France: Aircraft Finance - Eurocontrol: A Lien Too Far?

Last Updated: 3 July 1995

It sounds like a Euro-sceptic's worst nightmare. To help to provide safe transport across Europe, a Convention is passed and an office is created in Brussels with quasi-sovereign status and the ominous title of 'Eurocontrol'. It charges for the services it provides. The European Convention and the associated agreement are efficiently implemented into English law, with Parliament awarding the Brussels creation powers to detain and, if necessary, eventually sell property leased to or mortgaged by the transport operator in order to meet its debts to Eurocontrol. Then, put yourself in the shoes of a lessor or mortgagee. The operator's debts could have been wholly incurred in relation to other people's property leased to the operator. The debts might have nothing to do with your property and could even exceed the value of it. But, thanks to the extremely wide statutory powers given to Eurocontrol, which go beyond the requirements of the Treaty, your property can still be detained; and you can only get it back if you pay off or secure all the debt. Moreover, the detention can occur at random without any prior notice to you that the debt exists and, even more handily for Brussels, without any application to the English Court. The scenario is unpleasant indeed.

It is not one that troubles our political leaders, however, because it affects a constituency with few votes: the aircraft finance community. However, its impact in particular cases can be draconian, and it is an issue that has been troubling aircraft lessors and mortgagees for 10 years or so.

The background

The European Organisation for the Safety of Air Navigation - Eurocontrol - was created by Convention in 1960 for the entirely laudable aim of co-ordinating air traffic control ("ATC") services throughout Europe. Member states entered a separate agreement - the Multilateral Agreement - to cover the collection of charges for ATC, and membership has since expanded beyond the original European Community: to such countries as Austria, Cyprus, Switzerland and Turkey. Eurocontrol is based in Brussels and deals with the administration, collection and enforcement of charges for ATC. These are calculated from data submitted from various sectors of airspace within the member states: including details of the airports used on a particular flight, the type of aircraft and its call-sign.

Who pays the ATC charges?

The Multilateral Agreement provides that the operator of the aircraft - ie normally the airline - is primarily responsible for payment of Eurocontrol charges, and will usually be the person billed by Eurocontrol. In practice, they will normally identify the operator by reference to the call-sign of each aircraft. As a fall-back, if Eurocontrol cannot identify the operator of a particular aircraft, it can hold the owner liable for the charges until the owner can establish, to Eurocontrol's satisfaction, who the operator actually was.

The fleet lien

So far so good. The real problem in the UK comes from the width of the powers given to Eurocontrol to recover unpaid charges when the operator, who has the primary liability to meet the charges, goes into default or becomes insolvent. In that situation, the Civil Aviation Authority ("CAA") - acting as agent for Eurocontrol - has a statutory power to detain an aircraft to meet outstanding Eurocontrol charges: and ultimately to sell the aircraft to meet the charges as a priority claim.

Under Section 73 of the Civil Aviation Act 1982 and delegated legislation - currently the Civil Aviation (Route Charges for Navigation Services) Regulations 1993 - the CAA can detain on Eurocontrol's behalf:

- First, the aircraft in respect of which the ATC charges arose - whether or not the debtor airline is still operating the aircraft at the time of the detention - as effective security for just the outstanding ATC charges incurred by that aircraft; or

- Secondly, any other aircraft which the debtor airline is still operating at the time that the detention begins, as effective security for any outstanding ATC charges owed by the airline on all of the aircraft operated by it.

This second statutory right of detention is often (somewhat loosely but conveniently) known as the `Eurocontrol fleet lien' and is the cause of major concern amongst aircraft financiers. I suspect that few have any real difficulty with the first detention power - where Eurocontrol can detain an aircraft to recover the ATC charges incurred by that aircraft - and the principle that this right of detention should follow the aircraft even after a change of operator. It is an irritant, but the sum concerned should be relatively manageable. The British Parliament is, however, unique throughout all the Eurocontrol member states in having decided to arm Eurocontrol with the right to exercise a fleet lien.

