What are the principal types of insolvency proceedings?
In England and Wales, the principal insolvency procedures are liquidation (a terminal procedure) and administration (a recovery/rescue procedure). Most insolvent UK airlines have their AOCs suspended and cease operations immediately, and are wound up to pay their creditors' claims in liquidation proceedings. Leased aircraft are not included in the airline's insolvency estate. In rare cases, such as the March 2020 collapse of Flybe, insolvent UK airlines are put into administration rather than liquidation. Recent local insolvencies include Thomas Cook (2019, liquidation) and Flybe (2020, administration). The Thomas Cook experience led to calls for reforms to the UK airline insolvency regime discussed in this article. On 14 July 2020, Virgin Atlantic announced the first "restructuring plan" under the new Part 26A of the Companies Act 2006 under the recently-enacted Corporate Insolvency and Governance Act 2020 (CIGA). We discuss CIGA in more detail at the end of this note.
During administration there is a moratorium, during which creditors are unable to enforce certain rights (including repossession of leased aircraft) against the airline. This moratorium is to assist the airline's insolvency administrator in turning around or selling the airline's business. If this cannot be done via the administration, the insolvent airline will be liquidated. There are other broadly similar moratoria for English companies in financial difficulties in specific circumstances. However, all moratoria on aircraft repossession mentioned in this paragraph are overridden by the Cape Town Convention Alternative A insolvency regime mentioned below (where applicable) at the end of the 60-day "waiting period".
Has England and Wales adopted the 2001 Cape Town Convention and its Aircraft Equipment Protocol (together, Cape Town)?
Yes. The UK ratified Cape Town and made it part of English domestic law via the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the CTC Regulations). In doing so, the UK made all of the key creditor-friendly Cape Town declarations, such as choice of law, self-help remedies and enforcement of IDERAs. The UK also adopted Cape Town's Alternative A insolvency regime via the CTC Regulations, with a maximum 60-day waiting period (Alternative A). For more information, please see Key features of the UK's Cape Town ratification.
For aircraft subject to registered international interests, Alternative A overrides all moratoria on repossessing aircraft that arise under English insolvency law. Unless the insolvent airline has cured all relevant defaults, creditors under registered international interests are entitled to the return of their aircraft no later than 60 days after the airline goes into insolvency.
Can creditors use "self-help" to repossess leased or mortgaged aircraft?
Yes. English law allows a lessor or mortgagee to repossess an aircraft on a relevant default without a court order. Sometimes lessors or mortgagees voluntarily go to court to help them repossess. For example, under the CTC Regulations, if the lessor or mortgagor has evidence of a relevant default, the English courts may, at short notice and without a trial, order the grounding of an aircraft. Similar orders are available at common law and, with the right evidence, can be obtained very rapidly indeed and without notice to the airline.
How long does the aviation authority typically take to deregister an aircraft when an IDERA is invoked?
The UK Civil Aviation Authority (the CAA) will typically deregister an aircraft on the basis of an IDERA within three working days. If an export certificate of airworthiness is required for the aircraft, the application for deregistration under the IDERA should be made after the CAA has issued such certificate.
In addition to IDERAs, lessors and mortgagors typically take irrevocable deregistration powers of attorney (enabling them to sign any other documents and take other actions that are required to export the aircraft). English law broadly recognises such powers of attorney as irrevocable and effective.
Are there any non-consensual liens which would take priority to an ownership interest/mortgagee's rights as a secured creditor?
Yes. There are various English law aircraft liens and detention rights (together, relevant rights) that allow a creditor to detain an aircraft as security for specific liabilities and, in some circumstances, to sell it. They take priority to an ownership or security interests, including registered international interests under Cape Town. Relevant rights include statutory aircraft detention rights for certain airport charges as well as Eurocontrol and other navigation charges, common law liens (i.e. for maintenance providers in possession of an aircraft they have improved) and contractual liens (often in MRO terms and conditions; these do not necessarily work as drafted).
However, relevant rights cannot be invoked to initiate the detention of an aircraft during any of the moratoria mentioned in this note.
Are there any "fleet liens" (i.e. a lien for debts relating to one aircraft that may be asserted against any aircraft in the airline's fleet, regardless of ownership)?
Yes. The UK CAA (acting on behalf of Eurocontrol) and certain UK airports have the power to assert fleet liens.
