On June 9, 2006, the Supreme Court of Canada released an important aviation decision in Canada 3000 Inc., Re; Inter-Canadian (1991) Inc. (Trustee of), 2006 SCC 24. With the collapse of both Canada 3000 and Inter-Canadian airlines, the Court resolved important priority issues involving NAV Canada and airport authorities and the lessors of aircraft in cases of insolvent aircraft operations with outstanding NAV Canada and airport authority charges.
In a unanimous decision, the Court held that legal titleholders of aircraft (ie. lessors) are not personally or corporately liable for civil air navigation and airport services charges incurred by aircraft operators. However, the Court went on to find that airport authorities may apply for orders to seize and detain aircraft held by defaulting airline operators.
This case involved separate legal proceedings concerning Canada 3000 and Inter-Canadian. Like most modern airlines, both companies operated their fleet of aircraft under leasing arrangements whereby legal title to the aircraft remained with the lessors.
NAV Canada and several airport authorities sought to collect approximately $33.75 million in charges they were owed for civil air navigation and airport services from the airlines. The Ontario Court of Appeal dismissed an appeal from NAV Canada and the airport authorities that sought to seize and detain the aircraft held by Canada 3000. The Quebec Court of Appeal allowed the legal titleholders of the Inter-Canadian aircraft to take possession of the aircraft without being liable for charges owed to NAV Canada and the airport authorities. NAV Canada and the airport authorities appealed both decisions. Their appeals were allowed in part.
The Court found that legal titleholders of aircraft are not “owners” under s. 55 of the Civil Air Navigation Services Commercialization Act (“CANSCA”) because they are not persons in possession or legal custody and control of aircraft (para. 50). Consequently, the Court concluded that legal titleholders of aircraft are not subject to personal or corporate liability for unpaid charges under s. 55 of CANSCA (para. 61).
The Court, however, found that s. 56 of CANSCA and s. 9 of the Airports Act permit NAV Canada and airport authorities to apply for orders to seize and detain aircraft until the unpaid charges (plus interest) are paid off or acceptable security is posted. Technically, titleholders may be required to pay the charges incurred by the insolvent airlines’ entire fleet as opposed to individual aircraft sought to be released. However, the Court made it clear that the ability to seize and detain is not automatic. Instead, the Court emphasized that prior court authorization is required and that the remedy is discretionary, and may be subject to such terms and conditions that the court considers necessary (para. 73). Potential inequities are to be dealt with by terms and conditions imposed by the Court authorizing the detention. As noted by the Court, the judge need not make each aircraft hostage for the full amount of the unpaid charges, provided the result is that the authority is paid in full.
With respect to possibility of seizing and detaining aircraft engines, the Court found that such a remedy was not envisioned under the Aeronautics Act and that engines therefore could not be repossessed separately from the rest of the aircraft (para. 89).
Practically, while lessors of aircraft are not personally or corporately liable for the debts of aircraft lessees, if an aircraft lessor wants repossession of the aircraft, it will have to pay the operator’s unpaid charges or post acceptable security.
This decision places lessors of aircraft at a higher financial risk in their business dealings with aircraft operators. Although legal titleholders of aircraft will not be subject to personal or corporate liability, they may still have their aircraft seized to pay debts owed to NAV Canada and airport authorities. Consequently, it is necessary to factor the cost of this risk into future leases. Aircraft lessors should be selective of their lessees and negotiate security arrangements as part of their lease transactions to protect themselves against this type of loss to airport authorities and NAV Canada.
As noted in the decision:
An airline in the modern era may consist of little more than a name, with its aircraft leased, its suppliers on week to week contracts and even its reservation and yield management systems outsourced to one of the global service providers…start-ups are relatively easy, balance sheets are often thin, and failure can be quick and (to outsiders) unexpected. When a financial collapse occurs (and these have been frequent in Canada and elsewhere in the past decade), there is little meat on the corporate bones for unsecured creditors.