Court orders Virgin aircraft engines to fly home to Florida

 

The Virgin Airlines insolvency has shed new light upon aircraft repossession procedure under the Cape Town Convention.

In Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) [2020] FCA 1269 (3 September 2020), Justice Middleton in the Federal Court of Australia, decided two issues:

  1. The meaning of “shall give possession of the aircraft object to the creditor” in the context of Art XI of Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the “Aircraft Protocol” to the “Cape Town Convention”); and
  2. The relief from liability of an insolvency administrator who disclaims property in aircraft engines subject to lease under a Notice given under s 443B of the Corporations Act 2001.

This is an analysis:

Background

Between May and September 2019, Wells Fargo Trust (the legal owner) entered into four General Terms Engine Lease Agreements, each to lease one aircraft engine and various other aircraft objects (Engine Stands, QEC units, including Engine records) to VB Leaseco.

Each engine had at least 24,000 pounds of thrust and was used on Boeing 737 aircraft. The agreed value of equipment (the engines and objects) is US$40,000,000.

At the same time, Willis Lease Finance (the beneficial owner) entered into Engine Lease Support Agreements with VB Leaseco. VB Leaseco subleased the engines and equipment to Virgin Australia Airlines. This was a cross border transaction as Wells Fargo and Willis are based in the USA.

On 20 April 2020, insolvency administrators were appointed to the Virgin Australia Group, which included VB Leasco and Virgin Australia Airlines.

Willis requested the delivery up of the engines and the equipment.

On 16 June 2020, the administrators’ immunity of liability for rent and other obligations under the agreements expired.

On 16 June 2020, the administrators issued a property disclaimer Notice to Willis under s 443B(3) of the Corporations Act (Cth) disclaiming liability under the leases, advising that the engines which were “on the wing of” four separate Virgin Airlines aircraft in Adelaide and Melbourne, were available for collection, and that they were insured until 30 June 2020.

On 30 June 2020, Wells Fargo and Willis filed an Originating Application in the Federal Court of Australia seeking orders for delivery up of the engines and equipment to their Coconut Creek Facility in Florida, USA.

‘Giving possession’ of an aircraft object under the Cape Town Convention

Article XI – Remedies on insolvency, is the relevant part of the Aircraft Protocol. It was legislated in Australia as International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth), which came into effect on 1 September 2015. The provisions prevail over local law, to the extent of inconsistency. These are some extracts:

  1. 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:
    (a)  the end of the waiting period; and
    (b)  the date on which the creditor would be entitled to possession of the aircraft object
          if this Article did not apply.

    (Note: Australia has adopted Alternative A and has declared 60 days to be the “waiting period”)
  1. Unless and until the creditor is given the opportunity to take possession under paragraph 2:
    (a)  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
    (b)  the creditor shall be entitled to apply for any other forms of interim relief available under the applicable law.

    (Note: “aircraft object” is defined to include “aircraft engines” which includes “all modules and other installed, incorporated or attached accessories, parts and equipment and all data, manuals and records relating thereto”.

Wells Fargo argued that “shall give possession” required delivery of the aircraft engines and equipment to its facility in the United States (at the administrator’s cost).

The administrators agued it only required it to make the engines and equipment available for collection on as ‘as is, where is’ basis.

The Court concluded:

“The advantages of the Convention and Aircraft Protocol are predictability and enforceability, as well as reducing the risks for creditors (and consequently the borrowing costs of debtors) through the resulting improved legal certainty.”

“By their nature, aircraft engines have no fixed location, and different legal systems have different approaches to such matters like securities and repossession remedies. The Convention and Aircraft Protocol were intended to ensure that interests (in, for example, aircraft engines) were “recognised and protected universally”, as indicated in the preamble to the Convention.” [Judgment, paragraph 10]

“In my view, to interpret the relevant words, namely “shall … give possession of the aircraft object to the creditor”, as requiring redelivery in the manner ordered in these proceedings, which is effectively in accordance with the terms of the lease agreements, is consistent with the ordinary meaning of the phrase, the contractual bargain reached between the parties, the context in which the phrase is found in the Convention and Aircraft Protocol, and their object and purpose.” [Judgment, paragraph 9]

The Court ordered:

  • The administrators to “give possession” of the “aircraft objects” by transporting them consistent with the applicable engine manufacturer’s procedures for removal and the terms of the Engine Leases, to Willis’ facility in Florida on or before 15 October 2020.
     
