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On Friday, June 9, 2006, the Supreme Court of Canada ruled that major Canadian airport authorities as well as NAV Canada were entitled to seize and detain aircraft operated by airlines that had incurred airport and air navigation charges until the authorities and NAV Canada were paid or suitable security was posted, notwithstanding the identity of the legal owner of the aircraft. This unanimous decision reversed parallel judgments rendered by the Ontario Court of Appeal and Quebec Court of Appeal in the wake of the bankruptcies of Canada 3000 and Inter-Canadian airlines.

In Canada 3000 Inc., Re; Inter-Canadian (1991) Inc. (Trustee of), 2006 SCC 24, Binnie J., writing for a unanimous Court, finally resolved an issue which had created much uncertainty in the business of aircraft and aeronautic-services financing for a number of years.

In both instances, airport authorities and NAV Canada had sought court orders allowing them to seize and detain aircraft used by the airlines that had incurred the airport and air navigation charges. In each case, however, the aircraft did not belong to the airlines but to third parties that had leased the aircraft directly to the airlines or to some other parties that had subleased the aircraft to the airlines.

In the case of Inter-Canadian, the court order was obtained and the seizures were made prior to the bankruptcy of the airline. In the case of Canada 3000, the seizure motion was heard after the company went bankrupt. In that case, the motions judge ruled that there was no right to seize and detain third-party property. Both decisions were appealed, and ultimately both the Quebec and Ontario appeal courts ruled against the airport authorities and NAV Canada.

The authorities and NAV Canada, not-for-profit corporations created following the privatization of airport and air navigation services, were invoking provisions of their respective governing legislation which gave them the right to bring proceedings for a court order authorizing them to "seize and detain" aircraft owned or operated by the airline having incurred the charges until they were paid or security was posted in lieu of the aircraft.

The central issue in the appeals to the Supreme Court of Canada was whether these seizures could be invoked against the legal titleholders of the aircraft and, if so, to what extent. The Court answered the first question in the affirmative, approving the reasoning of the dissenting judges from the two appellate courts below. The Court also found that the statutory provision in issue did not distinguish between the charges attributable to specific aircraft operated by a defaulting owner or operator, with the result that the seized aircraft could be called upon to secure the payment of all outstanding charges incurred by the airline.

In reaching this conclusion, the Court considered the context in which the detention remedy was intended by Parliament to operate, noting that the airport authorities and NAV Canada were required to provide services according to a cost-based tariff and could not withhold services from even an obviously failing airline. The Court also observed that legal titleholders were in a better position to protect themselves against the consequences of an airline not being able to pay the charges, as they could select which airlines they were prepared to deal with and negotiate appropriate security arrangements as part of their lease transactions. It was noted in passing that, in the present instances, some of the lessors had indeed obtained substantial deposits from the now defunct airlines. Finally, the Court observed that this type of provision is not uncommon in the airline business, and cited as an example the UK, where airport authorities enjoy comparable rights.

Those in the finance business will be interested to know that the Court did point out some distinct features of this seizure and detention remedy. First, unlike its UK counterpart, there is, under Canadian aeronautics law, no express or implied right to sell the seized aircraft. The Court also rejected NAV Canada's argument that legal titleholders could be held personally liable for the debt incurred by the airline under its particular legislation, thereby restricting the meaning of "owner" in NAV Canada's legislation to the "registered owner".

In addition, the Court reiterated that the right to seize and detain aircraft was subject to court supervision. The Supreme Court pointed out that "much of the potential unfairness which the titleholders envisage in the operation of the detention remedy can be addressed by the motions judge." According to the Court, the door has been left "open for the motions judge to work out an arrangement that is fair and reasonable to all concerned, provided that the object and purpose of the remedy (to ensure the unpaid user fees are paid) is fulfilled."

What the decision does not resolve, however, is whether or not (and under what conditions) the detention remedy creates rights in favour of the authorities and NAV Canada which, in the context of an airline bankruptcy, confer the status of secured creditor. Where, as in these two cases, the aircraft are leased, the issue does not arise, as the aircraft do not become part of the estate of the bankrupt airline; accordingly the Court did not address this question.

However, a similar issue recently arose in other insolvency proceedings relating to the failure of an airline. In Jetsgo Corporation (In re), 2005 CanLII 10413 (QC C.S.), the motions judge, on the basis of the decisions rendered by the Ontario and Quebec appeal courts in the Canada 3000 and Inter-Canadian matters, dismissed the application brought by the airport authorities and NAV Canada seeking to have the stay of proceedings granted under the Companies' Creditors Arrangement Act lifted so as to allow them to seize and detain aircraft owned by the airline which the Monitor intended to sell. A motion for leave to appeal has been filed by the authorities and NAV Canada in this regard, and the insolvency issue will now be considered by the Quebec Court of Appeal, which will now have the benefit of the analysis of the Supreme Court in Canada 3000 Inc., Re; Inter-Canadian (1991) Inc. (Trustee of). The last chapter thus remains to be written.

Ogilvy Renault represented a number of airport authorities in both cases.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

© Ogilvy Renault LLP 2006 - All Rights Reserved

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