In the event that the operator is in financial difficulties, a financier can take a number of steps to protect its position.
The receipt of up-to-date, accurate and complete financial information is critical to the financier’s decision of whether or not to continue to support a turnaround effort.
A financier might want to consider obtaining from the operator a range of undertakings including: (1) undertakings to preserve the relevant aircraft and maintain its value (since the value of the financier’s security is dependent on the value of the underlying asset); and (2) undertakings to keep the relevant aircraft within the jurisdiction of the English court or that of other jurisdictions considered by the financier to admit straightforward enforcement of its security or which have “friendly” insolvency regimes.
In addition to undertakings, a financier should consider obtaining assurances from the operator including: (1) assurances that timely payments will be made to creditors which, if unpaid, might be able to take detention action (such as the Civil Aviation Authority or airport authorities) or exercise liens or other possessory security interests; and (2) assurances that the financier’s security is validly perfected and all necessary international registrations of the security are in place.
In the event that insolvency appears imminent, the financier will likely want to consider whether to exercise its rights of enforcement in advance; in particular, whether to take enforcement action in respect of aircraft and any security deposits.
Access to aircraft
If a financier is considering enforcement action either prior to or following the commencement of insolvency proceedings, it should consider how to obtain access to the aircraft and any maintenance or storage facilities.
Type of insolvency procedure
A financier should be aware that the type of insolvency proceedings to which the operator becomes subject in different jurisdictions can impact upon the degree of control that the financier is able to exercise. Where appropriate (e.g. where it is within the financier’s control), advice should be sought on which insolvency procedure is the most suitable in the circumstances. The insolvency proceedings most commonly encountered in the context of airline insolvencies are administration, liquidation and receivership (the latter is strictly a contractual remedy rather than a formal insolvency procedure).
Impact of insolvency procedure
The commencement of insolvency proceedings may trigger cross-default or automatic termination provisions in the operator’s contracts with other parties (which may, for example, result in the termination of sub-leases) but, otherwise, the commencement of such proceedings will not normally result in the termination of the operator’s contracts.
A financier should ensure that, as far as possible, its exposure to the operator is fully secured. In the event that the taking of additional security over the operator’s assets is proposed whilst the operator is in financial difficulties (or any other steps are taken to improve the financier’s position in any subsequent insolvency), financiers should be alive to the potential claw-back risks. In short, if new security is taken within a particular in the lead-up to the commencement of liquidation or administration, there is a risk that that security will be subject to challenge by the appointed insolvency office-holder and, potentially set aside, meaning that any priority accorded by the security will be lost. Claw-back and avoidance provisions differ between jurisdictions and suitable advice should be sought on specific fact scenarios.