The High Court of Australia’s decision in Wells Fargo Trust Company, National Association (as Owner Trustee) & Anor v VB Leaseco Pty Ltd (Administrators Appointed) & Ors (the “Willis” case).
On Wednesday, 16 March 2022, the High Court of Australia handed down its decision in the Willis case.
This is the first decision of an ultimate appellate court worldwide relating to the insolvency provisions and rights to repossession by a creditor under the Convention on International Interests in Mobile Equipment (“Cape Town Convention”) and the Protocol to the Cape Town Convention ("Cape Town Protocol"), as adopted in Australia by the International Interest in Mobile Equipment (Cape Town Convention) Act 2013 (Cth).
The court unanimously decided that Cape Town Convention and Cape Town Protocol does not require an administrator to redeliver an aircraft object in accordance with a lease agreement and to bear the costs of redelivering an aircraft object. The court concluded that to “give possession” means that an insolvency administrator need only take whatever steps may be necessary to provide an opportunity for the exercise of the right to take possession. The court gave a joint judgement which comprised of Chief Justice Kiefel and Justices, Gageler, Keane, Edelman, and Steward.
A Recap - What happened?
Wells Fargo Trust Company and Willis Lease Finance Corporation (together, "Wells Fargo") are respectively the legal and beneficial owners of four aircraft engines located in Adelaide, Australia. The engines were leased to VB Leaseco Pty Ltd and, in turn, subleased to Virgin Australia Airlines Pty Limited (together, "Virgin"). It was accepted by the parties that Wells Fargo's rights were "registered international interests" under the Cape Town Convention and the Cape Town Protocol and subject to the provisions of both.
On 20 April 2020, the Virgin Group was placed into administration, and Wells Fargo sought a declaration that the administrators were obliged to “give possession” of Wells Fargo’s leased engines and that they be delivered to Florida, USA in accordance with the redelivery terms of the lease agreements.
To read about the full background of the case and a discussion of what was at stake, read the discussion by John Canning and Dale Rayner.
The earlier decisions
At first instance, Justice Middleton of the Federal Court handed down judgement in favour of Wells Fargo and ordered the administrators to redeliver Wells Fargo's leased engines by transporting them to Florida at the administrators' cost. John Canning and Cameron Mew outline the decision of Justice Middleton here.
The administrators appealed the decision before the Full Federal Court, which decided in favour of the administrators on the basis that an order for redelivery would, in substance, grant Wells Fargo’s claim for redelivery costs priority over other creditors. This would involve a reworking of generally accepted principles of insolvency law, contrary to the intentions of the Cape Town Convention and Cape Town Protocol. Read the full commentary on the Full Federal Court decision from John Canning and Cameron Mew here.
On 12 April 2021, Chief Justice Kiefel and Justices Gordon and Steward granted leave to appeal to the High Court of Australia, indicating that the case raises new points of law.
Arguments before the High Court
Summary of Wells Fargo's Submission
The Full Federal Court erred because:
- To "give" possession under Article XI (2) of the Cape Town Protocol is to confer a self-help remedy on the part of Wells Fargo to retrieve the engines and requires the giving of physical possession and not just the opportunity to take possession. The giving of possession under Article XI(2) is a ‘remedy given by the Convention’ for the purposes of Article IX(3) as:
- Rights under the Cape Town Protocol are within the scope of Article IX(3), as the “Convention and the Protocol shall be read and interpreted together as a single instrument” in accordance with Article 6;
- The entitlement under Chapter III (“Default remedies”), Article 12 of the Convention to exercise any remedies agreed upon by the parties to the extent that are permitted by the applicable law and not inconsistent with the mandatory provisions of Chapter III has the effect that the exercise of a default remedy under the lease agreement a remedy under the Convention; or
- The right under Chapter III, Article 13 to court ordered interim relief against a debtor in default is a remedy given by the Convention.
