FW Aviation (Holdings) 1 Ltd v Vietjet Aviation Joint Stock Company
| Jurisdiction | England & Wales |
| Judge | Mr Justice Picken |
| Judgment Date | 31 July 2024 |
| Neutral Citation | [2024] EWHC 1945 (Comm) |
| Court | King's Bench Division (Commercial Court) |
| Docket Number | Case No: CL-2022-000467 |
Mr Justice Picken
Case No: CL-2022-000467
IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS OF ENGLAND & WALES
KING'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Akhil Shah KC, Mr Richard Lissack KC, Mr Robin Lööf, Ms Niamh Cleary and Mr Orestis Sherman (instructed by Quinn Emanuel LLP) for the Claimant.
Lord Wolfson KC, Mr Alexander Milner KC and Mr Giles Robertson (instructed by Elborne Mitchell LLP) for the Defendant.
Hearing dates: 4–14 June 2024. Judgment provided in draft: 24 July 2024.
Introduction
This case concerns four Airbus aircraft (the ‘Aircraft’), namely: two Airbus A321–271 passenger jet aircraft bearing manufacturer's serial numbers 8906 and 8937 — described as the ‘NEOs’ (or ‘New Engine Option’) aircraft; and two Airbus A321–211 passenger jet aircraft bearing manufacturer's serial numbers 8577 and 8592 — described as the ‘CEOs’ (or ‘Current Engine Option’) aircraft.
The Claimant is FitzWalter Aviation Holdings 1 Limited (‘FWA’), a Jersey-registered company. Through a series of assignments and transactions by itself and affiliates of its parent investment fund, the UK-headquartered FitzWalter Capital, it claims to have acquired all security rights under what is known as a ‘JOLCO’ structure.
FWA now seeks to enforce these rights to recover the sums amounting to over US$180 million and possession of the four aircraft from the Defendant, VietJet Aviation Joint Stock Company (‘VietJet’), the ultimate operator of the Aircraft under the scheme. FWA describes VietJet, for these purposes, as “an admitted delinquent debtor”.
For its part, VietJet disputes FWA's claim, contending that FWA (which VietJet suggests has acted in an “underhand and unapologetically rapacious” manner) has not acquired the contractual rights and securities which it asserts and, in the alternative, seeks the equitable remedy of relief from forfeiture to resist surrender of the Aircraft.
As will appear, my conclusion is that FWA's claim succeeds, albeit that the precise nature of the relief that is appropriate will need to be formulated after this judgment has been handed down.
What follows, by way of background, although somewhat involved, is almost entirely uncontroversial and is taken from a combination of each side's written openings.
The JOLCO arrangements involved in this case
The Aircraft were leased to VietJet through a Japanese Operating Lease with Call Option (or ‘JOLCO’). This is a structure which is used to finance the acquisition of, among other tangible assets, commercial aircraft.
As Mr Alain Chrun, FWA's expert in aircraft lease financing, explained, under a JOLCO structure, the aircraft price is financed by a mix of debt finance and equity finance. The equity portion of the aircraft is provided by Japanese investors, who are the ultimate owners of the aircraft, and so the full aircraft price is financed without the use of the airline's own capital.
More specifically, the aircraft is acquired by a tax transparent special purpose vehicle (or ‘SPV’) established under or recognised by Japanese law which represents the interests of the Japanese investors. The Japanese investors are small/medium Japanese companies and single investors, who invest in the structure for tax reasons: the SPV makes substantial losses in the first years of the deal, as it depreciates the aircraft, which the Japanese investors set off against their tax bills, thereby effectively deferring the investors' tax liabilities until the later years of the deal when the SPV makes a profit.
With no expertise or desire to be involved in the business of aircraft leasing, the Japanese investors do not, in substance, whether directly or through the SPV, supply the aircraft: indeed, in the present case the Aircraft were bought new from Airbus, under a purchase agreement between Airbus and VietJet, with the SPV (as Lessor) stepping in just before delivery in order to fund the acquisition through equity capital supplied by the Japanese investors (typically 25%) and through debt finance obtained by the SPV for the balance (typically 75%).
The aircraft is then leased by the SPV to the airline or (as in the present case) to a lessor which sub-leases the aircraft to the airline for, typically, between 8 and 12 years.
Under the JOLCO structure, the SPV receives scheduled rental payments under the lease with the airline or the sub-lessor if the airline is, in fact, a sub-lessee (as in the present case). Those rental payments correspond with the scheduled payments that the SPV is required to pay under the loan which the SPV has obtained in order to finance the balance (to repeat, typically 75%). The rental payments, accordingly, are used to repay that loan.
