statement regarding Vietnam’s compliance with international aircraft leasing standards in light of a recent dispute over the repossession of four aircraft, which raises concerns about the financing costs of future deliveries.
Under the relevant treaty, lessors are permitted to request the de-registration or removal of aircraft from the host country’s registry upon legal request, after which the aircraft can be placed on an international registry, thus allowing the owner to operate the aircraft.
The Aviation Working Group (AWG) disclosed that an unnamed lessor had made such a request, as a result of non-payment, between November and January, which was supported by a court order in England, whose jurisdiction governed the lease.
According to legal documents submitted to the commercial division of the High Court in England, VietJet Air has been subject to litigation for its non-payment of aircraft lease installments during 2021. In response, VietJet Air submitted its defense in December 2022, acknowledging the delayed rental payments, but attributing the cause to “cash flow problems” resulting from the COVID-19 pandemic and the nationwide lockdown in Vietnam, which necessitated the suspension of its operations. Notwithstanding, VietJet Air disputed the alleged breach of the lease agreement and rejected the claims for relief sought against it.
Following the decision ordered by the court in England, the Vietnamese regulator had agreed to deregister the aircraft, but a Hanoi court overturned this decision in February following a lawsuit filed by one of the airline’s shareholders.
The grounds and reasonings for the Vietnamese local court’s decision are undisclosed. Nevertheless, this decision is at the risk of directly contravening the convention to which Vietnam is a party, which will probably have many consequences for Vietnamese airlines in the future.