What you need to know

The entry of the Cape Town Convention into force under Canadian law is a positive step, but has led to a legislative “black hole” in the protection provided to certain aviation creditors, bringing with it considerable uncertainty and potentially expensive ramifications.

The Cape Town Convention in Canada

On April 1, 2013 the Cape Town Convention[1] (CTC) was ratified into Canadian law making it necessary to register Canadian security interests in “aircraft objects”[2] at the International Registry of Mobile Assets (the IR) from that date forward. Prior to its ratification and entry into force, aircraft leasing and financing agreements with Canadian air carriers were registered provincially under the applicablePersonal Property Security Act (PPSA) registry regimes.[3]

The CTC has not eliminated the importance of these registries, but operates at the international level to provide a uniform and comprehensive framework for the determination of rights in aircraft objects. It also provides a standardized set of legal remedies for defaults under leasing, conditional sales and security agreements, including those concerning repossession and those that impact the ownership and possession rights of aircraft objects in an insolvency context.

The legislative void created by the CTC

Despite the added benefits that the CTC offers, its entry into force under Canadian law has led to a legislative void in the protection provided to certain aviation creditors with potentially expensive ramifications.

The CTC was first introduced into Canada in 2005;[4] however it would not become Canadian law until it was ratified by the federal government and implemented by a majority of the provinces. To avoid the delay this would cause in bringing Canada in line with international standards, the federal government introduced stop-gap provisions into the various federal insolvency laws that substantively reflected the set of remedies similar to those found under Section 1110 of the U.S. Bankruptcy Code (Section 1110) and the CTC known as “Alternative A”. The Alternative A remedies provide aviation creditors an automatic right to recover their property after a specified waiting period. By the end of that period the debtor or insolvency administrator must either (a) give possession of the aircraft object to the creditor, or (b) have cured the defaults and agreed to perform future obligations under the relevant agreement.

In 2005, provisions providing for a 60 day waiting period consistent with Section 1110 and Alternative A were introduced into each of the Bankruptcy and Insolvency Act (Canada) (BIA), the Companies Creditors’ Arrangement Act (Canada) (CCAA), and the Winding-up and Restructuring Act (Canada) (WRA).

Who and what is impacted?

With the successful implementation of the CTC into Canadian law on December 12, 2012, the stop-gap insolvency provisions were promptly eliminated from the BIA, CCAA, and the WRA to coincide with the CTC’s entry into force on April 1, 2013. However, by eliminating these provisions entirely, parliament has created a situation where, on a strict reading of the law, only agreements that have been concluded on or after April 1, 2013 and registered under the IR pursuant to the CTC will receive the benefit of the automatic repossession remedy provided by Alternative A.

As a result of the above measures, there is now a void in Canadian insolvency legislation with respect to agreements concluded and registered prior to April 1, 2013.

Industry reaction

While those interests will maintain priority if properly registered under the PPSA or CCQ registry regimes, some commenters hold the view that unless such agreements are reconstituted after the effective date under the CTC and registered at the IR,[5] aircraft creditors must petition the court and rely on the discretion of the judge in order to lift the stay to repossess their aircraft objects.

Some have suggested that a judge considering the petition of an aircraft creditor will likely find that the law should operate as it did prior to the 2013 repeals of the stop-gap provisions of the BIA, CCAA or WRA; however, there have been no published rulings to support this position. It is possible that a judge will be swayed by other interests and another argument will prevail to undermine the aircraft creditor’s rights with the potential consequence that the pre-determined 60 day waiting period is not recognised or that the presumed right of recovery is not given effect.

Our view

The amendments have introduced considerable uncertainty to the rights of aviation creditors. Our view is that the 2005 amendments to the BIA, CCAA and WRA should have been retained by the legislators, but only to the extent to benefit the holders of pre-effective date interests. The federal government, in retrospect, admits that this was an “oversight” and its intention was not to eliminate this remedy for the holders of pre-effective date interests, not realizing that Alternative A would not apply to pre-effective date interests unless reconstituted under the CTC. The federal government has also indicated that it is unlikely that it will take active steps to resolve this problem, in hopes that in time it will resolve itself.

With the majority of aircraft financing deals in Canada (in some cases more than 90% of an airline’s fleet) having been established prior to the ratification of the CTC into law, this legislative void is a significant concern—in fact, it might be better referred to as a legislative black hole in which some aircraft creditors may become ensnared if there is a major airline insolvency in Canada. The only way to regain the protection of the automatic right of repossession is for an aircraft creditor to reconstitute its agreement with the debtor under the CTC and make the requisite IR registrations. This is a costly process that requires the cooperation of the debtor (which is not always possible to obtain). If the debtor is not willing or not required to cooperate, the aircraft creditor with a pre-effective date interest will be subject to uncertainty when enforcing its repossession rights in an insolvency event.

Next steps

If your business is affected by this legislative black hole, or if you have related questions, we can assist. Please do not hesitate to contact us for further discussion.