Partner Sydney
"Lessors should enter into leases with Australian operators on the basis that, in the event of an airline insolvency, their CTC rights would be subordinated to Australian insolvency law."
Australian courts are familiar with aircraft lease transactions, documents and the rights of lessors and lessees and have generally taken a commercial and practical approach to interpreting transaction documents. Given the limited number of decided cases in Australia, Australian courts will look to decisions in other jurisdictions for guidance in relation to lease terms, whilst seeking to ensure that their judgments are consistent with findings elsewhere. Lessors seeking to exercise their rights in an Australian court should refer to and rely on decisions in other jurisdictions and be prepared to distinguish international decisions which are not in their favour. Australian courts have also demonstrated their expertise in interpreting and applying English and New York law and Australia’s international treaty obligations.
Foreign affairs
Australian courts have considerable expertise in applying foreign law and in recognising and applying the judgments of courts in other jurisdictions. This was demonstrated by their approach to the Bonza, Rex and Virgin Australia insolvencies and should provide lessors and airlines with some certainty as to the choice of a foreign governing law for transaction documents and that the Australian courts will look to comparable judgments in other jurisdictions This may be particularly important for the interpretation and negotiation of key lease terms.
Arbitration versus litigation
The speed and efficiency with which the Australian courts have been able to deal with airline insolvencies and related claims and cases should provide lessors and creditors with certainty and comfort that their claims will be addressed quickly and efficiently. The Australian courts demonstrated their ability to address complex issues of insolvency law concerning an airline, the application of the Cape Town Convention (“CTC”) and interpreting aircraft lease terms. This expertise, together with the body of recent decisions on airline insolvencies and liquidations, provides a framework for future airline insolvencies and guidance to airlines and lessors on the terms and conditions of an aircraft or engine lease which will require careful consideration and negotiation. The ability of the Australian courts to deal quickly and commercially with airline insolvencies and related claims and cases provides an example of a jurisdiction in which arbitration of disputes between lessors and airlines may not provide significant time or cost advantages over litigation in the Australian courts.
Redelivery ‘as is where is’: CTC versus Australian insolvency law
"The Bonza and Rex administrations have not provided a clearer and better defined concept of what would constitute acting in a ‘commercially reasonable’ manner in responding to the decision of an administrator to reject an aircraft or engine 'as is, where is'."
Whilst Australian courts will strive to give effect to Australia’s international treaty obligations, the Willis Lease judgment demonstrates that Australian courts will not interpret lease terms to the detriment of the local insolvency regime even if this means subordinating CTC rights to Australian insolvency law. As this was a judgment of the High Court of Australia, the court of final appeal, all Australian courts are bound by this judgment or find grounds to distinguish the judgment. Lessors seeking to overturn this judgment will need to appeal to the High Court and persuade it to reverse its judgment. The Bonza and Rex insolvencies did not result in any such challenge or provide grounds on which to distinguish the Willis Lease judgment. On this basis, lessors should enter into leases with Australian operators on the basis that, in the event of an airline insolvency, their CTC rights would be subordinated to Australian insolvency law.
CTC versus the PPSA
Security interests registered under the CTC, which are known as International Interests, will take priority over security interests registered under domestic law. Domestic registration of security interests is generally pursuant to the Personal Property Securities Act 2009 (Cth) (“PPSA”). Unlike registration of security interests under the CTC, registration of security interests under the PPSA can be done unilaterally. While Australian courts should give priority to CTC rights over rights under the PPSA, International Interest holders should be prepared to deal with claims by PPSA security interest holders, who may seek to rely on the Willis Lease judgment to assert that CTC rights should be subordinated to PPSA rights on the basis that the High Court ruled that Australia’s treaty obligations are subordinate to domestic insolvency law.
Grounded: airports and the CTC
Article 29(10(b) of the CTC allows member states to declare that the rights of nominated organisations and private providers of public services to arrest or detain aircraft objects is not affected by the exercise of CTC rights. As Australia has not made such a nomination, the interests of Australian airports and private providers of public services to aircrafts will likely rank below those of International Objects. Whilst this did not prevent airports from detaining aircraft for unpaid charges, this may become a key issue in future airline insolvencies, particularly where outstanding airport charges are significant.
‘Commercially reasonable’ conduct means?
"Jurisdictional analysis should be up-to-date and reflect the outcomes of the Bonza, Rex and Virgin Australia insolvencies."
The Bonza and Rex administrations have not provided a clearer and better defined concept of what would constitute acting in a ‘commercially reasonable’ manner in responding to the decision of an administrator to reject an aircraft or engine ‘as is, where is’. As what constitutes acting in a ‘commercially reasonable’ manner in such a situation will depend on the specific facts and circumstances, the manner of the rejection, the transaction documents and the rights of the parties. The preferable approach may be to leave this concept broadly defined and for a court to determine whether a lessor has acted in a ‘commercially reasonable’ manner on the basis of the facts and evidence before it. Whilst this may not provide certainty and comfort to lessors, the key takeaway is that lessors should clearly assert their contractual and CTC rights and seek to repossess the rejected aircraft or engine as quickly and efficiently as possible. Defining ‘commercially reasonable’ conduct in the transaction documents may provide some certainty and clarity but may also serve to restrict the steps which a lessor could take in response to rejection of their aircraft or engine.
Key take-aways:
- jurisdictional analysis should be up-to-date and reflect the outcomes of the Bonza, Rex and Virgin Australia insolvencies, particularly the intersection of CTC and PPSA rights and domestic insolvency laws;
- lease terms should deal carefully with lessee obligations to return and redeliver and define what constitutes ‘commercially reasonable’ conduct in the context of lessee obligations to return and redeliver an aircraft or engine;
- risk analysis should address the risk of an ‘as is, where is’ redelivery in the event of an insolvency event; and
- lessors should register their security interests under the CTC and the Australian PPSA.
