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Clyde & Co Briefing Note: Important Decision of the High Court of Australia on the interpretation of "Give Possession" under the Cape Town Convention

  • Market Insight 25 March 2022 25 March 2022
  • Asia Pacific

Clyde & Co Briefing Note: Important Decision of the High Court of Australia on the interpretation of "Give Possession" under the Cape Town Convention

Wells Fargo Trust Company, National Association (as owner trustee) & Anor v VB Leaseco Pty Ltd (administrators appointed) & Ors [2022] HCA 8

Introduction

On 16 March 2022, the High Court of Australia gave judgment on the interpretation of the meaning of the obligation to "give possession" of an aircraft object under the Cape Town Convention in insolvency related circumstances. This is an important decision for the international aircraft finance and leasing community, as it provides judicial guidance from a final appellate court regarding the Cape Town Convention’s requirements relating to obtaining "possession" of aircraft objects when the debtor is insolvent in a Cape Town Contracting State.

Summary

Summary Background:

Australia is a contracting state party to the Cape Town Convention. A lessor of aircraft engines (being aircraft objects for the purposes of the Cape Town Convention) required the lessee airline undergoing insolvency proceedings in Australia to redeliver those aircraft engines to a designated redelivery location in Florida pursuant to redelivery requirements under the relevant lease agreements. The administrators of the airline did not relocate the aircraft engines to Florida, but instead offered the lessor the opportunity to retrieve the aircraft engines from their then current location in Australia.

Summary Take-away:

The High Court of Australia decided that providing the creditor lessor with an opportunity to take possession of an aircraft object, wherever it was then located, was sufficient for a debtor airline in insolvency to comply with the obligation to "give possession" under the Cape Town Convention. Such obligation to "give possession" did not require the debtor airline, in the circumstances, to go further and redeliver the aircraft objects to the creditor lessor at a specified location in accordance with the contractual terms of the relevant lease agreements.

Further Details

In this briefing note, references to the “Cape Town Convention” are to 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 (the "Aircraft Protocol"), each signed at Cape Town on 16 November 2001.

Factual Background

VB Leaseco Pty Ltd. ("VB Leaseco"), a company under the Virgin Australia group, leased aircraft engines (the "Aircraft Engines") from Wells Fargo Trust Company, National Association (in its capacity as owner trustee, "Wells Fargo") under various lease agreements. The beneficial owner of the Aircraft Engines was Willis Lease Finance Corporation ("Willis Lease"). Each lease agreement between VB Leaseco and Wells Fargo (collectively, the "Lease Agreements") set out the rights of Wells Fargo upon the occurrence of an event of default, including the right to require VB Leaseco to redeliver the Aircraft Engines to a location in Florida specified by Wells Fargo. Such redelivery conditions and procedures were the same as those required upon the expiration or termination of the Lease Agreements.

Following the appointment of administrators of VB Leaseco (the "Administrators"), Willis Lease made a demand for redelivery of the Aircraft Engines to a specified location in Florida at the expense of VB Leaseco. That request was rejected by the Administrators, who contended they were only required by Article XI(2) of the Aircraft Protocol to provide Willis Lease with the opportunity to take possession of the Aircraft Engines wherever they were then located in Australia.

Wells Fargo and Willis Lease commenced legal proceedings in the Federal Court of Australia and were successful at first instance before a single judge. The Administrators then brought an appeal to the Full Court of the Federal Court of Australia, which upheld the appeal and found that Article XI(2) of the Aircraft Protocol did not require redelivery of the Aircraft Engines to a specified location as sought by Wells Fargo. In turn, Wells Fargo then appealed to the High Court of Australia, which dismissed the appeal and affirmed the Full Court’s decision.

Relevant Legal Background and Commentary

The Convention and the Aircraft Protocol are given force and effect in Australian law under the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth).

Under Article XI(2) of the Aircraft Protocol, upon the occurrence of an insolvency-related event, an insolvency administrator shall "give possession" of an aircraft object to a creditor no later than the "waiting period" specified in the declaration of the Contracting State which is the primary insolvency jurisdiction. In Australia, the elected waiting period is sixty (60) calendar days from an insolvency-related event.

The Official Commentary on the Cape Town Convention and the Protocol (the Official Commentary)1 clarifies that "possession” means a “combination of factual possession of an object and an intention to hold it as owner. 

Article 10 of the Convention sets out the remedies available where an event of default occurs under a lease agreement. These include that a lessor may (1) terminate the contract and take possession or control of the equipment or (2) make an application for a court order to authorise those acts.

Article IX(3) of the Aircraft Protocol provides that any remedy given by the Convention in respect of an aircraft object shall be exercised in a “commercially reasonable manner”.

The HCA Decision and Relevant Judicial Comments

In the present case, the court referenced the Official Commentary and the Protocol in considering the meaning of ‘possession’.  It stated that "there is no reason to attribute the term "possession" in Article XI(2) of the Protocol anything other than the constant meaning that the term has in Article XI(5) and Article XI(7) of the Protocol, in Article 8 and Article 10 of the Convention and elsewhere in the Convention and the Protocol. Throughout the Convention and the Protocol, the reference to "possession" is to physical control to the exclusion of others".2

For the Administrators to "give possession" they are 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 Article 8 or 10 of the Convention".3 Unlike Article IX of the Aircraft Protocol, Article XI(2) of the Aircraft Protocol does not give any additional remedy to procure de-registration, export and physical transfer of the aircraft object from the territory in which it is situated to a creditor.4

The judgment elaborates that, after having taken possession of the aircraft objects, the creditor is then in the position to exercise its further rights under Article IX(1) and (5) of the Aircraft Protocol to de-register and export the aircraft object from the territory in which it is situated. The Civil Aviation Safety Authority in Australia, being the aviation authority of the Contracting State where the Aircraft Engines were located, is obliged to "expeditiously co-operate with and assist" the creditor in exporting the aircraft object in accordance with Article XI(8) of the Aircraft Protocol.5 It is further stated 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 aircraft objects from the Contracting State to the location nominated by the creditor.6

Accordingly, the Administrators' invitation to Willis Lease, and in effect to Wells Fargo, to take control of the Aircraft Engines where they were situated in Australia fulfilled the obligation to "give possession" imposed on the Administrators and VB Leaseco under Article XI(2) of the Aircraft Protocol. Such invitation allowed Wells Fargo to exercise its right to take possession under Article 10 of the Cape Town Convention in a commercially reasonable manner.7

Conclusion

In the present case, the obligation to "give possession" under the Cape Town Convention was to provide the opportunity to take possession wherever the Aircraft Engines were then located and did not extend to requiring redelivery to a specified location as was required under the relevant Lease Agreements.

This is a landmark decision for the global aviation industry as it is the first judgment of a final appellate court which interprets the meaning of the obligation to "give possession" in the Cape Town Convention. The decision reached on appeal is not only relevant to airlines, lessors and other aircraft finance and leasing industry participants operating in Australia, but will be of interest and provides judicial guidance to all industry participants located or operating in Cape Town Convention Contracting States.

 

1Goode, Convention on International Interests in Mobile Equipment and Protocol Thereto on Matters Specific to Aircraft Equipment, Official Commentary, 4th ed (2019), as approved for distribution by the UNIDROIT Governing Council pursuant to Resolution No 5 adopted by the Cape Town Diplomatic Conference.

2[2022] HCA 8 [46].

3[2022] HCA 8 [47].

4[2022] HCA 8 [44]

5[2022] HCA 8 [48].

6[2022] HCA 8 [49].

7[2022] HCA 8 [55]/[56].

 

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