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Global | Publication | July 2020
The Corporate Insolvency and Governance Act 2020 (CIGA) of the United Kingdom received the Royal Assent on June 26 and is now in force. It is a complex Act, radically overhauling UK insolvency law, and rapidly passed through Parliament. It contains a number of attractive measures designed to facilitate the rescue of companies in financial difficulties. CIGA introduces new provisions and amends into existing insolvency and company legislation.
It is beyond the scope of this Briefing to provide a detailed analysis of all of its provisions but pertinent features include:
The application of the CIGA to creditors with aircraft-related interests must be considered in the context of the United Kingdom’s ratification of the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters specific to Aircraft Equipment (together the Cape Town Convention). The Cape Town Convention was implemented in the United Kingdom by the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the UK Regulations). This Briefing considers the interaction of the CIGA with the Cape Town Convention and the UK Regulations.
The Cape Town Convention grants certain protections – and gives certain rights – to creditors with “international interests” in airframes and/or engines (referred to as aircraft objects). These “international interests” include the rights of lessors under leasing agreements, of vendors under title retention agreements and of creditors under security agreements, such as mortgages. The UK Government was conscious of the need to ensure that those protections and rights, enshrined in law by the UK Regulations and binding on the United Kingdom as a matter of international treaty law, were not prejudiced by the enactment of the CIGA.
This Briefing concentrates on the position of lessors, but a similar analysis would apply to mortgagees and vendors under title retention agreements.
Four specific areas of concern were identified in the application of the CIGA to aircraft objects subject to the Cape Town Convention:
The UK Regulations define insolvency proceedings as “liquidation, bankruptcy, sequestration or other collective judicial or administrative insolvency proceedings, including interim proceedings, in which the assets and affairs of the debtor are subject to control or supervision by a court (or liquidation committee)”.1 For present purposes, the definition is of significance because the separate concept of “insolvency-related event” is engaged for the purposes of Regulation 37 (Remedies on insolvency) of the UK Regulations (as to which, see below).
“Insolvency-related event” is defined in Regulation 37(13) of the UK Regulations to mean “the commencement of insolvency proceedings, or the declared intention to suspend, or actual suspension of, payments by the debtor where the creditor's right to institute insolvency proceedings against the debtor or to exercise remedies under the Cape Town Convention is prevented or suspended by law or State action”.
Neither the proposal of a Restructuring Plan nor of a scheme of arrangement amounts to a declared intention to suspend payments by the debtor preventing or suspending the rights of any creditor to institute insolvency proceedings or exercise remedies under the Cape Town Convention.
The question arises, then, as to whether a company proposing a Restructuring Plan has initiated “insolvency proceedings” for the purposes of the UK Regulations. The same question arises in connection with schemes of arrangement under current law and, indeed, with similar proceedings under different legal systems. That question may have different answers which depend on the laws of interpretation being used to reply to it. Many English commentators have suggested that the Restructuring Plan would not be an “insolvency proceeding” under English law on the grounds (for example) that it might be said that it is a creature of companies legislation, a statutory form of compromise or arrangement as between a company and its members and/or creditors affecting their rights against the company, and not a form of insolvency proceeding. Commentators in other jurisdictions might reach a different conclusion in respect of similar schemes being conducted under their laws. There is a danger then that, if the expression is interpreted under the applicable domestic law, the same type of proceedings would be categorised differently, depending on where they are being conducted.
However, the categorisation of a Restructuring Plan (or of any other scheme) under the domestic laws of any jurisdiction is irrelevant when it comes to considering whether they are insolvency proceedings for the purposes of the Cape Town Convention. Articles 5(1) and (2) of the Cape Town Convention provide:
So the question of whether the Restructuring Plans and schemes of arrangement are insolvency proceedings for the purposes of the Cape Town Convention needs to be settled in accordance with the principles underlying the Convention, and not domestic law. UK Regulation 6(2) provides that the UK Regulations must be applied in accordance with the provisions of the Cape Town Convention, and that includes the latter’s autonomous rules of interpretation.
The Cape Town Convention Academic Project has (with the agreement of Professor Sir Roy Goode and Unidroit) issued an Annotation to the Official Commentary on the Cape Town Convention to help answer this key question2. That Annotation confirms that arrangements fall within the definition of “insolvency proceedings” in the Cape Town Convention where they are (a) formulated in an insolvency context, or by reason of actual or anticipated financial difficulties of the debtor company, and (b) collective in that they are concluded on behalf of creditors generally or such classes of creditor as collectively represent a substantial part of the indebtedness. The Annotation also confirms that a reorganisation arrangement, in which a court acts to facilitate a statutory process, and where the court’s approval is required for its implementation, constitutes ‘insolvency proceedings’ where the ‘assets and affairs of the debtor are subject to control or supervision by a court for purposes of reorganisation’.
Since a condition to a Restructuring Plan under the CIGA is that the company “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern” and since the court’s approval is required for its implementation, it clearly falls within the definition of “insolvency proceedings” established by the Annotation.
Whether a proposed scheme of arrangement under pre-existing law would constitute an insolvency proceeding is less obvious and depends on the circumstances surrounding it. It is quite possible to have a solvent scheme. However, if part of the scheme involves requiring lessors to agree a cram-down, it would be natural to infer that the lessee is anticipating financial difficulties that might make it unable to service its debts as they fall due. That inference points to these being classified as insolvency proceedings as well.
The commencement of insolvency proceedings constitutes an “insolvency-related event” and has two major consequences under the UK Regulations:
Fears have been expressed that the categorisation of Restructuring Plans as “insolvency proceedings” for the purposes of the Cape Town Convention will result in those plans requiring unanimous lessor consent as a consequence of UK Regulation 37(9). We disagree with this analysis: a well-crafted Restructuring Plan need not have that effect. UK Regulation 37(9) only provides that no obligations of the lessee may be modified without the consent of the lessor, so that it cannot be obliged to agree a reduction in rentals.
However, a Restructuring Plan which gives a lessor a choice between agreeing a reduction in rentals and exercising its default remedies – to terminate the lease agreement, repossess the aircraft object and claim damages – would not contravene that UK Regulation. The quantification of damages following the exercise of the default remedies would need to be considered by lessor and lessee, but that falls outside the scope of the Cape Town Convention.
Commercially, that puts the lessor in precisely the same position as when faced with a different scheme or plan which does not fall within the definition of “insolvency proceedings” in the Annotation. Before that scheme or plan is implemented, the lessor would need to decide whether to be bound by it or to exercise its default remedies.
The CIGA is a hugely complex piece of legislation which was enacted into law with extraordinary speed. Barely one month passed between the publication of the Bill and its enactment. That left little time for scrutiny. The Aviation Working Group, the National Contact Group of the United Kingdom and the wider legal community provided detailed commentary to the Government, particularly as regards its interaction with the Cape Town Convention. It is natural that initially there should be different interpretations of such a complicated and untested piece of legislation. However, we are confident that the CIGA is consistent with the Cape Town Convention and the UK Regulations, when properly interpreted, and has created an attractive resolution mechanism for airlines in financial difficulties.
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The 29th Conference of Parties (COP 29) will be held in Baku, Azerbaijan between 11 and 22 November 2024.
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