Perth Airport’s effective seizure of Virgin Australia’s aircraft in Perth raises an interesting scenario should a priority dispute eventuate. Perth Airport is reported to have asserted liens over four planes as security for outstanding debts said to be owed by Virgin.
Assuming Perth Airport is entitled to do so, what are the implications for not only the Administrators of Virgin, but other parties that may have an interest in those planes such as financiers and lessors? It has been reported that lessors of Virgin’s fleet (predominantly Boeing 737s) are owed approximately $1.88b, while other secured creditors are owed $2.28b.
While Virgin’s administrators will be hoping for an orderly path out of administration, the present circumstances present an opportunity to consider the substantial changes in the law governing personal property as security since Ansett’s demise in the early 2000’s.
In the last decade, the Personal Property Securities Act 2009 (PPSA) has created a single register for security interests in personal property, including aircraft, and established a new priority regime for interest in personal property.
This was followed by Australia’s accession to the Convention on International Interests in Mobile Equipment (known as the Cape Town Convention) and Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (known as the Aircraft Protocol) which entered into force on 1 September 2015.
The Cape Town Convention
The significance of the Convention is that it prevails over all other Australian laws to the extent of any inconsistency;[1] that is, the PPSA and Corporations Act 2001 are subordinate to the Convention’s rules where there is a divergence between them.
It should be noted that the Convention and the Protocol only apply to aircraft objects meeting the following minimum requirements:[2]
airframes that can transport at least 8 persons (including crew) or goods in excess of 2750 kilograms;
helicopters that can transport at least 5 persons (including crew) or goods in excess of 450 kilograms; and
aircraft engines that have at least 1750lb of thrust.
The Convention provides for its own International Registry and rules for the registration, assignment and subordination of international interests in aircraft objects. Unsurprisingly, given their shared derivation from the United States’ Uniform Commercial Code Article 9, the Convention and PPSA are similar (in substance if not in form) and the concepts will be familiar to the many avid readers of the PPSA.
International Interests in Aircraft
The Convention is stated to apply if the debtor is situated in a Contracting State at the time of the conclusion of the agreement creating or providing for the international interest.[3]
International interests are interests in airframes, aircraft engines and helicopters:[4]
(a) granted by the chargor under a security agreement;
(b) vested in a person who is the conditional seller under a title reservation agreement; or
(c) vested in a person who is the lessor under a leasing agreement.
As is evident from the use of the word “agreement”, the Convention largely contemplates consensual interests and not interests created by the general law or statute, subject to two exceptions discussed below.
Priority of International Interests
Parts IV and V of the Convention create the international registry[5] and system of registration. The starting proposition for registration, subject to an exception, is that only international interests (whether extant or prospective; assigned or to be assigned) may be validly registered on the international register.
Priority between interests follows a basic formula set out in Article 29: a registered interest has priority over a later registered interest and over an unregistered interest even if the priority interest was acquired or registered with actual knowledge of the other interest. This is so even if the unregistered interest is incapable of being registered under the Convention.
There are two evident consequences. First, generally, only consensual arrangements giving rise to international interests may be registered.
Second, interests that are not able to be registered will be subordinate to the registered interests regardless of the fact there is no option to register.
Non-consenual Rights or Interests
Above I noted that there were exceptions to the Convention’s concern only for interests created by consensual arrangements.
Article 20(5) provides for the registration of a registrable non-consensual right or interest by the holder of that right or interest. A topical example of a non-consensual right or interest is a lien arising by reason of statute or the general law.
However, a non-consensual right or interest will only be registrable if the Contracting State (i.e. Australia) has made a declaration under Article 40. Australia has not made a declaration under Article 40.
However, non-consensual rights or interests can still obtain priority over registered international interests without being registered if the Contracting State has made a declaration under Article 39. Australia has made a declaration under Article 39(1)(a).
At the time of accession in 2015 the Australian government declared:
[T]he following categories of non-consensual right or interest have priority under its law over an interest in an object equivalent to that of the holder of a registered international interest and shall have priority over a subsequently registered international interest, whether in or outside insolvency proceedings: statutory liens registered in accordance with the Air Services Act 1995 (Cth).
Statutory Liens
Statutory liens are created under s 59 the Air Services Act and empowers Airservices Australia to take a lien over aircraft where:
o a service charge in respect of an aircraft is not paid in full by the due date for payment; and
o any part of the charge, or any part of late payment penalty on the charge, remains unpaid.
