UK: Global Knafaim Leasing Limited ("GKL") and CGTSN Ltd v The CAA and Others (11 June 2010)

Last Updated: 6 July 2010
Article by Zohar Zik

Powers to impose a 'fleet lien', revisited.

In this recent case, a claimant leasing company failed to challenge the imposition of a statutory fleet lien against its aircraft on the basis that it was contrary to the Human Rights Act 1998 and anti-competitive.

The background facts

GKL owned and leased an aircraft (the "Aircraft") to the Canadian airline, Zoom Airlines Inc ("Zoom"). On 27 August 2008, Zoom collapsed and filed for Canadian administration owing substantial amounts for airport charges and air navigation charges. On 28 August 2008, the Aircraft was detained by BAA and the CAA for charges relating not only to the Aircraft but also to other aircraft in the Zoom fleet.

In order to release the Aircraft, GKL paid over US$2 million of which, it is estimated, only about 20 per cent related to charges incurred by the Aircraft. The balance related to charges incurred by aircraft in which GKL had no interest at all. It was that extension of the charges beyond the Aircraft which GKL considered to be unfair and unlawful.

The statutory framework

A 'fleet lien' is a statutory power. For BAA, this power is set out in Section 88 of the Civil Aviation Act 1982. For the CAA, an equivalent power is set out in Section 83 of the Transport Act 2000. Both statutes permit detention as against (i) the aircraft in respect of which the charges were incurred (whether or not they were incurred by the person who was the operator at the time the detention begins); or (ii) any other aircraft of which the person in default is the operator at the time when the detention begins.

In this case, the fleet lien was exercised under the second limb because GKL had not terminated the lease and Zoom was therefore still the operator of the Aircraft. Had GKL terminated the lease before the detention, it would have been liable only under the first limb to discharge monies owing in respect of the Aircraft. However, this did not happen and, because Zoom was insolvent, GKL had to pay all the fleet charges in order to have the Aircraft released and without having any realistic chance of recovering those amounts from Zoom (or anyone else, for that matter).

The claim

GKL challenged the detention of the Aircraft for charges incurred in relation to aircraft in the Zoom fleet that GKL did not own. It did not challenge detention for charges owed in respect of the Aircraft, nor did it question the detention power as against an operator for fleet debts under the second limb. Interestingly, the use of the words "either" and "or" in the drafting of both statutory provisions seems to suggest that the powers conferred there under are disjunctive. However, those powers have always been construed as conjunctive, giving power to detain more than one aircraft in respect of unpaid charges.

GKL argued that, given that Zoom was insolvent, it was unfair and disproportionate to detain the Aircraft as a means of compelling GKL to discharge all outstanding fleet charges, otherwise than in exceptional circumstances. As such, it was contrary to the Human Rights Act 1998, as well as anti-competitive. GKL sought to rely on a number of cases including R (FTO) v HM Treasury [2008] STC 2524, in which the court was concerned with the doubling of Air Passenger Duty on short notice.

The judge did not accept GKL's claim. Recognising that airports and air navigation authorities fund themselves primarily through the collection of airport and air navigation charges, it was considered to be in the public interest to ensure to the greatest possible extent that those charges are paid. The judge also emphasised that airports and air navigation authorities must allow airlines to access their facilities and managed air space but have no means for validating those airlines' solvency. This, he noted, was in stark contrast to the position of lessors who not only can monitor lessees' financial position by accessing public records and lessees' own financial information (as is standard, GKL had the power within the lease with Zoom to obtain information from Eurocontrol on outstanding charges, which GKL did not in fact use), but also can select which airlines they are prepared to deal with and negotiate appropriate security arrangements as part of their lease transactions.

Accordingly, the principle that lessors should pay rather than the airport or air navigation authority was considered by the judge to be perfectly reasonable. The circumstances of this case were not exceptional and, therefore, insufficient to render the exercise of the fleet lien power unfair or disproportionate.

GKL has, however, been granted permission to appeal.

Comment

Generally, this decision is bad news all around. Although history tells us that the imposition of a fleet lien is rare as against owners - according to the CAA, excluding this case, this has only happened once since 2000 - lessors are bound to recognise that the outcome of this case could have been much worse had the airline in question been larger than Zoom. Consequently, lessors would be advised to be more proactive in their financial monitoring of their lessees. They may well wish to extend their lease powers to obtain information from Eurocontrol and the like more frequently. This would add to the administrative burden on lease managers on both sides of the lease and would probably have cost implications as well (which, invariably, fall on the lessee). In addition, lessors may seek to increase the security deposit amounts they require from lessees and may seek to interfere with lessees' operational activities by preventing them from operating in locations where the 'fleet lien' powers are particularly potent. Most disconcertingly, however, lessors may from now on be tempted to terminate leases early, which could have a significant adverse impact on lessees, especially in cross default situations

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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