Canada: Chopper Overhead: Helicopter Engines A Source Of Confusion In Aviation Financing

Last Updated: September 19 2019
Article by Marie-France Béland and Julie Djiezion

The question of how to effectively take security over helicopter engines is one of fundamental importance to creditors. However, despite its importance, this area of aviation financing remains surprisingly unclear.

The confusion surrounding this question stems from the way helicopter engines are defined under the Convention on International Interest in Mobile Equipment (the "Convention") and Protocol Thereto on Matters Specific to Aircraft Equipment (the "Aircraft Protocol"), herein collectively referred to as the "Cape Town Convention".

The Cape Town Convention applies to three categories of "aircraft objects": "airframes"1, "aircraft engines"2 and "helicopters".3 Helicopter engines are not defined in the Cape Town Convention. As a result, the category under which they fall varies depending on whether or not the engine is installed on the "helicopter".4

Since there is no definition of helicopter engines, practitioners initially claimed that they were not "aircraft objects" and that therefore interests in those engines were not covered by the Cape Town Convention.5 However, the official commentary to the Cape Town Convention (the "Official Commentary")6 adopted a different position that is now accepted by all practitioners.

According to the Official Commentary, a helicopter engine is considered an "aircraft engine" when it is not attached to a "helicopter". However, as soon as a helicopter engine is installed on a "helicopter", it loses its characterization as an "aircraft object" and instead becomes a component of or an accessory on the "helicopter".7

Considering the differing characterization, one might ask what impact this has on how creditors should register their international interests against helicopter engines. When a helicopter engine is not attached to a "helicopter", and thus is qualified as an "aircraft engine", it can become the subject of a registrable international interest. However, once it is installed on a "helicopter" and is no longer an "aircraft engine", but rather an accessory of the "helicopter", it is no longer capable of being the subject of a separate international interest.

Since it is not possible to register an international interest with regard to a helicopter engine while it is installed on a "helicopter", how can creditors ensure that their interests are adequately protected once the engine is removed? Below are a few solutions proposed by the Official Commentary depending on the situation of the creditor:

  1. If the engine is not installed on the "helicopter", the creditor should register an "international interest" against the helicopter engine.

    It is important to note that any "international interest" registered against a helicopter engine prior to its installation to a "helicopter" will retain its priority after the engine's installation, and even after its subsequent removal from the "helicopter".8
  2. If the engine is already installed on the helicopter, the creditor should register a "prospective international interest".9
  3. If the engine is already installed on the helicopter AND there is a prior interest registered against the "helicopter", the creditor should request the helicopter engine to be removed from the helicopter and register an international interest.

    Another solution for that particular situation would be to address this in an intercreditor agreement wherein the creditor that registered an international interest on the helicopter would subordinate his interest to the creditor that has an interest in the helicopter engine.

Although the treatment of helicopter engines is unnecessarily confusing, the solutions proposed by the Official Commentary offer protection to creditors. In practice, and what we recommend, is that creditor should always register an "international interest" and a "prospective international interest" on helicopter engines.

Footnotes

1 Airframes means airframes (other than those used in military, customs or police services) that, when appropriate aircraft engines are installed thereon, are type certified by the competent aviation authority to transport: (i) at least eight (8) persons including crew; or (ii) goods in excess of 2750 kilograms, together with all installed, incorporated or attached accessories, parts and equipment (other than aircraft engines), and all data, manuals and records relating thereto (Article 1(2)(e) of the Protocol).

2 Aircraft engines means aircraft engines (other than those used in military, customs or police services) powered by jet propulsion or turbine or piston technology and:(i) in the case of jet propulsion aircraft engines, have at least 1750 lb of thrust or its equivalent; and (ii) in the case of turbine-powered or piston-powered aircraft engines, have at least 550 rated take-off shaft horsepower or its equivalent, together with all modules and other installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto (Article 1(2)(b) of the Protocol).

3 Helicopters means heavier-than-air machines (other than those used in military, customs or police services) supported in flight chiefly by the reactions of the air on one or more power-driven rotors on substantially vertical axes and which are type certified by the competent aviation authority to transport: (i) at least five (5) persons including crew; or (ii) goods in excess of 450 kilograms, together with all installed, incorporated or attached accessories, parts and equipment (including rotors), and all data, manuals and records relating thereto (Article 1(2)(l) of the Protocol).

4 AVIATION WORKING GROUP, Practitioners' Guide to the Cape Town Convention and The Aircraft Protocol, The Legal Advisory Panel of the Aviation Working Group (2015) (the "Practitioners' Guide") at page 10, note 11.

5 Practitioners' Guide, at page 70.

6 Sir Roy GOODE, Official Commentary, 3rd ed. (Rome: Unidroit, 2013) (the "Official

7 Official Commentary, at para. 3.8 and 3.10.

8 Practitioners' Guide, at page 72.

9 "Prospective international interest" means an interest that is intended to be created or provided for in an object as an international interest in the future, upon the occurrence of a stated event (which may include the debtor's acquisition of an interest in the object), whether or not the occurrence of the event is certain (Article 1(y) of the Convention).

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