This article was written by John Canning and Cameron Mew.
On 14 May 2015, Australia acceded to the Convention on International Interests in Mobile Equipment (“Cape Town Convention”) and the Protocol to the Cape Town Convention (“Cape Town Protocol”). In particular, for insolvency related proceedings, Australia adopted what is known as “Alternative A” in aviation industry speak. The Cape Town Convention became effective as Australian law on 1 September 2015 and applies to the relevant aviation leasing and financing transitions entered into after that date.
As a result, in the event of an administration of an Australian aircraft lessee or borrower company, the administrator will need to “give possession” of the aircraft to the owner, lessor or mortgagee within 60 calendar days. In Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (Administrators Appointed), the Federal Court of Australia became the first Court among ratifying countries to directly consider the content of the obligation under Article XI(2) of the Cape Town Protocol to “give possession” in the context of the well-publicised administration of the Virgin Group.
What does this mean for you?
The Court held that the obligation under Article XI(2) of the Cape Town Protocol to “give possession” requires an insolvency administrator to provide “redelivery… effectively in accordance with the terms of the lease agreements”.
In the context of the Wells Fargo case, this meant that the administrators of the Virgin Group were required to redeliver Wells Fargo’s leased engines by transporting them to Florida at the administrators’ cost, as opposed to simply making the engines available for collection in Australia.
For aircraft owners, lessors and mortgagees, the Wells Fargo case strengthens their repossession rights in an insolvency of an Australian company and this approach may be followed in other ratifying countries which have adopted “Alternative A”. Accordingly, aircraft owners, lessors and mortgagees should be careful to preserve their rights under the Cape Town Convention in any insolvency. Aircraft owners, lessors and mortgagees may also wish to consider at the documentation stage being prescriptive with their requirements relating to redelivery of aircraft objects, so that they are able to rely upon those redelivery requirements in an insolvency.
It should be noted that the administrators of the Virgin Group through their counsel indicated to the Court that there was a “real possibility” they would appeal the Court’s decision once it is delivered.
Reminder – What is the Cape Town Convention?
Signed at Cape Town in November 2001, the Cape Town Convention brings into force a framework for an international standard for the protection of ownership rights and security interests in aircraft. The Convention commenced in Australia on 1 September 2015 and establishes:
- that an “international interest” in aircraft assets (such as airframes, aircraft engines and certain helicopters) arises in favour of: (a) the seller/conditional seller under a sale/title reservation agreement; (b) the lessor under a lease agreement; and (c) the creditor under a credit agreement;
- an electronic registration system for the perfection and priority of “international interests”; and
- default rights and remedies to enforce such international interests (including interim remedies) that are more tailored to aircraft finance transactions, such as giving secured parties the right to de-register or immobilise aircraft.
Importantly, the provisions of the Cape Town Convention and the Cape Town Protocol prevail over any law of the Commonwealth and any law of a State or Territory, to the extent of any inconsistency.
Background to the Wells Fargo case
Wells Fargo Trust Company and Willis Lease Finance Corporation (together, “Wells Fargo”) are respectively the legal and beneficial owners of four aircraft engines. The engines were leased to the VB Leaseco Pty Ltd (Administrators Appointed) and, in turn, subleased to Virgin Australia Airlines Pty Limited (Administrators Appointed) (together, “Virgin”). It was accepted by the parties that Wells Fargo’s rights are “registered international interests” under the Cape Town Convention and the Cape Town Protocol.
On 20 April 2020, the Virgin Group was placed into administration. Under Australian insolvency law, an administrator has the power pursuant to section 443B(3) of the Corporations Act 2001 (Cth) (“Corporations Act”) 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. If an administrator does not give such a notice, the administrator becomes personally liable for rent and other amounts payable under the lease agreement as is attributable to the period beginning after the 5 business days and during which the company in administration continues to use, occupy or be in possession of the leased property.