- It was not necessary to read into Article XI (2) that the words in accordance with the lease agreement for Well Fargo to succeed because Wells Fargo can exercise remedies under its lease as:
- The Cape Town Convention as modified by Article XI of the Cape Town Protocol applies to the exercise of remedies under Article XI (13).
- Any remedy must be exercised in a commercially reasonable manner
- Article XI (3) of the Cape Town Protocol establishes a safe harbour provision by providing that "a remedy shall be deemed to be exercised in a commercially reasonable manner where it is exercised in conformity with a provision of the agreement except where such a provision is manifestly unreasonable." (There was no suggestion in this case that the redelivery obligations in the lease were unreasonable).
- It may be necessary for the administrators to expend funds of the airline to undertake redelivery of the engine in accordance with the lease. This is the very priority provided by the Cape Town Convention and the Cape Town Protocol that reduces risk to the finance industry even if it comes at the cost of other creditors.
Summary of Virgin’s Submissions
- The phrase “give possession” does not entail a physical transfer of possession of the engines to Wells Fargo, and may be achieved by "disclaiming any intention to exercise control over an object in favour of another such that possessory title is being ceded to that person and that person may choose to take up the possessory title" because:
- This interpretation is consistent with the ordinary use of possession in both civil and common law contexts, where possession involves both factual possession and an intention to hold it as owner;
- In circumstances where the insolvent estate does not have the requisite funds to cover the significant costs associated with redelivery, such costs would fall on the administrator personally if redelivery was required; and
- For the administrator to meet the costs of redelivery would be to prioritise creditors holding international interests in aircraft objects, a proposition which Virgin argues is not supported by the Convention or Protocol.
- Wells Fargo's interpretation of Articles IX(3) and XI(13) of the Cape Town Protocol does not assist their case as:
- Article IX(3) of the Protocol applies only to remedies given by the Convention, and not remedies given by the Protocol or the security agreement; and
- The requirement to give possession under Article XI(2) of the Protocol imposes a mandatory obligation on the administrator, rather than granting a remedy to the creditor.
The safe harbour provisions of Article XI(3) stating that the exercise of a remedy is commercially reasonable where exercised in conformity with the agreement therefore do not apply.
The Decision of the High Court
The arguments before the court were on very technical aspects of interpretation of the Cape Town Convention and the Cape Town Protocol.
The key elements of the decision of the court are succinctly set out at paragraphs 46 – 48 of the judgement where the court states:
- There is no reason to attribute to the term "possession" in Art XI(2) of the Protocol anything other than the constant meaning that the term has in Art XI(5) and Art XI(7) of the Protocol, in Art 8 and Art 10 of the Convention and elsewhere in the Convention and the Protocol. Throughout the Convention and the Protocol, the reference to "possession" is to physical control to the exclusion of others and not the transfer of physical possession.
- For the debtor or insolvency administrator to "give possession" to the creditor within the meaning of Art XI(2) of the Protocol is for the creditor to be "given the opportunity to take possession" within the meaning of Art XI(5) of the Protocol: it is for the debtor or insolvency administrator to take whatever steps may be necessary to provide an opportunity for the exercise of the right to take possession which the creditor has under Art 8 or Art 10 of the Convention. If the creditor then chooses to take up the opportunity to exercise that right to take possession, the rules of insolvency procedure preserved by Art 30(3)(b) of the Convention will not stand in the way.
- Having taken possession of the aircraft object in the exercise of such right as the creditor has to take possession, the creditor is then in a position to exercise further rights under Art IX(1) of the Protocol to procure the de-registration of the aircraft and the export and physical transfer of the aircraft object. Article IX(5) of the Protocol contemplates that the creditor, in exercising those further rights, may take steps to procure the physical transfer of the aircraft object from the territory in which it is situated. And Art XI(8) of the Protocol obliges the Contracting State where the aircraft object is located to "expeditiously co-operate with and assist" the creditor in this regard.
The full judgement is here.
