Following the administration of Virgin Australia the lessors of four engines that were leased to Virgin served notice requiring delivery up of the engines to a nominated address in the USA. The administrators argued that their obligations to the lessors were met if they made the engines available for delivery up in Australia.
The case involved consideration of the Convention on International Interests in Mobile Equipment (the Cape Town Convention) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Aircraft Protocol) and Australia's domestic insolvency laws. Article XI(2) of the Aircraft Protocol provides that upon the occurrence of an “insolvency related event”, the insolvency administrator or the debtor “shall … give possession of the aircraft object to the creditor”.
The primary question in the case was whether the Administrators (or Virgin as the debtor) had complied with their obligation to “give possession” to the lessors of the engines and associated stands, equipment and records.
The judge concluded that that the requirement under the Aircraft Protocol involved the delivery up (effectively in accordance with the contractual regime under the lease agreement for redelivery) to the lessors in the USA. The Administrators could not rely upon any lesser requirement found in the Corporations Act 2001 (Cth) (the ‘Corporations Act’), if for no other reason than because the Convention and Aircraft Protocol prevail over the Corporations Act to the extent of any inconsistency.
In the course of the judgment the rationale for the Convention prevailing over domestic laws was discussed in some detail. The judge cited an article on point by Donald Gray, Dean Gerber and Jeffrey Wool: ‘The Cape Town Convention and aircraft protocol’s substantive insolvency regime: A case study of Alternative A’ (2016) 5(1) Cape Town Convention Journal 115:
"Given the large amount of money involved, and an industry susceptibility to bankruptcy, financiers have long demanded special protection for their investment. Without this protection, financial institutions or aircraft manufacturers would be unwilling to provide financing for aircraft to new or troubled airlines, leasing companies, or other users, or would do only under terms far less favourable to the borrower."
Given the precarious financial state of many airlines around the world at present, the judgment is important for the industry in clarifying the obligation of a lessee to "give possession" under the Cape Town Convention and the Aircraft Protocol.
New Zealand acceded to the Cape Town Convention and the Aircraft Protocol on July 2010. The Civil Aviation (Cape Town Convention and Other Matters) Amendment Act 2010 amended the Civil Aviation Act 1990 to give the Convention and Protocol the force of law in New Zealand. The judgment will therefore be of relevance to the airline industry here.