9.1.1 Would the airline be required to file for insolvency protection?
Yes. The Spanish Insolvency Act (Law 22/2003, of July 9th) sets forth the legal obligation for companies in a situation of insolvency, as defined in the Act (i.e. inability to comply with its ordinary course obligations) to file for insolvency proceedings within the two months following the moment at which the company becomes insolvent or becomes aware of such insolvency. Failure to comply with such obligation may give rise to liability on the part of the insolvent company’s directors.
9.1.2 Do the available forms of insolvency protection in the Relevant Jurisdiction involve the appointment of either an officer of the court or a specifically court appointed official to take control of the Airline (an Insolvency Official) while in insolvency protection?
Yes. An “Insolvency Administration” is appointed by the competent Court and depending on the circumstances of the insolvency (mainly, whether the proceedings filed by the insolvent company itself, within the legally established deadline, or they were started by a creditor) the Airline’s directors would maintain their managing powers or these would be transferred wholly to the aforementioned Insolvency Administration.
9.1.3 Does the Insolvency Official have authority to negotiate and reach agreement with the Owner in relation to matters such as the payment of unpaid rent, continuation or termination of the Lease and repossession of the Aircraft without the need for court approval?
No.
Payment of unpaid rent (accrued before the declaration of the insolvency of the airline), cannot be negotiated by the Insolvency Administration, in accordance with the principle of “par condicio creditorum” and will be subject to the order of priority for payment within the insolvency proceedings. As regards the rents accrued as from the declaration of insolvency, they would be considered as “créditos contra la masa” (“credits against the estate”) and should be paid with preference over debts of the debtor which are subject to the insolvency proceedings.
From the declaration of insolvency, the termination of the Lease (if it is considered beneficial for the insolvent party) would be subject to an agreement in which the Insolvency Administration must intervene and that should be authorized by the Court before which the insolvency proceedings are being held. The Owner can also give notice of the termination of the Lease due to the breach of the contractual obligations by the lessee, and the issue should be decided by means of a judgment entered within an incidental procedure before the Court in which the insolvency proceedings are being held.
9.1.4 Does the commencement of insolvency protection involving the appointment of an Insolvency Official in the Relevant Jurisdiction have the effect of prohibiting the Owner from taking the following actions to enforce the lease after commencement of such protection:
- Applying any security deposit held by the Owner against any unpaid amounts due under the Lease? Yes
- Accepting payment of rent or other lease payments from:
- (i.) the Airline? The payment of rents/debts accrued prior to the declaration of insolvency can only take place within the insolvency proceedings. Rents or debts accrued after the declaration of insolvency may be paid directly by the insolvent Airline (debtor) or the Insolvency Administration, in case the debtor has been deprived of its managerial powers.
- (ii.) a guarantor? No. A guarantor could make payments of unpaid rents or other lease payments as long as any guarantee conditions are met. The guarantor would then become creditor of the debtor and may file its claim within the insolvency proceedings in order to have its subrogation claim credit recognized.
- (iii.) a shareholder? No.
- giving notice of default under the lease? Yes. The owner can only terminate the lease agreement by filing an incidental claim in which it requests that termination, on the grounds of a breach of the payment obligations, irrespective of whether that breach is prior or subsequent to the declaration of insolvency, and apply for the repossession of the Aircraft. It must be noted that the Commercial Judge may dismiss the claim for termination even if the breach actually existed, and maintain the agreement in place, ordering the payment of all pending amounts against the estate, provided that the Judge considers that the relevant agreement is beneficial to the debtor and all the creditors.
- obtaining a judgment or arbitral award for unpaid lease payments? Yes. As regards the lease payments accrued prior to the declaration of insolvency, the creditor cannot file declarative proceedings against the debtor after that declaration. If the procedure was filed before the declaration of insolvency, it will be followed until a final and definitive judgment is rendered and its result will be reflected in the insolvency proceedings. If the creditor wishes to terminate the lease agreement on the grounds of lack of payment of amounts accrued before or after the declaration of insolvency, and also obtain payment of those amounts, please see (c) above.
