The United Kingdom’s Corporate Insolvency and Governance Act 2020 (CIGA) shifted the focus of the United Kingdom’s insolvency regime from administration and liquidation to rescue and recovery and introduced a number of interesting new features that apply to companies experiencing financial difficulties. This article considers how certain of these features fit into the insolvency regime of the Cape Town Convention.1

Of primary interest, CIGA permits a company experiencing financial difficulties to propose an arrangement or compromise with its creditors (a Restructuring Plan)2. This is a court-sanctioned scheme that could result in revised debt terms being imposed on each class of creditors, including any dissenting class, if the applicable requirements are satisfied (the so-called “cross-class cram-down”).3

Article XI(10) of the Aircraft Protocol to the Cape Town Convention, as implemented in the UK Regulations, provides that “no obligations of the debtor under the agreement may be modified without the consent of the creditor.” This is a protection for creditors against cram-down mechanisms in the context of insolvency proceedings – there is no such protection for solvent proceedings. It is therefore important to consider whether a Restructuring Plan is an “insolvency proceeding” for the purposes of the Cape Town Convention, which will be discussed in further detail below.

Three other notable features of CIGA

Firstly, CIGA introduced a moratorium (for an initial period of twenty business days, which may be extended with specific conditions), granting a payment holiday for some debts (including lease rentals) and protection from creditors. The moratorium could conflict with the sixty day waiting period for aircraft objects that are the subject of an international interest as set out in the UK Regulations,4 but CIGA amends the UK Regulations so that the protections from creditors cannot extend beyond the sixty day waiting period set out in the UK Regulations.5

Secondly, CIGA permits a company subject to the moratorium, which is in possession of certain leased assets, to dispose of those assets as if it were owner of those assets (subject to safeguards in favor of the lessor). A company may also dispose of certain assets that are the subject of fixed security. However, CIGA amends the UK Regulations to provide that the provisions about disposal of assets do not apply to aircraft objects that are registered international interests.6

Thirdly, CIGA may prevent a lessor from terminating its lease with a company that commences insolvency proceedings. However, CIGA clarifies that this does not apply in relation to leases that are registered international interests.7   Instead, Regulation 18 of the UK Regulations permits parties to agree on what events constitute defaults, which may include insolvency events – consequently, an insolvency event will still trigger the lessor’s right to terminate the applicable lease and repossess the relevant aircraft object(s).

Is a Restructuring Plan an “insolvency proceeding?

The Cape Town Convention defines “insolvency proceedings” as “bankruptcy, liquidation or other collective judicial or administrative proceedings, including interim proceedings, in which the assets and affairs of the debtor are subject to control or supervision by a court for the purposes of reorganisation or liquidation.”8 Pursuant to Article 5 of the Cape Town Convention,9 the classification of proceedings must be determined in accordance with the principles of the Cape Town Convention and in interpreting the Cape Town Convention it is useful to consider the Official Commentary to the Cape Town Convention10  which says, at paragraph 3.118:

“the proceedings must have as their purpose reorganisation or liquidation in insolvency. The winding up, reorganisation or dissolution of a solvent company falls outside the scope of Article XI. However, whether the debtor is in fact insolvent is irrelevant.”

It is clear that this means the purpose of the proceedings is key, and classification of the proceedings must be on a case-by-case basis rather than exclusively by reference to the broad type of proceedings.

However, the Cape Town Convention does not define “insolvency,” and the question arises how far forward a view should be taken on the likelihood of a debtor becoming insolvent when determining when a company is entering into arrangements “in an insolvency context.”

Under English law, as confirmed in Bucci v Carman (Liquidator of Casa Estates (UK) Ltd),11  the test requires that it is proven to the satisfaction of the Court, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, that the company cannot reasonably be expected to meet those liabilities. This means that a company may be deemed to be insolvent even if it is currently able to meet its debts as they fall due.

As noted above, CIGA provides that a Restructuring Plan may only be entered into when “the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern.”

Combining the CIGA test and the Bucci v Carman test to create a test to determine whether Article XI would not apply in the context of a Restructuring Plan:

“The company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern but, on looking at the company's assets and making proper allowance for its prospective and contingent liabilities, it can reasonably be expected to meet those liabilities.”

The annotation to the Official Commentary

To provide additional clarification, on 16 June 2020, the Cape Town Convention Academic Project published an annotation to the Official Commentary that says arrangements fall within Article XI where they are:

“(a) formulated in an insolvency context, or by reason of actual or anticipated financial difficulties of the debtor company,12  and

(b) collective in that they are concluded on behalf of creditors generally or such classes of creditor as collectively represent a substantial part of the indebtedness.”

The annotation was issued as CIGA passed through the UK’s Parliament, receiving Royal Assent on 26 June 2020 – the clear intention of the Academic Project is that Restructuring Plans are arrangements in relation to which creditors of aircraft objects with registered international interest can receive the protections of Article XI.

A slim prospect

Given the nature of the basic requirements for a Restructuring Plan – necessarily involving financial difficulties and ability to carry on business as a going concern – it is perhaps difficult to imagine the set of circumstances that would cause the “insolvency proceeding” requirement of Article XI not to be satisfied; and cause Cape Town creditors to be potentially subject to cross-class cram-down.

The annotation to the Official Commentary clearly seeks to extend the protections of Article XI to situations that do not fall solely within the insolvency context, an intervention that will be welcomed by Cape Town creditors but in the absence of any related judicial determination, drawing on the Official Commentary and the annotation to it, the position of Cape Town creditors in the context of any Restructuring Plan remains uncertain.

1 As implemented in the United Kingdom pursuant to the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the UK Regulations).
2 Sometimes called the “Superscheme.”
3 The restructuring can be imposed on a dissenting class of creditors if seventy-five per cent. of the creditors (by value) in any class agree to the restructuring plan and (a) none of the members of the dissenting class would be any worse off under the restructuring compared with the “relevant alternative,” being the most likely outcome in the absence of the restructuring (i.e. insolvency) and (b) the arrangement is approved by seventy-five per cent. in value of a class of creditors who would receive a payment or have genuine interest in the company, if the “relevant alternative” were to occur.
4 The UK has effectively implemented “Alternative A” in its national law - the UK could not elect to incorporate “Alternative A” into its national law at the time of ratification of the Cape Town Convention as insolvency matters are a competence of the European Union, but was able to amend its national law so that it matched the provisions of “Alternative A.”
5 Paragraph 55(4)(12A)(c) of Schedule 3 to CIGA.
6 Paragraph 55(4)(12A)(d) of Schedule 3 to CIGA.
7 Paragraph 55(4)(12A)(c) of Schedule 3 to CIGA.
8 Regulation 5 of the UK Regulations.
9 Article 5(1): In the interpretation of this Convention, regard is to be had to its purposes as set forth in the preamble, to its international character and to the need to promote uniformity and predictability in its application.
10 Article 5(2): Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the applicable law.
11 Official Commentary on the Convention on International Interests in Mobile Equipment and Protocol thereto on Matters Specific to Aircraft Equipment by Professor Sir Roy Goode.
[2014] EWCA Civ 383.
12 Emphasis added – the formulation of the annotation should be directly compared with the requirements for entering into a Restructuring Plan, noted above.