Aviation finance in Canada: overview

A Q&A guide to aviation finance in Canada.

This Q&A provides a high level overview of key practical issues including financing options for purchasing aircraft; registration and deregistration requirements; transfer of title; security, including aircraft mortgages; transfer of security; enforcement of security and repossession; and application of the Cape Town Convention.

To compare answers across multiple jurisdictions, visit the Aviation Finance Country Q&A tool.

The Q&A is part of the global guide to aviation finance. For a full list of jurisdictional Q&As visit www.practicallaw.com/aviationfinance-guide.

Contents

Financing options

1. What are the main options available for financing the purchase of an aircraft? How are aircraft purchases typically financed?

In Canada, aircraft are mostly financed through:

  • Leases, including sale and lease back agreements.

  • Leasing (crédit-bail in Québec).

  • Secured loans.

  • Chattel mortgages (referred to as personal property securities) (in the common law provinces) or movable hypothecs (in Québec).

  • Conditional sales/instalment sales.

 
2. What are the issues arising in relation to the various financing options?

Canada is a constitutional monarchy composed of 13 provinces and territories. The power to legislate is allocated between the provincial and federal legislative orders, depending on the subject matter. The principles applicable to secured transactions, which govern most of the aircraft financing options (see Question 1), are a matter of provincial jurisdiction. However, navigation and shipping, and bankruptcy and insolvency are a matter of federal jurisdiction (section 91, paragraphs 10 and 21, British North America Act (BNA)). Additionally, in its role for "peace order and good government" (section 91, BNA), the federal Parliament also legislates over aircraft transport under a series of aircraft-related rules, regulations and laws.

Some differences exist across provinces with respect to the rules on validity and enforcement of secured transactions. In particular, Québec, unlike the rest of the Canadian provinces and territories (which apply the rules of common law), is governed by a civil law regime. Therefore, dealing with the rules applicable to a specific type of aircraft financing requires a practitioner to analyse the particular provincial rules that apply and to remain aware of the distinctions between them. In addition, it is necessary to consider each province's conflict of laws regime in order to know which laws will be applicable (see Question 20).

Canada ratified the Convention on International Interests in Mobile Equipment (Cape Town Convention) (collectively with the Protocol on Matters Specific to Aircraft Equipment) on 1 April 2013, seven years later than the countries that originally ratified the Convention. As a result, Canada's implementing statutes contain a "grandfather" clause, which allow rights granted before 1 April 2013 to retain their priority over any rights registered under the Cape Town Convention regime on or after that date.

Common law provinces

The common law provinces each enacted their own Personal Property Security Act (PPSA), which establishes the legislative framework for secured transactions. The various PPSAs provide for very similar rules. Under these rules, a security interest is defined as any interest in personal property that secures payment or performance of an obligation (Ontario PPSA), without regard for the ownership of this personal property. The Canadian common law security interests include chattel mortgages. In addition, some other contractual devices are deemed security interests under the PPSAs, including:

  • Conditional sales contracts.

  • Leases for a term of more than one year.

The conditions for the validity of a security interest are as follows:

  • Existence of a written agreement.

  • Attachment of the interest to the underlying collateral.

  • Registration in accordance with the provincial requirements.

Québec

The Civil Code of Québec (CCQ) sets out the legal regime governing security interests in the province of Québec, which include movable hypothecs or other title-based instruments (collectively referred to for the purposes of this chapter as the "Québec security interests"). The conceptual foundations of Québec security interests are different, as their creation is contingent on the grantor being the owner of the collateral. This bears particular relevance with respect to aircraft, given the specific definition of "owner" provided in the Canadian Aviation Regulations (CARs) (see Question 3). Therefore, under the Québec regime, the main form of security interest over movable property, notably mobile objects such as aircraft, is the movable hypothec. Other available security instruments include the following:

  • Lease.

  • Leasing/crédit-bail arrangements, under which the lessor's property, acquired at the request and in accordance with the lessee's instructions, is put at the lessee's disposal in return for payment.

  • Instalment sale.

  • Sale with a right of redemption.

The conditions for the validity of a movable hypothec in Québec are as follows:

  • The grantor must have capacity to alienate the property.

  • The property must be sufficiently described in a written agreement.

  • The hypothec must be granted for a specific sum with a determinable interest rate.

  • The hypothec must be published (registered) on the Register of Personal and Movable Real Rights.

The validity requirements for the other security instruments available under Québec law are set out in specific Articles of the CCQ.

 

Registration and deregistration requirements

Registration

3. What is the procedure for registration of an aircraft?

Transport Canada is the governmental agency responsible for delivering aircraft certificates of registration. The "owner" of an aircraft, as defined in the Canadian Aviation Regulations (CARs), must obtain a certificate of registration. This certificate does not confer legal title to the aircraft.

