Come fly with me, let's fly, let's fly away - to ‘give possession’ does not include flying aircraft engines home

In VB Leaseco Pty Ltd (Administrators Appointed) v Wells Fargo Trust Company, National Association (trustee) [2020] FCAFC 168, the Full Federal Court of Australia has overturned a first instance decision requiring Virgin’s Administrators to redeliver leased aircraft engines to Florida.

What this means for you

The case is significant, in that it is the first detailed consideration by a Court of any Contracting State of the insolvency provisions in Article XI of the Cape Town Aircraft Protocol that governs international security interests in mobile aircraft assets (the “Protocol”).

These findings provide timely and unique consideration for insolvency practitioners and airlines as to the appropriate construction of Article XI and how to respond to insolvency events when faced with a request for ‘possession’.

Background

On 14 May 2015, Australia acceded to the Convention on International Interests in Mobile Equipment (the “Cape Town Convention”) and the Protocol . Australia has elected to apply Alternative A of Article XI of the Protocol to all types of insolvency proceedings, and has declared that the waiting period for the purposes of Article XI(2) is 60 calendar days.

The Cape Town Convention became effective as Australian law on 1 September 2015 with the commencement of the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) (the “Act”). The Act applies to the relevant aviation leasing and financing transitions entered into after that date.

Wells Fargo and Willis Lease Finance Corporation (“Lessors”) are respectively the legal and beneficial owners of four aircraft jet engines used on Boeing 737 aircraft (“Lessors”). Those engines, together with associated stands, equipment and records (the “Engines”) were leased to VB Leaseco and subleased to Virgin Australia Airlines (“the Virgin entities”).

On 20 April 2020, an “insolvency related event” occurred when Administrators were appointed to the Virgin Group, including the Virgin entities. Under s443B(3) of the Corporations Act 2001 (Cth) (the “Corporations Act”) an administrator has the power to give, within 5 business days, a notice to the owner or lessor of leased property specifying that the company in administration does not propose to exercise rights in relation to the leased property (“property disclaimer notice”). If an administrator does not give such a notice, the administrator becomes personally liable for rent and other amounts payable in respect of the property while the company is in administration. The Administrators obtained orders from the Court extending the 5 business day decision period to 16 June 2020.

On 30 May 2020 and again on 2 June 2020, the Lessors rejected a standstill proposed by the Administrators and sought the return of the Engines.

On 16 June 2020, the Lessors wrote to the Administrators insisting they ‘give possession’ of the Engines to their premises in Florida, USA, in accordance with their obligations under the Protocol.

The Administrators resisted that request, and on the same day issued a property disclaimer notice under the Corporations Act disclaiming the Engines, stating they were ‘on the wing’ of four separate aircraft in Melbourne and Adelaide and available for collection.

Proceedings were commenced by the Lessors for delivery-up. The question was whether the Engines should have been redelivered to the Lessors in Florida or whether it was sufficient for them to be made available to the Lessors/creditors.

At first instance

At first instance, the primary judge held that redelivery to Florida was required. It was held the obligation to “give possession” under the Protocol requires an Administrator to provide “redelivery… effectively in accordance with the terms of the lease agreements”. As such, the Administrators were required at their cost to deliver the Engines to Florida.

The Administrators and Virgin entities appealed.

Appeal Findings

On appeal, the Full Court overturned the first decision and held that Article XI(2) does not provide that ‘possession’ is to be given in accordance with the terms of the underlying lease or loan agreement between the parties. The Administrators were only required to transfer possession to the Lessor, and were not required to comply with the contractual regime for redelivery to Florida.

The Full Court said the reference in Article XI(5) to Article XI(2) that “unless and until the creditor is given the opportunity to take possession under paragraph 2” confirmed that “giving possession” under Article XI(2) did not include redelivery.

Although the Lessors were correct to point out that the proper construction of Article XI(2) was governed by Article 31(1) of the Vienna Convention, not by direct application of the Australian common law doctrine of possession, that doctrine, and the notion that possession may be established by (i) a sufficient degree of physical control, and (ii) a manifested intention to exercise that control personally in a manner that excludes unauthorised interference, was consistent in both common law and civil law countries.

Accordingly, it was held that the Administrators had complied with their obligations under Article XI(2) of the Protocol to offer to the Lessors the ability to assume lawful possession of the Engines, and making the Engines available for repossession was all that was required.

This article was co-authored by Ben Parry, paralegal