Newsflash - June 2022
In Melbourne Aircraft Leasing (UK) Ltd v Algeri [2022] NSWSC 443 the NSW Supreme Court dealt with a rather complex trust that was created over Virgin Australia Group’s assets following the Group’s exit from voluntary administration. The main question was whether the Trustee’s acted correctly in distributing funds to creditors without preferencing certain aircraft lessors. The lessors were of the view that their claims should be given priority in the distribution of funds from Trust based on the principle in Re Lundy Granite Co (1871) LR 6 Ch APP 462 (‘Lundy Granite’).
The Lundy Granite principle is an exception to the general rule that expenses incurred before an administration or liquidation are to be distributed in accordance with priority rules to secured and unsecured creditors. The principle provides that where the administrator uses property under lease during the administration period, the rent accruing is to be treated as an expense of the administrator and is therefore to be considered a priority debt. The Trustees rejected this claim and maintained that priority should be determined as outlined in the trust deed, which expressly provided for the proceeds of the Trust to be paid to ‘Pool A Creditors’ (which included the lessors) on a ‘pro-rata’ basis.
The Court held that the Lundy Granite principle, although equitable in nature, was not applicable in the present situation. The possession of the aircraft were kept by arrangement for the joint benefit of the lessors and Virgin. There was no evidence the lessors could have put the aircraft to any alternative profitable use and in fact the lessor’s obtained significant benefits in both avoiding continuing costs of possessing the aircraft and the ability to pursue lease opportunities with the new owner of Virgin. Even if equitable grounds were made, the court was unwilling to extend the principle beyond the distribution of assets in a winding up regime to a very different context of a distribution of assets in a deed of administration or creditors’ trust.
The effect of this case is that, where an airline goes into administration, an aircraft lessor is unlikely to obtain a priority interest for payment of lease rentals unless the administrator is using the aircraft specifically for the purposes of the administration. Any arrangement between the aircraft lessors and the airline to preserve the aircraft for use following administration will invariably deliver benefits to the lessor and therefore rental payments will be treated in accordance with the creditor’s trust.
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