Under the CARs, any "Canadian" who is the "owner" of an aircraft can register the aircraft in the Canadian Aircraft Register. A "Canadian" can be a physical person or a legal entity that has 75% of its voting rights held by Canadians. "Canadian" corporations can qualify as owners of commercial aircraft, while "non-Canadian" corporations can only qualify as owners of private aircraft. An "owner" is any person that has legal custody and control of the aircraft, regardless of whether that person has legal title to the aircraft. Therefore, the Canadian Aircraft Register is not a title register nor a security register, but rather an operator-based register. A person will be deemed to have control over an aircraft when it has complete responsibility for the operation and maintenance of the aircraft (CARs).

 
4. What is the procedure for registration of aircraft mortgages?

The registration of security interests is governed by provincial law regarding personal property security, and the approaches differ according to whether registration occurs in the common law provinces or in Québec (see Question 2).

In Québec, the provincial conflict of laws rules refer to the laws applicable in the jurisdiction where the domicile of the debtor or owner is located for the proper registration of a security interest charged on a corporeal movable used in more than one state. In common law provinces, the conflict of laws rules refer to the location of the debtor. The term "location" of the debtor, except in Ontario, refers to the jurisdiction where the following is located:

  • The debtor's place of business.

  • If the debtor has more than one place of business, his chief executive office.

  • If the debtor has no place of business, his principal residence (that is, the debtor's registered office).

In Ontario, a debtor that is a corporation organised under provincial or territorial law will be located in the province or territory of its incorporation. If the debtor is a corporation organised under federal law, it will be located in the jurisdiction where its registered office or head office is located. Therefore, under Canadian law, only registration in the province of the location or domicile of the debtor or owner will be strictly required.

However, since the Convention on International Interests in Mobile Equipment (Cape Town Convention) became effective in Canada, all security interests that qualify as international interests (as defined in the Convention) must also be registered at the International Registry (IR).

In the common law provinces, the registration procedure follows that of any security interest under the provincial Personal Property Security Acts. A financing statement indicating the form of the security interest must be registered electronically.

A Québec security interest must be published (registered) by filing an application with the Register of Personal and Movable Real Rights.

Personal property security and hypothecs over spare aircraft parts are subject to the same national registration requirements, provided that they remain individually identifiable.

In addition, the current state of the law has led practitioners to register security interests over objects governed by the Cape Town Convention both at the IR and the provincial property registry levels. This allows objects that are not included in the Convention's definition of "aircraft objects" (such as an auxiliary power unit), to be covered by the relevant security.

 
5. Can aircraft leases be registered? If so what is the procedure for registration of aircraft leases?

Leases subject to the Convention on International Interests in Mobile Equipment must be registered at the International Registry.

In Canada, the perfection and registration requirements applicable to any type of security interest (see Question 4) in common law provinces will apply to the lessor under a lease. Therefore, the lessor must take positive steps to protect its right of ownership through registration in the appropriate personal property registry.

In Québec, both lease and leasing/crédit-bail agreements can be registered on the Register of Personal and Movable Real Rights. However, it is necessary to pay particular attention to the distinction between a lease and a leasing agreement (which is another type of financing transaction) (see Question 14).

A lease is defined as "an agreement in respect of the operation of an aircraft for hire or reward that specifies a commencement and termination date and, during the term of which, the lessee has legal custody and control and the right to exclusive possession and use of the aircraft" (Canadian Aviation Regulations (CARs)). In addition, during the term of the lease, responsibility for airworthiness and maintenance rests with the registered owner of the aircraft. In terms of registration, a short-form lease must be filed with Transport Canada, accompanied by a short-form bill of sale in order to provide proof of ownership of the aircraft (CARs). This short-form lease only contains basic statutory terms and omits any sensitive or financial details in relation to the lease transaction.

 
6. What is the effect of registration of:
  • An aircraft?

  • An aircraft mortgage?

  • An aircraft lease?

Aircraft

Aircraft registration is mandatory. Registration allows an aircraft to be legally operated in Canada and internationally, subject to compliance with international conventions.

Aircraft mortgage

Since 1 April 2013, international interests registered at the International Registry:

  • Are effective against third parties.

  • Take priority over any other subsequently registered interests, whether registered internationally or nationally.

In common law provinces, security interests must be perfected to be effective against third parties. Provincial statutes provide that perfection occurs when both:

  • A security interest has "attached" (which includes the condition that the debtor signs a written agreement containing a sufficient description of the secured object).

  • A financing statement has been filed with the appropriate register.

Applicable statutes also provide that sole registration of a financing statement does not constitute constructive notice to third parties regarding the contents of the statement.

Perfection of Québec security interests occurs through simple registration at the Register of Personal and Movable Real Rights (Québec Register). The security agreement must also contain a sufficient description of the underlying object and the specific sum secured. Publication of a movable hypothec on the Québec Register creates a presumption that third parties are aware of the creditor's right.

Aircraft lease

A lease over an aircraft must be registered like any other type of security interest, namely in the relevant personal property register.

