Partner Sydney
"As lessor exposure to Thai airlines increases, we revisit and update our top ten takeaways from the rehabilitation proceedings."
It has been five years since Thai and NOK Air entered Thai Bankruptcy Court-supervised rehabilitation. While each Thai airline has since chartered a different trajectory, one of the key commonalities is that the growth and expansion of all Thai airlines is based on leasing more aircraft. As lessor exposure to Thai airlines increases, we revisit and update our top ten takeaways from the rehabilitation proceedings.
Our in-depth look into the key takeaways five years ago can be found here.
Order in the (bankruptcy) court
The Thai Airways rehabilitation was historic because it was the first major airline rehabilitation and because of the public stake in Thai Airways.
2021 takeaway: key issues from the rehabilitation proceedings included the approach to future payment obligations; creditor voting rights; creditors’ ability to sell or trade debts in Thai companies; the role of the court in Thai rehabilitation proceedings; the procedures to challenge proof of debt claims; and procedures for clarification or amendments to the plan terms.
Update: until the sections of the BA which deal rehabilitation proceedings applicable to airlines are amended and updated, the issues listed above will continue to be relevant in any future Thai airline rehabilitation proceedings. Ongoing jurisdictional, financial and credit risk analysis will continue to play a critical role in highlighting potential risk exposure for lessors to consider and address.
Past, present and future debts
Thai and NOK’s lessor creditors were expected to have significant influence over the rehabilitation plan terms. Creditor voting rights were substantially reduced by the technical approach taken by the official receiver in only admitting amounts due and outstanding before the date of the rehabilitation order made by the court. This resulted in significantly smaller approved claims for both operating and finance lessors.
2021 takeaway: revising the Bankruptcy Act (“the BA”) to address this issue appeared unlikely and the role of foreign lessors in any update to the legislation would have been limited. Lessors needed to consider whether security deposits and maintenance and other reserves adequately and appropriately reflected their risk exposure in future rehabilitation proceedings, particularly for leases of five or more years.
Update: amendments to the BA on the issues which arose in the rehabilitation of Thai and NOK Air still appear unlikely in the near to medium term. Lessors should continue to assess their risk exposure to Thailand based on current legislation and that the Thai and NOK Air rehabilitation processes and outcomes will provide a framework and guide for any future airline rehabilitations. Lessors should continue to focus on security deposits and maintenance as well as other reserves to moderate and address their risk exposure to future rehabilitation proceedings.
Saving for a rainy day?
Once the rehabilitation was ordered, lessors who acted promptly to apply security and other deposits to outstanding debts were able to reduce their debt exposure. Those who held security deposits and maintenance reserves found that these were quickly exhausted when applied to the debts owed by their Thai lessees. Lessees also sought to block or challenge application of the deposits on the basis that the deposits were subject to the control of the Bankruptcy Court.
2021 takeaway: lessors were advised to consider higher security and other deposits and closer monitoring of maintenance obligations. We recommended that lessors promptly exercise their rights over security and other deposits and ensure that relevant lease terms clearly allow them the contractual right to use deposits as they see fit without any recourse to the lessee.
Update: security and other deposits should be varied to reflect the risk profile of lessees and the risk exposure of lessors. Lessors should continue to ensure that lease terms, as clearly as possible, allow them the contractual right to use these deposits as they see fit without any recourse to the lessee. Lessors should not agree to provisions which require lessee consent or mutual agreement on the use of security and other deposits.
How secure is your security?
Finance leases are typically secured by foreign law-governed security which does not directly involve the Thai lessee. Lessors seeking to be classified as secured creditors based on these security rights, found that secured creditors in an airline insolvency were limited to Thai financial institutions.
2021 takeaway: in assessing the credit risk of a lessee, the enforceability of foreign law-governed security should be carefully considered. The position of lessors would be improved by Thailand adopting the Cape Town Convention.
Update: see below
How far to Cape Town?
The challenges of repossession and issues relating to recognition of foreign security could be at least partly addressed by Thailand adopting the Cape Town Convention and recognising aircraft mortgages under domestic law.
