MAB Leasing Limited’s Proposed Scheme of Arrangement – English High Court Approves Convening of Single Meeting of Single Class of Aircraft Lessors

On 20 January 2021, the English High Court approved MAB Leasing Limited ("MABL") to convene a single meeting of a single class of creditors to consider the proposed scheme. The affected creditor group comprises solely of lessors of operating leases.

BACKGROUND ON MABL

MABL is a Malaysian entity which is part of the group that operates Malaysian Airlines. It sub-leases aircraft and spare engines to Malaysian Airlines. The group has been struggling as a result of the impact of COVID-19 and a number of other factors. Although an emergency loan was provided by the ultimate shareholder (Khazanah Nasional Berhad, the sovereign wealth fund of Malaysia) of nearly $275 million, the company is forecast to run out of cash by 21 February 2021. Therefore, if the proposed Scheme of Arrangement ("Scheme") (and wider restructuring which the Group is effecting in tandem with the Scheme) is not approved by the lessors and sanctioned by the court, it is likely that MABL will enter insolvent liquidation in Malaysia.

One of the key liabilities for airline companies are the operating leases. Malaysian Airlines leases 84 aircraft, and 52 of these are subject to compromise under the proposed Scheme. The remaining 34 have been dealt with either via bilateral agreements or will be unaffected (these include engine leases and certain aircraft which are subject to finance leases, as opposed to operating leases).

The underlying assets which are proposed to be compromised are subject to varying commercial terms (e.g. rent, unexpired term of lease). The assets themselves comprise three different types of aircraft, but are different in terms of age, technical condition, market rental value etc.

WHAT IS BEING PROPOSED UNDER THE SCHEME?

The Scheme offers four options, each of which proposes to provide a better outcome for creditors than would be available in the event of MABL's liquidation:

1. an option to terminate the lease, recover the aircraft and receive a one-off payment which exceeds the upper end of what the lessor might expect to receive if MABL was to be liquidated.
2. the remaining three options provide for the leases to continue, but on amended terms. Broadly, the leases will be subject to a "power by the hour" structure (subject to a floor and a cap) whereby the airline only pays for actual utilization of the aircraft. Thereafter, the leases will be aligned to then-prevailing market rates (with certain variations).

KEY TAKEAWAYS

Differing rights do not necessarily fracture a class of creditors

• It was argued by MABL that although each asset was unique, if the court was to require a different class for each individual asset that would effectively render Part 26 of the Companies Act 2006 a dead letter for any company that wishes to restructure a portfolio of leases.
  
  
• The Court noted that differences in rights among the lessors will not fracture a class, provided that their rights are not so dissimilar that it is impossible for them to consult together with a view to their common interest.
  
  
• At a basic level, all lessors had the right to choose between the same four options. However, the lessors who elect to continue with their leases potentially stand to be impacted to different degrees given that the scheme proposes to adjust rent by reference to market rates (which will differ from aircraft to aircraft depending on aircraft type and vintage). The judgment notes that there is scope for material differences to arise "where, for example, the contractual rent under lease A is currently, say five times market value, whereas the contractual rent under lease B is only, say, two times market value", thus it may be said that the former lessor has materially different rights as against MABL in the context of a scheme which is proposing to align all relevant leases to market rate.
  
  
• In deciding against fracturing the class in this case, and determining that there was far more that united rather than divided the lessors, the court noted the following:

1. Although there were large variations between the rents in the affected leases, there are many points in between such that it would be very difficult to draw any clear line and create different classes save for putting each lessor in its own individual class.
2. Looking at the potential recoveries in a liquidation scenario, the difference between the lessors was de minimis given the extremely small dividend in the liquidation of MABL.
3. All of the lessors had the option to terminate and receive a payment calculated by reference to its contractual entitlement (i.e. what they would receive in a liquidation scenario, however, the scheme provides for a small additional pay-out on top).

Potential restrictions imposed by the Cape Town Convention

• On the question of whether the Aircraft Protocol to the Cape Town Convention [1] ("Protocol") imposes any restrictions on the court's power to sanction the Scheme, it was not disputed that all of the leases constituted "agreements" under the Protocol, however, MABL argued, among other things, that a scheme of arrangement does not fall within the definition of "insolvency proceedings" under the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (SI 2015/912) ("2015 Regulations"), which ratified the Protocol. Both UK and Malaysia have adopted "Alternative A" of the Protocol which gives more protection to secured creditors. One of the consequences of an insolvency related event under Alternative A of the Protocol is that the obligations of a debtor under the agreement cannot be modified without the consent of each individual lessor.
  
  
• The Court ultimately decided that applicability of the 2015 Regulations was not a point for determination at the convening hearing, but a point that could only be taken by a creditor who did not consent to the restructuring (no objections or representations were made by any lessors at the convening hearing in this regard). It remains to be seen how this will be dealt with at the sanction hearing, if the scheme is approved by the lessors, but not on a unanimous basis and any dissenting lessor raises an objection on the basis of the 2015 Regulations. The judgment does however note that counsel for MABL provided "a powerful case for concluding that the [2015] Regulations do not apply".
  
  
• It may also be noted that the applicability of the Cape Town Convention was not decided in the recent Part 26A Restructuring Plan effected by Virgin Atlantic Airways Limited (sanctioned by the High Court on 26 September 2020) which sought to compromise, among other liabilities, 26 aircraft under operating leases, because the Restructuring Plan had been unanimously approved by all lessors (and therefore the cram-down mechanism was not used).

Wider applicability

• The decision is expected to apply to U.K. schemes of arrangements and restructuring plans, and it potentially opens the door to a range of lease restructurings, including in relation to real estate portfolios. Historically, whilst CVAs have been used to restructure such assets, it remains to be seen whether schemes of arrangement and restructuring plans (given their flexibilities and, for the latter, cross-class cram-down abilities) form part of restructuring strategies in the real estate space.

[1] Convention on International Interests on Mobile Equipment signed at Cape Town on 16 November 2001.