In addition, a special time requirement applies to certain title-based Québec interests (such as leases and leasing/credit-bail agreements) over certain asset categories, including aircraft. If registration of these interests occurs within 15 days after their creation, the effects of the interests are retroactive to the date of creation. The common law provinces' Personal Property Security Acts similarly require that a lease over an aircraft (which does not constitute inventory) be registered within 15 days of its creation in order for it to have priority over any other security interest in the same type of collateral granted by the same debtor.

 
7. What is the procedure for obtaining a certificate of airworthiness?

A certificate of airworthiness can be obtained by submitting an application to Transport Canada. The owner (proposed operator) must provide basic information in relation to the aircraft and its engine. The manufacturer, model and serial number must be indicated in the application.

Once a certificate of airworthiness has been issued with respect to an aircraft, it is deemed to fulfil the conditions specified in the International Civil Aviation Organization's (ICAO) Convention on International Civil Aviation, and can fly through the airspace of ICAO contracting states.

A certificate of airworthiness will remain valid regardless of whether the aircraft is sold or otherwise transferred to a different owner.

It usually takes one to five days to obtain a certificate of airworthiness, from the date of receipt of the application.

Deregistration

8. What is the effect of deregistration of:
  • An aircraft?

  • An aircraft mortgage?

  • An aircraft lease?

Aircraft

The two following situations can be encountered:

  • An irrevocable deregistration and export request authorisation (IDERA) was obtained and registered with Transport Canada, under the regime established by the Convention on International Interests in Mobile Equipment (Cape Town Convention).

  • No IDERA was registered.

In the first situation, the beneficiary of the IDERA can request the transportation authorities to deregister the aircraft at any time. The IDERA regime obliges governmental authorities to co-operate with the beneficiary (see Question 31).

In the second case, deregistration can be requested by the registered owner (as defined in the Canadian Aviation Regulations) by filing a requisition with the Canadian Aircraft Register. The Canadian aircraft authorities do not consider the interests of any beneficial owner or secured creditor before it deregisters an aircraft, and will not notify any party other than the registered owner or the party listed on an IDERA before deregistering an aircraft.

If deregistration occurs as a result of a transfer of title, Transport Canada must be notified within seven days of the transfer. The person requesting deregistration must remit the original certificate of registration, along with any bill of sale, to Transport Canada, specifying which foreign aviation authority (if any) should be notified of the deregistration. An inspector or licensing officer from Transport Canada will then make a recommendation to headquarters as to the appropriateness of the removal. If deregistration is approved, Transport Canada headquarters will fax a confirmation of removal to any foreign aviation authority concerned. There is no deregistration fee.

There are bilateral agreements in place between Canada and each of the US, UK and Poland, which allow for deregistration to occur without a certificate of airworthiness for export being required.

Aircraft mortgage

Deregistration of an international interest must be made through a request for discharge to the International Registry (IR).

At the national level, secured creditors can seek deregistration of a registered security interest in an aircraft by filing a request for discharge with the relevant provincial personal property register. A similar procedure exists with respect to the Register of Personal and Movable Real Rights (for Québec security interests). In all cases, a confirmation is issued to the person requesting deregistration.

Aircraft lease

If an aircraft lease is an international interest, a request for discharge must be filed with the IR.

Under both the common law and civil law regimes, deregistration of a lease can be effected in the same manner as for other types of security interests (see above, Aircraft mortgage).

However, if there is a change in the basis for the operator's legal custody and control of the aircraft, this operator must also provide the Canadian Aircraft Register with a copy of the evidence of this change. This registration is mandatory and must be effected within seven days of the change.

 

Transfer of title

9. How is legal title to an aircraft transferred?

In Canada, there are no specific formalities to transfer title to an aircraft, airframe or engine. However, an owner seeking to transfer title must complete the following steps.

Airframe

The original owner of the aircraft must notify Transport Canada within seven days of the transfer of ownership, which occurs through delivery of a document evidencing ownership to the purchaser.

The bill of sale must also be filed with Transport Canada. This is particularly relevant for the purposes of a transfer of title governed by Québec law, as there are no documentary formalities in relation to a contract of sale/transfer of title under civil law. Therefore, with regards to aircraft, the transferor must keep in mind that an evidentiary document will always need to be filed with Transport Canada.

If the registered owner (see Question 3) changes on completion of the transaction, the original Transport Canada certificate of registration will be cancelled, and a new certificate of registration will be issued to the new registered owner. This cancellation will not occur if the registered owner remains the same person/entity and provides, within seven days of the transfer of ownership, a copy of the new document under which he retains legal custody and control of the aircraft.

Engine

As Transport Canada does not hold a separate register in relation to aircraft engines, no particular steps must be taken in order to effect a transfer of title to an engine.

 

Security

Mortgages

10. What are the types of aircraft mortgages available? What are the validity requirements for aircraft mortgages?

Since Canada's ratification of the Convention on International Interests in Mobile Equipment (Cape Town Convention), security interests over aircraft can qualify as international interests, which must be registered at the International Registry. There are no formalities other than the requirement that the interest be set out in writing.