How then does the problem arise in practice? Take an example of, say, an English airline operating 20 aircraft. It expands too fast and collapses. As English law currently stands, and as happened in the case of Air Europe, Eurocontrol is fully entitled to pick on just one of these aircraft at will in the UK and to refuse to release it until either the entire debt of the airline to Eurocontrol has been paid or security for all the debt is put up. After 56 days, it can take steps to sell the aircraft. Because ATC charges are inherently costly, and because of the 'arrears' basis for charging and the credit period that Eurocontrol is willing to give, it is quite possible for the debt, across even a relatively small fleet of aircraft, to exceed the value of any one aircraft. For example, whilst an airline's debts to airport authorities (who have a similar statutory fleet lien) or maintenance companies will normally be a matter of hundreds of thousands of pounds at maximum, it is not unusual for even a small charter airline to amass outstanding debt to Eurocontrol of between US $5m and US $10m. A lien on an ageing Boeing 727 for amounts on that scale could in practice wipe-out the owner's or the mortgagee's interest.

The position is made worse by the fact that lessors and mortgagees have no general right of access to Eurocontrol's records to find out the scale of their airline's debt or if there has been any default; and even if they do have access, Eurocontrol's records often lag behind the real level of debt. Moreover, Eurocontrol need not make any attempt first to detain individual aircraft to recover the charges incurred by each of them; they are entitled under English law to go straight to exercising a fleet lien on whichever aircraft they choose. To add insult to injury, once they have managed to extract the fleet debt from the hapless financier of one of the aircraft, that financier has no remedy under the terms of the original Convention, the Multilateral Agreement or English legislation to obtain contributions from the financiers of the other aircraft - who have directly benefitted from his misfortune by obtaining aircraft clean of any Eurocontrol debt or lien threat at all. The only other possible route to contribution would be in restitution law, and is very uncertain indeed. In the absence of any help from other financiers, all that can be done is to file a claim in the airline's insolvency as an unsecured creditor - for whatever that is worth, if anything.

This arbitrary and potentially catastrophic risk is of particular concern to institutions financing English airlines, not just because such airlines tend to fly aircraft around Europe, constantly incurring Eurocontrol charges, but also because the usual insolvency protection sought by English airlines since 1986 has been Administration. Assets leased to or mortgaged by the airline can then only be repossessed, under section 11 of the Insolvency Act 1986, with the consent of the Administrators or the Court. Meanwhile, however, the airline's Administrators may well still be operating the aircraft, and as long as this lasts, the financier runs the risk of the Eurocontrol fleet lien. Eurocontrol, too, will have to get consent before exercising a fleet lien from the Court or the Administrators, but this will often be easy to obtain, and can be sought without prior notice to the financier.

Challenges to Eurocontrol's powers

Not surprisingly, various attacks have been made on Eurocontrol's powers in the English Courts, but by and large they have failed. A lessor argued in a 1991 case involving Irish Aerospace (Belgium) NV as lessor and a Spanish airline, Canafrica, as lessee that Eurocontrol's use of its powers gave rise to a duty of care and was in breach of Article 86 of the Treaty of Rome. Irish Aerospace failed on both counts. Case-law did not support the existence of a duty of care in negligence, and as Eurocontrol was not involved in commercial or economic activities, it was not subject to EC treaty competition restrictions. Then, when Air Europe collapsed in 1991, the mortgagee of a Boeing 747 detained to meet the airline's fleet debt (the ECU equivalent of o2.7m) to Eurocontrol tried to persuade the English Court that it had been prejudiced within the terms of Section 27 of the Insolvency Act 1986 by the detention and that the detention should be released. They laid emphasis in particular on the fact that they had co-operated throughout with the Administrators, only to have their patience rewarded by the imposition unannounced of a fleet lien. The Court rejected this argument - although it did suggest that the position might have been different if the mortgagee had unequivocally asked the Administrators for repossession of the aircraft.

