The restructuring of Hong Kong Airlines has been approved. It is the first time that a parallel English Restructuring Plan and Hong Kong Scheme of Arrangement have successfully been used to restructure Hong Kong, PRC and English law-governed debts.
For the background to the restructuring and details of the plan and scheme, please see our article here.
Faced with a winding up petition in Hong Kong, the HKA restructuring was launched using parallel court processes at the end of September 2022. It has three core elements - the injection of HKD3 billion by a new investor in return for a subscription of new equity; the reduction of HKA’s fleet from 53 to 20 aircrafts, with retained aircraft being held on modified terms; and the compromise of the company’s unsecured creditor claims.
In sanctioning the restructuring the courts had to contend with a number of issues including, for the English High Court (i) the application (or otherwise) of the Cape Town Convention; and (ii) the composition of the ‘unsecured creditor’ class.
Cape Town Convention
To read more about the Cape Town Convention, please see our article here.
In the end, the English High Court avoided the “vexed question” of whether a Restructuring Plan is ‘an insolvency related event’ for the purposes of the Convention.
Potentially applying to eight aircraft intended to be retained by HKA, the court decided that the Convention presented no jurisdictional difficulty for the plan. The relevant lessor creditors had voted unanimously in favour of the plan, thereby consenting to the modification of their respective rights. And, each lessor was given the option under the plan to decline to accept the modification of its rights and instead terminate its arrangement and recover its aircraft.
Given the decision in Re MAB Leasing Limited, it now seems clear that if creditors are given an option to terminate a lease and repossess an aircraft, neither an English scheme of arrangement nor a restructuring plan will disturb the Convention.
To read more about the class composition issue, please see our article here.
In sanctioning the plan, the High Court determined that the creditor classes had been constituted correctly, despite some secured creditors being allowed to vote in the unsecured creditors’ class. It is the first time that secured creditors, using the unsecured portion of their claims, have been entitled to vote as part of an unsecured creditor class.
The court pointed out that the plan did not affect security rights. What was being compromised was the right of the secured creditor to recover its deficiency - the portion of its claim that exceeds the value of its security. In a liquidation scenario, the secured creditor would need to prove for the same alongside HKA’s other unsecured creditors. It was therefore not impossible for secured creditors to consult with unsecured creditors in relation to the deficiency claims.