Virgin Australia to avoid costly engines return after court ruling

Virgin’s administrators have won a significant court victory as they strive to finalise the sale to Bain by the end of the month.

Virgin Australia’s administrators have won a significant court victory as they strive to wrap up the deal with Bain by the end of October. Picture: Patrick Hamilton/AFP

Virgin Australia’s administrators have won their appeal against a Federal Court ruling that would have seen them liable for the cost of returning leased aircraft engines to the US.

In a significant victory for Deloitte, the Full Court of the Federal Court found the original judge had erred in his interpretation of the term “to give possession”.

Deloitte’s lawyers argued that the term meant they had to make leased engines and aircraft available to their owners for collection, rather than to redeliver the machinery in accordance with the original contract.

The administrators were concerned that in the current pandemic it would not only be difficult and expensive to return the engines to Florida by the deadline date of October 15, but the ruling would open the floodgates to other lessors to demand the same.

Court documents showed Virgin Australia had 78 leased aircraft and engines, with the cost of redelivering all of the items estimated to be considerable, and likely to further reduce the amount of money able to be returned to unsecured creditors.

The three judges, Neil McKerracher, David O’Callaghan and Craig Colvin, reached a unanimous decision in the appeal, and ordered the lessors, Wells Fargo and Willis Lease Finance Corporation to pay the administrators’ costs of the appeal.

“In our view, (the law) does not impose a requirement to effect redelivery according to the terms of the agreement with the creditor,” said the ruling. “That is a sufficient basis upon which to uphold the appeal.”

They ordered the matter be returned to the original judge, John Middleton, however, to decide what may be required “to give possession” of the four aircraft engines in question.

Justice Middleton would also decide on the administrators’ additional claim for the cost of complying with his orders to date, which was in the vicinity of $145,000.

Virgin Australia went into administration on April 21 with debts of $6.8bn.

An expedited sale process saw US private equity firm Bain Capital sign a contract to buy the airline in late June, with last month’s creditors meeting approving the sale by deed of company arrangement.

The total commitment of Bain was in the vicinity of $3.5bn, with more than $2bn of that to go towards paying creditors.

The sale is due to be finalised by the end of October, when all of the shares in Virgin Australia are transferred to Bain.

The Queensland government will hold a small equity stake in the company, as a result of a $200m investment, and the Virgin Group is also seeking a 10 per cent share including a board seat.