Where do aircraft
lessors stand after the insolvency of Virgin Australia
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
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
- the waiting period ending when the Aircraft Lessors
(lessors and financiers) are legally entitled to seize
the aircraft under the Cape Town Convention; and
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) 
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
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 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
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
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:
- The Aircraft Leased Property is critical to the
continuing viability of the airline business.
- The Administrators will use the period to negotiate
Aircraft Protocols* with the lessors.
- Prospective bidders for the Virgin Group business
have until 12 June 2020 to indicate which specific
aircraft they require.
- 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.
- 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.
- Three weeks extension is a reasonable time to
finalise the Aircraft Protocols*.
- 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:
- 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
- The Administrators will not have entered into an
Aircraft Protocol with the Aircraft Lessors, in which
event the Aircraft Lessors will repossess their
Commercial considerations will dictate whether or not the
Lessors will enter into an Aircraft Protocol, and if so, its
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
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.