Canada: Fully Secured @ Gowlings - Volume 4 - Number 1

Last Updated: April 9 2013

Edited by Richard Dusome.

Ratification of Cape Town Convention by the Government of Canada: Its Effects on Aircraft Financing and Sale in the Majority of the Provinces and Territories in Canada

By: David Kierans, Marie-France Béland and Scott Loong (Montréal)

On December 12, 2012, the federal government of Canada passed legislation that, in conjunction with various provincial laws, ratified its signature to the Convention on International Interests in Mobile Equipment (the "Convention") and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (the "Protocol" collectively with the Convention the "Cape Town Convention") which occurred on March 31, 2004. This ratification is subject to the declarations lodged by the Canadian government (the "Canada Declarations") amending and supplementing sections 39, 52, 53, 54 and 60 of the Convention and articles VIII, X, X(6) XII and XIII of the Protocol.

The Cape Town Convention requires, subject to the exceptions indicated therein and to the Canada Declarations, that a written security agreement, title reservation agreement, leasing agreement or  contract of sale1 involving a debtor situated2 in a contracting state of the Cape Town Convention (which now includes Canada), which creates an international interest3 or prospective international interest4 in aircraft equipment meeting certain size and power requirements,5 be published in the International Registry of Mobile Assets(the "IRMA") in order for such interest to be enforceable/perfected against third parties and for its priority to be established.

The Cape Town Convention will take effect on April, 1 2013 (the "Implementation Date") in Alberta, British Columbia, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Québec and Saskatchewan. Although registration is not required for International Interests, Prospective International Interests or Non-Consensual Rights or Interest (within the meanings given to such terms in the Cape Town Convention) created before the Implementation Date, all such rights and interests created after the Implementation Date will need to be published in the IRMA. The priority of IRMA registrations is established on a "first to register" basis.

The one exception to this rule pertains to Pre-Existing Rights or Interests (within the meaning set forth in the Convention) governed by Sections 426 to 436 of the Bank Act (SC 1991, c 46). Such rights and interest have been given a five year grace period: up until April 1, 2018, such rights and interests will continue to be governed by the Bank Act.  However, after April 1, 2018 the Convention will apply for the purposes of determining priority, including the protection of any existing property.

In addition to the abovementioned exception, the Cape Town Convention and the Canada Declarations6 provide that the priority of Non-Consensual Interests (within the meaning set forth in the Cape Town Convention), such as those arising from a government decree or a legal judgment, will continue to have priority over International Interests as defined by the Convention.

At present, the states that have ratified the Cape Town Convention include, but are not limited to, Canada, the United States, Brazil, New Zealand, Mexico, Norway, the United Arab Emirates and Russia. It should be noted however that several western countries including France, Germany, Switzerland, Italy and the United Kingdom have not ratified the Cape Town Convention.

The ratification of the Cape Town Convention by the Government of Canada will greatly alter aircraft financing and sale regimes in the majority of Canadian provinces and territories. The law imposes new obligations for publication and, in practical terms, will require that IRMA searches be included among the standard publication searches conducted in the context of aircraft financing or sale transactions.

The law will also provide creditors with a range of basic default remedies and recourses. Where there is evidence of certain defaults, the Cape Town Convention provides a means of efficiently obtaining interim relief pending final determination of its claim on the merits, deregistration, repossession, sale, lease and export of aircraft equipment.

In light of the above, creditors should conduct a thorough review of their standard financing documents to ensure that the terms and conditions of the Cape Town Convention have been accounted for. For creditors, this will include ensuring that standard documents provide for all rights, recourses and remedies available under the new law.


1. Subject to the adaptations made pursuant to the Protocol.
2. For the purposes of the Convention, the country where a debtor is deemed to be situated is based on the law of which it is incorporated or formed; or where it has its registered office or statutory seat; or where it has its centre of administration; or  where it has its place of business.
3. Amendments, assignments, subordinations and subrogations relating to an international interest may also be published.
4. Section 19 of the Convention also allows for the registration of  "Prospective International Interests". A Prospective International Interests which becomes an International Interests is treated as if registered from the time that the Prospective International Interests was registered.
5. Section 1 of the Protocol and section 2 of the Convention establish the particular application of the Cape Town Convention.
6. See the Canada Declaration regarding section 39(a) of the Convention.

Important Change in the Sale Process in Québec

By: Julie Frégeau and André Rivest (Montréal)      

On January 17, 2013, Justice Carole Julien of the Superior Court rendered a decision that could have a substantial impact on sales under judicial authority.

