Worldwide: Should The UK Adopt Cape Town’s Alternative A Insolvency Regime? Lessons From The US And Canada

This article first appeared in the December 2014 edition of Corporate Rescue & Insolvency journal. Written by Deepak Reddy in Dentons' New York office, Carlo Vairo in Dentons' Toronto office and Alexander Hewitt in Dentons' London office.

Key Points

  • The UK is consulting on whether to incorporate Cape Town's Alternative A insolvency regime into English law.
  • Alternative A is based on s 1110 of the US Bankruptcy Code and is in force in many states, including Canada.
  • Section 1110 appears to have been very successful in the US in promoting cheaper capital markets funding for airlines and successful restructurings of many major US airlines.
  • However, UK administrations already provide creditors with robust and flexible rights in airline insolvencies.
  • If the UK adopts Alternative A thought will have to be given as that regime will work in tandem with administration.

Introduction

The US experience relating to s 1110 of the United States Bankruptcy Code (s 1110) (from which Cape Town's Alternative A insolvency regime derives) includes:

  • successful restructurings of many major US airlines; and
  • cheaper capital markets funding for US airlines using Enhanced Equipment Trust Certificate (EETC) programmes.

Air Canada has also enjoyed impressive pricing for its EETCs, with the ratings agencies placing great weight on Canada's adoption of Alternative A. However, the Canadian experience also shows adopting Alternative A can sometimes have unintended consequences for a state's insolvency laws.

It is not completely clear how Alternative A (which is less sophisticated and flexible than its s 1110 parent) would mesh with the UK administration regime. This, and the already robust and flexible nature of aircraft creditors' rights under English insolvency law, raise the question of whether the UK case for Alternative A goes much beyond potentially better bond pricing for UK airlines. Though the likely progressive impact of Basel III and CRD IV on commercial bank debt pricing, and the increasing cost of export credit supported aircraft financings, make the capital markets argument for Alternative A very powerful in itself.

The UK consults on Alternative A

In the summer of 2014, the UK announced it will ratify the 2001 Cape Town Convention on International Interests in Mobile Equipment and its Aircraft Equipment Protocol (together, the CTC). However, the UK government wishes to consult on the terms of that ratification – including whether to adopt Alternative A. It appears to be concerned that Alternative A might hamper UK airline restructurings. In this article, among other things, the we look at whether the US and Canadian experiences validate that concern.

Alternative A

The CTC aims to:

  • reduce the risks and costs of financing and leasing aircraft into countries whose pre-CTC insolvency and other laws are not creditor-friendly; and
  • thereby increase the supply, and lower the costs, to aircraft operators of financings and leasings into those states.

Key to achieving these objectives is the CTC's optional Alternative A insolvency regime – which is largely based on s 1110. States ratifying the CTC (CTC states) can opt to make Alternative A part of their insolvency laws.

Broadly, Alternative A will apply between a lessor (including under a hire purchase, conditional sale or instalment sale) or mortgagee of an aircraft (the creditor) and its lessee or mortgagor (the debtor) if (among other things):

  • the debtor was resident in, or the aircraft was registered on the civil aircraft register of, a CTC state when its lease or mortgage with the creditor (the agreement) was executed;
  • the debtor's centre of main interests (as defined in the CTC) is situated in a CTC state that has made Alternative A part of its insolvency laws; and
  • the debtor is in insolvency proceedings in that CTC state.

Where Alternative A applies to a debtor's insolvency proceedings, the debtor has a fixed "waiting period" (typically 60 days) to hand the aircraft back to its creditor or:

  • cure all defaults under the agreement (other than the fact of the insolvency proceedings); and
  • undertake to comply with the agreement in the future.

Any breach of that undertaking entitles the creditor to repossess immediately.

Section 1110 in the US

Section 1110 dates back to 1978, when the US adopted a new federal Bankruptcy Code (the code). Section 1110 aimed to preserve aircraft financiers' rights to repossess their collateral within a fixed period if a US air carrier in bankruptcy failed to perform its obligations under a lease or mortgage. Through s 1110, aircraft financiers have been granted truly exceptional status in bankruptcy proceedings (one of the code's premises is equality of treatment of all creditors) that allows them to repossess their collateral for a default where most other creditors may not.

Under s 362 of the code, once an airline files for bankruptcy, its creditors are in most cases automatically stayed from taking any action to collect amounts owed under a financing or enforce security over an aircraft. The stay also prohibits a lessor from terminating a lease solely for a default caused by the bankruptcy filing. There must be another default under the lease.

Under s 1110, despite the stay, the aircraft lessor or mortgagee regains its rights as such to repossess an aircraft and enforce its other rights within 60 days (the s 1110 period) unless the debtor makes a s 1110(a) election before the s 1110 period ends, thereby agreeing:

  • to cure existing defaults under its lease; and
  • to perform all current and future obligations under a lease or mortgage.

Often an airline will use the s 1110 period to decide how to right-size its fleet within that period. Further, with the court's approval, it may enter into a s 1110(b) stipulation, whereby the creditor agrees to extend the 60-day period in exchange for resumed payments at a negotiated rate.

If the debtor fails to make a s 1110(a) election or to enter into a s 1110(b) stipulation, the debtor risks its creditor seizing the aircraft at any time. However, often market conditions favour the airline. If they cannot re-lease or sell the aircraft, many financiers agree to significantly reduced rentals or loan payments, on the theory that some revenue is better than none.

