On December 12, 2012, the federal government of Canada passed legislation that, in conjunction with various provincial laws, ratified its signature to the Convention on International Interests in Mobile Equipment (the "Convention") and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (the "Protocol" collectively with the Convention the “Cape Town Convention”) which occurred on March 31, 2004. This ratification is subject to the declarations lodged by the Canadian government (the “Canada Declarations”) amending and supplementing sections 39, 52, 53, 54 and 60 of the Convention and articles VIII, X, X(6) XII and XIII of the Protocol.

The Cape Town Convention requires, subject to the exceptions indicated therein and to the Canada Declarations, that a written security agreement, title reservation agreement, leasing agreement or  contract of sale 1 involving a debtor situated 2 in a contracting state of the Cape Town Convention (which now includes Canada), which creates an international interest 3 or prospective international interest4 in aircraft equipment meeting certain size and power requirements,5 be published in the International Registry of Mobile Assets(the “IRMA”) in order for such interest to be enforceable/perfected against third parties and for its priority to be established.

The Cape Town Convention will take effect on April, 1 2013 (the “Implementation Date”) in Alberta, British Columbia, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Québec and Saskatchewan. Although registration is not required for International Interests, Prospective International Interests or Non-Consensual Rights or Interest (within the meanings given to such terms in the Cape Town Convention) created before the Implementation Date, all such rights and interests created after the Implementation Date will need to be published in the IRMA. The priority of IRMA registrations is established on a “first to register” basis.

The one exception to this rule pertains to Pre-Existing Rights or Interests (within the meaning set forth in the Convention) governed by Sections 426 to 436 of the Bank Act (SC 1991, c 46). Such rights and interest have been given a five year grace period: up until April 1, 2018, such rights and interests will continue to be governed by the Bank Act.  However, after April 1, 2018 the Convention will apply for the purposes of determining priority, including the protection of any existing property.

In addition to the abovementioned exception, the Cape Town Convention and the Canada Declarations 6 provide that the priority of Non-Consensual Interests (within the meaning set forth in the Cape Town Convention), such as those arising from a government decree or a legal judgment, will continue to have priority over International Interests as defined by the Convention.

At present, the states that have ratified the Cape Town Convention include, but are not limited to, Canada, the United States, Brazil, New Zealand, Mexico, Norway, the United Arab Emirates and Russia. It should be noted however that several western countries including France, Germany, Switzerland, Italy and the United Kingdom have not ratified the Cape Town Convention.

The ratification of the Cape Town Convention by the Government of Canada will greatly alter aircraft financing and sale regimes in the majority of Canadian provinces and territories. The law imposes new obligations for publication and, in practical terms, will require that IRMA searches be included among the standard publication searches conducted in the context of aircraft financing or sale transactions.

The law will also provide creditors with a range of basic default remedies and recourses. Where there is evidence of certain defaults, the Cape Town Convention provides a means of efficiently obtaining interim relief pending final determination of its claim on the merits, deregistration, repossession, sale, lease and export of aircraft equipment.

In light of the above, creditors should conduct a thorough review of their standard financing documents to ensure that the terms and conditions of the Cape Town Convention have been accounted for. For creditors, this will include ensuring that standard documents provide for all rights, recourses and remedies available under the new law.