“As is, where is”: restitution under Cape Town – the judgment of the High Court of Australia

On March 16, 2022, the Australian High Court issued its decision in Wells Fargo Trust Company, National Association (as trustee owner) & Anor v VB Leaseco Pty Ltd (appointed directors) & 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.

context

The appeal arose out of the voluntary administration of Virgin Australia (“VA”) in 2020. During that administration, the administrators were required under s. 443B(3) of Corporations Act 2001 (Cth) (“the Companies Act”) to notify the owner(s) or lessor(s) of the leased property if they do not propose to exercise their rights in the property rented. In the absence of notification by the administrators, they will be personally bound to respect the clauses of the lease, in particular with regard to rents.

The directors of VA have notified Wells Fargo and Willis Lease Finance Corporation, as the legal owners and beneficiaries of the engines leased from VB Lease Co (“VB Lease”), that they are not exercising their rights with respect to said engines or were not available to Wells Fargo and Willis at various Australian airports. VB Lease had sub-leased the engines to VA. The terms of the leases provided for the return of the engines to Florida by VB Lease and the payment of the return costs.

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

Judgments

At trial, the Federal Court agreed with Willis and Wells Fargo that “give possession‘ instructed VA administrators to deliver the engines to Florida in accordance with the terms of the lease.

The VA administrators appealed to the full Federal Court, which agreed with their position that they had satisfied the requirements of Article XI(2) by making the engines available in Australia and did not need a new delivery by the administrators of the VA in Florida. Willis and Wells Fargo challenged this judgment in the High Court. The High Court dismissed their appeal and accepted the findings of the full Federal Court, with the following implications for the lessors:

  • The Full Federal and High Courts concluded that Cape Town Convention rights were subject to local insolvency proceedings and priorities and that ruling in favor of the lessors would result in a ‘overhaul of generally accepted principles of insolvency law‘. This would mainly result in delivery charges being paid from the pool of funds available to all creditors and, in effect, giving lessors a higher priority over other creditors. It is likely that the Full Federal and High Courts have considered the disputes and litigation that would likely follow such a finding and the impact on Australian restructuring and insolvency law and proceedings generally;
  • A finding in favor of Willis and Wells Fargo could also have resulted in litigation by other creditors seeking to challenge the priority of engine return costs, which could have delayed the return and resulted in higher costs and greater uncertainty. for donors;
  • The High Court appears to have considered the general purposes of the Cape Town Convention to provide lessors and owners with relatively effective, consistent and simple 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 VA’s restructuring and administration and allow lessors to quickly remove the engines and place them with new tenants;
  • The judgment does not limit the liabilities of the administrators to the issuance of the notice and the High Court found that the liability of the administrator is to ‘take all necessary measures to allow the exercise of the right to take possession available to the creditor under Article 8 or Article 10 of the Convention‘. This will be determined by the circumstances of each case and is likely to become the subject of litigation between lessors and administrators, particularly where the exercise of clawback 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 stages of repossession and which party is responsible for each stage. The actions that the trustee should take should be clearly communicated as soon as possible by donors to ensure that maximum pressure is exerted on trustees to fulfill their obligations. This could include matters such as the status of applicable insurance policies, records and logs and the handling of regulator requirements and requests;
  • Lessors should not assume that they can require the administrator to take all necessary steps to repossess and the requirements will depend on the transaction documents and the circumstances in which the administrator rejects the leased property;
  • The High Court has also focused on requiring lessors to act within a ‘commercially reasonablehow to respond to such decisions of an administrator. Although this reflects the requirements of the provisions of the Cape Town Conventionit is also likely to give rise to disputes between donors and trustees over what constitutes ‘commercially reasonable‘ driving. It will likely also depend on the transaction documents and the circumstances under which the administrator rejects the leased asset;
  • When leasing aircraft and aeronautical objects to Australian lessees, lessors may now need to consider whether the terms of the transaction documents need to be revised to reflect these issues, particularly with respect to the required steps to be taken. ‘an administrator to make the leased asset available for repossession and define what constitutes ‘commercially reasonable‘ conduct; and
  • The jurisdictional analysis of lessor rights under Australian law should now be reassessed, particularly with respect to the costs and ease of repossession and restitution for lessees in administration or other forms of restructuring.

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