The High Court has provided a judgment affirming that a hedge fund which acquired positions in certain tax lease structures is entitled to its claim against Vietnamese airline, Vietjet Aviation Joint Stock Company (“VietJet”), although the exact substance of that relief has yet to be determined.

In coming to its judgement in the recent case of FW Aviation (Holdings) 1 Limited v Vietjet Aviation Joint Stock Company [2024] EWHC 1945 (Comm), the High Court considered pertinent issues around, amongst other things, the right to terminate aircraft leases, loan transferee qualifications, and the right to claim relief from forfeiture.

The case concerned four Airbus A321 aircraft subject to Japanese operating lease with call option (JOLCO) financings with VietJet. For more information on JOLCO structures, please see our previous article here. By way of background and overview:

• The transactions were structured in customary fashion with title held by a Japanese incorporated owner/lessor and borrower, but the aircraft was leased to VietJet through a head lease/sub-lease structure (with the intermediate lessor being a VietJet vehicle).
  
• VietJet had defaulted on its rent payments amidst the COVID-19 pandemic and, whilst there had been discussions around potential relief, the leasing of the aircraft had been terminated in October 2021.

• Contemporaneously with termination, the previous financiers had transferred their loan participations to newly established English company (“English NewCo”), ultimately owned and controlled by the hedge fund and it was a fair inference noted by the court that the termination notices had been co-ordinated behind the scenes with the hedge fund.  

• In November 2021 the previous security trustees/agents resigned and were replaced by English NewCo. English NewCo subsequently sold its rights (as security trustee/agent) under the lease and sub-lease to a Jersey incorporated company (“Jersey NewCo”) whilst the aircraft themselves were sold (through foreclosure proceedings) to affiliated entities of English NewCo and Jersey NewCo.

• The aircraft themselves were eventually handed over by VietJet in December 2022, but have not themselves left Vietnam, subject to a complex array of proceedings.

The High Court found in favour of the hedge fund and their claim for substantive damages against VietJet. Whilst the exact nature of that relief has yet to be determined, in some ways this case vindicates a somewhat controversial (yet potentially lucrative) strategy which has sought to maximise value out of both the metal asset and contractual claims against the lessee.

In assessing VietJet’s defences, the case does shed some light on judicial determination regarding some key issues that regularly come up in any aviation financing or leasing transaction. Some particular points to take away include:

Had the leasing of the aircraft been validly terminated by the security trustee?

The High Court held that the security trustee had been entitled to serve a termination notice in respect of the lease and sub-lease as a result of lease events of default thereunder (notwithstanding the fact that a loan termination event had not occurred).

This is very specific to JOLCO transactions but, amongst other things, the existence of “co-extensive rights” (i.e. those available to both the (investor) lessor and the financiers) was indicative that the security trustee had the right to terminate the leasing of the aircraft in its own right.

This particular issue is more esoteric for JOLCO transactions where, unlike other airline financings, a lease event of default does not in and of itself trigger a loan event of default (for various reasons, predominantly relating to the involvement of Japanese equity investors).

Was a mandatory prepayment notice valid and effective to terminate the leasing?

Whilst the High Court affirmed the security trustee’s right to serve a termination notice in its own right, it also considered whether a separate mandatory prepayment notice (which in itself triggered automatic acceleration of the loans and termination of the leasing of the aircraft) had been valid. In that respect, the issue turned upon a very specific clause set out below:

Any notice of cancellation or prepayment notice given by any Party under this Clause 7 shall be irrevocable and, unless a contrary indication appears in this Agreement, shall specify the date or dates upon which the relevant cancellation or prepayment is to be made (which date shall not be earlier than five (5) Business Days after the date of the notice) and the amount of that cancellation or prepayment.”

The High Court found that the specific criteria set out in the notice provision had not been met – especially insofar as no specific date for prepayment had been provided and no prepayment amounts were detailed therein. A counter-argument ran that the amounts outstanding could be determined by the borrower, but that was dismissed on the basis that the relevant calculations were complex and the onus was upon the lender(s) to provide the relevant figures.

