Australia: The repossession of aircraft in Canada: Skyservice Airlines - The latest chapter in the conflict of priority between lessors and aeronautical authorities
Legalflyer - July 2011

In Skyservice Airlines,¹ a decision rendered last April, the Superior Court of the Province of Ontario highlighted the effects of Canadian insolvency laws on the exercise by lessors of their right to terminate lease agreement and the impact these laws may have on the statutory rights of seizure and detention that certain Canadian airport authorities and NavCanada possess pursuant to their governing statutes.²

The statutory right of airport authorities bears a number of similarities with the right of detention of certain English airports under the Civil Aviation Act, 1982, albeit with some notable differences:

• unlike a possessory lien, the remedy can be exercised even if the aircraft is no longer within the jurisdiction of the airport authority seeking the seizure, as long as the aircraft can be found in one of the Canadian provinces or territories
• it cannot be exercised without first obtaining a court order, which, however, can be obtained ex parte if there are reasons to believe that the aircraft is about to leave Canada
• the seizure affects the whole aircraft. As a result, items that are removed and whose title may be with different owners (for example, engines or other aeronautical equipment), cannot be repossessed when the aircraft to which they are attached is seized
• unlike in the UK, the charges incurred by one specific aircraft cannot be the subject of a seizure once the aircraft has ceased to be owned or operated by the airline.

The seizure and detention right of NavCanada is similar in nature.

The seizure and detention right of Canadian airports and NavCanada over legal title holders was confirmed (after much debate in lower courts) by the Supreme Court of Canada in the matter of the bankruptcy of Canada 3000.³

Since that decision, there has been a few cases that have allowed the courts to define the limits of the aeronautical authorities. The first of these cases came before the Ontario Court of Appeal in GE Capital Aviation Services, Inc. v. Winnipeg Airports Authority Inc.⁴ Here, the issue before the court was whether the aeronautical authorities had the right to call on the security posted by lessors in order to obtain the release of their aircraft (pursuant to a release protocol negotiated by all interested parties) and satisfy the unpaid charges.

The Court of Appeal held that, in practical terms, the aeronautical authorities' detention remedy is a statutory device intended to drive all interested parties to negotiate the payment of any debts owed to the aeronautic authorities, against the prospect of the release of the detained aircraft.

This decision was followed by the Alberta case of Zoom Airlines⁵ where limits to the rights of the aeronautical authorities were first met. In Zoom Airlines, notice of termination of the lease was given by a lessor prior to the relevant aircraft departing from Paris bound to Calgary. Upon landing in Calgary, an agent appointed by the lessor boarded the Canadian-registered aircraft, advised the flight captain that he was repossessing the aircraft on behalf of his principal and collected the aircraft's Certificate of Airworthiness, the Certificate of Registration and the technical log books. The first two documents were thereafter surrendered by the agent to Transport Canada, the governing regulatory authority which, a few days later, issued a temporary Certificate of Registry in the name of a lessor's appointee. Meanwhile, the Calgary Airport Authority applied for and obtained an order to seize and detain the aircraft. Seizure was effected thereafter. Despite the absence of notice and the fact that the civil registry still showed Zoom as the registered owner, the Motions Judge held that registration in the name of Zoom had been cancelled in accordance with the Canadian Aeronautics Regulations ("CARs") upon the lessor terminating the lease and taking possession, through its representative, of the Certificate of Registration and Certificate of Airworthiness and remitting the same to Transport Canada. These acts effectively took possession of the aircraft away from Zoom. The decision was confirmed by a majority of the Alberta Court of Appeal and leave to appeal to the Supreme Court of Canada was denied.

This brings us to Skyservice Airlines, where a judge from the Superior Court of Ontario was asked to determine if, in that other case also, the lessors had successfully taken possession of their aircraft prior to the aeronautical authorities' application for detention. In this case, the airline was put into receivership by a creditor within hours of announcing that it had ceased operations and its directors had resigned. Following the receivership order, the lessors notified the receiver of the termination of the leases and the receiver confirmed that he had no interest in the aircraft and would assist the lessors in returning them to their owners. However, no actual physical repossession took place prior to the aeronautical authorities having filed their application or their notice of application for detention orders. The Superior Court judge held that, absent effective repossession, the detention rights of the aeronautical authorities could be set up against the legal title holders. It was further held that the immediate effect of the receivership order was to stay the enforcement of any remedy against Skyservice, including the termination of the lease and repossession of the aircraft. Accordingly, by the time the aeronautical authorities' application for detention order was considered, no repossession had taken place. Unlike the lessors' rights, the right of detention of the aeronautical authorities was not stayed as a result of the receiving order, since the aircraft were not assets of the insolvent company and the receiver had no intention to carry on the business of Skyservice.

Although we have yet to hear the last word on this case, pending appeal of the decision to the Court of Appeal of Ontario, this decision serves as a useful reminder of the importance of insolvency laws on the exercise of creditors' remedies, especially when these remedies rest on the exercise of contractual rights against the debtor, as with the termination of a lease agreement.

Footnotes

1. Skyservice Airlines Inc. (Re), 2011 ONSC 703 (hereinafter "Skyservice Airlines").

2. Airport Transfer (Miscellaneous Matters) Act, S.C. 1992, c. 5, s. 9; Civil Air Navigation Services Commercialization Act, S.C. 1996, c. 20, s. 56

3. Canada 3000 Inc., Re; Inter-Canadian (1991) Inc. (Trustee of), [2006] 1 S.C.R. 865 (hereinafter "Canada 3000").

4. 33 CBR (5th) 151 (Ont. C.A.).

5. The Calgary Airport Authority v. Zoom Airlines Incorporated 2009 ABCA 306 (hereinafter "Zoom Airlines").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.