Only in one recent case has the tide turned a little. In the case of the CAA -v- Internationale Nederlanden Aviation Lease (and others), with Eurocontrol intervening, concerning Sultan Air, a Turkish charter airline, the fleet lien was exercised on Eurocontrol's behalf. The sum was once again huge: approximately US$7m. The Commercial Court held in October 1994, in a decision of His Honour Judge Diamond QC, that Eurocontrol's practice of relying on the call-sign in order to identify the operator was inadequate; and thus if (as with Sultan Air) a call-sign carried on being used after the airline concerned had, in reality, ceased to operate the aircraft, Eurocontrol could no longer detain the aircraft for a fleet lien. This, at least, will mean that in future Eurocontrol will have to make careful investigation of the operating position before seeking to exercise a fleet lien, the key criteria for `operation' being responsibility for airworthiness and for providing a properly trained and competent crew.

Solutions

The current imbalance in favour of Eurocontrol could be rectified in various ways. The most straightforward one legally would be to legislate to remove the fleet lien. However, in the absence, at least so far, of a sustained lobbying effort from the aviation finance industry or much sympathy from the electors or Government for the occasional plight of aircraft financiers, there must be little prospect of the necessary change to English law. Eurocontrol is naturally content with its draconian powers in England and could be expected to resist any such change. Another approach would be additional English regulations to enable someone who has discharged a fleet debt to obtain reimbursement from the financiers of the other aircraft that benefitted. This could be done by imposing on each of them a statutory obligation to reimburse the original payer to the extent of the charges incurred on each of their aircraft. This measure should appeal to both Eurocontrol and the aircraft finance community: since it would redistribute the financial risk of a fleet lien around all the parties who had financed the fleet. The solution has logic; but whether Parliament has the time or interest is another matter.

If the problem cannot be put right by one or other of the above approaches, a workable remedy is much harder to find. Any steps to change overall rights of access to Eurocontrol's records or to make other changes to the Convention or the Multilateral Agreement would presumably require the agreement and ratification of all member states. This is probably becoming ever more difficult to achieve as the number of applicants to join the existing Eurocontrol arrangements increases: even faster than the queue to the join the European Union itself. Financiers can also insist on special contractual provisions with airlines to obtain prior consent from them to the financier obtaining information on their Eurocontrol debt direct from Eurocontrol. At best, however, such access only provides a rather unreliable snapshot of the debt at a particular moment in time. It can sometimes help the financier in the cat-and-mouse game of trying to avoid a Eurocontrol fleet lien and should be requested where possible; but having the information will not be decisive in eradicating the risk. Nor is it likely that security deposits can be extracted from the airline in sufficient sums to properly guard against the threat.

Is there any other, more radical, way around the problem? Possibly. Litigation is outstanding in Brussels, Eurocontrol's home, in another case concerning Sultan Air - related to the English case mentioned above - to try to establish that under the terms of the Multilateral Agreement (that, in part, governs Eurocontrol's actions), Eurocontrol is obliged to take proceedings first in the defaulting airline's home country before it can adopt the easier option of exercising its fleet lien under English legislation. The Multinational Agreement prima facie requires this as a first step - which would oblige Eurocontrol to litigate against Sultan Air first in Turkey. The English Court rejected a similar argument in relation to English law in the Irish Aerospace case, because it felt that the English statutory provisions were quite clear in giving Eurocontrol an unconditional right to move straight to a fleet lien. However, the Belgian Court may take a different view of Eurocontrol's obligations under the Convention and Multilateral Agreement. If Eurocontrol's hands could be tied under Belgian law in this way, that could significantly reduce the number of occasions when Eurocontrol can send the CAA into action in England on its behalf without first trying to sue the airline in separate proceedings.

A more radical approach still may be for a financier caught by the fleet lien to take the UK Government to the European Commission on Human Rights, on the basis that the English legislation is so damaging to the rights of property owners that it violates the UK's Treaty obligations under the Convention on Human Rights. An interesting proposition, but one which would doubtless take many months, if not years, to establish in Strasbourg. In the meantime, however, the financiers of aircraft operating into the UK will continue to have sleepless nights.

Roger Baggallay, Clifford Chance, London

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.

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