15 September 2021
In November 2021, the High Court of Australia will consider the application of the Convention on International Interests in Mobile Equipment done at Cape Town on 16 November 2001 (the Convention) in Australia in light of facts arising out of the administration of the Virgin Australia group. The hearing will consider the interaction of the Convention in the context of Australia’s insolvency regime, and, more particularly, in what will be of significant interest to the aviation community, the requirements of the Convention to ‘give possession’ of an aircraft object to a creditor.
In this note, we take a closer look at the background to the hearing, the arguments being advanced, and the impact on the aviation sector if this appeal is successful.
The Virgin Australia group of airlines appointed voluntary administrators (the Administrators) on 20 April 2020. On 16 June 2020 the Administrators issued a notice under section 443B of the Corporations Act 2001 (Cth) (the s 443B(3) Notice) to Willis Lease Finance Corporation (Willis) in respect of certain aircraft engines leased to the Virgin Australia group. The s 443B(3) Notice:
stated that the Administrators did not propose to exercise rights to in relation to those engines that Wells Fargo Trust Company NA (as Owner Trustee) (Wells Fargo) for Willis (together, the Lessors) had leased to entities in the Virgin Australia group, and
was accompanied by correspondence that it was the Administrators’ intention to discuss and agree an orderly handback arrangement of the Lessors’ aircraft objects. Pursuant to that orderly handback arrangement, on 18 June 2020 a representative of the Administrators emailed the Lessors confirming that the Administrators would liaise with Willis’s staff to facilitate an orderly handback of the engines, summarised the status and location of the engines and engine stands, offered to assist in providing services to Willis in removing and delivering the engines (at Willis’s cost), and confirmed that the Administrators continued to insure and store the engines.
For Willis’ benefit, Wells Fargo held an international interest registered under the Convention in relation to each engine.
The Convention and the Aircraft Protocol to it (the Protocol) have force of law as a law of the Commonwealth by International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) (the CTC Act).
Since an ‘insolvency-related event’ had occurred to the relevant entities in Virgin Australia group, Article XI(2) of the Protocol (which regulates remedies on insolvency) mandated that the Administrators should ‘give possession’ of the aircraft object to the Lessors at the end of the ‘waiting period’ which, in Australia, is 60 calendar days.
The Administrators considered that the effect of the s 443B(3) Notice, together with the further steps they offered to implement to effect an orderly hand-back of the engines, satisfied the requirement of Article XI(2) in the sense that they had disclaimed control over the engines and, in effect, had passed possessory title to engines the Lessors.
The Lessors rejected the Administrators’ contention and applied to the Federal Court for relief. In essence, the Lessors submitted that, even were the s 443B(3) Notice valid (which they contested), the requirement under Article XI(2) to ‘give possession’ meant that the Administrators had to deliver the engines to Coconut Creek, Florida (which was the agreed redelivery location), in accordance with the terms of the leases (including in the redelivery condition) and that this was to be an expense of the insolvency.
The Lessors prevailed in the Federal Court. Middleton J held that Article XI(2) requires delivery effectively in accordance with the lease agreement for redelivery and that such a construction of Article XI(2) ‘provides an efficient model for the return of the aircraft objects, and affords security (in the event of an insolvency-related event) against mobile assets’. If a lease agreement did not cover the eventualities of repossession (or if there was no lease agreement), the Court said that the normal principles of contract, or custom, may apply to fill the gaps.
On appeal, however, the Full Court of the Federal Court agreed with the position of the Administrators. There the Court noted that ‘possession’ in Article XI(2) was not to be given ‘in accordance with the terms of the underlying lease or loan agreement between the parties’ since Article XI(2) does not refer to any such agreement and nothing requires such words to be implied into Article XI(2); and that such a construction would result in a ‘reworking of generally accepted principles of insolvency law’ that was not intended by the Convention and Protocol.
The Lessors applied for special leave to appeal to the High Court which was granted. The outcome of the appeal will turn on whether the construction of the words ‘give possession of the aircraft object to the creditor’ is given an expansionist construction as contended for by the Appellant Lessors or a narrower (and in our view, the correct) construction as contended for by the Respondent Administrators.
The High Court will be the first apex court to hear an appeal on this issue.
II. The parties’ arguments in the High Court
It is helpful to summarise the arguments that will be advanced by the parties.
