In a recent matter handled by Gowling WLG (Canada) LLP1 (the "Transaction") representing a financial institution in the Canadian aviation market (the "Aircraft Financing Company"), a Canadian court order implemented, for the first time, "Alternative A" of the insolvency provisions set out in the Convention on International Interests on Mobile Equipment (the "Convention") and the Protocol on the Convention on International Interests on Mobile Equipment on Matters Specific to Aircraft Equipment (the "Aircraft Protocol", and collectively with the Convention, the "Cape Town Convention"). This article briefly discusses the origin of the Cape Town Convention, as well as the insolvency provisions in connection with the Transaction.

1. The Origin of the Cape Town Convention 

The Cape Town Convention was signed on November 16, 2001, but Canada only ratified it in December 2012. The main objective of the Cape Town Convention is to facilitate the efficient financing and leasing of mobile equipment of high value.2 Airframes, aircrafts engines and helicopters, defined as "aircraft objects" in the Cape Town Convention ("Aircraft Object"), have no fixed location and as a result, creditors had difficulty obtaining secure and enforceable rights.

2. Novelties of the Cape Town Convention

2.1 The international registry

One of the main novelties of the Cape Town Convention is the creation of an international registry (the "Registry"). The Registry is an asset-based computerized registration system that registers not the debtor but individualized and uniquely identifiable asset by the serial number of the Aircraft Object.3 Parties to a security agreement, a title reservation agreement, a lease agreement, a transfer of rights under those agreements, or a sale without reservation of ownership4 can register interests in the Registry.5

The Registry is a central element of the priority system of the Cape Town Convention. Registration is not necessary for the creation of the international interest or its proof of existence, but it ensures, in most instances, priority against subsequently registered and unregistered interests.6

2.2 The insolvency proceedings

Each Contracting State has the option to make a declaration and to choose between two alternatives that will guide the insolvency process relating to Aircraft Objects. Under Articles XI and XXX of the Protocol7 , the declaration made by a Contracting State provides secured creditors with a special insolvency regime governing their rights. Canada amended the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (the "CCAA") to incorporate the remedies of Alternative A of the Cape Town Convention.8

2.2.1 Alternative A

Alternative A provides many advantages to the secured creditor as it grants more in-depth protection than otherwise available to a secured creditor under bankruptcy and insolvency laws. The debtor has two options upon the occurrence of an "insolvency event" as defined in the Cape Town Convention:

(i) give possession of the aircraft covered by the contract to the secured creditor; or

(ii) cure all defaults and agree to perform all future obligations under the contract no later than the earlier of the end of the waiting period specified by the Contracting State or the date on which the secured creditor would be entitled to possession if the Cape Town Convention was not applicable.9

Alternative A also requires the deregistration process and exportation of the aircraft to be completed in less than five working days. This is an undeniable advantage for a secured creditor.

Finally, Alternative A ensures the priority of secured creditors. It provides the Contracting States with a special provision stating that only non-consensual interests following a declaration under Article 39 (1) of the Cape Town Convention have priority over rights published at the Registry, during insolvency proceedings.10

2.2.2 Alternative B

Alternative B gives much less protection to secured creditors than Alternative A. It is often characterized as the "soft" version of the insolvency recourses available to a secured creditor. For instance, Alternative B does not provide strict time periods that the debtor must respect.

3. The Transaction

In 2017, a helicopter company (the "Helicopter Company") sought an Initial Order under the CCAA. The Aircraft Financing Company was one of the Helicopter Company's secured creditors and had first-ranking security over eight helicopters (the "Helicopters") owned and/or operated by the Helicopter Company, with subordinate security in all other assets that were registered at the Registry.

In theses circumstances we determined that, the remedies of the Cape Town Convention had to be applied. The CCAA proceedings constituted an "insolvency-related event" as defined in the Aircraft Protocol and enabled the Aircraft Financing Company to benefit from the remedies provided in the Cape Town Convention, in particular, Alternative A. Canada chose to ratify the Cape Town Convention and to adopt Alternative A. As such, a Canadian court had to comply with the obligations under the Cape Town Convention and enforce a security/international interest duly registered in the Registry.

In light of the arguments of Gowling WLG professionals, the Aircraft Financing Company was permitted to sell the Helicopters, and for the first time a Canadian Court recognized the application of the Alternative A remedy.

The buyers of the Helicopters also had to deal with the deregistration process. The Aircraft Protocol allows an irrevocable deregistration and export request authorization for an Aircraft Object, from a civil registry of the Aircraft Object as a remedy for default by a debtor. In this Transaction, a court order confirmed the transfer of title free and clear of all rights and ordered all regulatory authorities to effect the change of ownership.

Conclusion

In practice, the application of the Cape Town Convention is not as simple as intended. Not all Contracting States, when faced with a situation where the Cape Town Convention is applicable, recognize and apply the Cape Town Convention as expected by ratification. Indeed, the recognition and scope of the Cape Town Convention are not the same for all Contracting States. However in Canada, the Transaction has set a precedent for the procedure to be followed by other Canadian courts in similar circumstances.