- giving notice to terminate the leasing of the Aircraft? Please see (c) above.
- exercising rights to repossess the Aircraft? Please see (c) above.
9.1.5 Can the commencement of Insolvency Proceedings have retrospective effect in relation to any such actions taken before commencement? If so, for what period can there be a look back?
No. The commencement of Insolvency Proceedings in itself does not affect any of the aforementioned actions, given that they had already been taken or started. The ordinary declarative proceedings started before the declaration of insolvency may continue until a final judgment is entered by the corresponding court. As regards the enforcement proceedings started before the declaration of insolvency, they would be suspended as from the date of such declaration of insolvency, until the termination of the insolvency proceedings.
Nevertheless, under Spanish Insolvency law, the Insolvency Administration could exercise what is known as a “claw-back action”, by which it can request for the rescission of contracts, agreements and operations in general entered into the Airline and a third party two years before its declaration of insolvency, where that operation is deemed to be detrimental to the assets of the Airline.
9.1.6 Is there, either under law or as a matter of practice in the Relevant Jurisdiction, a period of time within which the Insolvency Official will either “adopt” the lease and pay rent and other lease payments as an expense of the insolvency or “reject” the lease and permit the Owner to enforce such rights as it may have under the lease?
The lease would remain in full force after commencement of insolvency proceedings, i.e., the declaration of insolvency does not affect the effectiveness of the lease agreement. In accordance with the answers already provided above, the Insolvency Administration can only intervene in order to propose or support an agreement for the termination of the lease (in case it is favourable to the insolvency proceedings), and the execution of such agreement would be subject to the authorization of the Court. For the event that the Insolvency Administration or the Airline fails to pay the rents/amounts accrued, please see 9.1.4. c).
9.1.7 If the lease is “adopted” will the Insolvency Official also pay any unpaid lease payments due as at commencement of the insolvency protection?
Yes, the debtor or the Insolvency Administration should pay all outstanding amounts against the estate.
9.1.8 If not or if the lease is “rejected”, would the Owner’s claim for any outstanding sums rank equally with other ordinary unsecured creditors of the Airline?
In case the lease agreement is terminated within the corresponding incidental procedure, outstanding debts accrued before the declaration of insolvency would rank as “ordinary credits” (junior to “privileged credits” and senior to “subordinate credits”), which can be fairly described as ordinary unsecured claims; the outstanding debts accrued from the start of the insolvency proceedings should be paid against the estate.
9.1.9 Are there certain types of preferred creditors whose claims will rank above claims of the Owner?
Yes. Any creditors with in rem security (mortgages, pledges, etc.) are referred to as special privileged creditors and have preference to collect payment over the collateral; and others such as tax authorities, workers, etc., which are considered general privileged creditors, who have preference over ordinary creditors over the assets of the debtor which have not been given as collateral.
9.1.10 If the Aircraft is in the possession of a person other than the Airline at the commencement of Insolvency Protection of the Airline, for example an independent maintenance facility, will such person be entitled, under the laws of the Relevant Jurisdiction, to assert a lien arising under law or contract over the Aircraft in respect of amounts then due and unpaid to such person by the Airline?
No. Retention rights such as possessory liens cease their effect when insolvency proceedings are commenced. The Spanish Insolvency Act only recognises as an exception in cases in which the retention is declared in accordance with administrative, tax, labour or social security rules.
9.1.11 Is a person other than the Airline, for example an airport authority, entitled under the laws of the Relevant Jurisdiction to seize possession of the Aircraft after commencement of Insolvency Protection and assert a lien arising under law or contract over the Aircraft in respect of amounts then due and unpaid to such person by the Airline.
No. The Aircraft being property of the Owner, not the Airline, no third party is entitled to neither seize it nor assert any lien on it based on debts by the Airline, with the only exception being where the retention is declared in accordance with administrative, tax, labour or social security rules.
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