The Tail(end) of Two Airlines: Legal Lessons from Bonza and Rex Collapses

“It was the best of times, it was the worst of times, …  it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us".¹

It was 2024, the year of (unfortunate) airline collapses in Australia. 

Bonza Aviation (Bonza) and Rex Airlines (Rex) each collapsed into administration, leaving passengers stranded and frustrated, and various legal issues to be resolved.

DLA Piper’s restructuring team, led by Partner Lionel Meehan with Special Counsel Amy Johns and Solicitors Morgan Hartley-Marschner, Hugh Wetherill, and Mahindra Ramani acted for the majority of Australia’s major capital city and regional airports to represent their interests in relation to unpaid aeronautical and other charges.

Various legal issues arose for consideration and resolution, demonstrating that disputes in relation to aircraft are rarely straightforward. This article outlines the key legal considerations and takeaways from these high-stakes scenarios.

Key Legal Considerations in Airline Insolvency  

Drawing upon our experiences in the Bonza and Rex matters, we have identified the following key considerations likely to arise when approaching a legal dispute in relation to unpaid amounts accrued by the operation of an aircraft. Similar considerations are likely to arise in many jurisdictions globally, especially those that have implemented the Cape Town Convention.

THE CAPE TOWN CONVENTION: NAVIGATING INTERNATIONAL INTERESTS

Operation of Cape Town Convention: the application and operation of the Convention on International Interests in Mobile Equipment done at Cape Town (Convention), including its protocol on matters specific to Aircraft Equipment (Aircraft Protocol), as implemented in Australia under the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth) (together, Cape Town) is absolutely key.  The Convention establishes various key legal regimes that require navigation upon an airline insolvency. These include:

• International interests: so-called “international interests” (International Interests), which in relation to so-called “aircraft objects” under Cape Town (airframes, aircraft engines and helicopters) are (broadly) the equivalent of a security interest granted either in an airframe or an aircraft engine. The Convention also establishes a priority regime for the determination of the priority between competing International Interests, and competition between International Interests and other interests in aircraft objects such as security interests arising under local law.
  
  In Australia, local law security interests in aircraft objects are mostly likely to arise under the Personal Property Securities Act 2009 (Cth) (PPSA).
  
  The general priority rules under the Convention are that:

• the first (in time) to register an International Interest on the “Cape Town Register” (Cape Town Register) prevails; and
• exceptions aside (see below), International Interests prevail over local law interests, such as PPSA security interests in Australia.

Registration of an International Interest on the Cape Town Register requires the consent of the debtor granting the International Interest. Registration of an International Interest cannot be conducted unilaterally by the holder of the International Interest (secured party). This is a key point of differentiation with many domestic secured transactions regimes, including Australia’s PPSA. It means that the urgent registration of an International Interest in circumstances of crisis is unlikely to be a viable option.

• Waiting period: where Contracting States implement the Convention and the Aircraft Protocol electing “Alternative A”, a “waiting period” (Waiting Period) applies, during which International Interests cannot be enforced, and an “insolvency administrator” (for example, in Australia, this would generally be a voluntary administrator) is entitled to retain possession of aircraft and attempt to sell or recapitalise the airline business. In Australia, the Waiting Period is 60 days, although Contracting States may stipulate the length of the Waiting Period.

• Airports – do they have a “protected position” for unpaid charges in the jurisdiction in question: the Convention permits the nomination of airports (or other providers of public services) as having rights to arrest or detain aircraft objects on account of amounts owing, such as aeronautical charges which may practically elevate their priority position above International Interests, subject to local laws and declarations by Contracting States (Airport Nomination).²
  
  Accordingly, it is key to determine whether the Airport Nomination applies in the relevant jurisdiction being considered. For example, the United Kingdom has made the Airport Nomination under the Convention, no doubt in an effort to protect the financial interests of its airports.³ By contrast, and interestingly, Australia has not made the Airport Nomination, which (as emerged in both Rex and Bonza) may potentially put the financial interests of Australian airports behind those of the holders of International Interests in aircraft objects. 

Local security issues: often stakeholders holding security interests granted pursuant to or arising under local law, find themselves in competition with an International Interest registered in the Cape Town Register.