2021 takeaway: we recommended that lessors press for Thailand to adopt the Cape Town Convention.
Key contacts
Partner Bangkok
Senior Associate Bangkok
Senior Associate Bangkok
Senior Associate Bangkok
"There are now greater prospects that Thailand may view ratification of the Cape Town Convention more favourably."
Update: there are now greater prospects that Thailand may view ratification of the Cape Town Convention more favourably. This appears to have been prompted, partly, by the significant increase in leased rather than owned aircraft and the challenges for Thai carriers, who compete with lessees in Cape Town Convention-member states for limited new aircraft supply. This is on the basis that many lessors consider Cape Town Convention-member states to provide better and more certain protection and enforcement of their rights than jurisdictions which have not acceded to the Cape Town Convention. Becoming a Cape Town Convention-member state would address a number of the issues and challenges in leasing aircraft to Thai operators. However, implementation of the Cape Town Convention into domestic law should ensure that lessor rights under the Cape Town Convention can be consistently and clearly recognised and enforced by the Thai courts. Recent experience of lessors enforcing their Cape Town Convention rights in India and Vietnam highlights the need to ensure that recognition and enforcement of Cape Town Convention rights is given the same focus, status and importance as ratification and implementation of the Cape Town Convention.
(re)possession is 9/10ths of the law?
At the time, the global market for aircraft made it difficult for many lessors to find new lessees for their aircraft. It made the threat of lease termination and aircraft removal from Thailand significantly less credible than in pre-COVID-19 market conditions. Due to repossession of aircraft in Thailand being less certain than in other jurisdictions, lessors who found new lessees for their aircraft were forced to engage in lengthy court proceedings or negotiate with the incumbent operator to obtain their consent.
The Civil Aviation Authority introduced a process for lessors to deregister and repossess aircraft without lessee consent. Further details are in our article here.
2021 takeaway: it was important that lease terms which factor in or depend on the lessor’s right of repossession as a deterrent to ensure lessees do not default were carefully reviewed.
Update: delays in aircraft deliveries, lease rate differentials and lessor preference for lessees in jurisdictions with greater protection for their rights have led many lessors to review their aircraft leased to Thailand operators. Thai operators have been expanding their exposure to leased aircraft, particularly Thai Airways, and given delays in deliveries of new aircraft, Thai lessees have sought to extend or renew leases of existing aircraft. This has led to some tension over lessor and lessee rights where leases are not renewed or the lessee is in breach of lease terms. Return of leased aircraft continues to be primarily based on lessee consent and non-consensual repossession and export of aircraft by lessors remains less certain than in many Cape Town Convention-member states. The rehabilitation processes for Thai and NOK Air did not address this or clarify the rights of lessors or lessees in a non-consensual repossession. Lessors should continue to address all events of default in accordance with the lease terms to preserve their right to repossession without lessee consent and to ensure that lessors retain the final and absolute right to repossession in the event of a lessee event of default.
Crystal balls and plans
The Thai and NOK rehabilitation plans were based on projections and assumptions as to levels of domestic traffic and a reopening of Thailand to foreign tourists in mid-2021 following the Covid-19 pandemic.
2021 takeaway: we suggested that lessors act promptly on events of default and ensure that they are prepared to deal with efforts by lessees to negotiate further favourable changes to lease terms against the threat to terminate leases.
Update: whilst tourist arrivals have now exceeded pre-Covid levels, tourist arrivals from China remain significantly below pre-Covid levels. This has impacted the financial performance of multiple Thai operators and highlighted the high levels of dependency on the Chinese market by the Thai tourism and aviation sectors before Covid. Operators who have been able to replace Chinese routes with flights to other destinations have been able to moderate the impact of the absence of Chinese passengers and tourists. The Thai domestic market remains competitive and price sensitive. Operators with the lowest unit costs and those able to access higher yielding interline and connecting traffic are likely to survive and to thrive. The current status of the Thai domestic and international aviation markets underscores and highlights the need for lessors to monitor market developments and lessee performance and projections. This is particularly given the impact of delivery delays on the negotiating positions of lessors and lessees.
