All questions

Security and enforcement

i Financing of contractsAircraft

Aircraft objects are primarily financed through leases, secured loans, chattel mortgages, and conditional or instalment sales. Those who have legal custody and control over an aircraft, as opposed to the registered owner, have complete responsibility for the operation and maintenance of the aircraft and must file evidence of this responsibility with Transport Canada in the Canadian Civil Aircraft Register (CCAR). Lease interests must also be registered with the CCAR, although the register is not a register of title or liens related to aircraft. An aircraft registered in the CCAR may be removed through a process known as de-registration in the event that legal custody and control over the relevant aircraft is transferred.

Security interests in aircraft are governed by provincial laws as opposed to those at the federal level. A movable hypothec will be required to create a security interest over an aircraft in Quebec, while in other Canadian provinces a security agreement will typically be sufficient for the purposes of creating and registering a security interest. To perfect a security interest after 1 April 2013 for aircraft meeting the requirements of the Cape Town Convention, security interests must be registered in the International Registry. It remains common practice to also register a security interest in the relevant provincial register for personal property security. An International Registry registration of a fully and properly constituted international interest in an aircraft object will have priority over all provincial registrations made after 1 April 2013. There are, however, limited exceptions to preserve the priority of non-consensual rights of third parties in Canada.

Marine

The most common method of financing vessels is through a mortgage pursuant to the CSA. However, as movable personal property, vessels are also subject to provincial personal property security legislation. The appropriate statutory regime is determined by the vessel category and the nature of collateral. When there is direct conflict between federal and provincial legislation, the doctrine of paramountcy dictates that federal regulation will take primacy. The interaction between provincial personal property regimes and federal jurisdiction over vessels has not been definitely resolved, and thus care must be taken to determine which statutory scheme governs.

The CSA allows the registered owner of a registered vessel to grant a mortgage against a vessel, or any share of it, as security for any financing. In addition to the statutory form, parties usually elect to enter into a collateral agreement outlining the full obligations and rights and remedies of the mortgage. The mortgagor will generally be required to, inter alia, pay the principal and interest on schedule, maintain and operate the vessel appropriately, and maintain insurance for the vessel. In the case where a mortgagee is entering into a subsequent mortgage, the loan may also involve higher interest to offset the increased risk associated with being a subordinate mortgagee. Mortgagors have a multitude of rights under the mortgage, including the right to sell the ship (assuming this is not explicitly excluded as a possibility in the agreement); however, the mortgagor must not materially impair the mortgage security.

As there are no provisions for taking a mortgage under the CSA over a licensed pleasure craft or a vessel registered in the small vessel register, the vessel is treated as 'personal property' and may be charged by any methods recognised by law for the taking of security in chattel or personal property (i.e., provincial personal property security legislation). In general, lenders (particularly financial institutions) are reluctant to provide financing unless the vessel is registered under the CSA.

The CSA also allows for the registration of a mortgage against a vessel in the process of being built. A builder's mortgage operates in a similar manner as if it were a mortgage of a registered vessel, although it is common practice that this is discharged upon completion of the construction and subsequently replaced with a standard mortgage.

The CSA augments the security of a mortgage to the extent that it provides a statutory scheme of registration whereby the mortgagee can give notice that it has an interest in and over a particular vessel. However, a statutory mortgage does not afford creditors complete security for repayment of indebtedness, as vessels may move to jurisdictions or ports where courts do not enforce Canadian mortgages. In addition, other unregistered maritime or statutory liens may take priority over the registered mortgage, which leads creditors to seek additional protection, such as the right to proceeds of insurance policies or a charge on the vessel's freight.

Under the CSA, no charges other than a mortgage are registrable; thus, searches may be used to determine the owner and statutory mortgages registered against a particular ship but will fail to reveal any other encumbrances on the ship, particularly maritime liens that are not registrable. In addition, failure to register the mortgage under the CSA can result in a loss of priority.

