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Impact of the recent Gategroup decision on aviation restructurings

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Marshall Jennifer
Jennifer Marshall

Partner

London

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Viswanathan Harini
Harini Viswanathan

Associate

London

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27 April 2021

First featured as an article in Global Restructuring Review, Jennifer Marshall and Harini Viswanathan consider what the Gategroup convening judgment that found UK restructuring plans to be an “insolvency proceeding” for the purposes of the Lugano Convention means for the aviation sector – especially creditors with registered interests under the Cape Town Convention.  

The Gategroup restructuring plan did not involve an airline or creditors with registered interests under the Cape Town Convention. Instead, the judge in the Gategroup case had to consider whether a restructuring plan under Part 26A of the Companies Act 2006 was an “insolvency proceeding” for the purposes of the Lugano Convention; he concluded that it was. Given the similar meaning of this expression for Cape Town purposes, this could well have implications for airline restructurings. It appears, as a result of this decision, that a restructuring plan will be an “insolvency proceeding” for Cape Town purposes, but a scheme of arrangement may not be.

In any event, so long as the scheme or restructuring plan allows a lessor to terminate its lease, any problems under the Cape Town Convention or the CTC Regulations 2015 (the domestic UK legislation giving effect to Alternative A of Article XI of the Aircraft Protocol) may be avoided.

For the purposes of this article, references to the Cape Town Convention include the CTC Regulations 2015 where appropriate.

Background to the jurisdictional issue in the Gategroup convening hearing  

Gategroup, which comprises a Swiss parent company, gategroup Holding AG, and its subsidiaries, is the world’s largest provider of airline catering services. As a result of the covid-19 pandemic and the associated reduction in worldwide flights and passenger numbers, Gategroup is facing severe financial difficulties. The restructuring plan, part of a wider proposed restructuring, aims to amend and extend the maturity of the group’s debt obligations to senior lenders and bondholders, while allowing those creditors to earn interest over the extended maturity period. The bonds are governed by Swiss law and have an exclusive jurisdiction clause in favour of the Zurich courts.

While the UK is no longer party to the Lugano Convention with effect from 1 January 2021, the claim form in this case was issued prior to that date when the UK was subject to it. Accordingly, at convening, the court had to consider whether a plan under Part 26A of the Companies Act 2006 fell within the bankruptcy exception under the Lugano Convention. Gategroup accepted that, if the restructuring plan did not fall within this exception, the exclusive jurisdiction clause in favour of the Zurich courts under the bonds would operate as a complete bar to the English court assuming jurisdiction.

The court considered two main questions in this regard. First, it considered the purpose of the bankruptcy exclusion under the Lugano Convention and found that the threshold conditions to a restructuring plan in section 901A of the Companies Act 2006 are sufficient to position it within this purpose. Those conditions require that the company has encountered, or is likely to encounter, financial difficulties that will or may affect its ability to carry on business as a going concern and that any plan must be one that seeks to eliminate, reduce or prevent, or mitigate the effect of those financial difficulties. Second, the court considered whether a restructuring plan constitutes an insolvency proceeding pursuant to Article 1(1) of the recast EU Insolvency Regulation (EIR) and therefore lies outside the scope of the Recast Brussels Regulation or the Lugano Convention . In this regard, the court found that restructuring plans are collective proceedings, based on laws relating to insolvency in which the assets and affairs of the debtors are subject to control and supervision by the court for the purpose of rescue, adjustment of debt, reorganisation or liquidation.  

Notably, the court in Gategroup did not consider whether a restructuring plan constitutes an “insolvency proceeding” for the purposes of the Cape Town Convention, although counsel for the plan company made submissions by reference to the Cape Town Convention but Mr Justice Zacaroli was not persuaded that this comparative analysis was relevant to the construction of the Lugano Convention. However, given the similarity between Article 1(1) of the EIR and the definition of “insolvency proceedings” under the Cape Town Convention or CTC Regulations 2015, we consider that the English courts will likely find that a restructuring plan is an “insolvency proceeding” for the purposes of the Cape Town Convention.

Consequences of a restructuring plan constituting an “insolvency proceeding” under the Cape Town Convention?

Pursuant to Alternative A of Article XI of the Aircraft Protocol and regulation 37 of the CTC Regulations 2015, the commencement of insolvency proceedings triggers, among other insolvency remedies, the remedies listed below.

It requires the insolvency officeholder to give possession of the relevant aircraft object to the creditor within a certain “waiting period” (60 days in the case of the UK) after an insolvency-related event has occurred, unless they have cured all defaults within that time, other than a default caused by the commencement of insolvency proceedings.

It states that unless and until the creditor is given the opportunity to take possession, the insolvency officeholder must preserve the aircraft object and maintain it and its value in accordance with the agreement.

It provides that on the occurrence of an insolvency-related event, "no obligations of the debtor under the agreement may be modified without the consent of the creditor".

In this alert, we focus on the implications of the third remedy above concerning creditor consent, although we note that, from a practical perspective, judicial clarity on when a restructuring plan is deemed to commence will be imperative especially because the applicable waiting period in the first remedy would need to be computed from that date.

Consequences of a restructuring plan triggering the insolvency remedy of “no obligations of the debtor under the agreement may be modified without the consent of the creditor”?

