CIGA 2020 – Implications of new restructuring plan for Cape Town creditors
A detailed analysis of how English restructuring tools apply to creditors under the Cape Town Convention.
This paper considers whether proposing an English scheme of arrangement and/or the new restructuring plan introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020) triggers the “remedies on insolvency” in the Cape Town Convention, its associated Aircraft Protocol and/or The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the CTC Regulations 2015).
The key selling point of both schemes of arrangement and the new restructuring plan is that they permit dissenting creditors to be crammed down. Both procedures allow intra-class cram down by enabling the court to bind the minority of dissenting creditors in a class that has otherwise approved the scheme. The restructuring plan has the additional advantage of enabling cross-class cram down, meaning that the court can sanction a restructuring plan even if an entire class has voted against it.
These cram down features are fundamentally at odds with the remedies on insolvency introduced under the Aircraft Protocol and the CTC Regulations 2015, which preclude the obligations of the debtor company towards creditors with certain interests under the Cape Town Convention or the Aircraft Protocol from being altered without their consent if an “insolvency-related event” has occurred.
Clarity on whether or not a scheme of arrangement or a restructuring plan are “insolvency related events” under the Cape Town Convention and its associated Aircraft Protocol or the CTC Regulations 2015 is essential, as this will determine whether and how airlines are able to use these tools to effect rescues as a going concern and avoid entry into a formal insolvency process with a view to winding down the company’s operations.
Put differently, the answer to this question may well determine the survival of airlines in the UK and the attractiveness of schemes of arrangement or restructuring plans for overseas airlines looking to reorganise in response to the Covid-19 pandemic.
In their analysis, the authors have considered various issues including:
- analysing each limb of the definition of an “insolvency related event” in light of statutory, judicial and academic commentary (including the official commentary to the Cape Town Convention) and the interpretation of similar definitions in other international legislation (including the UNCITRAL Model Law on Cross Border Insolvency);
- considering the position under the CTC Regulations 2015, including documents pointing to the UK government’s intention about which domestic insolvency proceedings are included in the definition of “insolvency proceedings” in the CTC Regulations 2015;
- considering the consequences for creditors with interests protected by the Cape Town Convention if proposing a scheme of arrangement or a restructuring plan does not trigger the “remedies on insolvency”; and
- responding to the Annotation to the Official Commentary on the Cape Town Convention dated 16 June 2020 which proposes a novel test for determining whether certain reorganisation arrangements are “insolvency proceedings” under the Cape Town Convention and the Aircraft Protocol. Notably, this annotation does not derive from any previous authority and does not have any official standing before the court.
- For the reasons detailed in this paper, it is our view that neither schemes of arrangement nor restructuring plans fall within the definition of an “insolvency-related event” for the purpose of the Cape Town Convention and Aircraft Protocol or the CTC Regulations 2015. Accordingly, we consider that airlines and other relevant companies can use a scheme of arrangement or a restructuring plan to restructure their debts, including by altering the obligations of the company towards creditors with CTC Interests without needing to obtain the unanimous consent of those creditors in advance.
- Importantly, any such scheme of arrangement or restructuring plan will only be sanctioned by an English court if the court is satisfied that the proposals comply with the established tests of fairness which include that all of the classes of creditors will do the same or better than they would do in the most likely alternative to the proposal. It is also pertinent to note in this regard that, unless the English courts deviate from established precedent, proprietary rights of creditors (eg rights to terminate leases) cannot be affected by a scheme of arrangement or a restructuring plan.
- Schemes of arrangement and restructuring plans are powerful tools for restructuring the debts of both UK and foreign airlines (where there is sufficient connection with the UK) in circumstances where those airlines are solvent, and have a viable business model, but are struggling with liquidity issues as a result of the Covid-19 pandemic. It is likely to be in the interests of all stakeholders, including those with CTC Interests, if such airlines can restructure their debts within the framework of restructuring processes that are designed to protect the interests of creditors, rather than those airlines being forced into an insolvency process due to the lack of suitable restructuring tools.
Harini is an associate in the Global Restructuring team at Allen and Overy, based in London. In addition to advising on domestic and cross-border restructuring and insolvency matters, she has experience advising across most areas of English banking and finance law.Read more
Lottie is a barrister at South Square. She specialises in domestic and cross-border insolvency and restructuring, and has acted for both UK-incorporated and foreign companies seeking to restructure their debts, as well as represented debtors and creditors in matters spanning all stages of corporate insolvency and personal bankruptcy.Read more
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