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‘As is, where is’: Redelivery under Cape Town – the judgment of the High Court of Australia23 March 2022

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"The issue in dispute was whether making the engines available at various Australian airports and not delivering them to Florida met the requirement to ‘give possession’ of each engine as required by Article XI(2) of the Cape Town Convention."

On 16 March 2022, the Australian High Court handed down its decision in Wells Fargo Trust Company, National Association (As Owner Trustee) & Anor v VB Leaseco Pty Ltd (Administrators Appointed) & Ors [2022] HCA 8. This is the first judgment by a court of final appeal on the interaction between the Cape Town Convention and local insolvency laws.

Background

The appeal arose out of the voluntary administration of Virgin Australia (“VA”) in 2020. In the course of this administration, the administrators were required under s. 443B(3) of the Corporations Act 2001 (Cth) (“the Corporations Act”) to give notice to the owner(s) or lessor(s) of leased property if they do not propose to exercise rights in relation to the leased property. If the administrators do not provide such notice, they will become personally liable to comply with the terms of the lease, notably in relation to lease payments.

The VA administrators gave notice to Wells Fargo and Willis Lease Finance Corporation, as legal and beneficial owners of engines leased to VB Lease Co (“VB Lease”), that they were not exercising their rights in relation to said engines or making them available to Wells Fargo and Willis at various Australian airports. VB Lease had sub-leased the engines to VA. The terms of the leases required redelivery of the engines in Florida by VB Lease and for it to bear the costs of redelivery.

The issue in dispute was whether making the engines available at various Australian airports and not delivering them to Florida met the requirement to ‘give possession’ of each engine as required by Article XI(2) of the Cape Town Convention. The VA administrators asserted that they had met these requirements in that, within the 60 day waiting period, the administrators as insolvency administrators had ‘give[n] possession of the aircraft object’ by disclaiming possession and making it available to Willis and Wells Fargo.

"Cape Town Convention rights were subordinated to local insolvency procedures and priorities."

The judgments

At first instance, the Federal Court agreed with Willis and Wells Fargo that to ‘give possession’ required the VA administrators to deliver the engines to Florida in accordance with the lease terms.

The VA administrators appealed to the Full Federal Court, which agreed with their position that they had met the requirements of Article XI(2) by making the engines available in Australia and did not require redelivery by the VA administrators to Florida. Willis and Wells Fargo challenged this judgment in the High Court.  The High Court rejected their appeal and agreed with the findings of the Full Federal Court, with the following implications for lessors:

  • The Full Federal and High Courts found that Cape Town Convention rights were subordinated to local insolvency procedures and priorities and that to find in favour of the lessors would result in a ‘reworking of generally accepted principles of insolvency law’. This would primarily be reflected in the costs of redelivery being paid from the pool of funds available to all creditors and, in effect, granting the lessors a higher priority over other creditors. It is likely that the Full Federal and High Courts considered the disputes and litigation which would likely follow such a finding and the impact on Australian restructuring and insolvency law and procedures generally;
  • A finding in favour of Willis and Wells Fargo could also have resulted in litigation by other creditors seeking to challenge the priority of the engine redelivery costs and this could have delayed redelivery and resulted in higher costs and greater uncertainty for the lessors;
  • The High Court appears to have considered the overall objectives of the Cape Town Convention in providing lessors and owners with relatively efficient, consistent and straightforward means of exercising their Cape Town Convention rights. In this regard, making the engines available in Australia would serve to quickly and clearly isolate them from the restructuring and administration of VA and allow the lessors to quickly remove the engines and place them with new lessees;
  • The judgment does not limit the responsibilities of the administrators to issuing the notice and the High Court found that the responsibility of the administrator is to ‘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 8 or Art 10 of the Convention’. This will be determined by the circumstances of each case and this is likely to become the focus of disputes between lessors and administrators, particularly where the exercise of repossession rights requires more than mere written notice by the administrator;
  • In responding to similar situations in the future, lessors will need to quickly assess the steps to repossess and which party is responsible for each step. Steps which the administrator should take should be clearly communicated as quickly as possible by lessors to ensure that maximum pressure is applied to the administrators to discharge their obligations. This could include issues such as the status of the applicable insurance policies, records and logs and dealing with the requirements and requests of the regulator;
  • Lessors should not assume that they can require the administrator to take all steps necessary for repossession and the requirements will depend on the transaction documents and the circumstances in which the administrator is rejecting the leased asset;
  • The High Court also focused on the requirement for lessors to act in a ‘commercially reasonable’ manner in responding to such decisions of an administrator. Whilst this reflects the requirements of provisions in the Cape Town Convention, this is also likely to give rise to disputes between lessors and administrators over what constitutes ‘commercially reasonable’ conduct. This is likely to also be dependent on the transaction documents and the circumstances in which the administrator is rejecting the leased asset;
  • In leasing aircraft and aircraft objects to Australian lessees, lessors may now need to consider whether the terms of the transaction documents should be revised to reflect these issues, particularly in relation to the steps required of an administrator to make the leased asset available for repossession and defining what constitutes ‘commercially reasonable’ conduct; and
  • Jurisdictional analysis of the rights of lessors under Australian law should now be reassessed, particularly in relation to the costs and ease of repossession and redelivery for lessees in administration or other forms of restructuring.

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