Latest update in Wells Fargo, Willis and Virgin Australia case – Appeal to High Court of Australia

On November 4, 2021, the High Court of Australia heard arguments made by Wells Fargo Trust Company, National Association and Willis Lease Finance Corporation, together Wells fargo, and the administrators (the Administrators) of the Virgin Australia Airlines group, which entered into administration on April 20, 2020. The dispute mainly concerned who was to pay for the return of four aircraft engines likely to be used on B737s (the Engines) to the Florida lease redelivery location. The engines were legally owned by Wells Fargo Trust Company and beneficially owned by Willis Lease Finance Corporation, were leased to VB Leaseco Pty Ltd. and have been subleased to Virgin Australia Airlines Pty Ltd.

Cape Town Convention

The case concerns the Convention on International Interests in Mobile Equipment (the Cape Town Convention) and the Protocol to the Cape Town Convention (the Cape Town Protocol), as adopted in Australia by the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth). Wells Fargo Trust Company, National Association held registered “international interests” in engines for the benefit of Willis Lease Finance Corporation.

The main provision in dispute was Article XI (2) of the Cape Town Protocol, which provides that in the event of the occurrence of an insolvency-related event (which was agreed to include the administration of the group Virgin Australia Airlines), the insolvency administrator must give possession of the aircraft object to the creditor.

Other relevant law

Section 443B of the Corporations Act 2001 (Cth) provides that a director may give notice to the owner / lessor of property leased by the company which specifies the property and indicates that the company is not proposing to exercise rights relating to property (a Section 443B Notice). The Directors had provided Wells Fargo with a Section 443B notice as well as e-mail correspondence, which indicated that the Directors did not wish to exercise any rights in relation to the Engines and that it was the Directors’ intention to discuss and to reach an agreement for the orderly return of the Engines. with the removal and delivery of the motors at the expense of Wells Fargo.

Previous decisions

This dispute has already been heard by two Australian courts, each of which has reached a different conclusion.

The trial court, the Federal Court, ruled that “giving possession” under Article XI (2) required the physical delivery of the engines in accordance with the redelivery provisions in the underlying leases. This meant that the directors would have to pay for the return of the engines to Florida in accordance with the return conditions in the leases. The Court said that if there were no leases, or if the existing ones did not cover repossession, then the normal principles of the contract – including those relating to the implication of terms and duty to act in good faith – would apply. This decision was contested by the directors.

On appeal, the Federal Court of Australia held that the effect of Article XI (5) of the Cape Town Protocol (which includes the words, “[u]unless and until the obligee had an opportunity to take possession under paragraph 2 … “) was that” give possession “did not mean effecting restitution in accordance with the rental agreement, but simply that the directors were required to ” provide Wells Fargo with the ability to take possession, which forces Wells Fargo to pay for the return of the engines to Florida.

This decision was later appealed by Wells Fargo and special leave to appeal to the High Court of Australia was granted.

Arguments in the High Court

On November 4, 2021, arguments of a very technical legal nature, regarding the construction and interpretation of various provisions of the Cape Town Protocol and the ultimate meaning of “give possession” were advanced by Wells Fargo and the Trustees. A brief summary of the overall position of each of the parties is presented below.

Wells Fargo argued that they were entitled to the self-help remedy available under Article XI (2) of the Cape Town Protocol to recover the engines, which required physical possession and not just the ability to take possession. The intention of the Cape Town Convention and Cape Town Protocol was to prioritize trade agreements and ultimately reduce the risk for secured creditors with registered international interests (even when this may have a cost to others. creditors). Further, since there was no indication that the lease restitution provisions were unreasonable, Wells Fargo could rely on Article IX (3) (which considered that the exercise of a remedy was commercially reasonable if it was exercised in accordance with a provision of the contract, unless such provision was patently unreasonable) to exercise its remedies under the leases. On this basis, Wells Fargo argued that in order to “return possession” under the Cape Town Convention, the Directors must return the Engines to Wells Fargo (i) at the place of return in Florida, and (ii) in the state required by the corresponding rental contract.

In response, the position of the Directors was to “give possession” as Article XI (2) did not require the Directors to physically return the Engines and it was sufficient for the Directors to inform Wells Fargo that the Directors had relinquished control of the Engines. . The Directors have determined that the Section 443B Notice and associated correspondence satisfied the waiver of control requirement.

The Directors argued that the Cape Town Agreement did not oblige the Directors to re-deliver the Engines in accordance with the terms of the relevant lease; while the Cape Town Convention provided a creditor with the right to “take possession” in the event of default, it did not authorize a creditor to use the Cape Town Convention to demand compliance with the terms of the underlying rental agreement. Once possession of the engines has been transferred to Wells Fargo, any enforcement of the remedies in the relevant rental agreement would not fall under the Cape Town Convention and would require enforcement in accordance with domestic law. The exception to this general rule is the requirement of the Cape Town Convention (in Article IX (3) of the Protocol) that a creditor must exercise its remedies “in a commercially reasonable manner”.

In support of their arguments, the Trustees suggested that requiring the Trustees to re-deliver the Engines in accordance with the terms of the relevant leases would require funds from the insolvent mass and give priority to creditors with international interests. , which was not the correct interpretation of Article XI. (13) (perhaps implicitly suggesting that such an approach might frustrate the objectives of national insolvency law).

Next steps

Following the November hearing, the High Court reserved its decision on the matter. We will post a further update on this decision and its consequences, once the judgment is rendered. In the meantime, please contact Richard Stock and Barry Cosgrave if you would like to discuss this matter or other aspects of the administration of Virgin Australia.

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