Australia: Virgin administration leads to consideration of Cape Town Convention obligations

In brief - A useful summary for aviation industry, finance and insolvency practitioners of the Full Court of the Federal Court's decision in VB Leaseco Pty Ltd (Admin Appointed) v Wells Fargo Trust Co, National Association [2020] FCAFC 168

In this case the Full Court of the Federal Court of Australia was obliged to consider the obligations under the Cape Town Convention and its protocol in relation to redelivery of leased objects.

The judgment of the Full Court of the Federal Court provides a useful summary of the competing arguments and a careful analysis of the applicable law both in Australia and in other jurisdictions, aimed at achieving substantial international comity in enforcement of rights under the Cape Town Convention and Protocol in circumstances where the lessee company is subject to an insolvency administration.

Primary judge finds that redelivery of jet engines to lessor was required

Wells Fargo were the owners of four jet engines which had been leased to VB Leaseco (VB) and subleased to Virgin Australia Airlines (VAA). On 20 April 2020, an "insolvency related event" occurred when administrators were appointed to the Virgin Group including VB and VAA.

Article XI(2) of the Protocol to the Convention on International Interests in Mobile Equipment or Matters Specific to Aircraft Equipment (the Protocol) provides that upon the occurrence of an insolvency related event, the insolvency administrator "shall give possession of the aircraft object to the creditor".

The question was whether the engines should have been redelivered to the lessor in Florida or whether it was sufficient for them to be merely made available to the creditor.

At first instance, the primary judge said that redelivery was required.

Decision of the appeal to the Full Court

The Full Court, comprising Justices McKerracher, O'Callaghan and Colvin, in a joint judgment noted that Article XI(2) does not provide that "possession" is to be given in accordance with the underlying lease or loan agreement between the parties.

The reference in Article XI(5) to Article XI(2) that "unless and until the creditor is given the opportunity to take possession under paragraph 2" confirms that "giving possession" under Article XI(2) does not include redelivery.

Article XI(2) provides that 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, notwithstanding any applicable law relating to the insolvency administration that might otherwise have prevented the creditor from exercising that self-help remedy. (In Australia the provisions of Part 5.3A of the Corporations Act would ordinarily prevent such a remedy for leased goods.)

The Full Court accordingly held that Article XI(2) does not require redelivery in accordance with the agreement with the creditor; making the objects available for repossession was all that was required.

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