Holders of local law interests such as security interests (these are most likely to be PPSA security interests in Australia) must navigate the complexities of perfection (often this means registration on a local security interest register), priority and enforcement of both their security interests under local law, and the International Interests in question that may compete with their local law interests.

Moratoriums on enforcement of security: many jurisdictions globally provide for some form of moratorium on the enforcement of security interests upon a debtor entering a “rescue” style of insolvency proceeding, such as Chapter 11 in the US (the automatic stay) and administration in Australia and the United Kingdom (the administration moratorium). For jurisdictions that have implemented the Convention with “Alternative A” to incorporate the Waiting Period, the Waiting Period under the Convention is also an example of a “moratorium” that applies to the enforcement of International Interests. 

These moratoriums will apply to prevent the enforcement of local law security interests or (in the case of the Waiting Period), International Interests, so it is key to understand what moratoriums apply and for how long.

Personal liability of insolvency officeholders – getting paid: further, many jurisdictions globally provide for some form of personal liability for insolvency officeholders when they continue to use leased (or similar) assets for the benefit of the insolvent estate. This applies in Australia to lease or rental payments due for the continued use of airframes and engines (unless the voluntary administrator elects no longer to use them), and any continued supplies of good or services to the administrator or the company under administration during the insolvent administration.

Key here for creditors is that the insolvency officeholder may be personally liable to pay for rental or similar payments for aircraft objects, or services provided during the insolvent administration.

Maintenance: aircraft and aircraft engines require regular and careful maintenance and upkeep. These considerations must be navigated while disputes unfold, to mitigate loss and risk to stakeholders.

Permitted liens, and monitoring credit limits: most aircraft and aircraft engines are the subject of finance, and almost every aircraft financing encompasses “permitted liens” – encumbrances that arise or are granted under local law in connection with the operation of aircraft (such as aeronautical charges payable to airports) are generally permitted to arise by holders of International Interests, often within certain agreed parameters.⁴

Key here is for stakeholders such as airports and suppliers to understand the applicable permitted lien regime that applies. Creditors are also well-served by (if this is practical) monitoring the level of outstanding charges or indebtedness, to maximise the likelihood that they remain within permitted lien status, and to ensure that outstanding indebtedness does not accumulate to unsustainable levels which is then challenging to recover.

Knowing what to ask for: an appreciation of the value of the collateral (airframes, engines, etc), weighed against the likely priority of competing interests in the collateral, and risks associated with enforcement of those interests, can serve to inform a balanced and risk-adjusted, negotiated outcome that is acceptable to stakeholders.

In short, situations involving highly valuable, encumbered aircraft objects are usually fast-moving situations, where the interplay of complex offshore financing structures involving the grant of International Interests, and competing interests arising under local law (such as PPSA security interests) are all vying for control of the same collateral.

Conclusion

Airlines and airports are an inherently complex business to operate.  Airports are even harder in some ways, given the context in which they operate.  Accordingly, airports (and related aviation industry participants) should have conditions of use (COU) which match the complexity of the business environment and provide the maximum protections available such as the grant of local law security interests in aircraft objects, and where possible registration of those interests on the Cape Town Register to elevate them to the status of International Interests.  This is especially so in jurisdictions that have not made the Airport Nomination such as Australia. 

Reducing an airport’s risk profile by adding security provisions into their COU, and perfecting their security interests, is a simple way to protect an airports’ financial interests in relation to aircraft objects such as outstanding aeronautical fees and other charges. 

With deep sector experience and a multidisciplinary team, DLA Piper is uniquely positioned to advise airport operators, financiers, and aviation stakeholders on navigating insolvency, protecting interests, and driving policy change. For more information, speak to our team today.

¹ Charles Dickens, A Tale of Two Cities, first published 1859
² See Convention, Article 39(1)(b).
³ See "Declarations lodged by the United Kingdom of Great Britain and Northern Ireland under the Cape Town Convention at the time of the Deposit of its Instrument of Ratification". Available at https://www.unidroit.org/instruments/security-interests/cape-town-convention/states-parties/d-united-kingdom-ct/
⁴ See Convention, Article 29(5), which permits the holder of an International Interest to agree to vary the priority that the International Interest would otherwise enjoy under the Convention.