This remedy will operate to mean that a restructuring plan cannot modify the debtor’s obligations under a security agreement, a title reservation agreement or a leasing agreement (each as further defined in the Cape Town Convention and CTC Regulations 2015) without the consent of each Cape Town creditor. Accordingly, rent obligations under a lease agreement with a Cape Town creditor for example cannot be modified under a restructuring plan without the consent of that creditor.

However, a restructuring plan can affect Cape Town creditors if structured in the right way. A restructuring plan that allows Cape Town creditors the option either to agree to modified contractual terms, for example rent deferral or rent reduction, or to terminate their lease, take possession of the aircraft object and recover damages would not cut across the protections under the Cape Town Convention. This is because the Cape Town creditors in such a case would always have the option to take possession of their aircraft objects if they reject the modified contractual terms. Allowing Cape Town creditors the option to terminate their leases should not be an issue because, unless the English courts deviate from precedent, this would be required in a scheme or restructuring plan in any event and regardless of the Cape Town Convention.

This gives rise to the question of how the damages claims stemming from lease termination should be treated. Given that the Cape Town Convention is silent on the treatment of damages, it is likely that the computation of damages on termination is a matter of applicable law and can be determined by the scheme or restructuring plan, rather than pursuant to the lease. In this regard, the recent judgment of the Malaysian High Court convening creditor meetings in the AirAsia X Bhd (AAX) Malaysian scheme of arrangement is instructive. On the basis of the terms of that scheme, the court held that the claim for damages arising from the termination of lease agreements would be the same claim that the lessors would make against AAX in the event of liquidation, where the lessors would have to share pari passu with other unsecured creditors of AAX. On that basis, the court found the scheme proposals aiming to compromise the damages claim had nothing to do with Article XI(10) of Alternative A.

Pursuant to the statutory protections under Part 26A, a plan company has to demonstrate that no creditors will be any worse off under the plan proposal than they would be in the most likely alternative if the plan is not sanctioned. Accordingly, we consider that the English courts will scrutinise the quantum of the damages claim against the outcomes for the creditors in the most likely alternative. By way of illustrative example, in the recently-sanctioned MAB Leasing Limited scheme of arrangement, the lease termination option allowed scheme creditors to terminate their lease, recover the aircraft and “receive a one-off termination payment calculated at 115% of what the creditors would have received from the company in its liquidation, assuming that a dividend would be paid at the upper-end of the range of estimated outcomes”(at paragraph 24 of the convening judgement).

What does Gategroup mean for English schemes of arrangement?

In the Gategroup case, the court did not have to decide whether schemes constitute “insolvency proceedings”.

However, as obiter, Mr Justice Zacaroli clearly distinguished schemes from restructuring plans in this context noting: (i) the lack of any financial threshold conditions in a scheme of arrangement (paragraph 119); and (ii) that unlike a restructuring plan, a scheme of arrangement “is not designed exclusively for insolvency situations, even given the expanded meaning of insolvency under the [EIR]” (paragraph 120).

Mr Justice Zacaroli also noted in the convening judgement for MAB Leasing Limited that there was a powerful case that the CTC Regulations 2015 did not apply to the proposed scheme of arrangement therein (paragraph 45). Mr Justice Snowden noted in the sanction judgment for MAB Leasing Limited that the point is arguable but he was content to leave the resolution of this issue to a “case where it matters” (paragraph 49).

Conclusion and need for clarification from the UK Government

From an airline’s perspective, although the issue has not been expressly decided, it is clearly helpful that Mr Justice Zacaroli took the view that a scheme of arrangement is not an “insolvency proceeding” for the purposes of the Cape Town Convention. It may be that airlines will seek to use schemes, rather than restructuring plans, for this reason.

It would however be a shame if struggling airlines could not make use of the new restructuring plan, particularly if this were to lead to a restructuring that would be in the best interests of creditors as a whole including lessors, for example by allowing the airline to avoid formal insolvency proceedings. As set out above, a properly structured plan proposal which allows Cape Town creditors the option either to agree to modified contractual terms or to terminate the lease, take possession of the aircraft object and recover damages would not cut across the protections under the Cape Town Convention. Restructuring plans therefore, remain a viable option in the airline restructuring toolkit.

We understand that the UK government is considering whether formally to ratify Alternative A by lodging the required declaration pursuant to Article XXX(3) of the Aircraft Protocol. Notably, Article XXX(3) gives each Cape Town contracting state a free choice about which of its national insolvency proceedings, if any, will trigger Alternative A. 

Other provisions of the Aircraft Protocol and the Cape Town Convention enable contracting states to change their stance at a later date. Accordingly, in its ratification, we would welcome clarity on whether the UK government intends for Alternative A to apply to all insolvency proceedings, which in light of the Gate Group judgement will arguably extend to restructuring plans, or whether it intends to carve out restructuring plans.

Finally, it is worth noting that the Gategroup decision could have implications regarding the recognition of restructuring plans in Europe, particularly if and when the UK is able to re-join the Lugano Convention. This is however the topic for another article.

Case references

Re Gategroup Guarantee Limited [2021] EWHC 304 (Ch).

Re AirAsia X Berhad v BOC Aviation Limited & 14 Ors (Originating Summons No.: WA-24NCC-467-10/2020)

Re MAB Leasing Limited [2021] EWHC 152 (Ch)

Re MAB Leasing Limited [2021] EWHC 379 (Ch)