On April 6, 2011, the Ontario Superior Court of Justice released its decision in the priority disputes between the lessors and aviation authorities resulting from the Skyservice receivership. The Court, in interpreting and applying the decisions in Canada 3000 and Zoom Airlines, may have raised the bar for lessors to defeat the seizure and detention rights of the aviation authorities in Canada.

On March 31, 2010 at 11:00 am, the Court granted a receivership order against Skyservice. In the hours and even days after the receivership order, the aviation authorities brought applications for aircraft seizure and detention orders. There was no dispute that Skyservice owed the various aviation authorities landing fees, general terminal fees, airport improvement fees and/or other charges related to the use of the airports, including monies for air navigation services provided by NAV Canada. The aviation authorities were attempting to recover amounts due to them from Skyservice by enforcing their rights as against the aircraft that were operated by and which were leased to Skyservice by the various lessors. The lessors took the position that the circumstances in this case were such that the aviation authorities did not have the right to seize and detain the aircraft.

Some of the more salient facts in the priority dispute were as follows:  

  • the receivership order did not allow either the receiver or Skyservice to carry on any business the receivership order authorized the receiver  
  • only to wind down (but not operate the business of Skyservice)  
  • a representative of Transport Canada attended at the offices of Skyservice at or about the time of the receivership order and delivered a letter suspending the air operator certificate and aircraft maintenance organization licenses and authorities held by Skyservice under the Canadian Aviation Regulations and the Aeronautics Act, because Skyservice had ceased business and could no longer meet the requirements of its air operator certificate, including possessing or having the authority or capacity to maintain or operate aircraft  
  • the lessors either served or purported to terminate the leases after the receivership order but none of the disputing lessors had taken physical possession of the aircraft  
  • upon becoming aware of the ex parte applications and after the receivership order, the lessors attended in court to advise the Court that the lessors had issued, or were in the process of serving, terminations or confirmations of terminations of their leases
  • at 6:30 pm on the day of the receivership order, a status quo order was issued by the Court which provided, among other things, that pending the hearing and determination of the aviation authorities’ applications, no applications and no person, including the receiver, would be permitted to take steps, or cause any steps to be taken, to possess or repossess the aircraft or to dispossess Skyservice of the aircraft in question – however, under the terms of the status quo order, the lessors of the aircraft were permitted to take limited measures to protect and maintain the aircraft  
  • after the granting of the status quo order, the parties negotiated a protocol for the release of the aviation authorities’ claims against the aircraft upon the lessors posting cash security with the receiver for the amounts claimed to be owing to the various aviation authorities  

The Court considered and relied upon the decisions in both Canada 3000 and Zoom Airlines, both cases which exhausted all appeals available under Canadian law. In Skyservice the Court held that:  

Canada 3000 stands for two important principles. The first is that the right to the detention remedy is subject to any stay that is in place. The second is that policy demands that the risk of default be shifted from airport authorities and NAV Canada onto independent private sector titleholders who are better positioned to protect themselves from default and, as a result, the CARs must be interpreted on terms favourable to airport authorities and to NAV Canada. For this reason, the term “operator” was defined by possession and repossession of the aircraft. If Canada 3000 is taken to be the binding authority, the lessors must show that they regained physical possession of the aircraft prior the Receivership Order.”  

The Court also considered the Zoom Airlines case, in which it was found that there is an exception to the airport authorities’ detention remedy in cases where the titleholders (lessors) repossessed aircraft prior to the issuance of a seizure order.

The Court in Skyservice went on to make the following findings:

  • the receivership order provided for a stay of proceedings against the debtor (Skyservice) or its property (including the aircraft)  
  • the stay restricted the exercise of all rights and remedies against Skyservice, the receiver, or affecting the aircraft, such that rights and remedies are stayed and suspended except with the written consent of the receiver or leave of the Court  
  • the effect of the receivership order was to halt any action of the lessors to enforce remedies against Skyservice including termination of leases  
  • the Court found that the steps necessary to terminate the lease and repossess the aircraft had not been completed prior to the receivership order (and effective stay)  
  • the Court made it clear that “default by Skyservice alone does not constitute a repossession”  
  • the Court further held that Canada 3000 addresses all of the arguments put forth by the aircraft lessors and it is a complete answer to the position put forth by the aircraft lessors  

In the result, the Court found that “there was no repossession of Aircraft prior to the Receivership Order. Repossession could not occur after the granting of the Receivership Order, absent consent of the Receiver or leave of the court, neither of which occurred. Therefore, at the time that the Status Quo Order was granted, no lessor had completed repossession in the manner set out in Zoom. In fact. no repossession took place until the order of April 15, 2010.” More fundamental, was the Court’s finding that at the time of the status quo order, Skyservice was in possession of the aircraft and was still the registered owner, notwithstanding it did not have the ability to operate the aircraft and was, in the view of the Court, still the “owner” or “operator” of the aircraft.  

The Skyservice decision stands for the proposition that absent a completed repossession, priority will go to the aviation authorities. As such, lessors must not only have terminated the lease, but must also obtain physical repossession of the Aircraft and, possibly even, apply for and obtain the deregistration of the aircraft from Transport Canada to defeat the claims of the aviation authorities in Canada. This means that lessors must be preemptive in their actions – not only must they be swift to terminate the lease but they must take immediate steps to repossess their aircraft before any stay is imposed in an insolvency or restructuring proceeding.

This situation is a difficult one for the lessor, because once a lessor takes these preemptive steps, the lessee typically will have no choice but to file insolvency or restructuring proceedings. In such event, the lessor will have little if any hope in recovering any unpaid rent or other monies owing under the lease. But the alternative is even worst. If the lessor is the last to take steps, it could have its aircraft seized and detained for all the unpaid aviation authorities’ claims, not only for its own aircraft, but all aircraft operated or leased by the lessee.  

The only measure lessors can take to combat this fate is to take substantial security deposits from the lessees, which in today’s market may be a difficult sell to the airlines.