On 16 March 2022, the High Court of Australia (the most senior court in Australia) handed down its judgment with respect to Virgin Australia's administrators' obligation to "give possession" of an aircraft object, subject to a registered international interest, to a creditor of Virgin Australia under Article XI(2) of the Aircraft Protocol (as defined below) to the Convention on International Interests in Mobile Equipment (the Cape Town Convention).
It was decided that the obligation of a debtor/insolvency practitioner under Article XI(2) would be satisfied when the creditor was provided the opportunity to take control of the aircraft object at its current location and the debtor/insolvency practitioner will not be obliged to redeliver an aircraft object to the redelivery location specified in the contractual agreement between the parties.
This decision is a timely reminder of the purpose of the Cape Town Convention and the role it plays in an insolvency scenario.
Background and the Cape Town Convention
The case involved four aircraft engines which were capable of being used on B737s (the Engines). The Engines were legally owned by Wells Fargo Trust Company, National Association (the Lessor) and beneficially owned by Willis Lease Finance Corporation. The Lessor had leased them to VB Leaseco Pty Ltd. (the Lessee), and the Lessee had subleased them to Virgin Australia Airlines Pty Ltd. Each lease agreement required the leased Engine to be redelivered in Florida upon lease expiry or termination.
The Lessee was part of the Virgin Australia Airlines group, which entered into administration on 20 April 2020. Shortly afterwards, the Lessor made a demand for the redelivery of the Engines to a specified location in Florida. The administrators of the Lessee (the Administrators) rejected this demand, which would have resulted in a significant expense borne by the general creditors of the Lessee. Instead, the Administrators gave the Lessor the opportunity to take control of the Engines in Australia (where the Engines were then located). The Lessor rejected this offer and commenced court proceedings in the Federal Court of Australia.
The Lessor held Cape Town Convention registered "international interests" (by way of its interest vested under the leasing agreement) in respect of the Engines for the benefit of Willis Lease Finance Corporation and the case centered around the interpretation of particular provisions of the Cape Town Convention and the Protocol to the Cape Town Convention on Matters Specific to Aircraft Equipment (the Aircraft Protocol), as adopted in Australia by the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth).
The Aircraft Protocol modifies the operation of the Cape Town Convention and Australia had adopted the insolvency-related provisions of Alternative A (which is modelled on s1110 of the United States Bankruptcy Code) of Article XI of the Aircraft Protocol, which provide further protection to secured creditors.
The key provision in dispute was Article XI(2) of the Aircraft Protocol, which provides that upon the occurrence of an insolvency-related event, the insolvency administrator shall give possession of the aircraft object to the creditor within a specified period. The appointment of the Administrators under Pt. 5.3 of the Corporations Act of Australia constituted an "insolvency-related event" for this purpose.
On 3 September 2020, the Federal Court decided that the obligation to "give possession" under Article XI(2) required physical redelivery of the Engines to a location in Florida, in line with the redelivery arrangements in the lease agreements. However, on 7 October 2020, on appeal, the Federal Court decided that the Administrators were only required to give the Lessor the opportunity to take possession in Australia. The Lessor then appealed to the High Court and the arguments of the parties were heard on 4 November 2021, following which judgment was reserved (our previous update on these arguments is available here). In the meantime and before this decision was handed down, the Engines were returned to the United States, removing the urgency factor of the appeal albeit still remaining a crucial legal issue to be resolved.
The High Court's Decision
In a unanimous decision, the High Court rejected the Lessor's argument that the Administrators were required under Article XI(2) of the Aircraft Protocol to "give possession" of the Engines in accordance with the underlying lease agreement. The Lessor had argued that this was either inherent in the requirement to "give possession" under Article XI(2) or arises in performance of that obligation as an aspect of Article IX(3) that a Cape Town Convention remedy "shall be exercised in a commercially reasonable manner".
The Court instead held that Article XI(2) did not "in form or substance" provide an additional remedy to the Lessor; rather, its purpose was simply to facilitate the exercise of the creditor's right to take possession under Article 8 or Article 10 of the Cape Town Convention. (For this case's purposes, Article 10 has the most relevance, which provides for certain remedies of a lessor under a leasing agreement, following an event of default, including that a lessor can "terminate the agreement and take possession or control of any object to which the agreement relates".) . The Court also held that the creditor (and not the debtor/insolvency practitioner) should be responsible for the effort and expense of physical transfer to the creditor's choice of location.
The Court found that throughout the Cape Town Convention and the Aircraft Protocol the reference to "possession" is "to physical control to the exclusion of others" and there was no reason to attribute to the term "possession" anything other than this meaning.
The Justices also considered the context in which the debtor/insolvency practitioner's obligation to give possession appeared and the other remedies available to the Lessor. A creditor, having taken possession of the aircraft in the exercise of such rights under the Cape Town Convention and the Aircraft Protocol, would then be in a position to exercise its other rights under Article IX of the Aircraft Protocol with respect to deregistration, export and physical transfer of the aircraft object from the territory in which it was located (indicating that the giving of possession was distinct from that of physical transfer).
The High Court concluded their analysis of the Cape Town Convention and Aircraft Protocol provisions by observing that this interpretation was consistent with the "underlying purpose" of Article XI as set forth in the Professor Sir Roy Goode's Official Commentary: to ensure, as far as possible, that the creditor secures recovery of the object or the defaults are cured and a commitment to perform the debtor's future obligations entered into by the debtor/insolvency practitioner. This interpretation also aligns the operation of Article XI(2) with the equipment "surrender and return" obligation in section 1110 of the US Bankruptcy Code (which was construed to mean no more than "you get [the equipment] immediately and you get it as is, where it is" (In re Republic Airways Holdings Inc [2016])).
In summary:
- The Lessor had a right under Article 10 of the Cape Town Convention to take possession or control of the Engines, including the right to demand redelivery of the Engines.
- Without consent of the Administrators or the leave of the Court, the Lessor was constrained by certain provisions of Australian insolvency law (preserved by Article 30(3)(b) of the Cape Town Convention).
- The Administrators' invitation to the Lessor to take control of the Engines where they were situated in Australia satisfied the Administrators' obligation to give possession of the Engines under Article XI(2) and allowed the Lessor to exercise its right to take possession under Article 10 so as to assume physical control of the Engines to the exclusion of others.
- If the Lessor chose to exercise its rights under Article 10 and take possession, it had the ability to exercise additional rights under Article IX(1) including to procure the deregistration of the aircraft on which the Engines were installed and the export and physical transfer of the Engines (subject to any registered statutory lien).
Final Remarks
This was a much anticipated decision, in which the High Court helpfully clarified the extent of an insolvency practitioner's obligations with respect to redelivery of aircraft objects under the Cape Town Convention and Aircraft Protocol. Whilst the Cape Town Convention provides remedies for creditors, it does not require insolvency practitioners to afford lessors with registered international interests super priority creditor status with respect to lease redelivery obligations nor to drain the airline's estate (at the expense of general creditors) in order to redeliver the aircraft object in compliance with the parties' contractual agreement.
Here, since the Engines had been returned to the United States pending the outcome of the appeal, the practical impact was that the transportation expenses would be borne by the Lessor and the Lessor was ordered to pay the costs of the Administrators' costs of the appeal.