CIGA restructuring plans vs the rights of Cape Town creditors
On 26 June 2020, CIGA came into force. CIGA contains very significant changes to the UK's insolvency regime. These include a number of pro-restructuring measures, such as the new "restructuring plan" under Part 26A of the (amended) Companies Act 2006. Most CIGA measures do not affect, or fully affect, the rights of holders of registered international interests under Cape Town (each, a Cape Town Creditor). This is particularly so when it comes to rapid repossession, deregistration and export of aircraft, engines and helicopters in English insolvency proceedings. However, at the time of writing, there is a debate among aircraft finance and insolvency lawyers over whether a Cape Town Creditor is immune from "cross-class cram-down" under a CIGA restructuring plan. If Cape Town Creditors have this immunity, their financial claims under registered international interests (such as cross-border aircraft leases into England and Wales) could not be written down under a CIGA restructuring plan without each Cape Town Creditor's individual consent. This is discussed further below.
The term "cram-down" originates from the practice around Chapter 11 of the US Bankruptcy Code and other aspects of US insolvency law. Broadly, in that context, it refers to the ability of an insolvency judge to compel all members of a class of creditors to accept a write-down of the value of their financial claims in a debt restructuring of an insolvent company, even if a minority of that class of creditors objects to the terms. Cram-down is not an uncommon feature of pro-debt restructuring laws in many developed countries around the world and, before CIGA, was possible under English law within a single class of creditors.
Under a CIGA restructuring plan, cram-down across different classes of creditor is permitted. Thus, subject to other conditions being fulfilled, under cross-class cram-down, a class of creditors that does not vote in favour of the restructuring plan (either at all or with the requisite 75% majority, by the value of claims) can be crammed down by the terms of that restructuring plan if the plan has been voted for by the requisite majority of creditors in one or more other classes of creditors. The result of this is that a certain class of creditors, say aircraft lessors, could be forced to accept the terms of a restructuring plan that they voted against, if the requisite majority in other creditor classes has voted in favour of the plan.
Cape Town Creditor immunity from cram-down and cross-class cram-down?
As noted above, Cape Town was made part of English law by the CTC Regulations. When Regulation 37 of the CTC Regulations has been triggered, it confers immunity to Cape Town Creditors from both cram-down, and cross-class cram-down, under Regulation 37(9). This is because Regulation 37(9) provides that the terms of a registered international interest cannot be modified without the individual consent of the relevant Cape Town Creditor.
Regulation 37 of the CTC Regulations becomes operative when a lessee enters into "insolvency proceedings". This has led to a debate over whether CIGA restructuring plans are "insolvency proceedings" for the purposes of Regulation 37, whose commencement would trigger immunity from both cram-down and cross-class cram-down for Cape Town Creditors under Regulation 37(9). Unfortunately, there are more or less reasonable arguments on both sides of this debate and, at the time of writing, very little consensus among expert restructuring and aviation lawyers on this issue. Thus, it is currently unclear whether Regulation 37 confers immunity from either type of cram-down on Cape Town Creditors, and clarity on this issue for both airlines and their creditors would be welcomed.
Finally, it should be noted that there is no question of English law cram-down rules being used to deprive an aircraft lessor or aircraft mortgagee of its property or security rights in an aircraft financed or leased within or into England and Wales.
Overall assessment of English insolvency laws
English insolvency law is very pro-creditor. So pro-creditor that British Airways was able, in 2013, to raise more than US$900 million for aircraft purchases in the US capital markets via an EETC issue, even before the UK had adopted Cape Town. Usually, investor insolvency law concerns prevent airlines doing EETCs if they are in non-US states that have not incorporated Cape Town and its Alternative A insolvency regime into their domestic laws – something the UK only later did in November 2015. When Alternative A then became part of English law, the rights of financiers and lessors under affected transactions to repossess mortgaged or leased aircraft rapidly in an insolvency of a UK airline became even more robust. CIGA has slightly shifted the balance of English insolvency laws in favour of debt restructurings. However, Cape Town Creditors, such as lessors of aircraft into England and Wales, are immune from most of CIGA's pro-restructuring and other reforms. Overall, English law remains very pro-creditor – particularly for Cape Town Creditors.
Key practical considerations for lessors and financiers
- Speed – prepare documents and terminate leases before aircraft are detained to avoid fleet liens
- Location – ground the aircraft and repossess outside the UK if there are concerns about fleet liens
- Eurocontrol charges – keep an eye on the airline's Eurocontrol bill. Get a CEFA agreement and a valid Eurocontrol Letter