The insolvency provisions: historical and economic perspectives Kristin van Zwieten John Collier Fellow in Law, Trinity Hall, Cambridge

Insolvency challenges for asset-based financiers Four areas of concern for the holder of a security (title reservation / lease) interest on a debtor’s entry into insolvency proceedings: Effectiveness of security interest (recognition) Susceptibility of interest to non-consensual creditor claims (e.g. preferential debts) Susceptibility of interest to avoidance Procedural bars to the exercise of default remedies These are questions of control and priority that might be predicted to affect the borrowing capacity of the debtor ex ante (Goode; Armour) Additional complexity for asset-based financiers of high value mobile equipment: Multiple insolvency proceedings (location of which cannot necessarily be fully predicted) Cooperation challenges (reality is far from ‘one law, one court’): wide variation across countries in both substantive rules and approach to jurisdiction and cooperation in cross- border insolvency Risk may be too uncertain / too great to be priced in

The development of the insolvency provisions As originally conceived, Convention project was not intended to have any substantive effect on domestic insolvency law: “it is completely unrealistic to attempt to influence national bankruptcy law in any significant way through a Convention” (Cuming Report) The ‘minimalist approach’: effectiveness only (a recognition rule) As supplied by Article 30(1) of the Convention – for registered Convention interests (in ‘insolvency proceedings’, given the presence of a connecting factor) But stakeholder input during drafting process suggested more robust incursions were necessary, if Convention was to positively affect availability and cost of credit: AWG proposed incursions into: a. substantive treatment of non-consensual interests (public notification by contracting state necessary to ensure superiority of these interests over convention-registered interest); b. procedural bars to the exercise of default remedies (limited time afforded to debtor to cure all defaults or return equipment, after which time default remedies exercisable), inspired by §1110 and empirical evidence of its impact on the rating of ETCs

The development of the insolvency provisions (II) Result was a far more ambitious set of provisions which (in fullest form) engage with all four areas of primary concern, and with aspects of the cooperation problem Combination of mandatory and optional provisions: Mandatory (supplied by the Convention): Article 30(1) – recognition of registered interests Article 30(3) – avoidance (restricts avoidance rules for ‘recognised’ interests to those reversing ‘preferences’ and ‘transactions in fraud of creditors’) Article 39 - non-consensual creditor priority rule, applicable in insolvency Optional (available for take-up at time of accession/ratification, by declaration): Core insolvency provision (Article XI of the Aircraft Protocol): applicable where contracting state that is debtor’s ‘primary insolvency jurisdiction’ has made declaration adopting the provision Several ‘alternative’ forms, but in ‘hard’ (‘Alternative A’) form – on commencement of insolvency proceedings, the IP (or debtor) is given limited period to cure defaults or return possession; on expiration, exercise of default remedies cannot be further delayed Supplementary insolvency provision (Article XII of Aircraft Protocol): cooperation with foreign courts/IPs carrying Article XI, where equipment is in the state Not a complete code (jurisdiction; treatment of unregistered interests, etc) but far from ‘minimalist’!

Economic impact analysis The Convention and Protocols are predicted to have a significant positive impact on the cost and availability of finance This prediction relies heavily on the insolvency provisions as offering financiers: assurance of the superiority of their interest in mobile equipment (the recognition rule; the non-consensual creditor rule), and assurance of their ability to promptly realise / redeploy the asset on default, assuming take-up of Alternative A (and the cooperation provision) (EIA 1998 ‘key principles’) Assuming both the take up of Alternative A, and ‘effective implementation’ of the Convention and Protocols by contracting states, the Convention project is predicted to: increase the availability of finance where it might not otherwise have been available (as in markets where the existing security rights framework is too weak to support asset-based finance) reduce the cost of finance where already available, including by facilitating the emergence of asset-backed bond products (by analogy with US) (EIA 1998)

Economic impact analysis (II) Preliminary evidence – Aircraft Protocol: ① OECD ASU ‘Cape Town’ discount – 10% discount on minimum premium rates for operators of aircraft objects in contracting states on the ‘Cape Town List’ Membership of list depends on take-up of Alternative A, and evidence of appropriate implementation of the Convention by the contracting state Current members include several UN ‘Least Developed’ countries ② Bond rating methodology: Accepted that rating uplift that is presently applied to the rating of US ETC/EETC issues covered by §1110 could be applied to foreign issues, where the issue country offers creditors similarly robust repossession rights in insolvency Accepted that Convention / Protocols can offer the functional equivalent to §1110, again assuming (a) take-up of Alternative A, and (b) ‘effective implementation’. Two themes: ① The importance of ‘Alternative A’ 34 of 45 contracting states that have acceded to/ratified Protocol have made a declaration adopting Article XI; of these, all but Mexico has adopted ‘Alternative A’ for all proceedings (30-60 day waiting periods) ② The assumption of ‘effective implementation’ Potential challenges (courts; insolvency practitioners); monitoring