(A) Lessors’ case in summary
First, as to the construction of the Administrators’ obligation in Article XI(2) to ‘give possession of the aircraft object’ to the Lessors, the Appellants contend that the Full Court fell into error:
in construing the words ‘give possession’ in Article XI(2) by reference to the words in Article XI(5) ‘[u]nless and until the creditor is given the opportunity to take possession under paragraph 2’ so as to limit the creditor’s remedy to the self-help remedy to recover the aircraft objects from wherever they might be. Article XI(5) does not qualify the insolvency administrator’s obligation under Article XI(2) but deals with its maintenance obligations whilst it remains in physical possession of the aircraft object;
in conflating the requirement of giving possession and the opportunity of taking possession;
in narrowing the obligation to ‘give possession’ to something less than giving physical possession of the engines because physical possession is the basis of the bargain for an aircraft lease. An aircraft lease is a ‘leasing agreement’ under the Convention by which a lessor grants a ‘right of possession’ to a lessee: Article XI(2), however, requires that the lessee ‘give possession’ and not simply relinquish its ‘right to possession’.
Second, the Full Court erred in holding that the Lessors’ case on ‘give possession of the aircraft object’ required the implication of the words ‘in accordance with the contract’. That is wrong because the Full Court omitted to consider the effect of Article XI(13). Article XI(13) requires that the Convention, modified by Article IX of the Protocol, is to apply to the exercise of any remedy available under Alternative A in Article XI. Article IX(3):
requires that any remedy under Alternative A in Article XI must be exercised in a ‘commercially reasonable manner’; and
creates a safe harbour in that exercise of a remedy under Article XI is deemed to be in a commercially reasonable manner if it is exercised in accordance with a provision of the agreement, except where the provision is ‘manifestly unreasonable’.
Third, the redelivery obligations under the lease remain following an event of insolvency by the effect of Article XI(2), (9), (10) and (13), and the insolvency administrator may have to meet the costs of giving possession. That is the priority that the Convention and Protocol provide which reduces the risks attendant on the financing of the airline industry.
On the facts, the Lessors’ exercise of the remedy under Article XI(2) by insisting on being given possession of the engines by delivery up to them by the Administrators was done in a commercially reasonable manner because what was sought of the Administrators was in accordance with the lease agreement for the engines.
(B) Administrators’ case in summary
The Administrators support the reasoning of the Full Federal Court and deny that the Administrators’ obligation to ‘give possession’ requires delivery up to the Lessors in accordance with existing leasing agreements.
First, as to the construction of the words ‘give possession’, the Administrators contend that:
the Lessors’ argument based on physical possession as the basis of the leasehold interest is flawed because the remedy in Article XI(2) applies to all creditors whereas possession is not the basis of all relevant agreements, the case in point being a secured financing;
reliance on the meaning of the word ‘give’ as a matter of ordinary English usage is of limited utility in ascertaining the meaning of the text and neither at common law nor under the civil law system does ‘possession’ require delivery up: under both systems of law, however, possession may be given by disclaiming the intention to control the chattel to another;
provisions in the immediate context of Article XI militate against the Lessors’ construction because it would warp the finely calibrated system that Article XI establishes: the distinction between the insolvency administrator’s ‘personal’ and ‘official’ capacity in Article XI(4) would be blurred and key provisions relating to the insolvency administrator’s obligations as to maintenance in Article XI(5) and deregistration and export of the aircraft object in Article XI(8) would become redundant;
provisions in the wider context of Article XI further militate against the Lessors’ construction in that it would permit creditors to circumvent the restrictions in Article IX on the exercise of their rights to cause deregistration and export of an aircraft object;
the Lessors’ construction does not promote uniformity and predictability of application of the Aircraft Protocol because it may impose complex redelivery obligations on insolvency administrators that they may be unable to discharge at all for want of resources or technical expertise, let alone within the particular timeframe imposed by the relevant domestic provisions. The uncertainty resulting from the Lessors’ construction would serve only to undermine the purpose of the Convention; and
the effect of the Lessors’ construction is to give first priority to creditors under the relevant lease agreement to secure the costs of delivery of the aircraft object which operates to the necessary detriment of all other creditors, whereas none of the provisions in Article XI on which the Lessors rely requires this result: those provisions are concerned only with securing possessory remedies and not boosting creditors’ standing in relation to priorities to the insolvent airline’s estate.
Furthermore, even were the Lessors’ argument about the effect of Article XI(13) imposing commercial reasonableness on the exercise of remedies correct, the Lessors’ insistence on the Administrators’ fulfilment of their obligation to ‘give possession’ under Article XI(2) is not in fact insisting on exercise of a remedy that Article XI(2) provides to the Lessors. That is because Article XI(2) imposes a mandatory obligation on the insolvency administrator to give possession of the aircraft object; but that is not the remedy. The remedy is the creditor’s taking possession of the aircraft object; and it is that act to which the requirement of commercial reasonableness in Article XI(13) applies.
