Original decision: Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed)  FCA 1269
Appeal: VB Leaseco Pty Ltd (Administrators Appointed) v Wells Fargo Trust Company, National Association (trustee)  FCAFC 168
The Federal Court of Australia has provided important guidance on the meaning of the phrase “give possession of the aircraft object to the creditor” as used in Article XI of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Aircraft Protocol) in the context of an insolvency. It is likely that other common law (and possibly civil law) Cape Town jurisdictions would reach a similar conclusion.
The Applicants (Wells Fargo Trust Company, National Association (as Owner Trustee for Willis Engine Structured Trust III) and Willis Lease Finance Corporation) leased four aircraft engines and their related engine stands and ‘quick engine change’ units to VB Leaseco Pty Ltd (administrators appointed) (First Respondent), which were then subleased to Virgin Australia Airlines Pty Ltd (administrators appointed) (Second Respondent).
The Administrators (Vaughan Neil Strawbridge, John Lethbridge Greig, Salvatore Algeri & Richard John Hughes (in their capacity as voluntary administrators of the First and Second Respondents)) were appointed to the Virgin Australia group on 20 April 2020, and discussions with the Second Applicant (Willis) in relation to the return of the engines and equipment began on 1 May 2020. Willis did not agree to the Administrators’ requested standstill, and instead sought the return of the engines and the related equipment.
As set out in the original judgement:
- On 16 June 2020, by letter from its solicitors, Willis wrote to the solicitors for the Administrators, insisting that the Administrators comply with their obligations under Art XI of the Aircraft Protocol to “give possession” of the Engines and Equipment.
- On the same day the Administrators issued a notice to Willis purportedly in accordance with s 443B(3) of the Corporations Act disclaiming the Engines, and stating among other things:
- “the Administrators are unable to comply with all the return terms of the lease agreement that Virgin has with you [ie Willis]”;
- the Administrators proposed to pay for insurance “in the interest of maintaining the existing insurance protection for the engines during the period until you have taken possession or control of the engines and in any event no later than 14 days from this notice [ie, until 30 June 2020]”;
- Willis “will have all risk in the engines when you [ie Willis] have taken possession or control of the engines and in [any] event no later than 14 days from this notice [ie until 30 June 2020]”; and
- the engines were “on the wing of” four separate aircraft, three of which were in Melbourne, and one of which was in Adelaide.
Further discussions between the parties and corrections in relation to the locations of the engines and equipment followed.
While the original decision found in favour of Wells Fargo, this has now been overturned on appeal.
The Convention on International Interests in Mobile Equipment done at Cape Town on 16 November 2001 (the Convention) became law in Australia on 1 September 2015, and Australia has elected to apply “Alternative A” of Article XI of the Aircraft Protocol to domestic insolvency proceedings. Article XI(2) of the Aircraft Protocol provides that upon the occurrence of an “insolvency-related event”, the insolvency administrator or the debtor “shall, subject to paragraph 7, give possession of the aircraft object to the creditor”.
At first instance, it was held that the obligation to “give possession” under Article XI(2) of the Aircraft Protocol requires an insolvency administrator to provide “redelivery… effectively in accordance with the terms of the lease agreements”. As a result, the Administrators would have been required, at their cost, to deliver engines that had been leased by Wells Fargo and Willis Lease Finance Corporation to Virgin Australia to Florida (in accordance with the return conditions under the leases).
This was appealed by the Administrators on the basis that the obligation to “give possession” in Article XI(2) of the Aircraft Protocol only requires the insolvency administrator to “make aircraft objects available to a creditor, in the sense of giving such a creditor the opportunity to ‘take possession’ of their aircraft objects, and thereby assume as against the whole world the possessory title which up until that point was held by the administrator”. The Full Court accepted this appeal, overturning the decision and holding that “Art XI(2) does not impose a requirement to effect redelivery according to the terms of the agreement with the creditor”.
Practically, therefore, the ruling means that whilst an insolvency administrator must take certain steps to “give possession” of an aircraft object to a creditor if the creditor wishes to take up the opportunity to take possession, it is not a positive obligation as a result of which the lessee or the administrators are required to effect redelivery of such aircraft object in accordance with the terms of the lease agreement.
In reaching its conclusion the Court cited four provisions within Article XI (namely, Article XI(5)(a), XI(7), XI(10) and XI(11)) in which the underlying agreement between the parties is expressly referenced, indicating that if the Aircraft Protocol intended for an obligation to be performed in accordance with the underlying agreement between the parties, it stipulates accordingly. In contrast, Article XI(2) contains no reference to the underlying agreement between the parties. Further, Article XI(5) contains the phrase “unless and until the creditor is given the opportunity to take possession under paragraph 2”. According to the Court, this reinforces that “giving possession” under Article XI(2) is not to be understood to include redelivery. Further, in both common law and civil law countries, possession may be established by: (i) a sufficient degree of physical control; and (ii) a manifested intention to exercise that control personally (not on behalf of another) in a manner that excludes unauthorised interference. Therefore, the obligation to “give possession” under Article XI(2) does not require physical redelivery.
Finally, the Court also held that if the obligation to “give possession” under Article XI(2) requires physical delivery in accordance with the terms of the underlying agreement, the insolvent estate would have to be applied to meet the costs of redelivery in priority to any other claim, instead of the creditor being confined to claims against the relevant aircraft object to cover the costs of redelivery. This would seem to give the holders of international interests a preferred position that goes beyond the intention of the Convention, and one which would prejudice other creditors of the insolvent airline in a manner contrary to generally accepted principles of insolvency law. The Court further held that Article XI(2) “properly construed, provides that notwithstanding the domestic insolvency law, the insolvency administrator must do that which is necessary to pass to the creditor the form of possession that the creditor could have taken in the exercise of the self-help right to take possession”.
When assessing the impact of this case on other jurisdictions that are contracting states, and that have adopted the “Alternative A” model, the Australian judgment will be persuasive, although not automatically binding. If the judgment is followed then the failure to return the aircraft object in compliance with the redelivery conditions under the lease would be a breach of a contractual obligation by the lessee, as a result of which the lessor could bring an action for breach of contract (for the failure to redeliver the aircraft in the required condition) together with a contractual claim under most lease agreements, which provide that in an enforcement scenario the lessee is liable for all costs and expenses (including legal and other costs) incurred by the creditor in connection with the enforcement or preservation of its rights. However, these claims may not be particularly attractive as they would only give the lessor an unsecured claim in the insolvency (absent any other security).
 VB Leaseco Pty Ltd (Administrators Appointed) v Wells Fargo Trust Company, National Association (trustee)  FCAFC 168 at 
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