The Bank Act also allows a bank to register security in fishing vessels and aquaculturists' vessels with the Bank of Canada. Under the Bank Act, the secured party only needs to provide notice of intention to take a security interest. In competition between a Bank Act security and a mortgage, priority will be determined based on the first to register under the CSA. To avoid this disadvantage, a fishing vessel (but not an aquaculturists' vessel) can be registered under both the CSA and the Bank Act, which allows banks to have the additional protection of the CSA in priority disputes.

Rail

Section 104 of the CTA allows any person to deposit in the office of the Registrar General of Canada (the Registrar) a mortgage or hypothec issued by a railway company, a security agreement entered by a railway company, an assignment or other document relating to the foregoing, or copies or summaries of any such documents. Similarly, Section 105 of the CTA allows any person to deposit in the office of the Registrar documents, or copies or summaries of security documents, relating to rolling stock, including those evidencing a lease, sale, mortgage, hypothec, security agreement, and various other types of transactions.

The office of the Registrar has established a registry system (the Registry) for security documents relating to railway assets under Sections 104 and 105 of the CTA. The Registry receives documents electronically and makes such documents available online in a publicly available and searchable database. The Registry is intended to provide public notice of the interests established in the documents deposited. Filings under Sections 104 and 105 of the CTA are optional. The Registry is not self-expunging; an interest will remain in the registry indefinitely, and therefore give notice to third parties, until it is expressly amended or discharged by filing of a subsequent document.

When searching the Registry, the searcher should input the name of the current owner or obligor, as well as previous owners or obligors (and any known predecessors to each), as applicable, of the property or rolling stock to be searched. When searching rolling stock, it may be advisable to also search by the rolling stock UMLER marks assigned by the Association of American Railroads. The Registry does not purport to be a title or ownership registry and no provincial or federal ownership registry exists for rolling stock.

Parties often choose to file memoranda or summaries of documents, so it may be necessary to attempt to contact one or more parties for further information. One may need to review many documents to assess the extent to which a particular asset is subject to a security interest. Further, because there is no requirement to file a security interest in the Registry, subsequent documents that affect the interest may not be available in the Registry. Accordingly, the results of searches of the Registry may bear some risk.

Provincial legislation may also apply to certain railway assets. Parties may elect to file security interests in real and personal property registries established under provincial legislation in addition to the Registry, or instead of the Registry, depending on the asset. As a result, it is generally advisable for a party seeking to take a security interest in a railway asset to search the Registry as well as potentially applicable provincial registries.

ii EnforcementAircraft

With the adoption of the Cape Town Convention, repossession of an aircraft upon default may be conducted subject to the applicable lease or security agreement. This includes repossession pursuant to foreign law as chosen by parties to the contract, so long as the choice to implement this foreign law was made bona fide. Federally governed insolvency law, as outlined in the BIA and the CCAA, is also applicable to aircraft contracts.

A creditor can enforce its rights under a lease agreement even in the event that the lease has not yet been terminated, so long as an event of default occurs. The common law provinces of Canada allow for self-help remedies in events of default under a lease agreement. In Quebec, enforcement originally must have been authorised by a court; however, this requirement has been modified since the coming in force of the Cape Town Convention, which allows for self-help remedies in the event of default under a lease agreement. Although the Cape Town Convention allows for self-help remedies, they have yet to be judicially considered in Quebec.

Injunctions are another effective, albeit costly and time-consuming, enforcement mechanism. They are particularly useful in situations where delivery of the aircraft would be challenging.

Marine

Mortgages must be recorded in the order in which they are filed with the Vessel Registry. The priority of competing mortgages in respect of the same vessel or share in a vessel is determined by the sequence of the registration of the mortgages and not according to date of each mortgage, unless all of the mortgagees file their written consent with the Chief Registrar.

