Q&A: aircraft repossession and enforcement of security in Canada

Enforcement measures

Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?

Under an aircraft lease agreement, creditors’ rights are enforceable either before or after the lease termination.

Creditors can initiate proceedings seeking repossession of an aircraft if the debtor defaults under a security agreement creating a security interest (or a hypothec in Quebec). Depending on the jurisdiction, they can enforce self-help remedies.

Common law provinces do not allow self-help remedies. Similarly, Quebec does not allow self-help remedies and a court must authorise any enforcement measure. With the adoption of the 2001 Cape Town Convention on international interests in mobile equipment (the Cape Town Convention), self-help remedies are now permitted in the event of a default made under an aircraft leasing agreement. However, they must be judicially authorised. Furthermore, under Quebec law, a default under a hypothec agreement does not necessarily allow the enforcement of the creditor’s rights. The debt must be certain, liquid and due.

In addition to jurisdiction, enforcement depends on the creditor’s right being enforced. Especially in Quebec, the following rights exist:

• personal rights; and
• the right to seize or sue in the case of a lease or leasing.

Instalment sales are more complex. Article 2 of the Bankruptcy and Insolvency Act 1985 makes the reservation of ownership akin to a security interest, forcing the instalment seller to be involved in the bankruptcy process. Under article 1749 of the Civil Code of Quebec, an instalment seller is forced to use a recovery process similar to those available to a hypothecary creditor.

With regard to hypothecs, creditors can either:

• take possession for the purpose of administration;
• take in payment;
• sell; or
• sell under judicial authority.

In common law provinces, provincial statutes may restrict the right to take possession of an aircraft if the lease is a conditional sale contract that contains a right to purchase or create a security interest. Moreover, the civil enforcement agency is the only one that can seize the aircraft in the event of default. In lessee-initiated bankruptcy proceedings, lessors must respect a 60-day stay period pursuant to Alternative A of the Cape Town Convention. During this period, the lessee must preserve and maintain the aircraft in accordance with the lease. The lessee must return the aircraft to the lessor unless:

• the default is resolved; or
• the lessee agrees to abide by future obligations once the 60-day stay period is over.

If the security interest is an international interest, federal law substantive rules governing enforcement on default are supplementary to the Cape Town Convention.

Secured creditors must:

• apply to Transport Canada to request the deregistration of the aircraft; and
• provide evidence that a default by the debtor has occurred or that all requirements for repossession have been met.

Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?

Enforcement will fall under the Cape Town Convention when other forms of security interest are also international interests. Under the Cape Town Convention, the enforcement measures are similar to those available under federal law, with the exemption that the judicial authority and remedies of sale by the creditor do not exist. Accordingly, a creditor has the following remedies available:

• taking possession or control of the aircraft;
• selling or leasing the aircraft; or
• collecting or receiving any benefits resulting from the use of the aircraft.

The court’s intervention is optional. However, remedies must be exercised in a commercially reasonable manner, which prevents the courts from interfering with the parties’ security agreement on the mode of exercising enforcement remedies. This is why some security agreements acknowledge the rights of a creditor in advance of a default to be commercially reasonable.

The regime contemplated by Alternative A under article XI of the Cape Town Convention's Protocol on matters specific to aircraft equipment has been adopted by Canada and was integrated into the Bankruptcy and Insolvency Act 1985. It allows for strict and efficient repossession measures to be taken. Hence, were a debtor to default on its obligations and fail to remedy them within 60 days, it would have to surrender possession of the aircraft in favour of the creditor.

Secured creditors can usually apply to the court to have the aircraft relinquished. In common law provinces, a creditor can exercise self-help remedies when the security agreement provides for them, or if the aircraft is repossessed without excessive force.

In Quebec, creditors must file a notice of exercise of hypothecary recourses with the Register of Personal and Movable Real Rights 20 days before repossessing the aircraft. Self-help remedies are prohibited in Quebec, which is not the case in common law provinces. Nevertheless, with the ratification of the Cape Town Convention, this position has been overruled with respect to aircraft objects.

The time frame within which repossession can take place depends on whether other parties with competing claims are opposing the enforcement. When there is no opposition, an order to relinquish the aircraft can be obtained in a few weeks. However, if a trial is required, the process may take up to one or two years.

If there is contestation, some provisional grounding measures may be sought as authorised under federal law, including:

• an interim recovery judgment in common law provinces; or
• a seizure before judgment in Quebec.

Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?

Despite article 39 of the Cape Town Convention, federal law governing non-consensual rights and prior claims continues to apply. As such, non-consensual interests that exist over an aircraft at the date of the declaration, or which are created thereafter with a priority over a registered security interest, will continue to maintain priority over any international interest. The same rule applies to a hypothec under Quebec law, which is similar to non-contractual liens available in common law provinces.

There are several types of liens under Canadian law that may have priority over consensual interests, including the following.

• Aviation authorities’ fees: charges associated with airport use, landing and terminal use could be imposed and collected by Canadian regulatory airport authorities. However, they cannot place a formal right to place a lien on an aircraft. They could seek detention if charges are unpaid. They may also apply to federal courts to obtain an ex parte seizure order, provided that the aircraft is operated by the debtor when the seizure occurs.
• Custom duties: when Canadian custom laws are breached, such as the failure to pay excise taxes on aircraft fuel, detention and forfeiture may ensue.
• Tax obligations: an aircraft may be detained or sold if the debtor fails to fulfil its tax obligations under federal, provincial and municipal statutes.
• Super-priority claims: the federal government has super-priorities based on the Bankruptcy and Insolvency Act 1985 concerning payments that are payable under pension plans and employment insurances.
• Repair and storage liens: in most common law provinces and in Quebec, a special possessory lien for unpaid repair or storage charges exists that takes priority over consensual security interests. The lien normally remains in effect while the person that is in charge of repairing and storing the object is in possession of it. That same person has the right to sell the aircraft if the outstanding sums are not paid within a certain time frame.
• Other detention rights: Transport Canada reserves the right to detain an aircraft. Nonetheless, that detention must be on reasonable grounds not be unsafe or likely to be unsafely operated.

Pursuant to article 2 of the Bankruptcy and Insolvency Act 1985 and article 1749 of the Civil Code of Quebec, in Quebec, liens do not affect the lessor in a lease or leasing and have a limited effect on an instalment seller.

How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?

Because Canada is a party to the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards, Canadian courts typically recognise and enforce judgments rendered by foreign courts in favour of a secured party.