The Corporate Insolvency and Governance (CIG) Act 2020, which was enacted on 25 June 2020, introduces a number of permanent changes to the insolvency and restructuring framework in the United Kingdom, some of which have specific ramifications for the aviation sector. Crucially, the moratorium provisions in the CIG Act do not displace the protections afforded to creditors who have registered their interests under the Cape Town Convention.
Three key features of the CIG Act 2020 are:
We summarised these features, and the other key provisions of the CIG Act, in our previous LawFlash, UK Corporate Insolvency and Governance Act 2020: Impact on the Aviation Sector.
For creditors (financiers and lessors), the Cape Town Convention and its related Aircraft Protocols to which the United Kingdom is party has introduced greater certainty, speed, and cost savings to the repossession, deregistration, and export of aircraft objects, i.e., aircraft, helicopters, and aircraft engines, in the event of an insolvency or on a default. Central to the purpose of the Cape Town Convention is the online International Registry for the registration of “international interests” relating to aircraft objects.
In order to be an “international interest”, and therefore registrable, the interest must relate to an aircraft object and be (i) granted by a chargor under a security agreement; (ii) vested in a person who is a conditional seller under a title reservation agreement; or (iii) vested in a person who is a lessor under a leasing agreement. International interests are then subject to a simple priority regime, whereby registered international interests take priority over unregistered ones and earlier registrations take priority over later registrations. Parties can also vary priority rights by agreeing and registering subordination arrangements at the International Registry.
In the airline industry, it is common practice for aviation equipment (e.g., airframes, aircraft engines, and helicopters), to be leased rather than sold outright to an airline or other aviation company. The Cape Town Convention gives ratifying states a choice of three insolvency regimes relating to aircraft objects: Alternative A, Alternative B, or (for states choosing neither) their own insolvency laws. The United Kingdom has adopted the US Chapter 11-style “Alternative A”, which requires that, upon the occurrence of an insolvency-related event, the insolvency practitioner or debtor must either:
In each case, this must be done by the earlier of the end of the specified waiting period (being 60 days) or the date on which the creditor would otherwise be entitled to possession of the aircraft object if the Cape Town Convention did not apply. A creditor is not required to obtain the court’s permission at the end of the waiting period in order to obtain repossession of the aircraft object. Once in possession, the creditor has the right to deregister and export the aircraft.
As we discussed in our previous LawFlash, UK Corporate Insolvency and Governance Act 2020: Impact on the Aviation Sector, any company which has the benefit of the moratorium under the CIG Act 2020 has a payment holiday for debts which fell due prior to the moratorium other than under contracts for financial services and certain other limited exceptions. Two sections of the new moratorium under the CIG Act 2020 impact secured creditors and lessors directly:
At first glance, these moratorium provisions appear to contradict the provisions of the Cape Town Convention in respect of UK companies with aviation assets. However, paragraph 55 of the CIG Act 2020 amends the International Interests in the Aircraft Equipment (Cape Town Convention) Regulations 2015 to ensure that the moratorium provisions in the CIG Act 2020 do not override anything contained in the 2015 Regulations in respect of an aircraft object in which an international interest has been registered. The moratorium provisions will not therefore apply to aircraft objects where the creditor has registered its interest under the Cape Town Convention.
This will no doubt come as a relief to financiers and aircraft lessors who have registered Cape Town interests in their aircraft assets, as they will not be subject to (i) the restriction on enforcing security over these assets nor (ii) the risk that the court will dispose of the assets over which they have security, under the new CIG Act 2020. They can therefore continue to rely on the protections afforded to them under the Cape Town Convention.
Any interests which have not been registered under the Cape Town Convention are, however, subject to the moratorium provisions in the CIG Act 2020, which may impact the ability of certain aircraft lessors to UK airlines to repossess their aircraft if the lessee obtains the protection of a moratorium.
The CIG Act 2020 makes clear that creditors with “aircraft-related interests” will be included in, and may be affected by, the new restructuring plan. While the initial draft of the bill presented to the UK Parliament included creditors with “aircraft-related interests” as a special case, (meaning that companies with aircraft assets in financial distress would have been denied the opportunity to rely on the new restructuring plan as a valuable tool to restructure outside of formal insolvency), the CIG Act 2020 provides that creditors (including aircraft funders and aircraft lessors) may be included in the new restructuring plan if it is proposed that their rights would be affected. For UK airlines in particular this may provide an opportunity to use the new restructuring plan in light of the current market conditions and issues affecting the UK aviation sector.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Peter Sharp
James Mead
Dannielle Hamer