Differences in rights do not necessarily fracture a class
In the recent case of Re MAB Leasing Limited in the High Court of England and Wales, MAB Leasing Limited (the Company) applied to the Court for an order to convene a meeting of creditors to approve a scheme of arrangement. The Company, incorporated in Malaysia, was part of the group which operated Malaysian Airlines. However, as it was liable to be wound up in England and Wales as an overseas company, the Court had jurisdiction over it to sanction a scheme of arrangement.
The Company leased aircrafts under 52 lease agreements which were all governed by English law, (satisfying the “sufficient connection” test as a matter of English law) and the scheme creditors were the lessors under those agreements.
The scheme provided creditors with four options, each provided a better return than in the event of the Company’s liquidation.
In each of the options, the rent was to be set by reference to the market rates, which differed between the age and type of the aircrafts leased pursuant to each agreement. Accordingly, the amount of rent to be offered under the new terms would differ between creditors. The issue was whether these creditors could still be treated as being in the same class.
Whilst each creditor may end up with different rights, this did not fracture the class. In relation to the rights conferred under the scheme, each creditor was given precisely the same right to choose between the four options. The Court held that there was more that united the creditors than divided them and the differences did not fracture the class because:
- The Company undertook an analysis of the differential for each of the leases which did not show extreme variations.
- Given the extremely small dividend in the liquidation, the difference in the actual amount that would be recovered in liquidation as between two different lessors was de minimis.
- Each creditor had the option to terminate the lease, recover its aircraft and receive a payment calculated by reference to its contractual entitlement. That was precisely what it would get in the Company’s liquidation.
The Court also considered whether the Aircraft Protocol to the Convention on International Interests in Mobile Equipment signed at Cape Town and its associated regulations (Regulations) would impose any restriction on the Court’s power to sanction the scheme. The key point was whether the scheme was an insolvency proceeding within the meaning of the Regulations.
The Court noted that it was a point which could only be taken by a creditor who did not consent to the restructuring, no such creditor raised this as an objection and it was possible that all creditors would ultimately consent to the scheme. Accordingly, the Court concluded that the potential applicability of the Regulations was not an obvious blot on the scheme which would necessitate the Court refusing to sanction the scheme. The Court made an order convening a single class of creditors.
Schemes of arrangement are regularly considered by offshore Courts and this decision, which sheds helpful light on the composition of class, will be persuasive in those jurisdictions.