Domestically, the grant of security over aircraft can occur in one of two ways. An owner can grant either a:

  • Security interest (under the relevant Personal Property Security Act in common law provinces).

  • Movable hypothec (under the Civil Code of Québec).

These two similar security instruments must be perfected through registration in the appropriate provincial personal property register. Depending on the province where the interest is registered, a variable level of information with respect to the financing transaction must be indicated in the registration documents. In particular, if a movable hypothec over an aircraft is registered in Québec, the documents must contain a sufficient description of the aircraft and state a maximum secured amount. Typically, this amount exceeds the maximum underlying obligations and possible enforcement costs. Unlike a common law security interest, a movable hypothec registered in Québec must be in notarised form if the movable hypothec is granted in favour of a hypothecary representative (fondé de pouvoir) for all present and future creditors of the secured obligations. However, these conditions and formalities have been overridden by the Cape Town Convention regime (except for the requirement that the agreement be set out in writing).

Security interests can also be created over aircraft engines. The same formalities as for the registration of regular security interests are applicable.

See Question 4 for information on the applicable registration procedure for security interests.

 
11. Will a registered mortgage take priority over other mortgages and charges over the aircraft?

The ranking of registered security interests is determined on a first-to-register basis. Therefore, a properly perfected and registered security interest will take priority over any subsequently registered interest.

However, particular attention must be paid to priority of international interests registered in the International Registry (IR). When the Convention on International Interests in Mobile Equipment (Cape Town Convention) came into force in Canada, national and provincial implementing statutes each contained a grandfather clause providing that security interests properly registered at the provincial level would maintain their priority internationally, with no need for registration at the IR. Canada's declaration under Article 60 of the Cape Town Convention provides that pre-existing security interests, including Québec security interests, will retain their priority for a period of five years following the entry into force of the Convention. Depending on the province concerned, this means that secured creditors will face the possibility of losing their priority in favour of subsequently registered international interests as early as in 2018. Therefore, it is highly important to conduct verifications in provincial registers and in the IR before entering into financing contracts involving the creation of international interests.

Consensual security interests over aircraft do not take priority over non-consensual security interests such as liens, prior claims and other "super-priorities", which exist with no need for registration. However, properly registered security interests will take priority over tax liens for amounts due under income tax and excise tax legislation. See Question 29 for further detail on non-consensual security interests.

 
12. Can spare parts be subject to an aircraft mortgage? If not, are there any other forms of security that can be taken over spare parts?

Spare parts and components of aircraft are automatically subject to the principle of accession, under both Québec civil law and common law. According to this principle, any security interest over an aircraft extends to all spare components that are sufficiently integrated into the aircraft so as to completely lose their individuality.

Spare parts themselves, and most importantly engines, can also be subject to security interests, in which case it is important to consider the application of priority rules. For example, under most Canadian provinces' Personal Property Security Act, a security interest that attaches to goods which subsequently become accessions to an aircraft, confers priority to security interests in the accessions over other security interests with respect to the aircraft as a whole.

However, the Convention on International Interests in Mobile Equipment (Cape Town Convention) has created an independent regime for security interests over aircraft engines. Therefore, a security interest over an aircraft created after the Convention's entry into force in Canada, which is registered at the International Registry, does not extend to the aircraft's engine. An engine-specific international interest will need to be registered.

Leases

13. What forms of security can be granted over an aircraft lease?

Under Québec law, a lessor or a lessee can grant a movable hypothec over their rights under the lease. Similarly, in the common law provinces, security interests can be granted over a lease. In most cases, lessors will insist on including a prohibition against such an arrangement in the lease agreement. Consent from the lessor will therefore be required.

A debtor can also assign his rights under a lease agreement to his creditor in a secured lending transaction. In certain circumstances, this provides the creditors with the ability to step in and exercise the rights of the debtor. Consent from the other party to the lease agreement must also be obtained.

Other forms of security

14. What other forms of security can be taken over an aircraft?

Both airframes and engines can be subject to various security instruments that are recognised under Canadian law. Common types of other security instruments encountered in practice include:

  • Leasing (crédit-bail) arrangements in Québec. In the case of a leasing (credit-bail) arrangement, the creditor acquires title to an aircraft from a third party, in accordance with the instructions of the debtor, and immediately leases it to the debtor. The creditor's ownership over the object results in a form of security interest that can be registered according to the rules of Québec law.

  • Sales creating a reservation of ownership (instalment sales in Québec, conditional sales in common law provinces). A creditor can benefit from a reservation of ownership created through a contract for the sale of an aircraft. In Québec, the instalment sale mechanism allows the seller to retain title over the aircraft until it is fully paid. A similar mechanism exists in common law provinces.

  • Equipment trust arrangements. Under an equipment trust arrangement, the aircraft is under the control of a trustee who, on the debtor's default and the secured creditor's instructions to that effect, will be entitled to transfer title to the aircraft to the creditor or to a third party, with the creditor obtaining the proceeds of sale. Under this scheme, the debtor does not have title to the aircraft.

