Alberta Court of Appeal refuses to stop grounding of European private charter airline

Airline defaulted in aircraft rental payments to Calgary-based leasing company

Alberta Court of Appeal refuses to stop grounding of European private charter airline

The Alberta Court of Appeal has refused to prevent the grounding of a European private charter airline which defaulted in paying for the lease of its aircrafts from a Calgary company.

The dispute in Avmax Aircraft Leasing Inc. v. Air X Charter Limited, 2022 ABCA 25 arose from lease agreements over eight aircrafts. Avmax Aircraft Leasing Inc. is an aircraft leasing company with headquarters in Calgary. The company leased its airplanes to the Air X group for its private charter airline business that operates across Europe.

Due to the COVID-19 pandemic, Air X faced business losses and had fallen deep into arrears under its lease agreements with Avmax. In an attempt to address the situation, the parties entered a Memorandum of Understanding (MOU), which provided for restructured payments and concessions. In the event that Air X failed to raise the capital and monthly payments required under the MOU, the restructured payments scheme would be voided.

The MOU was never formalized and it continued to be non-binding on the parties. Despite this fact, Air X made payments at reduced rates pursuant to the terms of the MOU until the company eventually fell behind on its obligations under the agreement. Avmax issued termination notices for the leases and demanded that the leased aircrafts be grounded.

Alberta action commenced by Air X

Air X filed an action against Avmax in the Alberta Court of Queen’s Bench, claiming that Avmax had breached the lease agreements which had allegedly been amended by the MOU. Air X argued that Avmax understood that Air X’s business had been impacted by the effects of the pandemic and, as a result, the parties agreed to a restructuring of the lease payments.

In its pleadings, Air X alleged misrepresentation, civil fraud, and bad faith, arguing that “Avmax purported to terminate the leases in September 2021, because it sought to capitalize on the increase in global air travel by re-leasing the aircraft at the now higher market rates. In doing so, Avmax acted in a predatory and opportunistic manner.” Air X sought damages of over $100 million.

Injunction order by chambers judge

Air X applied for an injunction order to prevent Avmax from taking possession and control of the leased aircrafts in accordance with the terms under the lease agreements, as well as the Convention on International Interests in Mobile Equipment and its related Aircraft Protocol.

Air X said that if an injunction was not granted, Air X would be unable to carry on its business and it would be forced to terminate approximately 350 employees. Air X further claimed that because Avmax agreed to the MOU and took steps to honour its terms, Avmax should be prevented from taking steps to ground the leased aircrafts or interfere with Air X’s operations.

On the other hand, Avmax argued that the injunction should not be granted because the MOU was not binding and the grant of an interim injunction would improperly prevent Avmax from exercising its rights, as well as the remedies available to it, under the Convention and Aircraft Protocol.

The chambers judge ruled in favor of Air X and granted the interim injunction order which restrained Avmax from taking any steps to interfere with Air X’s business, including seizing or grounding the leased aircrafts.

Convention and Aircraft Protocol applied in Alberta

Avmax appealed to set aside the injunction order. The appeal court noted that the Convention and Aircraft Protocol have legal and binding effect in Alberta and the purpose of these agreements was to provide creditors with “speedy relief” in the event of debtor default. Among these reliefs was a properly recorded irrevocable de-registration and export request authorization (IDERA), which is a special remedy that is agreed to in advance by the debtor. It allows creditors to obtain control or custody of the asset pending final determination of the creditor’s claim on the merits. The purpose for this, as the court pointed out, is to prevent the aircraft from being moved beyond the reach of the creditor. The Convention and the Aircraft Protocol provide a mechanism for creditors to control and preserve the value of the aircraft while disputes over events of default are resolved.

Interim injunctive relief not reasonably available

The appeal court emphasized that interim injunctive relief is an extraordinary remedy which requires an applicant to first demonstrate that there is a serious question to be tried, that they will suffer irreparable harm if the interim injunction is refused, and that the balance of convenience favours granting the pre-trial injunctive relief they seek.

The appeal court found that Air X wanted to avoid the standardized security framework for high-value mobile assets established by the Convention and the Aircraft Protocol and agreed to by the parties. Air X failed to demonstrate that there was a serious issue to be tried about whether the IDERAs applied. The court further found that Air X failed to demonstrate that it would suffer irreparable harm if injunctive relief was not granted because any harm that Air X claimed it would suffer could be cured in monetary terms.

Finally, the court was of the view that the balance of convenience did not favour Air X. The balance of convenience test requires the court to identify who will suffer greater harm from granting or refusal of the injunction pending a decision on the merits. The grant of injunction would undermine an international treaty, ratified by Canada and which provides “greater certainty, clarity and confidence for asset-based transactions.” The court concluded that the broader public interest in the aims of the Convention and Aircraft Protocol weighed heavily against the grant of interim injunctive relief in favour of Air X.

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