  • Until possession is given, the administrators are to maintain the engines and to maintain insurance cover over the aircraft objects to the same extent as when they were appointed.

The relief from liability of the insolvency administrator

On 16 June 2020, the administrators issued a s 443B Notice which enclosed a Form 509B ‘Notice of Administrators’ Intention Not to Exercise Property Rights’, and advised that they did “not intend to exercise any of their rights in respect of the property identified in the enclosed”.

The administrators argued that the Notice was sufficient to comply with its obligation to give possession in a “commercially reasonable” manner. The Court held the Notice was not valid.
The Court concluded:

The s 443B(3) Notice did not serve the purpose for which it was purportedly given, and on this basis was ineffective according to its terms as at 16 June 2020. It was of no effect to discharge the obligations on the Respondents under Art XI of the Aircraft Protocol. [Judgment, paragraph 158]

The Administrators have acted reasonably and were always willing to provide practical assistance to the Applicants to assist in the recovery of the aircraft objects. Whilst the s 443B(3) Notice was of no effect, this was upon the basis that the Notice (and for that matter the subsequent conduct of the Administrators) did not fulfil the obligations under Art XI(2), and any deficiencies in the s 443B(3) Notice were inadvertent, although still in my view of sufficient significance to invalidate the s 443B(3) Notice. [Judgment, paragraph 159]

I consider on the basis of the principles that apply to granting relief under s 443B(8) and s 447A, the Court should grant [the administrators] relief [from liability to pay rent and other amounts payable under the Leases] from the period 16 June 2020 to 20 October 2020 (the period of time allowed to arrange and give possession of the aircraft objects). [Judgment, paragraph 160].

The Court will make an Order so that the costs incurred by the Applicants are recoverable as costs in the administrations of the First, Second and Fourth Respondents. [Judgment, paragraph 194]

Conclusions

It’s a long and expensive flight from Melbourne to Atlanta, then by road to Florida. But that is what the Federal Court of Australia ordered the administrator to carry out for the four leased CFM International Aircraft Engines, their cradles and bases, Historical Operator Records, End of Lease Operator Records/Status Statements and Lease Inspection Records.

The cost will be borne by the insolvency administrators of the Virgin Australia Group as an administration cost, reducing the pool of funds available to unsecured creditors.

The issue litigated, whether “shall give possession” under Article XI (2) of the Aircraft Protocol to the Cape Town Convention is to make available or to deliver up aircraft objects, is unusual given that aircraft equipment lessors will usually act quickly to repossess to preserve their asset when the lessee becomes insolvent, as opposed to insisting on delivery according to their lease.

The explanation in this case is that the mass cancellations of flights caused by the COVID-19 pandemic means there is no demand for aircraft engines - no quick sale. Provided they are well maintained and insured, there is no reason to repossess. Willis decided that it was preferable to have the insolvency administrators deliver up the aircraft engines in accordance with the terms of the lease, at their cost.

But it’s not a free ride for aircraft lessors. In this case, the Court relieved the insolvency administrators from liability for rent and other amounts payable under the leases because they had acted reasonably.

The administrators, in the Report to Creditors of the Virgin Australia Group dated 25 August 2020 (before the judgment was handed down), said:

“We anticipate that judgment will be in favour of Willis. Should the judgment be as anticipated, we intend to seek an expedited appeal.”

This is an unusual comment for the administrators to make. It indicates that the significance of the court ruling extends beyond Wells Fargo and Willis. Other financiers and lessors whose aircraft and accessories are not required by the new owner of the Virgin Australia Group and who have requested delivery up of their assets will benefit from this ruling.

© Copyright 2020 Cordato Partners