Home Law Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions
Treatment of Security Interests Under Insolvency Procedures
One of the fundamental principles of English corporate insolvency law is that insolvency “does not affect the rights and remedies of those who own property in the possession of the company or who hold a security interest over all or any of its assets”. This statement is subject to qualifications on the basis of the insolvency procedure followed and the nature of the rights to be enforced.
A commentator recently noted that “the proceedings now most commonly encountered in the context of airline insolvencies are administration, liquidation and receivership”. Detailed treatment of insolvency procedures on property rights shall be sought elsewhere. The aim of this section is to provide a bird’s eye view of the general principles of English law on the rights and duties of holders of security and “quasi-security” interests in administration and liquidation.
We analysed in Sect. 4.2.2 that failure to register the security interest with the Register of Company Charges (under both the pre- and post-2013 schemes) makes it void against a liquidator, an administrator, and a creditor of the company. In practice the failure has the following effects: “the liquidator may take the property that would have been subject to the charge for the benefits of the creditors generally. If the company is put into administration, the administrator, acting on behalf of the company, may deal with the property as if there were no charge over it.”.
On the assumption that the security interest is properly registered, the rights of its holder will very much depend on which insolvency procedure is followed. In administration, the enforcement of their interests over assets in the company’s possession are subject to the consent of the administrator or the permission of the court; the same applies in the case of title-retention agreements. Enforcing the interest without prior approval would make the holder liable to pay damages. What would a court look in an application to allow enforcement? Professor Bridge et al provide a useful synopsis:
[t]he legitimate interests of the secured or hire purchase creditors have to be balanced against those of the other creditors of the company, with greater weight normally being given to the former. If the applicant would otherwise suffer a significant loss, leave to enforce should normally be granted. Relevant considerations also include the financial position of the company in administration, the length of the administration, and the conduct of the applicant.
In the question of how likely it is for the court or the administrator to grant such a relief one commentator recently gave an illuminating response:
the Lessor should bear in mind that administration is primarily a rescue procedure; accordingly it is unlikely to obtain the agreement of the administrator or the court to its overstepping the moratorium by seeking to enforce its Security Interest or contractual rights where to do so would be inconsistent with the objectives of the administration. A Lessor’s power to detain, repossess and/or sell aircraft operated by a lessor in administration are, therefore, severely circumscribed.
Restrictive as this arrangement is, it supports the statutory aims of the administration which have been explained by Sir Nicolas Browne-Wilkinson VC:
„.It is of the essence of administration.. .that the business will continue to be carried on by the administrator. Such continuation of the business by the administrator requires that there should be available to him the right to use the property of the company, free from interference by creditors and others during the, usually short, period during which such administration continues.
Having said that, the administrator is not permitted to act without any judicial control: she/he can exercise the right to sell assets which are subject to “security” or “quasi-security” interests (with the exception of floating charges) only upon the court’s approval; such approval to be given “where the court thinks that disposal of the property would be likely to promote the purpose of administration in respect of the company”. Furthermore, the proceeds of any sale shall be directed towards the interests-holders: the Insolvency Act 1986 expressly provides that any proceeds from the disposal of the property shall be “applied towards discharging the sums secured under the security [or payable under the “quasi-security” interest]”. In case the asset is not sold in its market value, the Act provides that the administrator shall top up the proceeds of the sale with “any additional money required... so as to produce the amount determined by the court as the net amount which would be realised on a sale of the goods at market value”.
Liquidation (either voluntary or compulsory) does not have a rescue role and its main aim is to realise and distribute the assets of the company to its creditors. It is not surprising then that the Insolvency Act 1986 provides that the liquidator “shall take into his custody or under his control all the property and things in action to which the company is or appears to be entitled”. His/her main aim is “to secure that the assets of the company are got in, realised and distributed to the company’s creditors and, if there is a surplus, to the persons entitled to it”. In that respect, assets which are subject to a security or a title-retention agreement do not belong to the company and as such they remain outside the distributable property. This further means that their owners can enforce their interests on a “self-help” basis, subject to any contractual restrictions/the equity of redemption/payment of the price. As such “liquidation is of little concern to secured creditors except to the extent to which they are owed an amount in excess of the value of security. A fully secured creditor is able largely to ignore the liquidation process and to go his own way, enforcing his security very much as if the debtor were still solvent.”[notes omitted].
Does it work in practice? In the words of a practitioner, it does: “a.liquidator appointed to the Lessee has extremely limited powers to interfere with the exercise of the rights of the Lessors and other third parties. Any terminating provisions contained in the Lease, whether effective automatically or on the giving of notice to the Lessee, will normally be unrestricted, As such, the Lessor will be able to avail itself of any rights or detention, repossession or sale flowing from termination.”
A recent market development gave a strong endorsement on English corporate insolvency law. British Airways managed to raise capital in the US via the issuance of Enhanced Equipment Trust Certificates (EETC), becoming one of the very few non-US airlines being able to do so. If one considers that at the time of the deal the UK was not a party to the Cape Town Convention, this development becomes even more impressive. It goes without saying that the credit rating of British Airways played a major role in the decision to provide funding. Yet, this does not tell the full story. In the words of a commentator the certainty of English law contributed in a significant manner to the decision: “In the BA transaction, the rating agencies investigated the underlying English insolvency and administration regime in detail. They concluded that whilst the regime was not as certain as the s 1110 or Alternative A—lacking a definitive 60-day end point—the general creditor-friendly approach was sufficiently well established through case law precedent to afford the required level of comfort to allow a favourable rating. In particular, they concluded that an administrator appointed to manage the affairs of BA in a corporate administration should not be able to simply ignore the proprietary ownership rights in the aircraft, and should be required either to allow timely repossession of the aircraft, or to continue leasing—and paying rental for—the aircraft”.
The British Government was initially reluctant to implement Alternative A on the basis that it would “restrict the ability of an airline in financial difficulties from effecting a turnaround of its business using the rescue provisions of the UK’s insolvency regime”. Yet, following consultation, it opted for Alternative A of Article XI of the Aircraft Protocol (with a period of 60 days). To facilitate UK carriers taking advantage of the discounts offered by export credit agencies, it also made the declaration of Art XXIII of the Aircraft Protocol.
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