In the Matter of Hong Kong Airlines Limited

The court considered an application to sanction a restructuring plan under Part 26A of the Companies Act 2006 (including s.901F). The principal issues were whether the court had jurisdiction (including whether the company had a sufficient connection with England), whether the proposal amounted to a compromise or arrangement, class composition and voting, compliance with statutory requirements, the effect of the Cape Town Convention on aircraft lessors' rights, the fairness of the plan compared with the liquidation alternative, and the plan's likely international effectiveness.

The judge found that the company met the Part 26A threshold conditions, that there was a sufficient connection with England (notably because English-law debt formed a substantial part of the liabilities and the perpetual notes were governed by English law), and that the plan was properly characterised as a compromise or arrangement. The court held that the classes were properly constituted, the required statutory majorities were achieved, the explanatory materials and modifications were adequate, and that the Cape Town Convention posed no obstacle because critical lessors had voted in favour and retained an option to terminate. On the evidence the plan offered materially better returns than immediate liquidation and had a reasonable prospect of effect in key jurisdictions. The court therefore sanctioned the modified plan.

Background and parties: Hong Kong Airlines Limited, incorporated and headquartered in Hong Kong and registered as an overseas company in England, was insolvent and faced multiple creditor constituencies including aircraft lessors, banks, trade creditors and holders of English-law governed perpetual notes guaranteed by group companies. The company proposed a multi-element restructuring involving new equity infusion, fleet reduction, amendments to leases, creation of two asset companies and contingent value rights (CVRs), and compromises of unsecured and other claims. A parallel Hong Kong scheme had been approved and a Hong Kong sanction hearing was scheduled.

Nature of application: The company sought sanction of its restructuring plan under Part 26A of the Companies Act 2006 (s.901F procedure) at first instance in the High Court.

Issues framed by the court:

• Jurisdictional threshold: whether Conditions A and B of Part 26A were satisfied and whether the English court had a sufficient connection to exercise the jurisdiction.
• Characterisation: whether the proposal was a compromise or arrangement for Part 26A purposes.
• Cape Town Convention: whether the plan would impermissibly modify aircraft lessors' rights without consent.
• Compliance and convening: adequacy of statutory and procedural compliance and the Explanatory Statement.
• Class composition and voting: whether classes were correctly constituted and whether statutory majorities had been properly obtained.
• Fairness and alternatives: whether the plan was fair compared with the liquidation alternative.
• International effectiveness: whether the plan had a real prospect of recognition and effect in key jurisdictions.

Court's reasoning and outcomes on issues:

• Jurisdiction: the judge found the company encountered financial difficulties affecting its business and proposed a compromise; the English court had a sufficient connection because the company was an overseas company registered in England, English-law debt (notably the perpetual notes) represented a significant portion of liabilities, there was active cross-border participation, and the English proceedings were conducted "hand-in-glove" with a Hong Kong scheme. Condition A and B were satisfied.
• Characterisation: the plan involved creditors giving up rights in exchange for replacement rights and therefore amounted to a compromise/arrangement under Part 26A.
• Cape Town Convention: the court assumed the Convention might apply but held no impediment arose because the Critical Lessors had voted unanimously in favour and retained an option to terminate the lease and recover aircraft (Option 2), so any modification would occur only with their effective consent.
• Compliance and convening: the court was satisfied statutory requirements and the convening order had been complied with; the Explanatory Statement (including subsequent supplements and modifications) was adequate for creditors to make an informed decision.
• Class composition and voting: the Unsecured Creditors, Critical Lessors and Perpetual Noteholders were properly constituted as classes; statutory majorities (75% by value present and voting) were achieved in each class and meetings were fairly representative and properly conducted.
• Fairness: the plan produced materially better projected recoveries for each creditor class against the realistic liquidation alternative and therefore met the court's fairness test.
• International effectiveness: evidence and circumstances (high support levels, parallel Hong Kong scheme, and opinion evidence on recognition) indicated a reasonable prospect of substantial effect in Hong Kong, the BVI, the Cayman Islands and China.

Disposition: The court granted sanction to the modified plan.

The court granted sanction to the modified restructuring plan under Part 26A of the Companies Act 2006. The judge held that the Part 26A threshold conditions were met, there was a sufficient connection with England, the proposal was a compromise or arrangement, classes were properly constituted and had validly approved the plan by the required majorities, the Cape Town Convention presented no obstacle because lessors had consented in practice, the explanatory materials and modifications were adequate, and the plan was fair and had a reasonable prospect of international effect. For these reasons sanction was given.