If seeking to enforce under a marine mortgage, the mortgagee has the right to take possession of and sell the vessel in circumstances of default or material impairment of the mortgagee's security by the mortgagor. Circumstances of default are generally defined in the loan agreement, in which case the mortgagee will often be able to take possession of the vessel in realisation of its security interest. Material impairment of the mortgagee's security is a question of fact, generally established when there is a material effect on the value of the vessel or the other property subject to the mortgage. Once material impairment is established, the mortgagee can take possession of the vessel and can treat the mortgage agreement as having been repudiated such that the contract is enforceable against the mortgagor for breach of contract but unenforceable against the mortgagee.

Possession by the mortgagee can take the form of actual possession or constructive possession, with constructive possession involving the establishment of a clear intention to take ownership of the vessel. Once the mortgagee is in possession, the mortgagee has all of the rights and obligations of ownership, including expenses associated with the vessel, and can make use of the vessel subject to the terms of the mortgage.

Upon default by the mortgagor, the mortgagee obtains an absolute power of sale. Up to the point of sale, the mortgagee has an obligation to exercise appropriate care of the ship and sell the vessel in good faith and at the best price possible. Sale can be conducted as either a personal sale or a judicial sale. When conducting a personal sale, the mortgagee will generally issue a statutory bill of sale such that the purchaser can maintain the vessel on the registry. Personal sale is a less costly and more time-efficient method than court-administered sale; however, the mortgagee will only be able to transfer as much good title to the purchaser as the mortgagee has itself.

However, if there is more than one registered mortgage of the same vessel or share, a subsequent mortgagee may not, except under court order of competent jurisdiction, sell the vessel or share without the agreement of every prior mortgagee.

Under the Bank Act, a bank's security interest will grant it the statutory power of seizure and sale upon default. The bank's power of sale in circumstances of default grants it the ability to conduct a sale by public auction, while the right of sale in other circumstance will be subject to the terms of the agreement entered into with the borrower. The bank has an obligation to provide notice of sale, act with expediency, and act in a commercially reasonable manner.

iii Arrest and judicial saleAircraft

With regard to international interests, the Cape Town Convention provides multiple remedies that can be exercised with or without the intervention of courts, so long as they are exercised in a commercially reasonable manner. These remedies include allowing a creditor to: (1) take possession or control of the aircraft; (2) sell or lease the aircraft; or (3) collect or receive income or profit arising from the use of the aircraft. The enforcement of foreign judgments is determined at the provincial level, and Canadian courts will generally enforce a judgment of a foreign jurisdiction for a sum certain that is a final non-appealable judgment issued by a court of competent jurisdiction.

Under non-international security interests, a secured creditor will typically apply to the court to obtain repossession of the aircraft. Creditors can only exercise self-help remedies if they are provided for in the security agreement and do not involve the use of excessive force. An order of surrender can be obtained within a few weeks in the event that the repossession is not opposed. If the matter requires trial, it may take one or two years for the order of surrender to be obtained, and this may take even longer if the trial is appealed. When a repossession is opposed, the law allows for provisional grounding measures. For example, common-law provinces allow for an interim recovery judgment. Additional measures are also available; for instance, an interlocutory injunction may be awarded to a creditor pending trial, so long as there is a risk of unlawful removal of the aircraft from the province.

Canada's adoption of the Cape Town Convention allows a lessee or debtor who seeks protection from its creditors under Canadian insolvency law to be granted a stay of up to 60 days prior to the lessor or secured creditor being entitled to seize the aircraft. The lessee or debtor will not be able to avoid the seizure unless it remedies all prior defaults and agrees to continue performing its obligations both during and after the insolvency proceedings.

Marine

One method of sale available to marine mortgagees is to arrest the ship and conduct an in rem judicial sale. Unlike personal sale, this allows the mortgagee to clear title on the vessel, so this is the preferred method of sale if there are multiple charges on the vessel or when multiple parties hold an interest in the vessel. In conducting a judicial sale, the mortgagee also has the option to obtain an in personam judgment against the mortgagor's other assets. As is the case with personal sales, either the mortgagee or the marshal will issue a bill of sale to the purchaser such that the purchaser can maintain the vessel on the registry. When a vessel is subject to several security interests, maritime liens will have a priority ranking above statutory mortgages.