The Virgin Australia Airlines insolvency
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Anthony J Cordato
Cordato Partners Lawyers, Sydney
Virgin Australia Airlines is the second largest airline in Australia, with a 31.3 per cent share of the domestic market.
The Virgin Australia Group was on the brink of insolvency before Covid-19 struck. When the pandemic hit, and mass cancellations reduced the flights to less than ten per cent of their normal rate, it could not continue to trade.
None of the major shareholders (Etihad, Singapore Airlines, Nanshan Group Airline, Hainan Airlines, Virgin Group) were willing or able to contribute working capital or equity to reduce its AUD$6.8bn debt, leaving the directors with no choice but to declare insolvency.
On 20 April 2020, the directors of the Virgin Australia Group appointed an insolvency administrator. The job of the administrator is to take control and investigate the company’s affairs, report to creditors about the company’s business, property, affairs and financial circumstances and, if feasible, recommend a plan to the creditors to take it out of administration. The appointment is equivalent to the appointment of a Chapter 11 Trustee in the United States.
Virgin was losing money quickly. The appointment of the administrator reduced Virgin’s cash funding requirement of AUD$200mper month to AUD$25mper month by ‘freezing’ debt servicing obligations.
The debt included a combined AUD$1.884bn owed to 73 aircraft lessors and financiers. Of its fleet of 144 aircraft, Virgin had 142 aircraft under lease or finance arrangements. All aircraft and engine leasing and financing facilities were secured against the underlying aircraft asset being financed. The security interests in these assets were registered on the Australian PPSR (Personal Property Securities Register) and/or on the International Registry established under the Cape Town Convention on international interests in Mobile Equipment. The leases were predominantly operating leases.
Australia adopted the Cape Town Convention on 1 September 2015. It made a declaration that Alternative A was to apply to all types of insolvency proceeding and that a waiting period of 60 calendar days would apply. Therefore, the aircraft financiers and lessors needed to wait until 19 June 2020 before exercising their rights to possession.
The administrator obtained personal liability exemption from the lease obligations for rent and other payments from the date of appointment until 16 June 2020. The adminstrator continued to maintain and insure the aircraft and aircraft engines.
In early May 2020, they entered into aircraft protocol (‘standstill agreements’) with many of the aircraft lessors. They are known as ‘power-by-the-hour’ because Virgin could use the aircraft and pay by the hour. The lessors received, on average, AUD$300,000 per month for selected aircraft.
On 2 June 2020, the administrator announced that two bidders had been shortlisted to purchase the Virgin Australia Group.
On 16 June 2020, the administrator’s personal liability exemption ended. The administrator issued property disclaimer notices under the Australian Corporations Law to all financiers and lessors for aircraft and aircraft objects that the bidders had indicated were not required. Under Australian Law, the issue of the notice puts to and end the administrator’s liability for lease and finance obligations for an asset. The administrator advised lessors and financiers that the aircraft and accessories were available for collection and would remain insured until 30 June 2020.
On 19 June 2020, the waiting period under the Cape Town Convention expired. Lessors and financiers could take possession of the aircraft and aircraft accessories but, given the dire state of the aviation market, few did.
Wells Fargo Trust (as legal owner) and Willis Lease Finance Corporation (as financier) had interests in four CFM International aircraft engines (manufactured by GE Aviation and Safran Aircraft Engines), their cradles and bases, and records. The engines were ‘on the wing’ of four aircraft in the Australian cities of Adelaide and Melbourne.
Wells Fargo and Willis did not enter into aircraft protocol agreements and so their aircraft engines were not in use. The aircraft were Boeing 737s, the frames of which were financed elsewhere. The bidders for the Group did not want the engines.
Wills requested the administrator to deliver up the aircraft engines and accessories to their Coconut Creek Facility in Florida, USA, at the administrator’s expense, in accordance with the lease agreements.
This is an unusual request in the world of aircraft financing, in that when the lessee becomes insolvent, aircraft equipment lessors will normally act quickly to repossess their asset, as opposed to insisting on delivery according to their lease. The lack of demand for aircraft engines caused by the Covid-19 pandemic explains why Willis requested delivery in this case.
The administrator refused the request and gave notice that the aircraft engines were available for collection on an‘ as is, where is’ basis.
Both the Willis and the administrator’s positions were arguable under Article XI of the Aircraft Protocol to the Cape Town Convention which provides:
‘Upon the occurrence of an insolvency-related event, the insolvency administrator or the debtor, as applicable, shall… give possession of the aircraft object to the creditor’.
Justice Middleton of the Federal Court of Australia decided, on 3 September 2020, that:
‘In my view, to interpret the relevant words, namely “shall… give possession of the aircraft object to the creditor”, as requiring redelivery in the manner ordered in these proceedings, is effectively in accordance with the terms of the lease agreements, and is consistent with the ordinary meaning of the phrase, the contractual bargain reached between the parties, the context in which the phrase is found in the Convention and Aircraft Protocol, and their object and purpose.”
It is a long and expensive journey flying from Melbourne to Atlanta, then travelling on by road to Florida. However, this is what the Federal Court of Australia ordered the administrator to carry out (at its own cost) for the four leased CFM International Aircraft Engines and their cradles and bases. It was also ordered to hand over a full set of Historical Operator Records, End of Lease Operator Records/Status Statements and Lease Inspection Records.
The Court has additionally ordered that the administrator maintain the aircraft engines and accessories and keep them insured until they are delivered. They are to be delivered by 15 October 2020.
There is, however, some cost and expense involved for aircraft lessors and financiers. The Court relieved the insolvency administrator from liability for rent and other amounts payable under the leases as from the date of their appointment because they had acted reasonably.
The decision is reported as: Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) [2020] FCA 1269 (available at www.fedcourt.gov.au).
The administrator, in its 'Report to Creditors of the Virgin Australia Group’ has indicated that the decision will be appealed because this court ruling extends beyond Wells Fargo and Willis. Other financiers and lessors (whose aircraft and accessories are not required by the new owner of the Virgin Airlines Group and who have requested redelivery of their assets) will benefit from this ruling.
The cost of delivery is an administration cost, which will reduce the pool of funds available to unsecured creditors.
On 4 September 2020, the creditors of the Virgin Australia Group resolved to approve Bain Capital’s AUD$3.5bn plan to buy the business assets of the Virgin Australia Group. As a result, Virgin Australia Airlines will continue to operate, having been recapitalised and having shed most of its liabilities, one half of its aircraft, one third of its staff and by discontinuing its low-cost brand, Tiger Airways.
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