The First and Second Lessors are respectively the legal and beneficial owners of four aircraft jet engines used on Boeing 737 aircraft (“the Lessors”). The engines and their associated stands, quick engine change equipment and records were leased to VB Leaseco Pty Ltd (‘First Respondent’) who in turn subleased them to Virgin Australia Airlines Pty Limited (‘Second Respondent’). The value of the engines and equipment amounted to US$40,000,000.
On 20 April 2020, voluntary Administrators were appointed to the Virgin Australia airline group, including the First and Second Respondents (‘the Administrators’). They were joined to the proceedings as the Third Respondent.
On 30 May 2020 and again on 2 June 2020, the Second Lessor rejected a standstill proposed by the Administrators and sought the return of the engines.
On 16 June 2020, the Lessors wrote to the Administrators insisting they ‘give possession’ of the engines and equipment in accordance with their obligations under Article XI of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (‘Aircraft Protocol’).
On the same day, the Administrators issued a property disclaimer notice under section 443B(3) of the Corporations Act 2001 (Cth) (‘Corporations Act’) disclaiming the engines, and stating the engines were ‘on the wing’ of four separate aircraft in Melbourne and Adelaide and were available for collection. The Administrators proposed to pay for insurance until 30 June 2020, after which time the engines would be at the Lessors’ risk.
In subsequent correspondence, the Administrators endeavoured to implement an orderly hand back arrangement and also provided records in respect of the engines.
|Interpretation||Article XI of the Aircraft Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Cape Town Convention).|
|Interpretation||Meaning of the phrase 'give possession of the aircraft object to the creditor' in Article XI – whether 'give possession' requires the Respondent parties to deliver the aircraft engines and equipment to the Lessors or whether it simply requires making those objects available.|
|Corporations||Whether the Administrators should be relieved of liability for rent and other amounts payable on the basis that they acted reasonably when providing assistance to the Lessors to recover the aircraft engines and equipment.|
The Lessors commenced proceedings in the Federal Court of Australia seeking orders under the Convention on International Interests in Mobile Equipment (‘Cape Town Convention’) and the Aircraft Protocol compelling the Respondents to ‘give possession’ of the aircraft engines and equipment by delivering up those objects to the Lessors’ premises in Florida, USA.
The Respondents resisted those orders and contended they had complied with their obligations by giving the Lessors the opportunity to take possession of the aircraft engines and equipment in Australia. Specifically, the Respondents submitted that the steps taken in giving notice under section 443B(3) of the Corporations Act on 16 June 2020, together with the further steps taken to implement the orderly hand back arrangement, were sufficient to ‘give possession’ to the Lessors for the purposes of Article XI(2) of the Aircraft Protocol.
The Convention and Protocol
The Cape Town Convention and the Aircraft Protocol have the force of law in Australia following the commencement of the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) on 1 September 2015. Moreover, Australia has elected to apply Alternative A of Article XI of the Aircraft Protocol to all types of insolvency proceedings, and has declared that the waiting period for the purposes of Article XI(2) is 60 calendar days.
The key provisions within Article XI are extracted below:
2. Upon the occurrence of an insolvency-related event, the insolvency Administrator or the debtor, as applicable, shall, subject to paragraph 7, give possession of the aircraft object to the creditor no later than the earlier of:
- the end of the waiting period; and
- the date on which the creditor would be entitled to possession of the aircraft object if this Article did not apply.
5. Unless and until the creditor is given the opportunity to take possession under paragraph 2:
- the insolvency Administrator or the debtor, as applicable, shall preserve the aircraft object and maintain it and its value in accordance with the agreement; and
- the creditor shall be entitled to apply for any other forms of interim relief available under the applicable law.
6. Sub-paragraph (a) of the preceding paragraph shall not preclude the use of the aircraft object under arrangements designed to preserve the aircraft object and maintain it and its value.
7. The insolvency Administrator or the debtor, as applicable, may retain possession of the aircraft object where, by the time specified in paragraph 2, it has cured all defaults other than a default constituted by the opening of insolvency proceedings and has agreed to perform all future obligations under the agreement. A second waiting period shall not apply in respect of a default in the performance of such future obligations.
Further, Article IX of the Aircraft Protocol provides the following:
Article 8(3) of the Convention shall not apply to aircraft objects. Any remedy given by the Convention in relation to an aircraft object shall be exercised in a commercially reasonable manner. 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.
