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 a lease agreement, creditors’ rights can be enforced either before or after the lease termination.

JurisdictionCreditors can initiate proceedings seeking repossession of an aircraft in the event that the debtor defaults under a security agreement creating a security interest (or a hypothec in Quebec). They can enforce self-help remedies depending on the jurisdiction:

• In common law provinces, self-help remedies are allowed.
• In Quebec, self-help remedies are not allowed and any enforcement measure must be authorised by a court. With the adoption of the Cape Town Convention, self-help remedies are now permitted in the event of a default made under a lease agreement; however, they have yet to be judicially authorised. Moreover, under Quebec law, unless the debt is certain, liquid and due, a default under a hypothec agreement does not necessarily allow the enforcement of the creditor’s rights (see “Outline the basic measures to enforce a security interest”).

Enforcement of rightsIn addition to jurisdiction, enforcement depends on the right being enforced.

Particularly in Quebec, the following rights exist:

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

Instalment sales are more complex. Article 2 of the Bankruptcy and Insolvency Act makes the reservation of ownership here akin to a security interest (forcing the instalment seller to be involved in the bankruptcy process) and Article 1749 of the Quebec Civil Code forces an instalment seller to use a recovery process similar to those open to a hypothecary creditor.

As regards hypothecs, creditors can either:

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

In common law provinces, if the lease is a conditional sale contract which contains a right to purchase or create a security interest, provincial statutes may restrict the right to take possession of an aircraft. In the event of default, the civil enforcement agency is the only one that can seize the aircraft. In lessee-initiated bankruptcy proceedings, lessors must respect a 60-day stay period pursuant to Alternative A of the Cape Town Convention. During such period, the lessee must preserve and maintain the aircraft according to the lease. Once the 60-day stay period is over, the lessee must return the aircraft to the lessor unless the default has been resolved or the lessee agrees to abide by future obligations.

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

Secured creditors must:

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

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

International security interestsWhen other forms of security interest are also international interests, enforcement will fall under the Cape Town Convention. Under the convention, the enforcement’s measures are similar to those available under federal law, except that the remedies of sale by the creditor and the judicial authority do not exist. Hence, remedies available to a creditor include:

• taking possession or control of the aircraft;
• selling or leasing the seized 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 refrains the courts from interfering with the parties’ security agreement on the mode of exercising enforcement remedies.

The regime contemplated by Alternative A under Article XI of the Protocol on Matters Specific to Aircraft Equipment has been adopted by Canada and was integrated in the Bankruptcy and Insolvency Act. Strict and efficient repossession measures can now be taken. Hence, if a debtor defaults on its obligations and fails to remedy these defaults within 60 days, it must surrender possession of the aircraft in favour of the creditor.

Non-international security interestsSecured creditors can typically apply to the court to have the aircraft relinquished. In common law provinces, self-help remedies can be exercised by a creditor when:

• the security agreement provides for self-help remedies; or
• excessive force is not used when the aircraft is being repossessed.

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. Unlike in common law provinces, self-help remedies are prohibited in Quebec. Nevertheless, with the ratification of the Cape Town Convention, this position has been overruled with respect to aircraft objects.

The timeframe within which repossession can take place will depend on whether the enforcement is being opposed by other parties with competing claims. If there is no opposition, an order to relinquish the aircraft can be obtained in a few weeks. However, it may take up to one or two years if a trial is required.

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

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

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 continue to apply following the government’s declaration. Hence, any non-consensual interests existing over an aircraft at the date of the declaration or created thereafter with a priority over a registered security interest will continue to maintain priority over any international interest. The same principle extends to the hypothec under Quebec law, which is similar to non-contractual liens available in common law provinces.

Under Canadian law, there are many types of lien that may have priority over consensual interests, such as:

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

In Quebec these do not affect the lessor in a lease/leasing and have a limited effect on an instalment seller (as stated in Article 2 of the Bankruptcy and Insolvency Act, together with Article 1749 of the Civil Code of Quebec).

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

The Canadian courts typically recognise and enforce judgments rendered by foreign courts in favour of a secured party.