Despite its creditor-friendly nature, s 1110 has greatly benefited US airlines. Aircraft financiers rarely repossess from defaulting US airlines before a bankruptcy filing (giving the airline a chance to fix its problems outside bankruptcy without disrupting operations) knowing they can repossess, if necessary, if the airline files for bankruptcy. This makes financing aircraft less risky for financiers and less costly for airlines. This is most apparent in the EETC market, where US issuances are thought to benefit from a one or two notch credit rating enhancement due to s 1110.

Most major US airlines (including American, Continental, United, Delta, Northwest and US Airways) have successfully restructured over the past decade or so without having found s 1110 an impediment. Section 1110 has been widely recognised as a success – with the recent widespread ratification of Alternative A by many CTC states a testament to this.

The Canadian experience

On 1 April 2013, the CTC was ratified into Canadian law. Despite the added benefits the CTC offers, its entry into force under Canadian law has led to a legislative void in the insolvency protection historically provided to certain aviation creditors.

The CTC began its introduction into Canadian law in 2005. However, the 2005 legislation would not become Canadian law until ratified by the federal government and implemented by a majority of the provinces. In the interim, the federal government introduced stop-gap provisions into the various Canadian federal insolvency laws similar to those found under the US's s 1110 and the CTC's Alternative A. This was to encourage lessors and financiers (who were aggrieved by the way Canadian insolvency law had worked in various Canadian airline insolvencies) to continue doing business with Canadian carriers and to keep Canada on a level playing field with competing markets.

With the successful implementation of the CTC into Canadian law on 12 December 2012, the stop-gap insolvency provisions were repealed with effect from the date of the CTC's entry into force on 1 April 2013. This created a situation where, on a strict reading of the law, only agreements concluded and registered under the CTC on or after 1 April 2013 could receive the benefit of Alternative A in Canada.

This has introduced uncertainty as to the rights of certain aviation creditors under pre-April 2013 agreements. Our view is that the 2005 stop-gap amendments to Canadian federal insolvency laws should have been retained, but only in favour of pre-April 2013 interests. The federal government admits, in retrospect, that this was an "oversight"; its intention was not to deprive holders of pre-April 2013 interests of Alternative A. It also says it is unlikely to act to fix this problem, which will resolve itself as pre-April 2013 interests expire.

Consequently, there is now a void in Canadian insolvency legislation with respect to agreements concluded prior to April 2013. As a result of this void, aircraft creditors under pre-April 2013 agreements must petition the court and rely on the discretion of the judge to lift the stay to repossess their aircraft in insolvency proceedings of an aircraft operator.

Some aircraft creditors have requested their debtors execute an "aircraft object security agreement" to fill this gap. Whether the resulting agreements will be sufficient to give aircraft creditors the benefit of Alternative A in Canada is yet to be tested in an airline insolvency with competing creditors.

A UK perspective

Most UK aircraft operators lease their aircraft. The moratorium in an English administration extends to repossession of leased equipment to facilitate a turnaround of the operator's business and lasts for the entire duration of the administration, which can be a year or more. However, the English court's interpretation of the UK provisions which enable the stay to be lifted have led to an expectation on all sides that the administrators will pay the rentals for the aircraft they wish to retain: the threat of long term retention of the aircraft without payment, which s 1110 addresses, is not present in the UK market.

A fixed waiting period of 60 days may be less favourable to lessors of UK aircraft. It would run counter to the flexibility of the current arrangements. Under these arrangements, if the administrator plans to trade the business, s/he is adept at striking new deals with lessors for the continued use of the aircraft s/he requires at an early stage. Market and regulatory conditions in the UK are such that, if the business is going to trade on, the administrator's trading strategy, including fleet requirements, will be pre-planned.

Absent a degree of pre-planning, an unanticipated failure will most likely result in immediate closure of the airline and the availability of the aircraft for immediate repossession. Indeed the more likely consequence of having had the time to pre-plan will be the immediate transfer of the business by the administrator to a new operator via a "pre-pack".

The UK insolvency profession may also be concerned that Alternative A might increase their administration expenses, which are payable out of a limited pot of assets which may not cover all of their outgoings and would rank ahead of the administrator's own remuneration. Alternative A requires the administrator to:

  • agree to perform all future obligations under the lease;
  • cure all defaults under the lease; and
  • maintain the aircraft.

A particular problem here is the maintenance obligation (which is not in s 1110; only in Alternative A). It may be a factor which inhibits the rescue of the business if the exposure to increased costs acts as a deterrent to trading on in administration.

The evidence from the US suggests that Alternative A may be highly conducive to successful airline restructurings. However, if Alternative A were adopted in the UK, it may be advisable to consider how it would mesh with existing UK insolvency law, including in relation to administration expenses. Under EU law, the UK cannot, in ratifying the CTC, adopt Alternative A, but is permitted to replicate Alternative A by separate legislation. If the UK decides to do this, it may want to consider devising a more flexible version of Alternative A, that is designed to work with the UK's current insolvency regime.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
22 Jan 2019, Seminar, San Francisco, United States

Dentons is pleased to offer a full day of classes, just in time for the California MCLE compliance period deadline of January 31, 2019.*

23 Jan 2019, Seminar, Los Angeles, United States

Dentons is pleased to offer a full day of classes, just in time for the California MCLE compliance period deadline of January 31, 2019.*

24 Jan 2019, Other, New York, United States

Join Dentons’ Health Care Partner Lori Mihalich-Levin and White Collar & Government Investigations Counsel Christine Genaitis as they lead conference sessions at AHLA Academic Medical Centers and Teaching Hospitals Institute.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions