28 April 2020
Introduction
The COVID-19 outbreak has had a devastating effect on Thailand’s aviation industry. Both international and domestic flights have been dramatically curtailed or stopped altogether. When operations do resume, it is uncertain how many passengers will actually fly because of virus fears and economic impacts. Meanwhile, while airlines’ revenue drops, their expenses continue. A lack of cash flow has resulted in airlines resorting to laying off employees or having their employees take leave without pay.
Under these unprecedented social and economic conditions, airlines who lease aircraft may face severe challenges making rental and maintenance reserve payments to lessors. Lessors must be prepared for lessee defaults, and even bankruptcy. In such circumstances, lessors have a number of options under Thai law.
Payment restructuring
Payment restructuring may be a viable option for lessors and lessees, depending on the terms of the lease agreement and the parties’ commercial positions. Under this option, a lessor and lessee can agree to restructure the amount and timing of rental and maintenance reserve payments. For example, a lessor may permit an airline to defer rental payments until an agreed upon future time when business is expected to improve. A lessor may also consider lowering the rental payments and applying the security deposit to make up the difference, or any combination that is doable for the parties.
Thai law is flexible in this regard and recognizes the parties’ right to contract. The Thai courts and the Civil Aviation Authority of Thailand (CAAT) will generally allow any payment restructuring arrangement agreed by the parties, so long as the new arrangement forms a valid contract and does not contravene the law. As a practical matter, if there are any guarantee agreements associated with the lease, it is recommended that the guarantors give their consent to the new restructuring arrangement.
Repossession
If a payment restructuring agreement cannot be reached, or is not a feasible option, a lessor may seek to repossess the aircraft upon a lessee’s default. Thailand’s normal repossession procedures would apply here. A lessor may apply to the CAAT to deregister the aircraft, or obtain the lessee’s consent to voluntarily deregister and return the aircraft. Obtaining a lessee’s consent is the fastest, easiest, and usually cheapest option. However, if the lessee refuses to return the aircraft, a lessor must seek CAAT intervention.
Pursuant to CAAT Regulation No. 11, which became effective on August 6, 2018, the director-general of the CAAT has authority to deregister an aircraft on various grounds, including if the lessee’s possessory right to the aircraft has expired for any of the following reasons:
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The lease agreement has expired due to the lease term;
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The lease agreement has been terminated by either the lessor or the lessee;
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The lessor and lessee agree to terminate the lease agreement;
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The lessor notifies the CAAT of the termination of the lease agreement and submits an irrevocable deregistration power of attorney to them, together with an application requesting the exportation of the aircraft.
If a lessee defaults and the lessor terminates the lease, the lessor can submit a deregistration application to the CAAT, which includes, among other things, a deregistration power of attorney. The CAAT will then examine the application and decide how to proceed. If the CAAT concludes that the lease termination is valid and the lessee no longer has possessory rights, the CAAT will deregister the aircraft.
Litigation
If the CAAT declines to deregister the aircraft, or if a lessor also wants to pursue monetary damages against a lessee, the lessor must initiate legal action by filing a complaint in a Thai court, as the CAAT does not have the authority to award damages under the lease. Thailand does not enforce foreign court judgments, and enforcing a foreign arbitral award in Thailand with respect to aircraft deregistration is problematic since the CAAT only has express legal authority to deregister an aircraft based on a Thai court order.
The case would thus need to be litigated until either settlement or judgment. If the court orders the lessee to deregister, the lessee will have a fixed deadline to comply. If the lessee fails to comply with the judgment, the lessor can present the judgment to the CAAT. The CAAT will then deregister the aircraft.
An important consideration before commencing litigation is whether the lessee will have assets to pay any judgment. Freezing assets is challenging under Thai law, and the COVID-19 situation will also likely drive down a lessee’s assets. By the time a case reaches judgment, the airline may not have any assets for the lessor to enforce.
Force majeure
Due to the extraordinary circumstances of the COVID-19 outbreak, a lessee-airline may raise force majeure as a defense for not making lease payments. Thai law defines force majeure as an event that a party is not able to protect against, despite taking the appropriate level of care that should be reasonably expected in such event. Under this definition, when a debtor owes a debt to a creditor, the debtor is responsible to pay the debt, even during a disaster or economic crisis, since a disaster or economic crisis does not make it impossible to pay the amount owed.
However, if the debtor’s business is forced to close because of the law or a government order, and the debtor cannot pay its debt as scheduled, this could be considered an event that temporarily prevents the performance of the obligation. A debtor may raise this issue as a defense for default. A lessor must therefore carefully examine the circumstances of each lessee default to determine if force majeure truly applies. For example, if the lessee’s default was a direct result of the CAAT’s grounding of all of the lessee’s flights, force majeure may be invoked. If the lessee defaulted because of the economic crisis resulting from COVID-19 however, force majeure may not apply.
Bankruptcy
Lessors should also consider the possibility that an airline may use bankruptcy law to seek protection. An airline may file a petition for business rehabilitation (i.e., reorganization) with the Central Bankruptcy Court. Under Thai bankruptcy law, an automatic stay on civil actions is imposed when the Bankruptcy Court accepts the rehabilitation petition. (The court’s acceptance of the petition does not mean that it is granting or allowing the airlines to enter rehabilitation. It just means that the court has agreed to decide whether to allow the airlines to enter rehabilitation.)
The automatic stay also suspends all civil court proceedings against the debtor. The automatic stay will end if:
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the Bankruptcy Court dismisses the rehabilitation petition;
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the rehabilitation plan fails; or
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the rehabilitation plan succeeds and there is no need for a further automatic stay.
If the Bankruptcy Court allows an airline to enter rehabilitation, the automatic stay could potentially last for years while the rehabilitation plan is implemented.
The lessor has the option to object to the airline’s rehabilitation petition. If the lessor’s objection is successful, the court will dismiss the airline’s petition, and the lessor can repossess the aircraft. If the lessor chooses not to object, it can submit a claim as a creditor and join the rehabilitation process until the case’s conclusion. However, unless the lease term expires through the passage of time, the lessor cannot request the return of the aircraft from the Bankruptcy Court while the automatic stay is in place.
Thai government measures
The COVID-19 outbreak has upended the global aviation industry, Thailand included. To help support Thai airlines during this difficult time, the government has implemented the following assistance measures:
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50% reduction in landing and parking fees for all Thai and foreign airlines from April 1 to December 31, 2020.
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50% reduction of the air navigation service charge for domestic flights and 20% for international flights.
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Reduction of arrival and departure fee from THB 15 to THB 10 per passenger for all Thai and foreign airlines.
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Reduction in jet fuel excise for domestic flights for Thai airlines from THB 4.726 (USD 0.15) per liter, which had been the rate for 24 years, to THB 0.20 (USD 0.01) per liter, up to the end of this year.
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50% reduction in office rental fees for Thai airlines.
In addition to the above aviation-specific measures, the government has also launched an overall corporate assistance package, including loan payment holidays, soft loans, and other fiscal and monetary incentives. Time will tell if these measures prove to be effective. However, in the meantime, lessors should consider preparing plans in case of default by their Thai airline customers.
For further information, please contact:
John Frangos, Tilleke & Gibbins
john.fr@tilleke.com