In five (5) non contested matters, Justice Julien decided that the officer designated by the court to proceed with the sale could not be a representative of the law firm representing the lender. The court is of the view that someone from the law firm representing the lender does not have the distance required to conduct the sale on behalf of its client. Justice Julien is of the view that there is a conflict of interest.

In her judgment, Justice Julien does not suggest any particular person to be appointed officer to proceed with the sale; she did however put the files on hold for 30 days to allow the lenders to suggest the appointment of someone other than a representative of their lawyers' firms.

Finally, Justice Julien decided that unless it is justified, the upset price should be fixed at the municipal value as opposed to 75% of same, which is usually what is asked by lenders.

The decision has not been appealed and if it is followed, lenders will have considerably less control on the judicial sale process and costs will likely increase.

Considering this important change in the sale process, lenders should follow developments attentively.

Ontario: Declaration that Security Constituted Improper Preference Upheld on Appeal

By: Richard Dusome (Toronto)   

In an earlier edition of Fully Secured (June 27, 2012 – Volume 3, Number 2), we reported on the Ontario Court of Justice decision in Snoek7 where security granted by a borrower ("HSLP") to a group of individual creditors ("B") was held to constitute an improper preference and declared invalid following a challenge by the trustee in bankruptcy. B had been one victim of a Ponzi scheme involving numerous unsecured creditors of HSLP.

The security had been granted to B in the form of a transfer of an undivided interest in a registered mortgage asset held by HSLP. B was originally an unsecured creditor of HSLP that demanded the security following the occurrence of a payment default, and accepted extended payment terms on its debt in exchange for the granting of the security. The Ontario Court of Justice concluded that the security constituted an improper preference under Section 4 of the Assignments and Preferences Act8, and was not saved by one of the available exemptions under Section 5(1) or 5(5)(d) of the Act. 

In particular, the lower Court found that HSLP had clearly granted the security at a time when HSLP was insolvent with the clear intent to prefer B over other creditors of HSLP who were also demanding repayment from HSLP at the same time but did not receive similar security. Moreover, B had not shown the characterization of the security granted to it as an improper preference was saved by virtue of one of the exemptions available under Sections 5(1) or 5(5)(d) of the Act.  Specifically, the lower Court held that B had not proven that either (i) the security was granted for a present actual advance of money, or (ii) the security was granted for a pre-existing debt and B made a new advance to HSLP in the belief that the advance would enable HSLP to continue its business and pay its debts in full.

Madam Justice Mesbur stated that the Act requires an actual advance of money to satisfy the saving provisions, and noted that Section 5 did not expand the plain meaning of the term "money" or expressly contemplate any other types of consideration like money's worth or a forbearance. However, as she had questioned whether B's actions actually constituted a forbearance, she did not technically have to determine if a proper forbearance could in any circumstances be sufficient to qualify as an advance of money.

B appealed the decision of the motion judge to the Ontario Court of Appeal on two grounds:

  1. that there was no evidence of an intent to give B an unjust preference, and
  2. that Section 4 of the Act did not apply because the interest in the mortgage asset was granted by HSLP to B "as security for a present actual advance of money" within the meaning of Section 5(1) of the Act.

In a brief endorsement judgment9, the Ontario Court of Appeal dismissed both grounds of appeal. Firstly, the Court of Appeal held that the motion judge's finding that the interest in the mortgage asset was granted to B with the intent to give B an unjust preference over other creditors was amply supported by the record.10 The appellate Court also rejected B's argument that B had notionally advanced money to HSLP when it surrendered the existing promissory notes issued to it by HSLP in exchange for new notes issued to it on slightly different terms relating to the capitalization of interest, a reduction in the interest rate and an extension of the term.11 It then confirmed the lower Court's finding that the beneficial interest in the mortgage asset was not granted by HSLP to B as "security for a present actual advance of money" as required by Section 5(1) of the Act12, but it did not provide detailed analysis or reasons for doing so. As such, the Court of Appeal did not take the opportunity to specifically address whether a proper forbearance in demanding payment could in any circumstances be sufficient to qualify as an advance of money. Lenders must therefore continue to exercise caution in obtaining shore-up security after a borrower's default to ensure that proper consideration is received by the borrower for that delivery.


  7. Harry Snoek Limited Partnership (Re), 2011 ONSC 6667.
8. Assignments and Preferences Act, R.S.O. 1990, c.A.3, as amended [the "Act"].
9. Harry Snoek Limited Partnership (Re), 2012 ONSC 765 [the "Appeal Judgment"].
10. Appeal Judgment, at paragraph 9.
11. Appeal Judgment, at paragraphs 6 and 10.
12. Appeal Judgment, at paragraph 10.

