The High Court of Australia has unanimously dismissed the appeal of Wells Fargo Trust Company, National Association (Wells Fargo) on the construction of Article XI(2) of the Cape Town Convention’s protocol on Matters Specific to Aircraft Equipment (Protocol). This decision is of importance to the global aviation community as it is the first decision by court of final appeal to consider the meaning of the obligation to “give possession” imposed by the Convention and Protocol.
By way of brief background, administrators were appointed to the Virgin Australia Group (of which VB Leaseco is a member) in April 2020. Following the commencement of that process, Wells Fargo (as owner trustee for Willis Lease Finance Corporation) sought the redelivery of certain aircraft engines it had on lease to VB Leaseco. As part of their argument, Willis argued that the Convention and Protocol required administrators of VB Leaseco (at their expense) to redeliver the engines to the location specified under the lease agreements. For a detailed background, including intermediate Court decisions, please refer to our previous article.
Australian legislative framework
It is helpful to understand the legislative context in which the decision to dismiss the appeal was made, as statutory interpretation was key in the High Court’s reasoning. Australia has enacted the Cape Town Convention and the Aircraft Protocol under the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth).
As stated at the outset of the judgment, the Cape Town Convention, and the Protocol “as so in force prevail to the extent of any inconsistency over any law… of the Commonwealth”. This includes the Corporations Act 2001 (Cth) (the Corporations Act), which is relevant given the insolvency and administration of VB Leaseco under Pt 5.3A.
The Protocol details the linkages between insolvency and the Cape Town Convention in respect of aircraft objects. The High Court determined that “through the combination of Art XI(6) and Art XI(7)” of the Protocol, an insolvency administrator must “give possession” under Art XI(2) no later than the end of the waiting period. The elected waiting period in Australia is 60 days from an insolvency-related event.
Meaning of “possession” in the context of Article XI of the Protocol – Remedies on insolvency
The appeal revolved around the meaning of Art XI(2) of the Protocol, which required the administrators to “give possession” of the aircraft objects to the creditor. Wells Fargo asserted that this provision required the administrators of VB Leaseco (at their expense) to redeliver the engines to the location specified under the lease agreements i.e., Florida, United States of America.
The High Court referred to the Official Commentary on the Cape Town Convention and the Protocol (the Official Commentary), which defines “possession” broadly as requiring a “combination of factual possession of an object and an intention to hold it as owner, so that an equipment lessee is not a possessor but a ‘detainer’”. Article 10 of the Cape Town Convention sets out the regime for remedies where an event of default occurs under a leasing agreement. This includes that a lessor can (1) terminate the contract and take possession or control of the equipment or (2) make an application for a court order to authorise those same acts. However, per Art IX(3) of the Protocol (modification of default remedies provisions), the exercise of the remedy in respect of an aircraft object must be in a “commercially reasonable manner”.
Wells Fargo’s argument that to “give possession” inherently means to redeliver the engines in compliance with the lease agreements was not accepted by the High Court. This is because Art XI(2) of the Protocol does not give additional remedies to a creditor as it applies in the broader context of an insolvency event of default where remedies are already provided for under Art 10 of the Cape Town Convention.
The High Court noted that in isolation, the term “give possession” may suggest that a debtor is required to pay for or arrange the transfer of the engines to the agreed location under the lease agreement. However, ultimately there was “no reason to attribute to the term “possession” in Art XI(2) of the Protocol anything other than the constant meaning that the term has” in other sections of the Protocol and the Cape Town Convention. The obligation on VB Leaseco was to “take whatever steps may be necessary to provide an opportunity for the exercise of the right to take possession which the creditor has” under Art 10 of the Cape Town Convention and nothing more.
In further support of the administrators’ position, to interpret Art XI(2) as requiring redelivery by the end of the 60 day waiting period would conflict with the purpose of Art XI(7), which is to provide the debtor with the opportunity to use the aircraft object to try and trade out of insolvency in that waiting period (which may be successful). The decision to dismiss the appeal was also consistent with the purpose of Art XI of the Protocol (remedies on insolvency) as detailed in the Official Commentary, being to facilitate aviation financing by ensuring creditors can either secure recovery of aircraft objects or cure all past defaults with the debtor. The High Court emphasised that the Official Commentary specifically centres the creditor (not the debtor) in the post insolvency enforcement activities listed.
The appeal was dismissed with costs noting the aircraft engines were already transferred to the United States prior to judgment. The decision confirms that in the Australian context at least, the cost of a repossession falls on the aircraft object creditor following an airline’s insolvency.
For further information, please contact:
Mark Clifton, Partner, Herbert Smith Freehills