Virgin Australia win sets Cape Town Convention precedent

In a precedent-setting interpretation of the Convention on International Interests in Mobile Equipment (Cape Town Convention) and the Protocol to the Cape Town Convention (Cape Town Protocol), the Australian High Court has unanimously dismissed with costs an appeal by the owners of aircraft engines to “give possession” in the context of an insolvency.

The case revolves around the repossession of four B737-800 CFM International CFM56-7B engines which were leased by VB Leaseco Pty Ltd, part of Virgin Australia Group, from Wells Fargo Trust Company and Willis Lease Finance – together Wells Fargo.

When the Virgin Australia Group including Leasco was placed in administration on April 20, 2020, Wells Fargo demanded that the engines be returned to Florida as required by the redelivery terms in the relevant lease agreements and in line with their rights under the Cape Town Convention. Virgin’s administrators’ argued it was enough to give notice under Australia’s Corporations Act to give effect to the giving of “possession” clause under the Cape Town Protocol. They argued they did not have to physically hand back the engines in Florida, but rather only provide the opportunity for Wells Fargo to take possession of them in Australia. At issue was the costs of transporting the engines back to Florida by a company in administration.

Wells Fargo rejected this and won an appeal in the Australian Federal Court. The aircraft engines were returned to the United States.

Underlying Wells Fargo’s subsequent appeal in the Australian High Court was the question – of importance to the aviation industry – as to the obligation to “give possession” under Art XI(2) of the Cape Town Protocol. The practical effect of the court’s answer to that underlying question determined who would pay the costs that had been incurred in returning the aircraft engines to the US.

Contrary to the Federal Court before it, the High Court found that Virgin’s administrators’ invitation to Wells Fargo to take control of the aircraft engines in Australia had fulfilled their obligation under the Cape Town Convention.

“This decision is of importance to the global aviation community as it is the first decision by a court of final appeal to consider the meaning of the obligation to “give possession” imposed by the [Cape Town] Convention and Protocol,” commented international law firm Herbert Smith Freehills.

“Wells Fargo’s argument that to “give possession” inherently means to redeliver the engines in compliance with the lease agreements was not accepted by the High Court. This is because Art XI(2) of the Protocol does not give additional remedies to a creditor as it applies in the broader context of an insolvency event of default where remedies are already provided for under Art 10 of the Cape Town Convention.”

“The obligation on VB Leaseco was 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 10 of the Cape Town Convention and nothing more,” the legal experts point out. “The appeal was dismissed with costs noting the aircraft engines were already transferred to the US prior to judgment. The decision confirms that in the Australian context at least, the cost of a repossession falls on the aircraft object creditor following an airline’s insolvency.”