15 October 2020

Virgin v Wells Fargo: the Full Federal Court adopts a different interpretation of an insolvency administrator’s obligation to “give possession” under the Cape Town Convention

This article was written by John Canning and Cameron Mew.

Following our previous alert here on Justice Middleton’s decision in Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (Administrators Appointed),[1] the administrators of the Virgin Group have successfully appealed that decision.

At first instance, Justice Middleton held that the obligation to “give possession” under Article XI(2) of the Protocol to the Convention on International Interests in Mobile Equipment (“Cape Town Protocol”) requires an insolvency administrator to provide “redelivery… effectively in accordance with the terms of the lease agreements”.  As a result, Justice Middleton ordered the administrators of the Virgin Group, at their cost, to deliver to Florida engines that had been leased by Wells Fargo Trust Company and Willis Lease Finance Corporation (together, “Wells Fargo”) to VB Leaseco Pty Ltd (Subject to Deed of Company Arrangement) and, in turn, subleased to Virgin Australia Airlines Pty Limited (Subject to Deed of Company Arrangement) (together, “Virgin”).

On appeal, the Full Federal Court overturned Justice Middleton’s decision and held that “Art XI(2) does not impose a requirement to effect redelivery according to the terms of the agreement with the creditor.”[2]

What does this mean for you?

For aircraft owners, lessors and mortgagees, the Full Court’s decision has pared back the seemingly strong position that those parties held under the interpretation of Article XI(2) favoured by Justice Middleton.  Although the Full Court’s decision confirms that some affirmative steps are required to be taken by an insolvency administrator to comply with Article XI(2), this is a matter that needs to be worked through.

As the Full Court is the first appellate Court among ratifying countries to directly consider the content of the obligation under Article XI(2) of the Cape Town Protocol to “give possession”, it is likely that the Full Court’s decision will be taken into account in other ratifying countries which have adopted the “Alternative A” model in Article XI of the Cape Town Protocol.

The Full Court’s reasoning

In coming to the view that Article XI(2) does not require redelivery in accordance with the terms of the underlying agreement, the Full Court relied upon the following grounds:

  • 4 provisions within Article XI (namely, Article XI(5)(a), XI(7), XI(10) and XI(11)) include an express reference to the underlying agreement between the parties. According to the Full Court, this indicated that, wherever the Cape Town Protocol intends for an obligation to be performed in accordance with the underlying agreement between the parties, it says so.  In contrast, Article XI(2) contains no reference to the underlying agreement between the parties;[3]
  • Article XI(5) contains the phrase “unless and until the creditor is given the opportunity to take possession under paragraph 2”. According to the Full Court, this confirmed that “giving possession” under Article XI(2) is not to be understood to include redelivery;[4]
  • in both common law and civil law countries, possession may be established by: (i) a sufficient degree of physical control; and (ii) a manifested intention to exercise that control personally (not on behalf of another) in a manner that excludes unauthorised interference. Therefore, the obligation to “give possession” under Article XI(2) does not require physical redelivery;[5] and
  • if the obligation to “give possession” under Article XI(2) requires physical delivery in accordance with the terms of the underlying agreement, the insolvent estate would have to be applied to meet the costs of redelivery in priority to any other claim, instead of the creditor being confined to claims against the relevant aircraft object to cover the costs of redelivery. According to the Full Court, it is clear that the Cape Town Protocol is not intended to operate in a way that would result in such a reworking of generally accepted principles of insolvency law.[6]

In the Full Court’s view:

“Art XI(2), properly construed, provides that notwithstanding the domestic insolvency law, the insolvency administrator must do that which is necessary to pass to the creditor the form of possession that the creditor could have taken in the exercise of the self-help right to take possession.  To do so may require the taking of affirmative steps by the insolvency administrator beyond simply disclaiming the property.  Merely submitting to the claim by the creditor may not be enough.  However, the extent of those affirmative obligations is confined by what is needed to overcome any barrier to taking possession that is a consequence of the insolvent administration, and does not extend to affording to the creditor any form of possession of the relevant aircraft objects that the creditor would be unable to take in the exercise of the remedy conferred by the Convention (and applied to aircraft objects by the opening words of Art IX of the Protocol) in circumstances where there was no insolvent administration.”[7]

Practical issues

Unfortunately, the Full Court did not provide further guidance as to how its “no insolvent administration” counterfactual test is to be applied, with the factual issue as to what “affirmative steps” were required to be taken by the administrators to “give possession” to Wells Fargo being remitted to Justice Middleton for determination.

However, it is clear from the Full Court’s judgment that “giving possession” does not require:

  • the insolvency administrator to effect redelivery in accordance with the terms of the underlying agreement;[8]
  • the creditor to be able to exercise remedies in a commercially reasonable manner;[9] or
  • the insolvency administrator to pay out liens or other third party claims affecting the aircraft object.[10] 

The question that remains unresolved is the level of “affirmative steps” required to be taken by an insolvency administrator to enable the creditor to obtain “possession”, a concept involves the creditor obtaining a degree of physical control and the ability to exercise that control to exclude unauthorised interference.

It is important to note the Full Court’s view that, if an insolvency administrator provides the creditor with the opportunity to take possession and the creditor seeks to take up that opportunity, the insolvency administrator’s obligations to maintain and preserve the aircraft object under Article XI(5) of the Cape Town Protocol continue until the obligation to give possession is performed.[11]

What’s next?

As noted above, the factual issue as to what “affirmative steps” were required to be taken by the administrators to “give possession” to Wells Fargo have been remitted to Justice Middleton for determination.  We will continue to update you on any further developments and appeals.

 

[1] [2020] FCA 1269.

[2] VB Leaseco Pty Ltd (Administrators Appointed) v Wells Fargo Trust Company, National Association (trustee) [2020] FCAFC 168 at [110].

[3] At [93] to [94].

[4] At [95] to [96].

[5] At [97] to [101].

[6] At [102] to [105].

[7] At [106].

[8] At [110].

[9] At [101].

[10] At [110].

[11] At [106].

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