Introduction
Facts
Decision
Comment
Aircraft lessors and secured creditors will be required to collect their aircraft and engines from insolvency administrators appointed for airlines, rather than compel redelivery of the equipment where their leases or security attract the operation of the Convention on International Interests in Mobile Equipment (the Cape Town Convention).
In those circumstances, the Australian High Court(1) has decided that aircraft and engines do not need to be redelivered to a lessor or secured creditor on the appointment of an insolvency administrator, despite what the terms of the lease or the security may provide. This is the first decision by a court of ultimate appellate standing in the world on the application of the Cape Town Convention.
In a landmark decision that will have international significance, the Court interpreted the meaning of the obligation to "give possession" in the Cape Town Convention and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Protocol).
The decision requires an insolvency administrator to provide an opportunity for the lessor to take possession by making "aircraft objects" (for example, airframes and engines) available for the lessor to assume lawful, physical possession.
While the High Court has reached this conclusion in the context of the voluntary administration of the Virgin Australia Group, it has done so on a close analysis of the Cape Town Convention and the Protocol. Accordingly, the Court's conclusion has application to other insolvency administrations of airlines and is not limited to Australia.
The dispute concerned four aircraft engines and equipment (the engines) leased to VB Leaseco Pty Ltd (Virgin Leaseco), which subleased them to Virgin Australia Airlines Pty Ltd (the Virgin Australia lessees). The Virgin Australia group, including the Virgin Australia lessees, entered Australian voluntary administration on 20 April 2020, in the early days of the covid-19 pandemic.
The lessors of the engines wrote to the voluntary administrators of the Virgin Australia lessees (the administrators) demanding that they "give possession" within the meaning of XI(2) of the Protocol and contending that the engines should be physically returned to Florida, United States, at the administrators' expense. The administrators refused and instead purported to disclaim the engines and disown possession or use of them.(2)
The Cape Town Convention and the Protocol are given force in Australian law by the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth). Article XI(2) of the Protocol requires the insolvency administrator to "give possession" of the aircraft objects to the creditor no later than the "waiting period", which is 60 calendar days in Australia.
The High Court agreed with the administrators and rejected the alternative position that the relevant agreement of the parties (for example, the lease) would govern the obligations for the giving of possession. The obligation to "give possession" was no more than to provide the lessors with an opportunity to take control of the engines in Australia. It explained the interaction of the various rights of the parties as follows:
- The lessors had the right to take possession or control of the engines under the Cape Town Convention and the right to demand redelivery in accordance with the lease as preserved by the Cape Town Convention.
- Restrictions under the local insolvency procedure on exercising these rights would take priority over the position of the lessors. In Australia, there are moratoria preventing the enforcement of security, which operate during a voluntary administration. Had the administrators not foregone the Virgin Australia lessees' rights to possession, those moratoria would have prevailed to stop the lessors regaining possession.
- The administrators' invitation to the lessors to take control of the engines was sufficient to comply with the obligation to "give possession" under the Cape Town Convention.
- If the lessors chose to exercise their rights to take possession (in this case, after the administrators' consent) they were required by the Cape Town Convention to do so in a commercially reasonable manner.
The decision provides this template as to how the rights of various interested parties may be exercised where the Cape Town Convention applies, not just in Australia but in other jurisdictions that have adopted the Cape Town Convention as well.
For further information on this topic please contact Maria O'Brien, Ian Innes or Peter Lucarelli at Baker McKenzie by telephone (+61 2 9225 0200) or email (maria.o'[email protected], [email protected] or [email protected]). The Baker McKenzie website can be accessed at www.bakermckenzie.com.
Endnotes
(1) Wells Fargo Trust Company, National Association (as owner trustee) v VB Leaseco Pty Ltd (administrators appointed) [2022] HCA 8.
(2) Under section 443B(3) of the Corporations Act 2001 (Cth).