Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) [2020] FCA 1269

In a significant decision for aircraft leasing and finance, the Federal Court of Australia last week 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.

The decision is positive for lessors and financiers, and is of particular relevance as airlines globally continue to navigate the effects of the Covid-19 pandemic, and as the aircraft finance industry looks to the Convention on International Interests in Mobile Equipment done at Cape Town on 16 November 2001 (the Convention) to protect international interests subject to insolvency proceedings in a range of jurisdictions.

In summary, the Court held:

  1. that the Aircraft Protocol requires the active ‘delivery’ of aircraft objects in accordance with the provisions of the underlying lease agreements – a lessee or administrator (in the Australian context) ‘cannot rely upon any lesser requirement found in the Corporations Act 2001 (Cth) (the Corporations Act)’[1], and merely making the aircraft objects available to be retrieved by their owners is not sufficient; and
  2. that this construction of the language of Article XI of the Aircraft Protocol ‘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’[2], which is in line with the purposes of both the Convention and of the Commonwealth Parliament of Australia when adopting the Convention into domestic law.

The facts

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 judgement:

  1. 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.
  2. 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:

1) “the Administrators are unable to comply with all the return terms of the lease agreement that Virgin has with you [ie Willis]”;

2) 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]”;

3) 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

4) 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.

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’.

The Applicants submitted that, in accordance with Article XI(2) of the Aircraft Protocol, the requirement to be met by the Administrators or the airline was ‘to give possession as a positive act of delivery in the United States in accordance with certain lease agreements, and not simply giving the Applicants the opportunity to take possession of the aircraft objects in Australia’[3].

The Respondents (being the First and Second Respondents and the Administrators) submitted that the Article XI(2) requirement to ‘give possession’ ‘should be construed to mean “make available the aircraft object to the creditor”’, and that the Court should find that this obligation had been complied with because ‘giving notice under s 443B(3) [of the Corporations Act] on 16 June 2020, together with further steps taken to implement the orderly hand back arrangement, were sufficient to “give possession” to the Applicants for the purposes of Art XI(2) of the Aircraft Protocol’[4]. They also argued that the underlying lease agreements were ‘irrelevant to the operation of Art XI’[5].

Giving possession: ‘Deliver’ or ‘make available’?

The Court considered the proper content of the obligation to ‘give possession’.

The Respondents argued that ‘the only remedies available to a lessor under the Convention on an event of default are: (a) to terminate the agreement; and (b) to “take possession or control” of any object to which the agreement relates: Art 10’[6]. It was submitted, amongst other things, that ‘the better view is that Art XI(2) grants creditors additional protection in an insolvency context by imposing an obligation on the debtor or insolvency administrator to make aircraft objects available to a creditor, so that the creditor does not themselves need to enforce their entitlement under Art 10 of the Convention to “take possession or control” of its aircraft objects’[7].

However, the Court agreed with the Applicants that ‘give possession’ imposed an active and positive obligation: ‘The use of the verb “give” in combination with the word “possession” means to deliver or hand over, and in context means to give back, in the sense of restoring a thing to the lessor’[8]. Middleton J noted that ‘To hold that the obligation to “giv[e] possession” is satisfied where the debtor or insolvency administrator merely abandoned or relinquished possession would be to transform that positive obligation into an ability to abandon the creditor’s property wherever it happens to be and in whatever condition’[9], and went on to say that this obligation ‘is intended to be more onerous than would be required under any local law (such as an “as is where is” disclaimer by an administrator under s 443B), and the quid pro quo for those more onerous obligations is that airlines had access to cheaper finance’[10].

In terms of how this is to be satisfied in practice, Article IX(3) of the Aircraft Protocol requires that ‘any remedy given by the Convention in relation to an aircraft object shall be exercised in a commercially reasonable manner. A remedy shall be deemed to be exercised in a commercially reasonable manner where it is exercised in conformity with a provision of the agreement except where such a provision is manifestly unreasonable.’ The Court found that ‘the Applicants’ entitlement to relief, namely obtaining possession in the present case requires redelivery in accordance with the existing lease agreement terms between the parties in clause 18.3 of the GTA [i.e the “General Terms of Agreement applicable to any Engine Lease” (defined at [53])]. The location in Florida is expressly stated in Art III of the Aircraft Engine Lease Agreements for each Engine. There has been no suggestion that the provision is manifestly unreasonable’[11].

Middleton J also noted that, from the policy perspective,

  1. Predictability is achieved by applying the Aircraft Protocol rights in a manner consistent with the terms of the parties’ underlying agreement. Imposing an obligation on a creditor of retrieving aircraft objects from numerous jurisdictions does not create predictability. From the point of view of the parties, the Aircraft Protocol can be applied with both uniformity and predictability by upholding the terms of the underlying lease agreement in insolvency. […]
  2. The overall objective of predictability would be undermined by an interpretation which simply allowed debtors to leave aircraft objects on an “as is, where is” basis. […]

The Court found that the Respondents had failed to comply with their obligation to ‘give possession’ under Article XI of the Aircraft Protocol[12]. The Respondents were also ordered to maintain the Engines, and to maintain insurance coverage in respect of the Engines, their accessories, parts and equipment until redelivery was complete.

Conclusion

As noted in the judgment, ‘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’[13], and it is positive to see the purposes and advantages of the Convention being so central to the local interpretation of its provisions. It may be that courts in other jurisdictions required to apply the Convention in the context of their own insolvency regimes look to this as a constructive approach, and place a similar emphasis on the benefits of predictability and consistency in interpretation for the industry.

Lessors should also be mindful when drafting of making redelivery provisions in lease agreements as precise and detailed as possible, in order to maximise their effectiveness in an insolvency scenario.

Click here to read the full text of the judgment.

[1] Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) [2020] FCA 1269, [8]

[2] Ibid. [10]

[3] Ibid. [7]

[4] Ibid. [16] and [152]

[5] Ibid. [88]

[6] Ibid. [119]

[7] Ibid. [120]

[8] Ibid. [92]

[9] Ibid. [92]

[10] Ibid. [118]

[11] Ibid. [87]

[12] Ibid. [173]

[13] Ibid. [10]