Federal Court of Australia Sheds Light on What It Means to “Give Possession” Under the Cape Town Convention’s Aircraft Protocol

On 7 October 2020, the Full Federal Court of Australia handed down its judgment in Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) [2020] FCAFC 168, which clarified the meaning of "give possession of the aircraft object to the creditor" under Article XI(2) of the Cape Town Convention's Aircraft Protocol ("Aircraft Protocol"). The Aircraft Protocol was signed in November 2001 and introduced a framework of international standards for the protection of ownership rights and security interests in aircraft assets. The provisions of the Cape Town Convention ("Convention") state that it prevails over domestic laws to the extent of any inconsistencies. The Convention became law in Australia on 1 September 2015, and Australia elected to apply ‘Alternative A’ of Article XI of the Aircraft Protocol, which gives more protection to secured creditors.

The Federal Court of Australia is the first international court among the ratifying countries to consider the meaning of "give possession" under Article XI(2) of the Aircraft Protocol.

Background

• Wells Fargo Trust Company and Willis Lease Finance Corporation owned (legally and beneficially, respectively) four aircraft engines. The engines had been leased to VB Leasco Pty Ltd which in turn sub-leased the engines to Virgin Australia Airlines Pty Limited.
• Voluntary administrators were appointed to the Virgin Australia Group on 20 April 2020 (the "Administrators").
• The Second Lessor rejected a standstill proposed by the Administrators and sought return of the engines and associated equipment (valued at US$40m), and requested that the Administrators "give possession" in accordance with the Aircraft Protocol.
• The Administrators issued a disclaimer notice under s.443B(3) of the Corporations Act 2001 ("CA 2001"). They stated that the engines were attached to four aircrafts (three in Melbourne and one in Adelaide), and were available for collection.

The Administrators had effectively done what they were obliged to do so under CA 2001 in order to discharge their obligations, however, the Lessors argued that the Convention and Aircraft Protocol prevailed, and under the foregoing "give possession" required a positive act which meant delivery up in accordance with the contractual regime for redelivery. They argued that the lesser requirement under CA 2001 did not apply.

Appeal Decision

The court in the first instance found that the obligation to “give possession” under Article XI(2) of the Aircraft Protocol required the Administrator to provide “redelivery… effectively in accordance with the terms of the lease agreements”. This meant, inter alia, that the Administrators would need to deliver the engines to specific redelivery locations at their own cost.

The decision was however overturned by the Full Federal Court of Australia which held that Article XI(2) of the Aircraft Protocol "does not impose a requirement to effect redelivery according to the terms of the agreement with the creditor". To do so, in their view, would result in funds which are available to creditors generally in an insolvent administration applying to meet redelivery costs in priority to other claims (including the administrator's own costs and other costs which have statutory priority).

It was acknowledged however that Article XI(2) may require the Administrator to take affirmative steps beyond simply disclaiming the property, such "affirmative obligations is confined by what is needed to overcome any barrier to taking possession that is a consequence of the insolvent administration". It remains to be seen what "affirmative obligations" apply to an insolvency administrator to discharge their obligations in this respect.

 In summary, the Full Court found that to "give possession" does not require:

• the insolvency administrator to effect redelivery in accordance with the terms of the underlying agreement;
• the insolvency administrator to deal with third party interests (e.g. pay out liens) affecting the asset as the Aircraft Protocol only deals with claims by the creditor against its counterparty under the relevant agreement; or
• the creditor to be able to exercise remedies in a commercially reasonable manner.

Concluding Remarks

This decision has somewhat eroded what was previously considered to be a strong position for secured creditors under Article XI(2). It is likely that the decision will be followed, or at least taken into account, by courts of other ratifying countries which have adopted the "Alternative A" model, including the UK. 

Engines are high value assets and aircraft leases typically place extensive redelivery obligations on lessees which go beyond simply redelivering assets to a particular redelivery location (e.g. conducting inspections, servicing the asset and creating end of lease records). Given the susceptibility of the aviation sector to distress and insolvency, it will be interesting to see how lessors, financial institutions and aircraft manufacturers react to these developments and whether it results in more stringent terms for borrowers and lessees.