The Aircraft Protocol specifically relates to an insolvency regime that provides a special remedy in the context of aviation insolvencies. The Court’s helpful description of the procedure under that regime can be summarised as follows:
- On the occurrence of an insolvency-related event, an insolvency Administrator has the primary obligation to ‘give possession’ of the aircraft object to the creditor no later than the specified date;
- Unless and until the creditor is given the opportunity to take the possession, the Administrator shall preserve and maintain the aircraft object;
- However, if the Administrator cures the relevant default and agrees to perform future obligations by the specified date, the Administrator may retain possession of the aircraft object pursuant to Article XI(7), being the possession granted under the relevant lease agreement;
- If the Lessor is not ready and willing to take possession of the aircraft object, Article XI(5) will operate to relieve the insolvency Administrator from still preserving the aircraft object after giving the Lessor the opportunity to take possession;
- Until the Lessor takes possession, the Lessor can still apply for other forms of interim relief available under the applicable law; and
- The Administrator’s primary obligation to give possession and the creditor’s corresponding remedy must be exercised in a commercially reasonable manner.
In this case, it was not in dispute that an insolvency-related event had occurred. The primary question before the Court was whether the Respondents had complied with their obligation to ‘give possession’ of the aircraft engines and equipment by making those objects available to the Lessors in Australia, or whether they were required to undertake the positive act of delivering the objects to the Lessors in Florida.
Ultimately, the Court held the Lessors were entitled to obtain possession of the aircraft engines and equipment in accordance with the redelivery terms within the existing lease agreement, that is, in Florida. In coming to this conclusion, the Court made the following findings:
- The ordinary natural meaning of the phrase ‘give possession’ means to deliver or hand over in the sense of restoring a thing to the Lessor;
- The content of the primary obligation to ‘give possession’ is to be exercised in a commercially reasonable manner, which will be informed by the lease agreement redelivery terms unless a relevant provision is manifestly unreasonable;
- Predictability is achieved by applying the Aircraft Protocol rights in a manner consistent with the terms of the parties’ underlying agreement. Imposing an obligation on a creditor of retrieving aircraft objects from numerous jurisdictions does not create predictability;
- To hold that the primary obligation is satisfied where a debtor or insolvency Administrator merely abandons or relinquishes possession would be to transform a positive requirement into an ability to abandon the creditor’s property in a context where aircraft engines are complex machinery capable of being relocated in the ordinary course of the aircraft’s work to almost any location. To do so would put an engine Lessor in a position where it has no way of knowing the equipment’s condition, whether it will have access to the relevant aircraft, or whether facilities will be available to remove the engine; and
- The obligation to redeliver aircraft objects in the event of insolvency is consistent with the purpose of the Cape Town Convention and the Aircraft Protocol to encourage ‘broad and mutual economic benefits for all interested parties’. That obligation is intended to be more onerous than would be required under any local law, such as an ‘as is where is’ disclaimer by an Administrator under section 443B of the Corporations Act. In return, airlines have access to cheaper finance.
In light of these findings, the Court rejected the Respondents’ submission that the steps they had taken were sufficient to ‘give possession’ of the aircraft engines and equipment to the Lessors in Australia. The Court also held the property disclaimer notice was ineffective and, by its very nature, it could not satisfy the requirements of section 443B(3). Accordingly, the Court ordered the Respondents to deliver up the engines and equipment to the Lessors’ premises in Florida.
All the same, the Court found the Administrators had acted reasonably and were always willing to provide practical assistance to the Lessors to assist in the recovery of the aircraft engines and equipment. While the section 443B(3) notice was of no effect, the Court granted the Administrators relief from personal liability to pay rent or other amounts payable under the engine leases for the period of time allowed to deliver up those objects to the Lessors.
Due to COVID-19 related contraction of air travel and associated financial pressures on airlines, this decision by the Federal Court of Australia provides timely guidance to both airlines and insolvency practitioners as to how to respond to insolvency events involving leased equipment in an aviation context.
An appeal was heard by the Full Federal Court on 22 September 2020, and judgement is awaited.
This article was written by Simon Liddy, Partner, James McIntyre, Special Counsel and Ben Pool, Solicitor.