 
15. What other forms of security over an aircraft can be registered?

Registration of the other forms of security interests mentioned in Question 14 at the International Registry is not mandatory in all cases. These interests can only be registered as international interests if they are created under a "security agreement", as defined in the Convention on International Interests in Mobile Equipment (Cape Town Convention). Reservations of ownership (title retentions) are considered as creating security interests covered by the Cape Town Convention.

Equipment trust arrangements over aircrafts must also be registered under Québec law. In the common law provinces, a creditor's interest in property held in trust is deemed to be a security interest, which must conform to the rules applicable to any other form of security, and must therefore be registered.

 

Transfer of security

16. Is it possible to transfer security interests over an aircraft? Are there specific issues of local law when transferring security interests?

It is possible to transfer a security interest alone, both under civil law and common law. A transfer of security requires a written agreement that complies with the validity requirements of the underlying security interest.

 
17. Is a transfer of security subject to registration requirements?

In the common law provinces of Canada, a transfer of security takes effect by filing a financing change statement with the appropriate personal property register.

In Québec, a transfer requires the publication of a document evidencing the transfer in the Register of Personal and Movable Real Rights. In addition, a summary of the registered rights must be provided to the debtor.

 

Enforcement of security and repossession

Mortgages

18. What are the circumstances in which a mortgagee can take possession of the aircraft and/or sell the aircraft? What requirements must the mortgagee comply with?

If a debtor defaults under a security agreement creating a security interest (or a hypothec in Québec), the creditor can initiate proceedings to seek repossession of the aircraft. Depending on the jurisdiction, the creditor may be able to enforce self-help remedies (see Question 19). Under Québec law, a default under a hypothec agreement does not give rise to enforcement rights in favour of the creditor unless the debt is certain, liquid and due.

If the security interest constitutes an international interest governed by the Convention on International Interests in Mobile Equipment (Cape Town Convention), the substantive rules of national law governing enforcement on default are merely supplementary. Under Article 11 of the Cape Town Convention, the parties are free to agree on what exactly constitutes "default" under their security agreement. If the parties do not agree on this, "default" is an event "which substantially deprives the creditor of what it is entitled to expect under the agreement". Once an event of default occurs, the procedure for the exercise of enforcement rights is set out in the Canadian Aviation Regulations.

For example, in all cases, a secured creditor must both:

  • Apply to Transport Canada to request deregistration of the aircraft.

  • Provide evidence that:

    • a default has occurred; and

    • the requirements for repossession are met.

 
19. What is the procedure for repossession of the aircraft?

Enforcement of international interests

Measures of enforcement provided under the Convention on International Interests in Mobile Equipment (Cape Town Convention) are similar to those available under national law, except that the remedies of sale by the creditor and by judicial authority (Québec-specific remedies) are no longer applicable. The remedies provided by the Cape Town Convention allow a creditor to:

  • Take possession or control of the aircraft object.

  • Sell or lease the aircraft object.

  • Collect or receive income or profit arising from the use of the aircraft object.

These remedies can be exercised with or without the courts' intervention. They must be exercised in a commercially reasonable manner. This signals to the courts that they should refrain from interfering with the parties' agreement on the mode of exercising enforcement remedies.

Additionally, the regime envisaged by Alternative A under Article XI of the Protocol to the Cape Town Convention, which has been adopted by Canada and integrated into national bankruptcy and insolvency legislation, allows for strict and efficient repossession measures. If a debtor defaults on its obligations and fails to remedy these defaults within 60 days, it must immediately surrender possession of the aircraft in favour of the creditor (see Question 30).

Enforcement of non-international security interests

A secured creditor will typically apply to the court to obtain the surrender of the aircraft. In common law provinces, a creditor can only exercise self-help remedies on the debtor's default if both:

  • The security agreement provides for self-help remedies.

  • Repossession of the aircraft does not involve the use of excessive force.

In Québec, enforcement by repossession is subject to a ten-day prior notice filed with the Register of Personal and Movable Real Rights. Unlike in common law provinces, self-help remedies are not available under the Civil Code of Québec. However, the entry into force of the Cape Town Convention has overruled this position with respect to aircraft objects.

The time frame within which repossession can occur will vary depending on whether the enforcement is opposed by other parties (for example, if there are competing claims). If the repossession is not opposed, an order of surrender can be obtained within a few weeks, but it may take up to one or two years if the matter requires a trial, or even longer if an appeal is subsequently lodged.

Depending on whether an action for enforcement (including through self-help remedies) of a non-international security interest over an aircraft is contested, national law allows for provisional grounding measures, such as:

  • A seizure before judgment in Québec.

  • An interim recovery judgment in the common law provinces.

In addition, if there is a risk of unlawful removal of the aircraft from the province, an enforcing creditor can apply for an interlocutory injunction pending trial.

 
20. Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local rules that apply, despite a choice of foreign law?

In most cases, the Canadian national courts will enforce a choice of law clause when a dispute arises over the application of a security agreement. In the interest of international comity and party autonomy, choice of foreign law clauses will typically be applied.