We agree that the judgement is correct on the point of law considered, namely that an administrator appointed under our Corporations Act is not obliged under Article Art XI(2) of the Cape Town Protocol to redeliver an aircraft object and bear the cost of that redelivery in accordance with the relevant agreement. On the arguments presented before the courts, the judgement rightly concentrates on this narrow aspect of the Cape Town Convention and the Cape Town Protocol and does not deal with other areas. Many commentators have raised or commented on tangential legal and policy issues associated with the points of law raised by this case. The judgement does not comment or offer any views on those legal and policy issues.
The court offered no guidance on the matter of whether an administrator by just providing a lessor a non-use notice under section 443B of the Corporations Act stating where the Aircraft object is located, has taken the necessary steps to provide to a lessor an opportunity for the exercise of the right to take possession. This itself will be determined by the circumstances of each aircraft object repossession.
From the judgement it safe to assume that a lessor cannot just refuse or reject to take delivery if offered by an administrator. The lessor or financier must engage with the administrator and determine what steps need to be taken to be given the opportunity to take possession
Also, from this decision the conclusion must be drawn that any costs of repossession and redelivery are not for the administrator if the administrator has taken whatever steps may be necessary to provide to a lessor an opportunity for the exercise of the right to take possession.
The court in passing did note that until an administrator has given the opportunity to take possession an administrator at its cost, will be obliged to preserve and maintain the aircraft object and its value in accordance with the relevant documentation with a lessor or financier under Article XI (5) of the Cape Town Protocol.
Although it may be inferred from the decision of the High Court that in this case the administrator had taken the necessary to provide steps to the lessor an opportunity for the exercise of the right to take possession, that matter itself was not before the court for determination. The steps the parties took in this case are outlined in the judgement of Mr Justice Middleton at first instance - see paragraphs 29 – 49.
Takeaways for practitioners and commercial parties
One could take a very narrow view of matters determined by this decision, but the practical ramifications are far wider than outlined in the judgement.
Transaction documentation will prescribe what protections that a lessor or financier will have at the outset of the transaction for the aircraft objects.
For lessors and financiers, the decision demonstrates the need to establish rigorous ongoing due diligence procedures on monitoring all aspects of their aircraft objects and actually performing that due diligence. This will ensure that parties understand the state, location and compliance with operational matters which relate to the aircraft objects This information will be vital in heading into a pending insolvency of an airline.
A large airline insolvency poses many practical and logistical challenges with all lessors and financiers wanting information as to all matters relating to their aircraft objects. Subject to commercial considerations and negotiation, if there is to be a likely repossession then the actions of the administrators will need to be recorded and monitored to ensure the administrators take necessary steps to provide to a lessor or financier an opportunity to take possession.
What is clear for the High Court decision it is not enough for administrators to sit on their hands and say come and get your aircraft object, if there are steps to be taken so as to afford the lessor or financier the opportunity to take possession. It will not be enough for an administrator to deliver a non-use notice under section 443B of the Corporations Act (or an equivalent disclaimer) which notifies parties of the location of the Aircraft.
If the circumstances require, positive action may be required to be taken by an administrator to put a lessor or a financier in a position to have an opportunity to take possession. Putting aside the issue of costs which can be generally negotiated in an insolvency, an administrator may have to facilitate steps which include matters like:
- Extending insurances and dealing with insurers
- Dealing with regulatory authorities
- Locating parts, records, and engines and relocation of the same
- Putting the Aircraft in an airworthy condition
- Liaising and assisting on operational and technical matters
- Obtaining an Export Certificate of Airworthiness
- Assisting with parties who assert liens over the Aircraft
- Dealing with contractual matters and/or novation of maintenance and other relevant contracts relating to the Aircraft
- Complying with Aviation Authority and manufacturers directives and guidelines
- Assistance with access to the Aircraft if it with a third party
Hopefully this decision will provide certainty on the rights of lessors and financiers under Article XI (2) of the Cape Town Protocol in what is now, a very uncertain world!