While this appeal deals with a some quite technical areas, we consider it clear that arguments focused narrowly on the semantic range and technical legal meaning of the words ‘give’ and ‘possession’ are unlikely to yield a either a definitive or workable answer. The answer to the question of construction depends on the intention that the instrument evinces in its context and in the light of the Convention and Protocol’s object and purpose which was ‘to facilitate the efficient financing and leasing of mobile equipment’.
Australian Policy considerations underlying the Convention
Although neither lower Court found utility in the Australian parliamentary materials as aids to interpretation of the text of the treaty, it is nonetheless interesting to note that, while access to cheaper aircraft finance drove the implementation of the Convention and Protocol in Australia, the speech of the Minister introducing the bill for its second reading in the House of Representatives specifically discussed the ‘internationally-consistent remedies available to the lender in the event of default or insolvency’ which included the ‘right to take possession of the aircraft without needing to seek approval of the courts’.
The Explanatory Memorandum was still more explicit in stating the Commonwealth Government’s view of the policy of the creditor’s remedy on insolvency: ‘[t]he mobile and highly depreciative nature of commercial aircraft objects emphasizes the importance of ensuring such can be quickly repossessed upon insolvency. The greater the amount of time between debtor default and repossession, the greater the risk exposure of the creditor, which leads to higher costs for airlines (to balance these risks)’ and ‘Article XI of the Protocol provides that after a nominated waiting period (60 days), the creditor automatically gains the right to repossess the aircraft object.’
To similar intent, the Explanatory Memorandum to the regulations in the UK Parliament when it implemented the Convention and Protocol speaks of the requirement under Alternative A in Article XI that an insolvency administrator ‘give up possession … to a holder of an international interest …’.
Although these materials cannot determine the meaning of the Administrators’ obligation as defined by Article XI(2), they suggest in clear terms that the Commonwealth Government’s intention in implementing the Convention and Protocol in Australia was that the creditor’s transfer of possession remedy would be to repossess aircraft objects from insolvent lessees so as to permit them more expeditiously to mitigate any losses by re-leasing or otherwise monetising the aircraft objects. That is because the remedy would guarantee to secure to the creditor expeditious control of such valuable equipment, which is where the creditor’s interest lies commensurately with its proprietary rights in the equipment. Furthermore, such a repossession remedy allows the creditor to avoid becoming entangled in the operation of the domestic insolvency regime. Those points are entirely consistent with the Convention’s objective of facilitating efficient financing in the airline industry, and at odds with an argument that Article XI(2) requires an insolvency administrator undertake the timely, complicated and expensive exercise of redelivering an aircraft object in return condition (assuming of course the insolvent estate has the funds to do so).
Additional creditor’s rights on insolvency
Whilst it is unrealistic to view Article XI(2) as an absolute mitigant against lessee risk, the self-help remedy of repossession without judicial intervention is very likely not also available under the domestic insolvency regime of a signatory. The remedy would be a significant additional benefit to the creditor in terms of the allocation of risk in aircraft financing over what would be available to it under the domestic insolvency regime in terms of time and costs saved in repossession. In this connection, it is relevant to note that, although it was not an issue necessary to be decided in the courts which have considered Alternative A under Article XI, the remedy of ‘repossession’ or ‘taking possession’ rather than redelivery has been the view accepted by those courts. It is, moreover, worthy of note that Quinn J in the Irish High Court seemed to accept the conclusion of the Full Federal Court in the Willis matter when considering the application of the Convention in the context of the insolvency of the Norwegian Air group.