However, the law applicable in the various Canadian provinces provides for certain limitations:

  • For example, in Québec:

    • the courts will apply Québec procedural rules;

    • the provisions of the foreign law will not be applied if they are manifestly inconsistent with public order as understood in international relations;

    • the foreign law must be both pleaded and proven as a fact before the court;

    • where required by legitimate and manifestly preponderant interests, the courts can give effect to a mandatory provision of the law of another country with which the situation is closely connected; and

    • courts retain discretion to decline to hear an action if it is contrary to public order, if it is not the proper forum to hear the action, or if concurrent proceedings are properly being brought elsewhere.

  • The common law provinces add that a choice of law clause will be enforced provided that it is not inserted as a way to deliberately avoid the laws of another jurisdiction.

The issues of validity and perfection of any security interest will be governed by the law as determined by the local conflict of laws rules (see Question 4).

 
21. Will local courts recognise and enforce a foreign court judgment in favour of a mortgagee?

Canadian courts will recognise and enforce a foreign court judgment in favour of a secured party. However, the enforcement of foreign judgments in Canada is subject to a prior recognition judgment issued by Canadian courts. In Québec, for example, this is a rather easy and expeditious process that only involves a few formalities.

Other forms of security

22. What is the applicable procedure for repossession of an aircraft under other forms of security interests?

When other forms of security interests fall under the definition of an international interest, enforcement will proceed in accordance with the provisions of the Convention on International Interests in Mobile Equipment (Cape Town Convention) (see Question 19, Enforcement of international interests).

The repossession remedies provided by national law for other forms of security interests that are not international interests must be exercised in accordance with the same procedure as for traditional forms of security interests (that is, security interests in the common law provinces and movable hypothecs in Québec). For example, in the common law provinces, a conditional sales contract is deemed to create a security interest.

The right of enforcement through repossession under these types of security agreements is restricted by statute in some provinces, where enforcement can only occur through the use of a civil enforcement agency.

In the specific case of instalment sales in Québec, the procedure for enforcement follows the rules applicable to the exercise of hypothecary rights (see Question 19, Enforcement of non-international interests).

Leases

23. In the event of a default event under an aircraft lease, can the lessor take possession of the aircraft without judicial intervention?

The Convention on International Interests in Mobile Equipment (Cape Town Convention) provides self-help remedies for enforcing creditors, subject to each country's express implementation of these provisions into national law. Therefore, the exercise of self-help remedies will be subject to each province's applicable law:

  • The common law provinces of Canada allow self-help remedies for default under a lease agreement.

  • Under Québec law, self-help is not permitted and any enforcement measure must be authorised by a court. However, the entry into force of the Cape Town Convention has altered this rule and self-help remedies will now be allowed in the event of default under a lease agreement, although self-help has yet to be judicially considered in that province.

 
24. What is the procedure for taking possession of an aircraft before the expiration of a lease?

Enforcement of a creditor's rights under a lease agreement can take place whether or not the lease is terminated. Therefore, the remedies provided by the Convention on International Interests in Mobile Equipment, or those provided under national law, can be exercised when an event of default occurs.

In circumstances where delivery of the aircraft may prove difficult (for example, if the aircraft is located in a foreign jurisdiction), a secured creditor may prefer to apply for an injunction. In Canada, the procedure for obtaining an injunction is costly and potentially time-consuming, but is a very effective enforcement mechanism. Injunctions are also easily recognised by local authorities.

 
25. If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the aircraft?

The judgment obtained by the lessor will order the debtor to surrender possession of the aircraft, and provide a specific time frame in which this surrender must occur. For example, in Québec, a debtor will usually be ordered to surrender the aircraft subject to enforcement measures within ten to 30 days after service of the judgment. If the debtor does not conform to the order, a creditor can have recourse to the assistance of a bailiff in order to forcibly remove the aircraft from the debtor's premises. This may cause additional delays in gaining possession.

 
26. Will local courts recognise a foreign court judgment in favour of a lessor?
 

Cape Town Convention

27. Has your country signed and ratified the Convention on International Interests in Mobile Equipment (Cape Town Convention)?

Canada ratified the Cape Town Convention in 2013. Provincial implementing statutes have been enacted in order for the Convention to fully apply in national law. Accordingly, the Cape Town Convention is currently in force in all Canadian provinces, except for New Brunswick. However, on 23 December 2015, Canada notified the International Institute for the Unification of Private Law (UNIDROIT) (the official depositary of the Cape Town Convention) that the Convention will enter into force in New Brunswick on 1 July 2016.

 
28. Has ratification of the Cape Town Convention caused any conflicts or issues with local laws?

The Cape Town Convention was only ratified on 1 April 2013. However, the Convention has had an influence on Canadian law since 2005, when the Federal Government introduced stop-gap provisions into federal insolvency laws similar to those found under the Convention's Alternative A (see Question 30), in order to keep the Canadian market competitive with the rest of the world. These stop-gap provisions were repealed on the date of the Convention's entry into force. Some argue that this created a situation where only agreements concluded and registered under the Cape Town Convention on or after 1 April 2013 can be subject to Alternative A in Canada. This argument has not been tested yet before a court, but this interpretation appears to contradict legislative intent.

