FW Aviation v VietJet: Meaning of the “Financial Institution”

Introduction

The English High Court has given its judgment in the legal battle between FW Aviation (FWA) and VietJet Aviation Joint Stock Company (VietJet). This case revolved around the enforcement of leasing agreements for four Airbus aircraft and the alleged interference by VietJet in the aircraft’s repossession in Vietnam.

VietJet, a prominent Vietnamese airline, leased four Airbus aircraft (two A321-271 NEOs and two A321-211 CEOs) under a Japanese Operating Lease with Call Option (JOLCO) structure. Each aircraft was owned by a separate Japanese special purpose vehicle (SPV), financed through a blend of equity from Japanese investors and debt from international banks. Each aircraft was initially leased by the relevant SPV to intermediary entities owned by VietJet and sub-leased to VietJet.

The debt financing for each aircraft was via loans to the SPV which used the lease rental from VietJet (via the intermediate entities owned by VietJet) to repay the debt to the lending syndicate. The loans were secured, including through aircraft mortgages and security assignments by the sub-lessor and head lessor of their interests under, amongst other things, their respective leases in favour of security trustees acting on behalf of the lenders.

The onset of the COVID-19 pandemic in early 2020 affected VietJet's operations due to travel restrictions in Vietnam, leading to VietJet being in substantial rent arrears under each of the JOLCO structures. These were defaults under the relevant lease agreements. As a consequence of these defaults, in October 2021, each security trustee issued termination notices to VietJet, terminating the leasing of each of the aircraft. Despite this, VietJet continued to operate the aircraft for over a year without paying any rent. 

VietJet later went on to dispute the validity of each of the termination notices and this was a key issue before the Court which we will consider in detail below. 

FWA purchased the rights that the security trustees (for and on behalf of itself and the lenders) had against VietJet under the four JOLCO structures and brought a claim in the English High Court for damages arising as a result of the defaults and for the termination values payable as a result of the premature termination of the leasing of the aircraft. VietJet disputed (amongst other things) the validity of the termination of the leasing and brought a counterclaim for relief from forfeiture – seeking that the English High Court put in place a new lease between FWA and VietJet. FWA and certain of its affiliates had already recovered and repossessed the aircraft in Vietnam, but asserted that they were prevented from completing the deregistration and export process as a result of alleged actions taken by (amongst others) VietJet and certain of its shareholders.

In June 2024, the English High Court held the first trial in respect of liability. A second trial will follow to deal with quantum. 

Key legal issues

1. Was the leasing of the aircraft validly terminated? 
2. The meaning of the term “financial institution” under the loan agreements
3. Was VietJet entitled to relief from forfeiture?

Validity of the termination of the leasing of the aircraft

VietJet had argued that the security trustees could not rely on an “Event of Default” under each of the lease agreements to terminate the leasing of the aircraft even though the leases had been assigned to them. It argued that the security trustees required an "Enforcement Event" (being the pre-condition required by the security trustees to exercise certain other rights under the lessor security assignments) to exercise any termination rights in respect of the lease agreements.  VietJet asserted that such an “Enforcement Event” (as defined in the lessor security assignment) had not occurred as at the date of termination of the leasing of the aircraft.

The Court disagreed and confirmed that the termination notices served by the security trustees in October 2021 validly terminated the leasing of the aircraft. 

It will bring comfort to lenders in the aviation financing industry to note that the Court confirmed that the entitlement to terminate the leasing under the lease agreements had been assigned under the security assignments.  Other remedies granted to the security trustees under the assignments (such as the right to dispose of the assigned property and which might be exercised in different circumstances) did not impact on this analysis. Therefore an “Event of Default” under the head leases and sub leases was all that was required for the security trustees to take action against VietJet and exercise the termination rights. 

The Court’s decision emphasised the broad scope of assigned rights and the clear distinction between assigned powers which were granted at the outset of the transaction from the conditional powers granted under specific clauses within security agreements and which are only capable of being exercised following an “Enforcement Event”. 

The complexities of the case however serve as a useful reminder to lenders in the aviation financing industry to focus on clearly identifying in any security document the relevant circumstances when the parties to those security documents can exercise the various rights and powers which are assigned and/or granted (as applicable) to them. 

The way in which the security trustees sought first the termination of the leasing of the aircraft and secondly the acceleration of the related loans was closely scrutinised by the Court.  Certain of the notices sent by the security trustees to the SPVs requiring acceleration of the loans did not fully comply with all of the requirements under the loan agreements.  The Court relied on the position in the Mannai¹ case and held that strict compliance with the contractual terms was a condition precedent to validity of a notice. For FWA, these notices of loan acceleration did not fall within its primary claim and as such were not determinative for the outcome of its claim.