If the remedy were, however, the ability to insist on redelivery by the insolvency administrator in accordance with the lease, whilst it would in theory be an additional right on insolvency, its value would often be doubtful and it would be far from clear how it would promote commercial certainty. The obligation to give possession only lies on the insolvency administrator in his/her official capacity because of Article XI(4). As noted, the insolvent estate may well not have sufficient assets to indemnify the insolvency administrator to effect redelivery so that the creditor would have to take its chances on waiting to see what turned up. Such an outcome seems at odds with intention of the Convention to provide for speed and certainty in repossession. Nor does it seem a prudent response to a lessee’s insolvency. If the insolvent estate were deficient (which may well be a question of degree and would likely be contentious), it would be unclear to what funds (if any) recourse could be taken to effect delivery up. Moreover, it would be unclear on what basis any Court order might be made or what power would be available to enforce such an order. Presumably in such a case the creditor would be forced to repossess the aircraft object itself if only in order to insure and maintain it, as the insolvency administrator’s obligation to maintain ends once the creditor has been ‘given the opportunity to take possession’ of the aircraft object under Article XI(5) and in practice this would likely be offered as soon as possible following a determination that the asset was no longer required by the insolvency administrator. Such dealings would tend to inefficiency in that the clear time when possession is to pass under Article XI(2) would become simply a starting point for negotiation. Furthermore, such a remedy would no doubt raise significant, and possibly insurmountable, concerns for insolvency administrators considering accepting an appointment to an insolvent airline when faced with the obligation to complete the aircraft redeliveries. That could only have a detrimental effect on the financing and leasing of mobile equipment and in turn on the airline industry as a whole.
Effect on aircraft financing
Ultimately, the High Court will be asked to decide on whom the costs of a repossession fall following an airline’s insolvency. If the Lessors’ arguments are accepted, those costs will be for the account of the Administrators and effectively for the account of the general unsecured creditors. If the Administrators prevail, those costs will sit with the specific aircraft object creditors.
It is suggested that, for the reasons above, the latter is the correct outcome. The contrary conclusion subverts the intention of the Convention when considered in the context of its implementation in Australia, and ignores the reality that prudent creditors will always have known that they may wish to exercise the remedies to repossess, deregister, and export the aircraft object – simply because it may be in their commercial interest to do so in order to place the relevant aircraft object with another operator – and will have reckoned on it in the calculation of the credit risk of any given lessee and its jurisdiction. Indeed, Willis’ own 2020 Annual Report recognises this risk and discloses that in the event of a customer insolvency, “[a]pplicable bankruptcy laws often allow these airlines to terminate leases early and to return our engines or aircraft without meeting the contractual return conditions. In that case, we may not be paid the full amount, or any part, of our claims for these lease terminations”. This cannot be altered by the fact that repossession may turn out to be a costly and inconvenient endeavour to the creditor with little prospect of recouping losses by proving for them in the insolvency. That may be an uninviting prospect; but it is of the essence of such commercial bargains in aircraft finance that market participants must accept this risk, and have done so in previous crises affecting the industry (post-9/11 and SARS when aircraft were moved to the other operators). After all, a sophisticated lessor leasing aircraft objects around the world clearly has the technical capability and means to repossess and relocate aircraft in a manner which it would be patently unreasonable to expect of an insolvency administrator. One may therefore treat with scepticism suggestions that, if the Administrators should prevail in the High Court, conditions for financing aircraft objects in Australia would worsen or that such a result would be inconsistent with the objectives of the Convention and Protocol for, in reality, the costs of repossession will already have been tallied in any calculation of credit risk.
For further information, please contact:
Rebecca Maslen-Stannage, Partner, Herbert Smith Freehills
 Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed)  FCA 1269 -.
  FCA 1269 .
 2020] FCA 1269 .
 VB Leaseco Pty Ltd (administrators appointed) v Wells Fargo Trust Company, National Association (trustee)  FCAFC 168 - (McKerracher, O’Callaghan, Colvin JJ).
  FCAFC 168 .
 Wells Fargo Trust Company, National Association (as Owner Trustee) & Anor v VB Leaseco Pty Ltd (Administrators Appointed) & Ors  HCATrans 63 (12 April 2021) (Kiefel CJ, Gordon and Steward JJ).
 R Goode, Official Commentary to the Convention (4th ed) [2.1].
  FCA 1269 ;  FCAFC 168 .
 Explanatory Memorandum to the International Interests In Mobile Equipment (Cape Town Convention) Bill 2013 (circulated by authority of the Minister for Infrastructure and Transport the Honourable Anthony Albanese, MP).
 EM [1.3].
 EM [4.25].
 Explanatory Memorandum to the International Interests In Aircraft Equipment (Cape Town Convention) Regulations 2015 [8.4].
 And (subject to lessee consent) deregistration and export of the aircraft object by the creditor.
 In the matter of AirAsia X Berhad (Company No. 200601014410 (734161-K)) (High Court of Malaya in Kuala Lumpur – Originating Summons No: WA-24NCC-467-10/2020)  (Ong Chee Kwan JC)
 In the Matter of Arctic Aviation Assets Designated Activity Company  IEHC 268 [298 (4)] (Quinn J).
 Ibid .