The administrators of the Virgin Group previously obtained orders from the Court extending the 5 business day decision period to 16 June 2020. On 16 June 2020, the administrators of Virgin purported to give notices under section 443B(3) of the Corporations Act. In response, Wells Fargo brought an application in the Federal Court seeking various declarations and other relief, including a declaration that the section 443B(3) notice did not discharge the administrators’ obligation under Article XI(2) of the Cape Town Protocol to “give possession” of the Wells Fargo’s leased engines and an order that the administrators deliver up the engines in Florida, as required by the redelivery terms in the relevant lease agreements.
What is the content of the obligation to “give possession”?
Wells Fargo’s primary submission was that the ordinary, natural meaning of the word “give” connotes positive action. Therefore, despite the phrase “opportunity to take possession” being used in Article XI(5) of the Cape Town Protocol, an interpretation which reads down the obligation in Article XI(2) to “give possession” as an obligation only to give an “opportunity to take possession” should be rejected.
Further, Article IX(3) of the Cape Town Protocol provides that:
- any remedy under the Cape Town Convention or the Cape Town Protocol must be exercised in a “commercially reasonable manner”; and
- a remedy is 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”.
Accordingly, Wells Fargo submitted that the obligation to “give possession” should be interpreted to mean redelivery in accordance with the underlying lease agreement.
Against this, the administrators submitted that the ordinary meaning of the phrase “give possession” only required the administrators to make the engines available to allowing the creditor to take up possession. In support of their argument, the administrators relied upon Article XI(5) of the Cape Town Protocol, which uses the phrase “opportunity to take possession”.
The administrators also relied upon United States case law on section 1110 of the US Bankruptcy Code, upon which the “Alternative A” model is based. The United States courts have interpreted the obligation under section 1110 to “surrender and return” aircraft objects to mean “you get [the aircraft object] immediately and you get it as is, where it is”.
Ultimately, the Court accepted Wells Fargo’s submissions. In particular, the Court held that:
- interpreting “give possession” as requiring redelivery in accordance with the terms of the lease agreements is consistent with the ordinary meaning of the phrase, the contractual bargain reached between the parties, the context in which the phrase is found in the Cape Town Convention and the Cape Town Protocol, and the object and purpose of the Cape Town Convention and the Cape Town Protocol;
- such an interpretation provides an efficient model for the return of aircraft objects and affords security against such assets in an insolvency, thereby reducing the risks for creditors (and consequently the borrowing costs of debtors) through improved legal certainty;
- the phrase “give possession” in Article XI(2) is to be contrasted with the phrase “given the opportunity to take possession” in Article XI(5), with the opportunity to “take” only arising after possession has been “given”. This contrast supports the interpretation that “give possession” is a positive act of giving, and not merely giving an opportunity to take possession;
- the content of the obligation to “give possession” is provided by the requirement in Article IX(3) that remedies must be exercised in a “commercially reasonable manner”, with the manner of giving possession deemed commercially reasonable if it is exercised in conformity with the terms of the underlying agreement, except where those terms are manifestly unreasonable;
- the obligation to “give possession” is necessarily more onerous than what would be required under any domestic law, and the creditor’s enhanced position is confirmed by the Cape Town Protocol’s heavy reliance on the parties’ contractual bargain in Articles IX(3), XI(5), XI(7), XI(9), XI(10 and XI(12); and
- although Alternative A in Article XI is derived from section 1110 of the US Bankruptcy Code, the relevant wording of Article XI and the context of the Cape Town Convention and the Cape Town Protocol are different from section 1110.
Accordingly, the Court ordered the administrators to redeliver Wells Fargo’s leased engines by transporting them to Florida at the administrators’ cost, as required by the terms of the lease agreements.
As noted above, the administrators may appeal the Court’s decision. We will keep you updated on any appeal.
  FCA 1269.
 In re Delta Air Lines, Inc., Case No. 05-17923, Hearing Transcript of October 17, 2005