The lien is effected by entry on the Register of Statutory Liens created by the Air Services Act.[6]
The priority of a statutory lien as against other interests, notably security interests, is set out in s 60 of the Air Services Act.
Under s 60(3A) the federal parliament has made a declaration pursuant to s 73(2) of the PPSA, which defers the determination of priority between statutory interests and security interests to the Air Services Act, albeit expressed to be “for the purposes of priorities amongst creditors and the purposes of the distribution of the proceeds of a sale made under section 67” of the Air Services Act.
A statutory lien will be subordinate to any security interest created before the time of the registration of the lien (save for a security interest that has attached to an aircraft as a circulating asset within the meaning of the PPSA).
Leaving aside the concept of aircraft as circulating asset, the wording of s 60(3)(a) is curious in that priority of a registered statutory lien is expressed to be subordinate to an unregistered security interest if the security interest was created before the lien, rather than registered on the PPS Register and thereby perfected under the PPSA.
The importance of registration, rather than creation, under the PPSA is best exemplified by the vesting of unperfected security interests in the grantor of the security interest upon an insolvency event.[7] On one reading, a statutory lien appears to be subordinate to an unperfected security interest if created before its registration, but superior to a perfected security interest if created after the lien.
However, the issue of priority upon an insolvency event between an unperfected security interest and a later registered lien over the same aircraft would, in my view, be resolved on the basis that the unperfected security interest would vest in the grantor, while the statutory lien would still be held by Airservices Australia. But the statutory interest would come behind a perfected security interest in the same aircraft if the security interest was created first.
General Law Liens
But what of the priority of holders of common law or equitable liens against other interest?
Without delving deeply into the distinction between common law and equitable liens and the various circumstances in which they may arise, it is enough to say that a common law lien is a right in a person to retain possession of property that is rightfully in that person’s possession.
An equitable lien is not contingent on possession of the property and has been described as “a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness”.[8]
Broadly, the PPSA does not apply to “a lien, charge, or any other interest in personal property, that is created, arises or is provided for by operation of the general law”.[9] Except when it does.[10]
In fact, the PPSA provides that a general law lien will have priority over a security interest under the PPSA if:[11]
i. it arises in relation to providing goods or services in the ordinary course of business; and
ii. the person who holds the lien provided those goods or services; and
iii. the lien holder did not have actual knowledge that the acquisition constituted a breach of the security agreement that provides for the security interest.
The general law lien will take priority even if it came into existence after the security interest was created or even perfected.
Conclusion
But to assume that is the priority a lien over aircraft would necessarily enjoy over security interests in the same aircraft is to neglect the primacy of the Cape Town Convention over the PPSA (and other Australian legislation) where there is an inconsistency between them.
Moreover, the Convention and Aircraft Protocol have their own insolvency regime (or more properly regimes) providing two alternatives to Contract States regarding insolvency remedies (with the option of choosing neither).[12]
Australia opted for Alternative A which requires an insolvency administrator (or debtor) to give possession of the relevant aircraft object to the creditor at the end of a “waiting period” unless the administrator or debtor has cured all defaults other than a default by reason of the insolvency, and has agreed to perform all future obligations under the agreement.
Australia specified 60 calendar days as the waiting period. Upon the ending of the waiting period, there is no ability for an administrator to approach the court to restrain the taking of possession or extend the waiting period.[13]
However, the extent to which the Convention and Protocol will govern interests in aircraft will be limited to those interests that came into existence after 1 September 2015, being the date when the Convention came into force in Australia.[14]
Those pre-existing interests will enjoy the priority they enjoyed under the applicable law before 1 September 2015; in this respect, the applicable law is the PPSA.
[1] International Interests in Mobile Equipment (Cape Town Convention) Act 2013; s 8.
[2] Article 1 of the Aircraft Protocol.
[3] Article 3(1) of the Cape Town Convention, but see also Article IV of the Aircraft Protocol.
[4] Article 2 of the Cape Town Convention.
[5] Located in Dublin, Ireland.
[6] S 64 of the Air Services Act 1995.
[7] Personal Property Securities Act 2009, s 267.
[8] Hewett v Court (1983) 149 CLR 639 per Deane J at 663.
[9] Personal Property Securities Act 2009, s 8(1)(c).
[10] Personal Property Securities Act 2009, s 8(2).
[11] Personal Property Securities Act 2009, s 73(1).
[12] Article XI of the Aircraft Protocol.
[13] Article XI(9) of the Aircraft Protocol; see also Australia’s declaration under Article 54(2) of the Cape Town Convention.
[14] Article 60 of the Cape Town Convention.