The SPV's liability under any such financing arrangements is, however, limited, with the lender's recourse being to the security package in place over the aircraft, including the proceeds derived from the sale of the aircraft and from the lease which is assigned to a security trustee. Specifically, as Mr Chrun explained, in the event of an early termination of the leasing, the airline may be required to pay termination sums and all other amounts due under the lease (or sub-lease as applicable). Different lines of termination sums are payable upon termination, each one corresponding to the satisfaction of a particular liability under the JOLCO structure. One line of termination sums corresponds to the repayment of the outstanding balance of the loan, another to the repayment of the Japanese investors' contribution.
Early interruption of the JOLCO is very damaging to the economic benefits expected by the Japanese investors. Hence, the termination sum payable upon early termination as a result of the default of the lessee will include a sum compensating the Japanese investors for the reduced tax benefit. The termination sum also includes an expected return on the equity investment for the Japanese investors.
Lastly, Mr Chrun explained that, during the term of the JOLCO and at its maturity, the airline may have one or more call options upon the exercise of which, it may purchase the aircraft. The airline is not obliged to exercise the call option, but, if it does, it will be obliged to pay the call option price. The call option price includes an “equity” portion which will be an amount sufficient to repay the original equity investment by the Japanese investors, plus a pre-agreed return on investment for those investors.
In a default scenario if the airline does not exercise the call option, it must pay a liquidated amount defined as the Termination Value and return the aircraft in full compliance with the return conditions set out in the lease agreement.
In substance, therefore, as Lord Wolfson KC put it on behalf of VietJet, JOLCOs are structures to finance the airline's purchase of the aircraft: the expected outcome, if all goes to plan, is that the airline will pay the lease rent (and thus, indirectly, the loan interest and principal) over several years, and then purchase the aircraft through the call option. The airline receives the benefit of any increase in the aircraft's value (because the price under the call option is fixed) and, in practice, is intended to bear the burden of any foreseeable decrease in value as well (until the point where the aircraft is worth so little that the airline is better off doing the expensive work required to return it, than paying the option price and keeping it).
The arrangements in the present case mirrored the JOLCO norm. Thus:
(1) As explained in more detail in a moment, the relevant SPVs formed in the case of each of the Aircraft purchased the Aircraft from the aircraft manufacturer.
(2) Debt financing for those purchases was provided in each case by a Loan Facility Agreement entered into between the SPV (as the Borrower), the Original Lenders (or the financial institutions) and BNP Paribas (‘BNP’) or Natixis Singapore Branch (‘Natixis’) – BNP in the case of the CEOs (as Facility Agent, Security Agent and Fixed Rate provider) and Natixis in the case of the NEOs (as Facility Agent, Security Trustee and hedge counterparty).
(3) The SPVs (the Borrowers) leased the Aircraft to different SPVs owned by VietJet (the ‘VietJet SPVs’) pursuant to Aircraft Lease Agreements in respect of each of the Aircraft (the ‘Head Leases’).
(4) Those different SPVs, the VietJet SPVs, (the Sub-Lessors), in turn, leased the Aircraft to VietJet (the Sub-Lessee) pursuant to Sub-Lease Agreements (the ‘Sub-Leases’).
The Loan Facility Agreements were each supported by certain security arrangements. These included:
(1) a New York law mortgage, pursuant to which the Borrower (the SPVs) granted the Security Trustee/Agent a first priority Security Interest over the Aircraft (the ‘NY Mortgages’);
(2) a Security Assignment (Lessor) between the Lessor/Owner (the SPVs again) and the Security Trustee/Agent pursuant to which the Lessor in each case assigned its interests in, inter alia, the Head Leases, the Sub-Leases and the Security Assignments (Lessee) (to which I refer shortly) to the Security Trustee/Agent by way of security for “any and all liabilities and obligations … which are now or which may be at any time and from time to time hereafter be due, owing, payable or incurred or be expressed to be due, owing, or payable from or by the Lessor to the Financing Parties …under any Operative Document…” (the ‘Lessor Security Assignments’) — in each case VietJet signing an Acknowledgement of Assignment of Sub-Lease (the ‘Assignment Acknowledgements’) agreeing to the terms of the Lessor Security Assignments;
(3) a Security Assignment (Lessee) entered into between the Lessor/Owner (the...
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