For aircraft lessors, lenders and other parties seeking to exercise termination rights or acceleration rights under lease and loan agreements, this case helpfully emphasises the need to follow exhaustively the contractual requirements with respect to such notices (particularly as regards timing and content). Notwithstanding those alleged disparities, the Court held that the security trustees had complied with the notice requirements in the termination notices to terminate the leasing of the aircraft effectively.

Meaning of the term “financial institution”

In November 2021, the original security trustees resigned and appointed FitzWalter Capital Partners (Financial Trading) Limited (FWC) as new security trustee under each of the loan agreements.  During the dispute, VietJet challenged these appointments on the basis that, it argued, FWC was not a “financial institution”. 

The Court, however, concluded that FWC was a financial institution for the purposes of the loan agreements. The Court afforded a broad meaning to the term “financial institution” and adopted the definition which had been previously provided by the Court of Appeal in Essar Steel Ltd v The Argo Fund Ltd [2006] of: “a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance.” The Court considered FWC to fall within this definition, notwithstanding it was not a traditional lending institution. It considered this finding to be consistent, as a matter of interpretation, with the language of the requisite clauses in the loan agreements.

Relief from forfeiture

The Court refused VietJet's application for relief from forfeiture, determining that it would not be fair or equitable to grant such relief given the substantial defaults, egregious conduct, and the need for commercial certainty. The decision reinforces the principle that relief from forfeiture is exceptional and should not destabilise commercial agreements. The key findings were as follows:

1. Jurisdictional basis for relief from forfeiture and nature of VietJet’s rights: The Court confirmed that relief from forfeiture is, in principle, applicable to leases of the type used in JOLCOs and in particular because of the proprietary nature of VietJet’s contractual rights in respect of the aircraft. The Court held that relief from forfeiture would not be available if the lessee’s interests were purely possessory, as would be the case in a simple operating lease.
2. Substantial defaults by VietJet: VietJet had significant and long-standing arrears in rental payments. The Court noted that VietJet had the financial capability to meet its obligations but chose not to, fully aware of the consequences of non-payment. This persistent default weighed heavily against granting relief.
3. Egregious conduct by VietJet: VietJet engaged in obstructive behaviour in Vietnam to interfere with FWA's efforts to export the aircraft. This conduct was directly related to VietJet's application for relief from forfeiture and further justified the denial of relief. The Court emphasised that VietJet’s actions were aimed to place FWA in an unfavourable position.
4. Commercial certainty: The Court stressed the importance of maintaining commercial certainty in leasing transactions. Granting relief from forfeiture in this context could undermine commercial relationships and create uncertainty, particularly in the aviation sector where lease agreements are detailed and specific about obligations and default consequences.
5. Fair and equitable considerations: The Court considered that compelling FWA to continue dealing with VietJet was inequitable and unreasonable due to VietJet's unreliability and orchestrated interference with FWA’s rights. 

The Cape Town Convention

Whilst FWA sought to rely on a number of its Cape Town Convention remedies and invited the Court to grant remedies and give rulings in that regard, the Court did not make any determinations on Cape Town. The Cape Town Convention became a part of English law upon the UK’s ratification of the Cape Town Convention and the implementation of The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 into English law (the English Regulations). The Court found that the leasing had been terminated under the contractual documents and did not consider whether or not relief from forfeiture was compatible with the rights under the Cape Town Convention. 

In respect of relief from forfeiture and the Cape Town Convention, our view is that:

1. relief from forfeiture and any previous domestic case law on the matter were superseded by the English Regulations and as such are now unavailable to the extent that the Cape Town Convention applies. Article 10 of the Cape Town Convention permits a lessor to terminate the leasing of an aircraft and take possession of it following a default, a remedy which would be denied if the court granted relief from forfeiture; and
2. relief from forfeiture is inconsistent on a broader basis with the Cape Town Convention. It is contrary to the objectives of the Cape Town Convention, which are to promote uniformity and predictability within contracting states as to the exercise and protection of creditor rights (See Article 5.1 of the Cape Town Convention). The Cape Town Convention does not permit applicable law, including relief from forfeiture, to curtail or undermine any remedies available to creditors under the Convention. 

Notwithstanding this, the Court’s reluctance to determine this matter means that there is no case law expressly supporting the above conclusion.

Conclusion

The Court ruled in favour of FWA, confirming the validity of the terminations under the termination notices and the subsequent transactions. The decision reinforces the legal robustness of structured finance mechanisms like a JOLCO and the interpretation of security assignments.  

This case underscores the critical importance of meticulous documentation and adherence to contractual requirements. The decision serves as a critical reference for understanding the limits of relief from forfeiture in commercial leasing agreements, particularly in the aviation industry. It also highlights the necessity for lessees to maintain compliance with their obligations under their lease agreements, even amid unforeseen disruptions like a global pandemic.