"Whilst tourist arrivals have now exceeded pre-Covid levels, tourist arrivals from China remain significantly below pre-Covid levels."
In 2025, Russia was the fourth largest source of tourists and second largest market by tourism receipts and is and will continue to be an attractive inbound market for Thai operators. This reflects the absence of Thai sanctions and restrictions on Russian airlines and tourists. While most leases restrict the ability of Thai lessees to operate to, from and over Russia, this is been largely achieved on the basis of contractual terms and the restrictions on insurance cover for flights to, from and over Russia. Unlike other jurisdictions, this is not supported by domestic laws and regulations giving effect to sanctions and restrictions on Russia. A Thai lessee operating flights between Russia and Thailand would not be breaching Thai law and it is unclear whether a Thai court would consider such flights as an event of default and enforce lessor rights arising out of such an event of default or recognise or enforce an arbitral award in favour of a lessor on the basis that such flights constituted an event of default. Given the focus on rebuilding the Thai tourism sector and the prominence of Russian tourists, lessors should be prepared to deal with requests from Thai lessees to operate their leased aircraft between Russia and Thailand.
With friends like these?
In the rehabilitations, lessees and their advisors sought and will continue to seek to ensure that the lessors do not act in concert and negotiations are conducted on an individual lessor basis.
2021 takeaway: Lessors should also be prepared for other Thai operators to propose lease rates based on the terms agreed with Thai and NOK.
Update: until the provisions of the BA dealing with classes of debts and debtors are amended and updated, lessors will continue to face a ‘divide and conquer’ approach from Thai airlines.
Foreign affairs
The Thai and NOK fleets of leased aircraft were subject to foreign law-governed leases and to dispute resolution processes outside in Thailand. These were largely untested in the rehabilitations.
2021 takeaway: jurisdictional analysis, questionnaires and advice should be reviewed and updated to reflect the outcomes of these rehabilitations.
Update: arbitration of lease disputes appears to now be more accepted by lessors and lessees as a means of resolving their disputes. This has been partly driven by the experience of lessors in the rehabilitation proceedings in the Thai Central Bankruptcy Court and by lessors preferring operators in other jurisdictions, which they consider to provide better and more certain application and interpretation of lease terms. Robust and independent arbitral procedures and an ability consider interpretation of lease terms in other jurisdictions and in a commercial context can result in a more certain outcome in arbitration. Where an award in favour of a lessor must be enforced in local courts, Thai courts can only refuse to enforce a foreign arbitral award on the grounds set out in the New York Convention and where to do so would be contrary to the good order and public morals of the Thai people. The latter is a broad and expansive basis to decline to enforce an award but applications to reject enforcement on this ground are not always successful. As has been evident in other regional jurisdictions, the (mis)use of local courts to prevent lessors from exercising their rights provides, at best, short term relief. Given the current delivery delays, lessors can and will continue to avoid these markets or impose more onerous terms on lessees to reflect and accommodate the risks of enforcement in the local courts.
"It is also important to note that an arbitral award cannot address all issues and rights."
It is also important to note that an arbitral award cannot address all issues and rights. Lessors should continue to proceed on the basis that non-consensual repossession of aircraft from Thailand may require the judgment of a Thai court. Other than on the grounds above, Thai courts are likely to enforce a foreign arbitral award, which orders the return of the aircraft. If the lessee fails to comply with an order of the Thai court to return the aircraft, lessors will need to commence separate enforcement action through the Legal Execution Department. Enforcement of an arbitral award or the judgment of a Thai court against an airline under Bankruptcy Court-supervised rehabilitation is subject to an automatic stay for the duration of the rehabilitation proceedings.
Lessors should also assess their risk exposure on the basis that the insolvency of a Thai operator will continue to be dealt with under the BA and in the Central Bankruptcy Court.
Key contacts
Partner Sydney
Partner Bangkok
Senior Associate Bangkok
Senior Associate Bangkok
Senior Associate Bangkok
