High Court takes insolvency-friendly approach to determining what is required of administrators to ‘give possession’ of aircraft engines

On 16 March 2022, the High Court of Australia handed down a decision regarding the interplay between insolvency procedures and international treaty obligations. The decision arose out of the administration of the Virgin Australia airline group and concerned obligations under the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth), the Convention on International Interests in Mobile Equipment (2001) (the Convention) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (2001) (the Protocol).

The specific issue to be determined by the Court was the content of the obligation of VB Leaseco (Leaseco) and its administrators, under the Convention and the Protocol, to ‘give possession’[1] of certain aircraft engines to Wells Fargo Trust Company (Wells Fargo) after the appointment of the administrators. Wells Fargo submitted that the obligation was for the engines to be redelivered to it in the United States, in accordance with the terms of the lease agreement between the parties. Leaseco and its administrators submitted that the obligation was only to provide Wells Fargo with an opportunity to take control of the aircraft engines in Australia.

The Court agreed with Leaseco and the administrators, holding that the obligation was to provide an opportunity to take control of the aircraft engines in Australia, not to make actual delivery of the engines to Wells Fargo in the United States.

Preservation of rules of insolvency procedure

In analysing the relevant provisions of the Convention and the Protocol, the Court noted that Article 30(3)(b) of the Convention operated to preserve any rules of insolvency procedure related to enforcement of rights to property which is under the control of external administrators. This preserves rules designed to limit the enforcement of security or other property rights, in the interests of the general body of creditors and/or in order to facilitate a reorganisation.

Article 30(3)(b) of the Convention, combined with Article XI(2)(b) of the Protocol, accordingly operated to protect the stay of enforcement of security interests by the secured party (in this case, Wells Fargo as lessor) which would otherwise apply in an external administration in Australia, pursuant to the terms of section 440B of the Corporations Act 2001 (Cth).

Thus, unless that stay of enforcement were lifted (which, in this case, it was not), Article XI(2) of the Protocol provided for a 60-day waiting period from the insolvency event before Leaseco or its administrators were obligated to ‘give possession’ of the aircraft engines to Wells Fargo.

This 60-day waiting period provides an opportunity – which is otherwise allowed by the provisions of Article XI(5)-(7) of the Protocol – for the debtor or external administrator to use the particular aircraft object to attempt to trade out of default during that period. If the debtor is unable or unwilling to trade out of default by the end of the waiting period, then it must ‘give possession’ of the particular aircraft object at the end of the 60-day period.

The Court’s decision

In holding that Leaseco and its administrators were only obligated to make the aircraft engines available to Wells Fargo, and not to actually deliver them to the United States, the Court noted the following:

• There is a requirement of commercial reasonableness which applies to the exercise of the right to take possession under the Convention;
• The relevant provisions of the Protocol make it clear that it is the creditor who is to undertake and be responsible for the burden of the effort and expense of the physical transfer of the aircraft object to the location nominated by the creditor;
• If the debtor was obliged to deliver the aircraft object to the creditor by the end of the waiting period, this would effectively negate the opportunity to use the object to attempt to trade out of default during that period;
• Such an interpretation aligns the operation of Article XI(2) of the Protocol with the operation of the provision of the United States Bankruptcy Code (11 USC § 1110) on which that article was substantively based; and
• Such an interpretation is also consistent with the ‘underlying purpose’ of Article XI(2) of the Protocol, as identified in the Official Commentary, which is to reflect the realities of modern structured finance by ensuring the creditor can either secure recovery of the object (on an ‘as it is and where it is’ basis) or obtain from the debtor or external administrator a cure of all past defaults and a commitment to meet future obligations.

Key takeaways for insolvency practitioners

The outcome in this case is a positive result for Australian insolvency practitioners, because it highlights the importance placed by the Court on the stay and other procedural rules designed to further the interests of the general body of creditors in an external administration.

Where a secured creditor has a contractual agreement that appears to confer a substantial benefit on them at the expense of the creditors as a whole, it is important to consider any applicable statutory or regulatory regimes which may impact the enforceability of that contract or of the particular provision in the circumstances of an external administration.

[1] Art XI(2) of the Protocol.