More generally, given the recent entry into force of the Convention in Canada, and the period of relative uncertainty with respect to its practical application and interaction with national law, actual conflicts have yet to emerge.

 
29. What is the legal position regarding non-consensual rights and interests under Article 39 of the Cape Town Convention?

According to the Government of Canada's declaration, national law governing non-consensual rights and prior claims apply despite Article 39 of the Cape Town Convention. More specifically, any non-consensual interest existing over an aircraft object under Canadian law at the date of the declaration or created after, and that has priority over a registered security interest, will continue to have priority over any registered international interest. The same applies to legal hypothecs under Québec law, which are similar to non-contractual liens available in the common law provinces.

Canadian law provides for many types of liens that may have priority over consensual international interests, including:

  • Aviation authorities' fees. Canadian regulatory airport authorities can impose and collect charges for landing, terminal use and airport use. The regulatory authorities do not have the formal right to place a lien on aircraft and seek detention in the case of non-payment of the charges, but they can readily apply to national courts and obtain an ex parte seizure order, provided that the aircraft is "operated" by the debtor at the time of the seizure.

  • Customs duties. Aircraft can be detained, and sometimes forfeited, in cases of breaches of Canadian customs laws. This includes failure to pay excise taxes on aircraft fuel.

  • Tax obligations. Failure to fulfil tax obligations under a number of federal, provincial and municipal statutes may also lead to the detention and sale of aircraft. For example, for unpaid amounts contrary to the Income Tax Act, the Ministry of National Revenue can initiate proceedings to seize and sell the owner's personal or real property. These proceedings must give the owner a 30-day delay to pay the outstanding amounts. However, these tax liens will be subordinate to the rights of an owner in possession of a writ of execution over an aircraft.

  • Super-priority claims. The Canadian Bankruptcy and Insolvency Act creates certain super-priorities for the benefit of the federal government with respect to amounts due under federal pension plans and employment insurance contributions statutes.

  • Repair and storage liens. The majority of common law provinces, as well as Québec, have created a special possessory lien for unpaid repair or storage charges, which also takes priority over consensual security interests. This lien normally only remains in effect while the person repairing or storing the object has it in its direct possession. However, if payment of outstanding sums is not made within the prescribed delay, the repairer or storer will be entitled to sell the object.

  • Other detention rights. Transport Canada can detain an aircraft that is believed, on reasonable grounds, to be unsafe or likely to be unsafely operated.

 
30. Has your country adopted the remedies on insolvency provided under Article XI of the Protocol to the Cape Town Convention?

All Canadian provinces and territories have opted for Alternative A under Article XI of the Protocol to the Cape Town Convention. Therefore, before an aircraft is seized in the context of bankruptcy proceedings, the debtor will benefit from protection under Canadian bankruptcy and insolvency statutes for a period of 60 days. Seizure can be avoided if both:

  • All defaults are cured by the debtor during that 60-day period.

  • The debtor undertakes to continue to perform its obligations both during and after the insolvency proceedings.

 
31. What is the procedure to file an irrevocable deregistration and export request authorisation (IDERA)?

The beneficiary of an IDERA seeking deregistration for the purposes of exportation must simply file an IDERA with Transport Canada. No further formalities are required. Transport Canada, which must co-operate expeditiously with the IDERA beneficiary, will acknowledge and confirm receipt of the IDERA. A beneficiary (whether a lessor or a secured creditor) can then request the deregistration of the aircraft.

 

Reform

32. Are there any proposals for reform in the area of aviation finance?

The adoption by the International Accounting Standards Board of its new lease accounting standard (IFRS 16), which will take effect in Canada in January 2019, will have an impact on aircraft financing practices in Canada. For example, these norms now provide that the obligations under a lease arrangement with a term of more than 12 months (whether a capital or operating lease) must appear on a corporation's annual balance sheets.

Acknowledgments: this article was prepared in close collaboration with Alexandra Belley-McKinnon, student-at-law, Lavery.

 

Online resources

Transport Canada – Civil Aviation Directorate

W www.tc.gc.ca/eng/civilaviation/menu.htm

Description. Transport Canada is the Canadian transport regulatory authority. The Civil Aviation Directorate's website contains links to legislative instruments applicable to air safety and transportation activities.

Transport Canada – Canadian Aviation Regulations

W www.tc.gc.ca/eng/civilaviation/regserv/cars/menu.htm

Description. This page contains updated versions of the Canadian Aviation Regulations, as well as links to policies and standards applicable to aviation transportation.



