Australia: Come and get them - Cape Town Convention does not require redelivery of aircraft by insolvency practitioners

In brief

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 ("Cape Town Convention").

The Australian High Court1 has decided, in those circumstances, 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.


Contents

Key takeways

In a landmark decision which will have international significance, the High Court of Australia has interpreted the meaning of the obligation to "give possession" in the Cape Town Convention and the associated Protocol. 2

The decision requires an insolvency administrator to provide an opportunity for the lessor to take possession by making "aircraft objects" (for example, airframes, engines) available for the lessor to assume lawful physical possession.

Whilst 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 Protocol. Accordingly, the Court's conclusion has application to other insolvency administrations of airlines and is not limited to Australia.

In depth

The dispute concerned four aircraft engines and equipment ("Engines") leased to VB Leaseco Pty Ltd ("Virgin Leaseco"), which subleased them to Virgin Australia Airlines Pty Ltd (together 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 ("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, USA at the administrators' expense. The Administrators refused, and instead purported to disclaim the Engines, and disown possession or use of them.3

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 a right to demand redelivery in accordance with the lease as preserved by the Cape Town Convention.
  • Restrictions under the local insolvency procedure on exercising those 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.


 

1 Wells Fargo Trust Company, National Association (as owner trustee) v VB Leaseco Pty Ltd (administrators appointed) [2022] HCA 8
2 Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment
3 Under section 443B(3) of the Corporations Act 2001 (Cth)

 


 

Contact Information

Copyright © 2022 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.