Virgin administrators’ approach upheld in world-first decision on key provision of international aviation convention

16 Mar 2022

The High Court today gave the first decision, globally, of a Court of ultimate appeal on the question of the construction of Article XI(2) of the Cape Town Convention's protocol on Matters Specific to Aircraft Equipment (Aircraft Protocol), which is of seminal importance for financiers and lessors of aircraft property, insolvency administrators globally. The High Court judgment advances the development of the law on the Cape Town Convention and its Aircraft Protocol (Wells Fargo Trust Company, National Association (As Owner Trustee) & Anor v VB Leaseco Pty Ltd (Administrators Appointed) & Ors [2022] HCA 8;  Clayton Utz acted for the Administrators).

The Virgin Australia administration

Virgin Australia Airlines was the highest profile corporate casualty of the restrictions introduced in response to the Covid-19 pandemic, when Deloitte partners Salvatore Algeri, John Greig, Richard Hughes and former partner Vaughan Strawbridge were appointed as voluntary administrators on 20 April 2020.  The complex voluntary administration ultimately resulted in the successful restructure of the airline pursuant to several interconditional deeds of company arrangement.  The Virgin Australia Airlines business remains in operation with new owners Bain Capital and a creditors’ trust was established from the proceeds of the restructure and sale.  Clayton Utz acted for the Administrators (including as the trustees of the creditors trust) at all stages of the external administration, the restructuring of the group and the sale process.

One of the many pressing issues facing the Administrators upon their appointment in April 2020 was how to manage Virgin Australia’s extensive fleet of leased and financed aircraft and engines.  Uniquely, such ‘aircraft objects’ are subject not only to Australian corporate insolvency law, but also to an international treaty, the Convention on International Interests in Mobile Equipment, done at Cape Town on 16 November 2001 (commonly referred to as the Cape Town Convention) and its protocol on Matters Specific to Aircraft Equipment (Aircraft Protocol).  The Cape Town Convention and Aircraft Protocol have the force of law in Australia by reason of s 7 of the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth).

A dispute emerged between the Administrators and one of the lessors of engines, Willis Lease Finance Corporation (Willis), in relation to the construction of the Cape Town Convention and the Protocol.  The dispute turned on Article XI.2 of the Aircraft Protocol, which (in substance) provides that, by no later than the expiry of a 60 day ‘waiting period’ following their appointment, “the insolvency administrator shall […] give possession of the aircraft object”.  Willis claimed that Article XI.2 required the Administrators to deliver their engines to the place for redelivery stated in the lease (Florida, USA).  The Administrators maintained that the words “give possession” simply required the Administrators to give Willis the opportunity to take possession of the property where it was located (in Australia).  Willis rejected that offer and commenced proceedings against the Administrators and the relevant lessor entity within the Virgin Group (VB Leasco Pty Ltd (Administrators Appointed)).  Under the relevant leasing structure and documentation, Wells Fargo Trust Company, National Association owned the engines on trust for Willis.

Willis was successful at first instance before a single judge of the Federal Court of Australia, in a judgment that was handed down on 3 September 2020, involving a complex redelivery and engine realignment regime.  Given the potential consequences of that decision for the administration of Virgin Australia, the Administrators brought an expedited appeal to the Full Federal Court.  On 7 October 2020, the Full Court unanimously upheld the Administrators’ appeal, finding that the obligation to give possession Article XI.2 of the Aircraft Protocol did not require redelivery as contended by Willis.  Willis then appealed to the High Court, obtaining special leave on 12 April 2021.

The High Court's decision: the Administrators were right

The High Court unanimously dismissed Willis’ appeal from the Full Court’s decision with costs and affirmed the reasoning of the Full Court of the Federal Court. It has held that the Administrators' obligation to "give possession" of aircraft objects means to take whatever steps may be necessary to provide the creditor an opportunity to exercise the right to take possession which the creditor has under the Convention. It found that the Administrators' invitation to Willis to take control of the aircraft engines where they were situated in Australia fulfilled the obligation to "give possession" imposed on the Administrators by Art XI(2) of the Protocol. The High Court identified that underlying the question in the appeal was a question of general importance to the aviation industry as to the content of the obligation to "give possession" under Art XI(2) of the Protocol and the determination of that question resolved who should pay the costs that had been incurred in returning the aircraft engines to the United States. In the High Court’s view, its construction of Article XI(2) operated consistently with the underlying realities of modern structured finance, particularly to facilitate capital market financing.

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