MAB would test legal waters with UK restructuring plan | News | Airfinance Journal

MAB would test legal waters with UK restructuring plan

Malaysia Airlines (MAB) could use a new regime under Part 26A of the Companies Act 2006 in the United Kingdom if lessors do not agree to aircraft rental requests, sources tell Airfinance Journal.

The regime is part of the new Corporate Governance and Insolvency Act, which enables a distressed company to propose a 'Restructuring Plan'.

According to sources familiar with the matter, MAB has implied in notices to lessors that it will follow in the footsteps of Virgin Atlantic and use Part 26A to restructure leases and hand back a number of aircraft.

The carrier approached the leasing community earlier this month with a 25 September deadline. The new cut-off point is now set for early October, sources add.

According to Keith Wilson and Emma Riddle, partners at law firm CMS, a restructuring plan is a new regime in the UK that is similar to a scheme of arrangement but provides additional flexibility to a debtor seeking to compromise its debts due to financial difficulties.

Aircraft lessors will care about the possibility of an airline utilising the new restructuring plan possibility in two circumstances, the partners indicate.

"Firstly if their lessee is a UK airline – the recent Virgin Atlantic use of such a restructuring plan being the prime example as the first-ever use of a restructuring plan – and secondly if their lessee is not a UK entity but can demonstrate a sufficient connection with the UK to permit jurisdiction for a restructuring plan process."

In the latter case, the partners say the courts have historically shown great flexibility in respect of the scheme of arrangement regime – which has many similarities to the restructuring plan – to allow jurisdiction.

Airfinance Journal's Fleet Tracker shows that 53 out of 95 mainline MAB aircraft are under lease agreements with 15 leasing entities. The top three lessors include Standard Chartered with eight aircraft leased to the Malaysian airlines, followed by Aercap and Air Lease with six aircraft each.

Sources confirm to Airfinance Journal that they are working with the Aviation Working Group to respond to the carrier's decision to possibly use the new regime. The Aviation Working Group and MAB were unavailable for comment as Airfinance Journal went to press.

If the lessee can show suitable cause for the UK courts to have jurisdiction, a restructuring plan may be of concern to lessors because of provisions that allow a class of dissenting creditors to be "crammed down" – i.e. forced to agree to the plan – in two ways, according to the CMS partners.

"If 75% by value of the lessors agree, a dissenting lessor can be bound without individual consent; if other creditor classes agree the restructuring plan and the lessor class disagrees, the court can order a 'cram down' if the plan provisions can be demonstrated to put the dissenting creditors in no worse position than what the court considers would be the situation under the 'relevant alternative'.

In the Virgin restructuring plan, the lessors were accepted to be a class of creditors for these purposes, but the plan was approved by the requisite majority of all classes so the 'cram down' was not needed."

There are some critical factors to note, the lawyers say.

"The restructuring plan is only available where a company's ability to carry on as a going concern has been (or may be) affected by financial difficulties – this may not be the most difficult test for airlines in the present circumstances, but the test will still need to be satisfied. There is also a Cape Town factor to be considered where the leased aircraft objects are subject to international interests – when the UK introduced the Cape Town Convention into UK domestic law it provided in the context of 'insolvency-related events' that no obligations of the debtor may be modified without the consent of the creditor – there is an argument that this protects lessors with international interest from cram down under a restructuring plan."

In the case of Virgin, the lessors were offered the choice of rent deferrals or the return of their aircraft. They agreed damages in an attempt to mirror the rights that a lessor would have against a defaulting lessor – either to voluntarily agree a deferral or to take the aircraft back and claim damages. The court did not have to consider whether this choice navigated the Cape Town issue because of the positive votes in favour of the restructuring plan, so there remains uncertainty in this regard.

"Finally, there is the 'Rule in Gibbs' which is old but still important law which says that English law obligations can only be modified by agreement or by an English court. There are exceptions to this – EU insolvency provisions would be an example (at least at present), but this may limit the possible venue for an airline to seek to restructure if cramming down dissenting creditors with English law leases is to be part of the restructuring proposal."
Another lawyer source questions whether MAB has sufficient connection with the UK to avail itself of Part 26A.

"It could all be bluff to get lessors to agree to take aircraft back or reduce rent," the lawyer says, adding: "If MAB is successful then a number of other carriers across the world are likely to want to go down the same route – aiming to hand back aircraft as part of a solvent restructuring - which would be problematic for lessors."

A lessor source echoes this view: "Lessors will fight back hard against this because it sets a bad precedent. Airlines should not be able to pick jurisdictions that favour them and allow them to single out lessors over other creditors for concessions."

UK jurisdiction

So, how would an airline based, for instance, in Malaysia qualify for a restructuring plan under UK law?

The CMS law partners say: "Any international airline looking to use a restructuring plan would need to demonstrate a sufficient connection to England and Wales for the English courts to extend jurisdiction," the CMS partners say. "There is no single bright-line test for this, and the English courts will resist 'forum shopping', but factors would be whether the airline has a place of business in England, whether it has bank accounts here, operates here and whether the documents subject to the restructuring plan are governed by English law. An international airline would also need to demonstrate that the use of the restructuring plan would be recognised or given effect in the relevant jurisdictions and achieve the intended outcome of the restructuring."

A lessor source says it is "monitoring the situation" after receiving a notice of possible cancellation on some of its leased aircraft. The Malaysian carrier could reject up to 50% of its fleet, the source adds.

Could the new regime impact future UK sale and leaseback transactions?

"This is more a commercial question than a legal one. The widespread use of English law leases reflects the reputation which the English courts have for neutrality and fairness adjudicating disputes. In recent times and in the aircraft context, they have shown their ability to grasp complex transactions and recognise the risk allocations that underpin successful leasing. The other major system of law that governs many leases is New York law. Chapter 11 of the US Bankruptcy Code has for many years provided equivalents of the restructuring plan regime, and the New York courts have shown flexibility in extending jurisdiction. It is not obvious why lessors would now change the choice of law provisions either to a country without the same legal history or from English to New York law (or indeed the other way) simply because of the restructuring plan regime.

"It is also worth reflecting that the aim of the restructuring plan regime is to assist financially challenged companies restructure so that they avoid not being able to continue as a going concern. Having represented one of the major creditors on the Virgin restructuring, while they would obviously have preferred that COVID had not occurred and airlines had not been challenged so severely, the creditor was very happy with the outcome. Lessors will be realistic that the extent of the current market interruption means that airline restructuring is inevitable – the restructuring plan is a tool to provide a framework and court supervision to that process."

Airfinance Journal understands that the negotiations are based on a 'first come, first served' principle.

MAB's regional subsidiary Firefly operates 12 ATR72-500s, mainly under Japanese operating lease and Japanese operating lease with call option structures.

 

Transaction SnapshotMalaysia Airlines | ECA Guaranteed loan | 10-19 | $250m (est.) | 4xA330-300

Financial Close:
01/10/2019
SPV:
MAS A330 Cayman I Limited
Value:
$250.00m USD
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