The High Court further found that – whilst a valid mandatory prepayment notice would trigger automatic acceleration of the loans (and, in turn, termination of the leasing) – compliance with the contractual notice provisions was a condition precedent to that termination. To quote VietJet’s counsel in the proceedings, the relevant notices needed to be “bang on”.

Whilst this issue was not fatal to the claim given the court’s determination on the previous issue, this particular point affirms the caution that must be taken in putting together any form of termination or equivalent notice (whether under a loan agreement or a lease agreement) and ensuring that it complies with the relevant contractual conditions.

Were relevant loan transfer conditions met?

Lengthy consideration was given to whether the English NewCo satisfied relevant transfer conditions. This turned on whether discrepancies in use of terminology (between definitions of “Lender”, “Qualifying Lender” and the transfer provision itself) were to be construed in a manner to exclude the English NewCo as a permitted transferee.

Ultimately the court found in favour of the English NewCo, but it does strike a cautionary note that such interpretative wrangles could be avoided if terminology is used consistently across transfer provisions – something that can be missed amidst the “white heat” of contractual negotiations.

Additionally, consideration was given to specific points of interpretation as to whether the English NewCo met certain conditions as a “Qualifying Lender” for the purposes of UK-Japanese double taxation treaties. Two particular points were in contention here: (1) was the English NewCo carrying out business other than making or managing investments on its own account and (2) was the main purpose of the creation or assignment of the debt claim to take advantage of the double-taxation treaty itself.

On the first point, the nature of the English NewCo’s activities was such that – although a newly incorporated SPC – it was deemed to be carrying out business other than making or managing investments on its own account. That turned upon the fact that loans were purchased not to make a return on the loans themselves, but rather to gain an upside from taking ownership of the underlying collateral.

On the second point, the High Court again found in the English NewCo’s favour – perhaps taking a more conservative approach given that no specific witness evidence had been given on that point by key parties involved. Additionally, it took the approach that it should not be lightly assumed that obtaining a benefit under a tax treaty was one of the principal purposes for an arrangement. The fact also that the loans and leasing had been terminated when the English NewCo stepped in, so technically there would be no interest payable in the ordinary course, was perhaps also influential.

Again, points of construction around Qualifying Lender eligibility are complicated issues warranting tax analysis. The nature of the hedge fund’s business and activities, and the distressed nature of the loans, does suggest that the court was perhaps more favourably inclined towards them than might have otherwise been the case for a lender taking a participation in the ordinary course of business.

Could relief from forfeiture be provided?

The High Court judged that VietJet was not entitled to relief from forfeiture. The issue would not ordinarily arise for operating leases, but the issue was considered because – by virtue of being a tax lease structure – the circumstances were perhaps more analogous to a finance lease where the airline has an economic interest in the aircraft. The claim was dismissed for several reasons, but three particular points are pertinent.

First, VietJet had argued that the hedge fund would benefit from a substantial windfall because VietJet would be forced to pay all amounts due under the lease but also would lose any entitlement to the aircraft (which, had it paid termination amounts within a specified window, it would have been entitled to). This was dismissed on the basis that the windfall had been part of the contractual bargain which VietJet had voluntarily signed up to.

Secondly, VietJet’s course of conduct was such that they were seeking to interfere with efforts to export the aircraft from Vietnam. As such, its conduct in that regard was – in the view of the court – contrived to try and strengthen their hand in the ongoing court proceedings to claim relief for forfeiture.

Thirdly, it would not be fair and equitable to compel the hedge fund and its affiliates to transact with VietJet. The possibility of any commercial relationship was far-fetched and any prospect of the two working together going forward being described as “somewhat fanciful”.

To conclude, the High Court shows that the test for relief for forfeiture in the context of aircraft transactions is a high bar. This is particularly useful precedent in the context of any finance lease or other tax lease structures where an airline may seek to frustrate proceedings on the basis of its economic interest in the aircraft.