Where do aircraft lessors stand after the insolvency of Virgin Australia Airlines?

 

Virgin Australia Airlines operated a fleet of 144 aircraft of which 142 were leased to approximately 73 lessors and financiers when the Board resolved to appoint Administrators on 20 April 2020 because of concerns as to solvency. Virgin Australia Airlines Pty Ltd is the second largest airline operating in Australia.

The Administrators have taken the view that by remaining in possession of the Aircraft Leased Property (the aircraft, the aircraft engines and other aviation equipment leased or financed) and by continuing to operate the business as a going concern, they will be able to sell or restructure the business, and achieve a better return to creditors than in a winding up where business assets are sold on a liquidation basis.

The Administrators have invited bidders to lodge bids for the business by 12 June 2020.

The Administrators face two challenges in continuing to operate the business as a going concern and in selling the business:

  1. the waiting period ending when the Aircraft Lessors (lessors and financiers) are legally entitled to seize the aircraft under the Cape Town Convention; and

  2. a personal liability exemption from an aggregate monthly liability payable to the Aircraft Lessors in excess of $40 million per month.

On 25 May 2020 Federal Court of Australia made orders to extend the period in which the Administrators were protected from personal liability for any Aircraft Leased Property (including amounts payable pursuant to any leases) until 16 June 2020: Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 3) [2020] FCA 726 (Middleton J).

This is an analysis of how the ‘waiting period’ under the Cape Town Convention ties in with the liability exemption available to Administrators under the Corporations Act 2001 (Cth).

The Cape Town Convention ‘waiting period’

The Cape Town Convention (2001) and the Protocol is the International Convention on International Interests in Mobile Equipment as applied to aircraft, and for related purposes. It has been incorporated into Australian domestic law by the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth).

Article XI of the Protocol outlines Remedies on insolvency. The Government of Australia has made an opt-in declaration that Alternative A is to apply to all types of insolvency proceeding and that the ‘waiting period’ before a lessor can enforce their rights under an aircraft lease is sixty (60) calendar days.

Aircraft lessors and financiers of Virgin Group aircraft must therefore wait until the waiting period ends on 19 June 2020 before exercising their rights to possession.

Aircraft lessors will not exercise their rights if the Administrators have cured all outstanding defaults or have agreed with them on performance of future obligations under the leases.

Note that under the Cape Town Convention Act, an Irrevocable Deregistration and Export Request Authorisation (‘IDERA’) applies. This allows aircraft lessors to deregister and export aircraft assets immediately the waiting period ends, without obtaining leave or order of the court.

The waiting period cannot be extended by an Australian Court because the Cape Town Convention prevails over the local law. This means that the Administrators must reach agreement with the lessors by 19 June 2020, or risk the termination of the leases and the aircraft leaving the country.

Administrators – personal liability exemption

Company Administration in Australia protects the business and assets of a company by suspending creditor claims to allow the company to be ‘reorganised’. If the Virgin Group were based in the USA, it would have filed for Chapter 11 bankruptcy protection.

An Administrator manages the business, property and affairs of the company under Part 5.3A of the Corporations Act 2001 (Cth) – Administration of a Company’s affairs with a view to executing a Deed of Company Arrangement (a Voluntary Administration).

Under section 443B(2) of the Corporations Act 2001 (Cth), an Administrator is personally liable for payments for property used or occupied by, or in the possession of, the company, commencing five (5) days after the administration begins, unless they give notice under section 443B(3) of the Corporations Act 2001 that do not propose to exercise their rights in relation to the property, in this case the Aircraft Leased Property

The Administrators needed more time to consider their position, but wanted a liability exemption whilst they did so. The made an application to the Court under sections 443B(8) and 447A(1).

On 24 April 2020 (within the five (5) days), the Court ordered that the Administrators were exempt from their personal liability obligations under leases of property until 26 May 2020.

On 25 May 2020, the Court ordered an extension of the liability exemption until 16 June 2020 ‘for the Administrators to decide whether to cause the Virgin Companies to remain in possession of Aircraft Leased Property in accordance with the terms of existing agreements in place at the commencement of the administration period (without personal liability for the obligations of the Virgin Companies under those leases in the interim)’ and gave these reasons:

  1. The Aircraft Leased Property is critical to the continuing viability of the airline business.
     
  2. The Administrators will use the period to negotiate Aircraft Protocols* with the lessors.
     
  3. Prospective bidders for the Virgin Group business have until 12 June 2020 to indicate which specific aircraft they require.
     
  4. The Administrators are unwilling to take on personal liability for leasing liabilities and would be forced to give a section 443B(3) notice to give up their interest in the aircraft leases immediately if the extension of time were not granted.
     
  5. There is unlikely to be any material prejudice to the Aircraft Lessors given the Aircraft Leased Property is insured and properly maintained, the Aircraft Lessors have been regularly informed and have had the opportunity to inspect electronic records and aircraft in their physical form.
     
  6. Three weeks extension is a reasonable time to finalise the Aircraft Protocols*.
     
  7. It is in the creditors’ best interests, including the Aircraft Lessors, to grant the extension to maximise the prospect of the preserving the business as a going concern for sale or restructure.

    * The Aircraft Protocols are ‘stand-still’ agreements between the Administrators and the Aircraft Lessors in respect of their rights while the Virgin Group remains in Administration (to apply after the end of the waiting period). The Administrators will endeavour to identify which Aircraft Leased Property is surplus to the Virgin Companies’ business requirements, and provide for payment of a usage charge for the aircraft and engines, maintenance of aircraft and engines and for insurance. And of course, there is a personal liability exemption for the Administrators.

What will happen to the Virgin Group Aircraft leases on 16 June 2020?

As of 16 June 2020, there are 2 possibilities:

  1. The Administrators will have entered into an Aircraft Protocol with the Aircraft Lessors for the aircraft. The Aircraft Protocol will preserve the status quo until the creditors meeting on 22 August 2020 / sale of the Virgin Group business; or
     
  2. The Administrators will not have entered into an Aircraft Protocol with the Aircraft Lessors, in which event the Aircraft Lessors will repossess their aircraft.

Commercial considerations will dictate whether or not the Lessors will enter into an Aircraft Protocol, and if so, its terms.

Justice Middleton analysed the commercial considerations of the Aircraft Lessors as:

“having regard to the significant travel restrictions in place during the COVID-19 pandemic, as a matter of commercial reality it is not apparent that the return or surrender of Aircraft Leased Property to the Aircraft Lessors will enable the relevant lessors and financiers to derive any better financial return for their property in the short term.”

On 16 June 2020, we will know the commercial decisions taken by the Aircraft Lessors. They are owed substantial amounts. As of 15 May 2020, 50 aircraft lessors are together owed approximately AU$1,883,914,848 and 23 aircraft financiers and 3 secured corporate financiers are together owed approximately AU$2,003,447,473.

We may also learn the commercial considerations of the bidders, which may be to allow some of the leases to be terminated and to negotiate new leases on better terms for the aircraft they wish to use.

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