Financing mobile equipment comes with certain risks, particularly when the equipment being financed is aircraft. Aircraft can leave Canada and land where foreign laws may not provide protection for Canadian financiers.

A recent example of this type of risk was Export Development Canada’s (EDC) $41 million financing of the purchase of a Bombardier jet by the Gupta family from South Africa. The jet was operated outside of Canada, in South Africa and elsewhere. When the loan went into default, EDC was unable to locate the jet because the tracking device had been turned off. At the time the Guptas were subject to South African arrest warrants on corruption charges.

Luckily EDC was able to rely on the Cape Town Convention (CTC), an international convention for the enforcement of interests in aircraft. EDC successfully applied to the South African court to obtain an order grounding the jet in South Africa once it was located.

The CTC was adopted by Canada on April 1, 2013 and has been adopted by numerous countries worldwide. It governs the enforcement and priority of security interests in larger aircraft (airplanes that can transport 8 or more passengers or crew, helicopters that can transport 5 or more passengers or crew, and engines of a certain size). As in the Gupta example, the CTC facilitates recovery of aircraft in other countries when enforcement becomes necessary.

The CTC applies to interests in aircraft created by a security agreement, lease or conditional sale agreement. Those interests must now be registered in the International Registry, which is a global security registry administered in Ireland.

The adoption of the CTC means Canada now has two different priority and enforcement regimes that can apply to enforcing security against aircraft.

Firstly, the CTC applies to security in larger aircraft registered after April 1, 2013. This type of security interest must be registered in the International Registry.

Secondly, PPSA legislation applies to security in larger aircraft that were registered in a provincial personal property registry before April 1, 2013. It also continues to apply to smaller aircraft regardless of when the security is registered. This type of security interest must be registered in a provincial personal property security registry.

Knowing which regime applies permits financiers to understand what rights and remedies apply to their security, which can be different between the two regimes. Registration in the correct registry establishes priority among secured parties based on timing of registration. However registration must have been made in the correct registry – either the International Registry or a provincial personal property registry – depending on the date of the security registration and the size of the aircraft.

The CTC’s stated purpose is to increase confidence and predictability in the aviation finance industry. Although there has been little Canadian judicial consideration of the CTC to date, it is expected to provide increased certainty for financiers. By all accounts the CTC has facilitated significant growth in global aviation finance, a sector once plagued with poor credit risk and enforcement conflicts.

It is crucial to know when to register, and how to register, an interest in the International Registry to avoid having a security interest in aircraft defeated as a result of an improper registration. McMillan Dubo Law Group regularly represents clients in aircraft financing transactions. We are registered as a user entity authorized to make registrations in the International Registry. If you are navigating the new regime, McMillan Dubo Law Group can help you plan your route.