On 20 January 2021, the UK High Court approved the convening of a single scheme meeting for certain aircraft lessors of MAB Leasing Limited (MABL) in relation its proposed UK scheme of arrangement. This is an important step towards the implementation of a wider restructuring for the Malaysia Airlines group, but may also have wider implications on the restructuring options available not only to airlines, but also to businesses with other leased assets, including real estate.
Lessors form a single class
The proposed UK scheme offers all relevant lessors a number of options, including to:
- amend rents to be in line with market rates (with variations depending on the type and vintage of the aircraft); or
- terminate their leases, take back their aircraft and receive a termination payment, with the termination payment representing a premium to recoveries in the alternative to the scheme – being insolvency.
The amended rents offered necessarily mean creditors that do not choose to terminate their leases will receive differing rent reductions compared to their existing contractual terms. The Court considered that this did not fracture the single proposed class for the following reasons:
- there was no clear alternative other than each lessor being in its own class;
- given the level of recoveries for lessors in the alternative to the scheme (insolvency), the difference in dividends that the differing rent reductions translated into was immaterial; and
- if a lessor thought that what was on offer was less than the market rate, it was open to them to take their plane back (with a small uplift compared to their recoveries in an insolvency) and put their plane back on the market.
The decision makes it clear that, while individual leased assets may be unique and the contractual terms across a proposed class may not be identical, this does not mean the lessors of those assets are unable to consult together and form a single class for the purpose of a UK scheme, where, as here, there is more that unites them than divides them.
Cape Town Convention
Without deciding the point, the Court referred to 'powerful' arguments made by MABL’s counsel that a scheme was not an 'insolvency proceeding' for the purposes of the Cape Town Convention and therefore did not prevent a UK scheme from varying leases without the consent of each individual lessor. In doing so, the Court was effectively disagreeing with some academic and industry commentary that UK schemes are insolvency proceedings for these purposes.
- The decision would be expected to apply equally to UK schemes and restructuring plans.
- The approval of a single-class scheme for aircraft leases opens the possibility of using UK schemes and restructuring plans for other lease restructurings, including regarding leases of real estate assets. Commonly those are restructured using company voluntary arrangements (CVAs), in part because of the class concerns the Court has cut through with this decision. We could in future see landlords forming one of the classes in a broader restructuring plan, where they could face cross-class cram down from trade and financial creditors.
- The strong indication of the Court’s views on the Cape Town Convention suggests any lingering concerns about the ability to use a UK scheme or restructuring plan to amend aircraft leases are unfounded.
- Following the ruling, UK schemes and restructuring plans present viable alternatives to US Chapter 11 to deliver airline restructurings, which could include aircraft being rejected without consent, as commonly seen in the US process.
A global Freshfields restructuring and aviation team is advising Malaysia Airlines, including Craig Montgomery, Konrad Schott, Catherine Balmond, Madlyn Primoff, Johannes Vogel, Yong Wei Chan, Dan Butler, Alper Utlu, Felipe Villena, Adam Jones, Miryam Farrelly, Ed Lewis and Arthur Law.