Insolvent Airlines Must Meet Redelivery Terms

Of several airlines to have entered administration this year, Virgin Australia may be among the first to exit after creditors approved its takeover by Bain Capital.

The airline’s situation is also interesting because of a case brought against it by Wells Fargo Trust and Willis Lease Finance, in which an Australian court clarified a provision of the Cape Town Protocol in a way that is likely to provide big benefits to aircraft and engine lessors in the months to come.

The case centered on the meaning of “to give possession” in Article XI of the Cape Town Protocol, specifically in regard to the return of four leased engines. Virgin Australia’s administrators argued that this meant they only had to make engines available for repossession, in effecting handing responsibility to Willis for picking up and shipping the engines from Australia to the U.S.

However, the court sided with Willis, agreeing the “give possession” meant to redeliver the engines in accordance with the terms of the lease, which required Virgin Australia to foot the bill for the engines’ return.

This ruling could be cited in other repossession cases in countries that, like Australia, have adopted the so-called ‘Alternative A’ of the Cape Town Convention. These include the US, the UK and Ireland.

Furthermore, it appears to strengthen the rights of aircraft and engine lessors to insist that their equipment is returned in the correct maintenance condition, as stipulated under the lease, even if an airline is under administration.

“Aircraft owners, lessors and mortgagees may also wish to consider at the documentation stage being prescriptive with their requirements relating to redelivery of aircraft objects, so that they are able to rely upon those redelivery requirements in an insolvency,” said John Canning and Cameron Mew of law firm King & Wood Mallesons in a commentary about the case.

Alex Derber

Alex Derber, a UK-based aviation journalist, is editor of the Engine Yearbook and a contributor to Aviation Week and Inside MRO.