'Cram down' of lessors under U.K. law still needs to be tested: AFJ Asia-Pacific 2020 | News | Airfinance Journal

'Cram down' of lessors under U.K. law still needs to be tested: AFJ Asia-Pacific 2020

An expert panel at the Airfinance Journal Asia-Pacific conference has discussed the potential for airlines around the world to use U.K legislation to restructure leases and hand back aircraft.

Several distressed airlines, most prominently Malaysia Airlines, have started proceedings that will follow in the footsteps of Virgin Atlantic and use Part 26A of the Companies Act 2006 to help them restructure.

According to Keith Wilson and Emma Riddle, partners at law firm CMS, a restructuring plan under 26A is a new regime in the U.K. 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 in two circumstances, the partners indicate.

"Firstly if their lessee is a U.K. 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 U.K. entity but can demonstrate a sufficient connection with the U.K. 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.

Part 26A is a very recent development, says Riddle, having been confirmed in the summer of 2020 only. Since then, however, some in the industry have questioned its applicability with regards to existing Cape Town (CPT) convention frameworks.

Riddle says the “Cape Town convention element still needs to be tested in case law” but she believes that Part 26A and Cape Town are not in conflict.

“Cape Town addresses insolvency proceedings. As per UK law a restructuring is now an insolvency proceeding, it's part of company legislation, so I think that’s quite a forceful argument but we need to see it tested in the courts,” the CMS partner says.

Cape Town definitely adds “a level of complexity to the debate”, says Houlihan Lokey senior managing director Joe Swanson. “I think over time, as cases get litigated, I think what people will see is that despite the white board nature of 26A underneath is the requirement for fairness. The English bench is renowned globally for being ruthlessly fair. It’s a rules-based society at its core. I think the courts will challenge creditors aggressively.”

One of the features of 26A is that courts ultimately decide on the restructuring in a ‘cross-class cram down’, even if not all creditors agree.

If creditors 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 agree, a dissenting firm 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'," they say.

In the Virgin restructuring plan, 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,” note Riddle and Wilson.

“26A provided the best route for Virgin Atlantic to find a solvent solution under which to restructure. Virgin Atlantic wasn’t a failing firm that was looking to shift debt to equity. It was an unprecedented liquidity event due to the Covid pandemic,” says Virgin Atlantic general counsel Julian Homerstone.

“26A provided four important elements for us: Simplicity, speed, certainty, success,” Homerstone adds although he cautions that it was paramount to “maintain trust and momentum” whilst being “fair and equitable”.

Homerstone also issues a strong warning to avoid side deals. “Do not do side deals. All are given the same choice, no matter the class of creditors, so don’t do side deals.”

“In the case of Virgin Atlantic, 26A was most appropriate because of the jurisdiction of the company, the contracts, and frankly the versatility and stability provided,” Swanson adds.

Since it became known that Malaysia Airlines was seeking to shave up to 75% off its annual lease bill by attempting a 26A restructuring in the U.K. some have questioned why it may be able to use English courts for this purpose.

“It’s always possible for overseas companies with English law contracts to apply for restructurings under English law. There’s a huge number of ‘overseas’ contracts that are governed by English law so English law is most appropriate,” says Riddle.

“It’s necessary to have a sufficient connection to the UK and that sufficient connection can be the governing law of the contract, being English law, that you have operations in the UK or that a number of your creditors are based in the UK. There are a number of other factors too,” Riddle adds.

“The other question is whether the restructuring would be recognisable in their own local courts; for example, if you had an airline from Brazil then would a UK ruling be recognised there?” she asks.

Transaction SnapshotMalaysia Airlines | Operating lease | 06-15 | 6xA350-900

Transaction SnapshotVirgin Atlantic Airways | Commercial loan | 07-20 | £170m

Value:
$213.02m USD
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