Malaysia Airlines restructuring case study
Using English law to help an Asian client
Following 2020’s massive drop in international travel caused by the pandemic, many airlines saw revenues plummet and had to undergo major financial restructurings to survive.
The Malaysia Aviation Group (‘the Group’) was one such airline and called on Freshfields to advise, including on the restructuring of MAB Leasing (MABL), the Group’s main aircraft leasing entity.
Airline restructuring options
Airlines have a number of options to reduce their aircraft lease liabilities, including negotiation with individual lessors, local proceedings and US Chapter 11 proceedings.
As the MABL leases (like most outside the Americas) were governed by English law, another (but unprecedented) option was a UK court-based restructuring known as a scheme of arrangement, which allows a compromise between a company and specified creditors.
Once approved by a majority in number and 75 per cent in value of each class of the scheme creditors and sanctioned by the court, it is binding on all scheme creditors.
A UK scheme had various potential advantages over the other options for MABL. For example, it:
- avoided having to deal with each lessor individually, which could be time consuming;
- allowed company directors to remain in control, rather than be subject to court supervision, as in Chapter 11;
- allowed for continuous operations under the relevant aviation regulatory regime(s);
- could be combined with some local law processes if non-English law liabilities had to be included (though ultimately they were resolved bilaterally);
- had a low jurisdiction threshold (it was sufficient that liabilities were governed by English law, as was the case with MABL’s leases, with MABL having no other connection to the UK);
- maximised recognition, given that a foreign restructuring of English-law obligations is not technically effective; and
- could be quicker and more cost-effective than a Chapter 11 or local process (particularly court proceedings), allowing more time to negotiate with lessors.
Our shortlisted options
We laid out the English scheme and Chapter 11 as the two options. For two main reasons, a scheme was unprecedented, making it a riskier option that Chapter 11:
- Creditors have to be split into classes according to how they are affected by the scheme. MABL wanted to move all leases to a market rent, which meant a 10 per cent haircut for some lessors and a 40 per cent haircut for others. This could have meant every lease being in its own class, defeating the purpose of the scheme.
- Commentators argued that the Cape Town Convention (CTC) prevented lessors from being forced to accept a deal without their consent as, if a scheme is an ‘insolvency proceeding’, ‘no obligations of the debtor under the agreement may be modified without the consent of the creditor’. Some lessors and the Aviation Working Group, a lessor industry body, argued that a scheme is an ‘insolvency proceeding’. View our short explanatory video on LinkedIn for details on the CTC and these arguments.
However, we were confident a scheme was viable and persuaded the client to risk being the first mover.
With financial adviser Houlihan Lokey, we developed a proposal that achieved the significant savings the Group required and high levels of lessor support.
On 22 February 2021, the English High Court sanctioned the MABL scheme, holding that:
- lessors could vote as a single class (which has implications well beyond aircraft leasing); and
- there were strong arguments the CTC did not prevent a scheme from being sanctioned.
This was the first time an airline has used the English courts to reduce its aircraft lease liabilities. With lease rents being among the most significant fixed cost for airlines and given the prevalence of English-law aircraft leases, the UK scheme will likely be used more widely by lessees.
A more secure future
The scheme put the Group on a secure financial footing from which it can now implement a new long-term business plan with a meaningful competitive advantage.
Ina Anzalna Shamsuddin, General Counsel for the Group said: ‘We had an excellent team from Freshfields assisting the company with the recent restructuring exercise from day 1 right up until the very last day. No doubt that their professionalism and expertise had greatly contributed to the early conclusion of the exercise. The team was extremely knowledgeable and well experienced to handle last-minute challenges. We were confident we made the right choice!’
Craig Montgomery Partner
Catherine Balmond Partner
Dr. Konrad Schott Partner
Frankfurt am Main
Bing Guan Partner
Flora McLean Partner
Adam Jones Associate
Edward Lewis Associate
Dr. Johannes Vogel Partner
Frankfurt am Main
Celine Zeng Principal Associate
Frankfurt am Main
Yong Wei Chan Counsel