Canada: Where In The World To Register? - A Canadian Perspective On Registration Of Aircraft Interests Under The Cape Town Convention

Last Updated: February 13 2013
Article by Bogdan Teofilovici

The Convention on International Interests in Mobile Equipment (Cape Town, 2001) and Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Cape Town, 2001) (together, the "CTC"), will take effect in Canada on April 1, 2013. The application of CTC reduces the risks, thus the costs, associated with purchases and leases of aircraft and, as a result, encourages manufacturers, lenders and lessors to complete such transactions, particularly in emerging-markets. While CTC applies to both airplanes and helicopters, this summary is concerned with airplanes only, and the term aircraft is used accordingly.

International Registration System

An International Registry was created under CTC in Dublin, Ireland, for the registration of "international interests, prospective international interests and registrable non-consensual rights and interests" and assignments, acquisitions and subordinations of, or in relation to, such interests or rights, and also for the registration of notices of "national interests".

Conditions to CTC Application

The following three (3) conditions are required for CTC to apply:

  1. aircraft or aircraft engine must comply with size or power requirements: an aircraft must be certified to transport at least eight persons (including crew) or goods in excess of 2,750 kilograms and its engines, must each be rated to at least 550 horsepower;
  2. "International Interest" is created: an "International Interest" is the interest granted to a chargee (secured creditor) under a security agreement, vested in a conditional seller under a title reservation agreement or vested in a lessor under a leasing agreement in respect of an aircraft or aircraft engines, as applicable. "International Interests" include security interests, hypothecs, leasehold interests, conditional sales agreements, registrable non-consensual rights and interests and assignments, acquisitions and subordinations of, or in relation to, such International Interests.

    Note that a Contracting State may elect, at any time, to treat interests registered in a national registry as "National Interests" excluded from CTC, notwithstanding that such interests would otherwise qualify as "International Interests". 

    Also note that the term "leasing" as used in CTC probably refers to a lease transaction which is typically different from both a "leasing or crédit-bail" and a "lease" as defined under the Civil Code of Québec (the "Civil Code"). Under the Civil Code, a leasing or crédit-bail is a contract whereby the lessor acquires the aircraft from a third person at the request and in accordance with the instructions of the lessee and places the aircraft at the disposal of the lessee for a fixed term in return for payment, with the lessee assuming all the risks of loss, even by force majeure, as well as all maintenance and repair expenses. Such a leasing or crédit-bail excludes an assignment of the original purchase agreement by the lessee to the lessor or a sale and leaseback. As opposed to a leasing or crédit-bail, a lease imposes on the lessor certain obligations without which the contract will not be a "lease" for the purposes of the Civil Code. In particular, the lessor must deliver the leased aircraft in a good state of repair and warrant that the aircraft may be used for the purpose for which it is leased and maintain the aircraft for that purpose throughout the term of the lease. Under a leasing or crédit-bail the lessor is not required to warrant that the aircraft may be used for the intended purpose and, provided that the aircraft has been delivered to the lessee and that the lessor does not, as a result of its own acts, interfere with the quiet enjoyment of the aircraft, the lessee must make the rental payments whether or not the aircraft may be used for the intended purpose or, for that matter, whether or not the aircraft may be used at all; and 
  3. "Contracting State" nexus: either the aircraft or aircraft engine is registered in a Contracting State or the chargor (borrower), conditional buyer, lessee or person whose interest in aircraft or aircraft engine is subject to a registrable non-consensual right or interest (i.e., common law lien or civil law prior claim) is "situated" in a Contracting State at the conclusion of the agreement creating the International Interest. A party is "situated" in a Contracting State if it is incorporated or formed, has its registered office, centre of administration or place of business, in a Contracting State.

Registration

An interest that is intended to be created may be registered as a "Prospective International Interest", meaning as an interest which may or may not become an International Interest in the future. This approach is similar with that under Canadian PPSA legislations and it enables the lender, seller or lessor to establish the priority of its interest against intervening secured creditors during the negotiation period because the perfection of the International Interest is effective as of the time the "Prospective International Interest" is registered with the International Registry, provided that the transaction with respect to which it was registered is completed. Under this "first to file" system, once the Prospective International Interest is registered, the priority of rank of the resulting International Interest is determined irrespective of the knowledge which such lender, seller or lessor may or could have had, at the time its International Interest was registered, of other prior, but not yet registered International Interests. The International Interest, Prospective International Interest, and their assignments or amendments may be registered by either party with the written consent of the other and are valid until discharged or until the expiry of the period specified in the registration.

Remedies

CTC provides a series of remedies, while not excluding contractual remedies which are not inconsistent with its mandatory provisions. Such remedies include the vesting (transfer of ownership) of the aircraft or aircraft engine in satisfaction of the secured.

Conclusion

While CTC creates an international priority system for ownership and security interests in aircraft and aircraft engines, the national priority rules (in our case, Canadian provincial rules) are not necessarily eliminated. The corresponding Canadian provincial legislations implementing CTC permit, at the request of a province, the Canadian federal government to declare that specific provisions of the CTC have no effect in such province. 

In Canada, the implementation of the personal property security acts in the common law provinces, starting with Ontario in 1976, and of the "new" Civil Code in 1991, resulted in a period, which may not be over yet, of jurisprudential uncertainty as both practitioners and judges struggled to adapt to new rules of substantive law. One may expect a similar period of transitional uncertainty until our courts have a sophisticated enough understanding of CTC and the interaction between its international registration system and the provincial systems and the relative priority rules. For instance, it will be interesting to see if our courts will determine that a leasing or crédit-bail under the Civil Code is covered by CTC. Thus, until our jurisprudence establishes that a registration of the International Interest at the International Registry will suffice, it is our view that, precaution and good practice dictate that registrations under both CTC and the provincial PPSA or Civil Code be made.

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.

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