Hypothecs Not Denominated in Canadian Dollars Have Been Considered Invalid by the Québec Courts

By: Marie-France Béland and Scott Loong (Montréal)

For a hypothec to be considered valid under Québec law it is necessary that i) it be established for a particular amount and ii) such amount be precisely determinable in the deed of hypothec itself. Article 2689 of the Civil Code of Québec ("CCQ") establishes the requirement that a deed constituting a hypothec indicate the "specific sum" for which it is granted. This is true whether the underlying asset is movable (personal) or immovable (real) property.

The Québec courts have held that a critical nuance to the "specific sum" requirement imposed by article 2689 is that, in order to be considered specific, the sum of the hypothec must be indicated in Canadian dollars. Although it is possible to determine the exchange rate between US and Canadian currency at any given moment, Québec courts have held that fluctuations in such rates over time render the amount of a hypothec indicated in a foreign currency insufficiently precise and therefore not a "specific sum" in the meaning of article 2689 CCQ.

In Trans-America Trade Exchange Inc. v. Haltrecht, the Québec Court of Appeal upheld a lower court decision invalidating a hypothec on the grounds that it was not denominated in Canadian dollars. Similarly, in Caisse populaire Desjardins de Baie-Comeau v. Gérald Robitaille et Associés Ltée the Québec Superior Court held that because the amount of the hypothec was indicated in US dollars, it did not meet the precision requirements necessary for validity under Québec law. Indeed, this interpretation of the "specific sum" requirement is settled in Québec doctrine and jurisprudence and subsists regardless of whether the grantor of the hypothec intends or is bound to repay the amount in a foreign currency.

Legal practitioners in Canada's common law jurisdictions may note thatthis requirement is unique to the province of Québec. In circumstances where a Québec hypothec must be drafted to secure an amount owed in US currency, the generally accepted practice is to indicate a "specific sum" equivalent of 150% to 200% of the amount owed.

Indicating a "specific sum" that greatly exceeds the secured debt is bound to offend those unfamiliar with the civil law. For this reason, it is important to stress that doing so creates no additional risk or exposure for the grantor of the hypothec: Québec hypothecs are rights that are accessory to the secured debt and cannot be used to collect more than what is owed.

A Banker Asked Us: Pledges of Limited Partnership Unit Certificates

By: Richard Dusome (Toronto)


My Ontario corporate borrower holds certificates representing units of a limited partnership ("LP") within its corporate group. Can the bank take possession of those certificates to perfect a pledge of the LP units granted under a pledge agreement?


It depends upon whether the borrower's interest in the LP would be classified  as a "security", such that the unit certificates would be classified as "certificated securities" for purposes of both the Ontario Securities Transfer Act13 and the PPSA.14

Under Section 12 of the STA, an interest in a partnership is not a "security" unless (1)  that interest is publicly traded on a securities exchange or is a mutual fund security, or (2) the originating documents establishing the partnership expressly provide that the interest is a "security" for purposes of the STA (also known as an opt-in provision). 

Taking delivery and control of the unit certificates (together with an endorsed stock transfer power of attorney) will perfect a pledge in those certificates if they constitute "certificated securities".15  Having control of a "certificated security" provides the highest level of protection against other PPSA claims to that category of assets.16

However, if the borrower's interest in the LP does not meet the test of being classified as a "security", the borrower's interest in the LP will be classified as an "intangible" under the PPSA.  In that situation, the unit certificates would not be considered to be "certificated securities". Thus, possession of those unit certificates is largely irrelevant from a security perfection perspective. A security interest in an "intangible" may only be perfected by the registration of a financing statement.17 So even if the bank has possession of the unit certificates, you will still need to deal with any prior registered secured creditors shown on the PPSA register and obtain PPSA comfort letters or estoppel letters from them confirming that their registrations do not cover or extend to the borrower's interest in the LP.

Given the advantages associated with the characterization of an LP interest as a "security", the bank could consider requiring the borrower to arrange for the LP to amend its limited partnership agreement to include an STA opt-in provision before the pledge agreement is signed and before the unit certificates (together with an executed stock transfer power of attorney) are delivered to the bank.


13. Securities Transfer Act, 2006 S.O. 2006, c. 8 [the "STA"].
14. Personal Property Security Act, R.S.O. 1990, c. P. 10, as amended [the "PPSA"]
15. Section 23(2) of the STA and Sections 1(2) and 22.1(1) of the PPSA.
16. Section 30.1(2) of the PPSA.
17. Section 22 of the PPSA.

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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