UK CIGA Act;
Lessors and Financiers take note September 2020

The far-reaching Corporate Insolvency and Governance Act 2020 (CIGA) came into force in the UK on 26 June 2020, with the aim of providing “breathing space” to businesses affected by the Covid-19 pandemic. The act is radical, containing significant debtor-friendly reforms to UK insolvency law.

The CIGA doesn’t exist in isolation, however:aircraft finance professionals should consider it alongside the regulations (the UK Regulations) by which the Cape Town Convention and Aircraft Protocol (together, the Convention), were, on 1 November 2015, implemented into law in the UK.

The Convention is based on encouraging the efficient financing and leasing of aircraft, and seeks to achieve this, in part, through registering an “international interest” to secure priority against subsequently registered interests, unregistered interests, and creditors in the debtor’s insolvency.

Another way the Convention incentivises efficient financing and leasing is by including — for the benefit of creditors — a range of default and insolvency-related remedies in respect of companies facing financial trouble, as well as the ability for creditors to obtain “speedy relief” in such a situation.Under the UK Regulations, the creditor-preferred “Alternative A” US Chapter 11-style insolvency regime was imported into domestic law so that, as in the US, the debtor must return the aircraft, or cure the breach, within a 60-day window called a “waiting period”. Failing this, the creditor may exercise all its available remedies.

There are three key areas where the CIGA reforms UK insolvency law; each such reform can be seen to interact with the UK Regulations.

A moratorium on creditor action

Firstly, under the CIGA, any company incorporated in England and Wales (or overseas provided it has a “sufficient connection” with the UK) may request a moratorium on creditor action where the company is unable to pay its debts, if having this moratorium would result in the rescue of the company as a going concern. This ability is not however available to companies already subject to formal insolvency proceedings, or to a moratorium, company voluntary arrangement (CVA) or administration in the prior 12 months.

The moratorium will initially last 20 business days (subject to extension). It will instigate a payment holiday in respect of rent (and any other amounts) due before the moratorium begins, but (importantly) does not extend to rent due, and amounts for goods and services supplied, during the moratorium itself — these sums must continue to be paid.

In addition, the moratorium will prevent creditors enforcing security and repossessing assets in the affected company’s possession under the likes of leases and conditional sale agreements (except where the High Court authorises otherwise).

It will also enable the relevant company (with permission of the court) to dispose of assets (including those subject to leases or that are secured) in the ordinary course of business as if it were the owner (subject to creditor safeguards) if this would support the rescue of the company.

But, crucially for lessors and lenders, this is where the UK Regulations come to the fore. No such restrictions on creditors repossessing assets or claiming rent will apply where the creditor has a registered “international interest” at the International Registry over the relevant aircraft — at least, beyond from the 60-day “waiting period” mentioned previously (the window creditors must wait to elapse prior to seeking to enforce security or repossess assets).

Contractual Termination Invalidated

While a “relevant insolvency procedure” (such as a moratorium, administration, CVA or liquidation) is ongoing, the creditor will not be able to terminate certain supply contracts (including (likely) an operating lease, but excluding a finance lease) or the supply itself, or do “any other thing” (such as amending the terms of such contract).

Critically, the CIGA confirms that restrictions on terminating or amending a contract while the debtor is in the middle of an insolvency period will not affect the provisions of the UK Regulations. So, again, where the creditor has a registered “international interest” at the International Registry over the relevant aircraft, the UK Regulations prevail. Creditors can, if the debtor defaults, turn to remedies laid out in the UK Regulations (such as exercising “self-help” or seeking a court order) in order to repossess an aircraft.

Where the Convention does not apply, creditors should consider if they can avail themselves of any relevant exemptions (for example, banks will not be subject to the rule). Alternatively, creditors can still terminate contracts based on any event of default that occurs prior to the insolvency, or if the debtor does not pay any monies owed during any moratorium. Alternatively, the debtor may itself agree to contractual termination, or termination can be ordered by a court.

Proposing a Restructuring Plan

A company facing “financial difficulties” that affect or may affect its ability to carry on business as a going concern can propose a Restructuring Plan — a compromise or arrangement with its creditors and/or members. Virgin Atlantic Airways recently became the first entity to take advantage of this, with the UK High Court approving the Plan on 2 September 2020.

75% of creditors or members votes (based on value) must approve the proposal, which must then be sanctioned by the court. This may be done even in the face of dissenting creditors (dubbed the “cram-down” ability) if the court is satisfied that, amongst other things, no member of a dissenting class would be worse off than if the alternative to the Plan was followed (likely, liquidation).

But would a dissenting creditor that benefits from the protections afforded under the Convention be bound by any such Restructuring Plan created under the CIGA? Well, the answer broadly turns on whether a Restructuring Plan can be considered to constitute an “insolvency proceeding” for the purpose of the definition of “insolvency-related-event” in the UK Regulations.

The world’s largest regional aircraft lessor, Nordic Aviation Capital, recently argued in the Irish High Court it could not. Although this distinct point was not determined, several commentators share this view. However, contradicting this, an annotation to the Official Commentary on the Cape Town Convention implies that a Restructuring Plan would constitute an “insolvency proceeding” — so messages for lessors and financiers are still mixed.

If this argument in the Official Commentary is correct, Cape Town creditors need not accept a “cram-down” and will be able to utilise their Convention remedies after the 60-day “waiting period”. Clarification here — either via the courts or statutory instrument — would be welcome.