Contributor profiles

Pierre Denis, Partner

Lavery

T +1 514 877 2908
F +1 514 871 8977
E pdenis@lavery.ca
W www.lavery.ca (www.lavery.ca/en/lawyers-paralegals-notaries-lavery/13-pierre-denis.html)

Professional qualifications. Member of the Barreau du Québec, 1983

Areas of practice. National and cross-border financing transactions, including aircraft leasing and project financing, both for lenders and borrowers (consistently listed in The Canadian Legal LEXPERT® Directory, including in 2015, in the fields of Financial Leasing and Asset Equipment Leasing; listed in the 2016 edition of Best Lawyers in Canada as a leading practitioner in the field of equipment finance law).

Recent transactions

  • Acting as Canadian adviser to an international leasing and financing company with respect to its financing of numerous business jets.

  • Represented two Canadian banks in the financing of an aircraft fleet of a Canadian airline company.

  • Represented BAL Global Finance Canada Corporation, a subsidiary of Banc of America Leasing, with respect to the interim financing, the financing and the acquisition of, among other things, a Bombardier Global 6000, a Dassault Falcon 2000S and a Bombardier Challenger 605.

Languages. English, French

Publications

  • The Cape Town Convention and the Evolution of the International Registry: Adapting to the Transactional Context of Aircraft Financing and Leasing (www.lavery.ca/DATA/PUBLICATION/1886_en~v~the-cape-town-convention-and-the-evolution-of-the-international-registry-adapting-to-the-transactional-context-of-aircraft-financing-and-leasing.pdf).

  • Canadian ratification of the Convention on International Interests in Mobile Equipment and of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (www.lavery.ca/DATA/PUBLICATION/1624_en~v~canadian-ratification-of-the-convention-on-international-interests-in-mobile-equipment-and-of-the-protocol-to-the-convention-on-international-interests-in-mobile-equipment-on-matters-specific-to-aircraft-equipment.pdf).

Etienne Brassard, Partner

Lavery

T +1 514 877 2904
F +1 514 871 8977
E ebrassard@lavery.ca
W www.lavery.ca (www.lavery.ca/en/lawyers-paralegals-notaries-lavery/989-etienne-brassard.html)

Professional qualifications. Member of the Barreau du Québec, 2007

Areas of practice. Business financing; banking law; commercial law, including aircraft purchases and sales, corporate structures, and the negotiation and drafting of various commercial agreements; negotiation and drafting of aircraft financing agreements and related security agreements, leasing, lease financing and instalment sales; cross-border financings; financing of specific assets such as aircraft, equipment, rolling stock and heavy machinery.

Recent transactions

  • Represented two Canadian banks in the financing of an aircraft fleet of a Canadian airline company.

  • Represented BAL Global Finance Canada Corporation, a subsidiary of Banc of America Leasing, with respect to the interim financing, the financing and the acquisition of, among other things, a Bombardier Global 6000, a Dassault Falcon 2000S and a Bombardier Challenger 605.

  • Acting as Canadian adviser to BCI Aircraft Leasing with respect to the reorganisation of four owner trusts that each own legal title to a Bombardier CRJ Series 705 aircraft on lease to a Canadian carrier and subleased to another Canadian carrier.

Languages. English, French

Publications

  • The Cape Town Convention and the Evolution of the International Registry: Adapting to the Transactional Context of Aircraft Financing and Leasing (www.lavery.ca/DATA/PUBLICATION/1886_en~v~the-cape-town-convention-and-the-evolution-of-the-international-registry-adapting-to-the-transactional-context-of-aircraft-financing-and-leasing.pdf).

  • Canadian ratification of the Convention on International Interests in Mobile Equipment and of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (www.lavery.ca/DATA/PUBLICATION/1624_en~v~canadian-ratification-of-the-convention-on-international-interests-in-mobile-equipment-and-of-the-protocol-to-the-convention-on-international-interests-in-mobile-equipment-on-matters-specific-to-aircraft-equipment.pdf).

Benjamin David Gross, Partner

Lavery

T +1 514 877 2983
F +1 514 871 8977
E bgross@lavery.ca
W www.lavery.ca (www.lavery.ca/en/lawyers-paralegals-notaries-lavery/474-benjamin-david-gross.html)

Professional qualifications. Member of the Barreau du Québec, 2001

Areas of practice. Banking law; negotiation and drafting of loan documents and related security agreements, leasing contracts, leases and instalment sales contracts (aircraft, rolling stock, heavy machinery, and so on) (listed in the 2015 Canadian Legal LEXPERT® Directory in the fields of asset and equipment finance and leasing).

Professional associations/memberships. Canadian Finance and Leasing Association; Equipment Finance and Leasing Association (US). 

Sibylle Ferreira, Associate

Lavery

T +1 514 878 5641
F +1 514 871 8977
E sferreira@lavery.ca
W www.lavery.ca (www.lavery.ca/en/lawyers-paralegals-notaries-lavery/1294-sibylle-ferreira.html)

Professional qualifications. Member of the Geneva Bar, 2008; Member of the Barreau du Québec, 2015

Areas of practice. Finance and financial services, including advice to lenders and borrowers, and drafting of credit agreements and security documents; aircraft financing and acquisitions.


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