Transaction structure and background
Airbus sold four aircraft for operation by VietJet, a Vietnamese airline. The purchase was financed using a Japanese Operating Lease with Call Option (JOLCO) structure, through a mixture of syndicated bank debt and Japanese equity. The aircraft were sold to special purpose vehicles (SPVs) that were owned by Japanese investors, leased to VietJet-owned SPVs, and then sub-leased to VietJet itself. The rights under the headleases and sub-leases were assigned by way of security to the security trustee for the benefit of the lenders, via security assignments.
When VietJet defaulted on lease payments during the COVID-19 pandemic, the security trustee under the syndicated loan served termination notices in relation to the leases. The lenders subsequently sold their positions to a debt fund, which sought to enforce the security.
Vietjet opposed the enforcement of the security arguing that under the terms of the security assignments, the security trustees were not entitled to serve termination notices terminating the leases prior to an enforcement event (being an event of default under the facility agreement) having occurred. Vietjet argued that as there had not been an event of default under the facility agreement, the termination notices were invalid.
Legal issue: Assignment vs. enforcement
Part of the dispute turned on the interpretation of two standard clauses within the security assignments:
- Assignment Clause: the rights under the leases (including the right to serve termination notices) was assigned "…absolutely and unconditionally by way of security to and in favour of the Security Trustee…".
- Enforcement Clause: The security trustee’s enforcement powers were triggered following the occurrence of an "Enforcement Event".
VietJet argued that the security trustee’s ability to serve termination notices was limited by the enforcement clause and could only be exercised after the occurrence of an "Enforcement Event".
The Court’s decision
The Court of Appeal drew a distinction between assigned rights and enforcement rights. The assignment clause created an immediate assignment of rights under the relevant contracts, and the security trustee could exercise those rights straight away. The enforcement clause, by contrast, governed the enforcement of the security interest itself.
The court held that the termination notices were valid because the assigned rights had been validly exercised. If the parties had intended that assigned rights could only be exercised after an "Enforcement Event", the court put forward that this should have been expressly stated in the assignment clause.
Looking ahead
- Importance of Precise Drafting: This case reinforces the importance of precise drafting in security documentation. Security assignment documents must clearly specify when and how assigned rights and (separately) enforcement powers can be exercised. It may not be sufficient for a notice of assignment to state that the assignee may only exercise rights under the contract following the occurrence of a trigger event. If the intention is to restrict the exercise of assigned rights until after a trigger event occurs, such intention should be explicitly set out in the security document itself. Precise drafting mitigates the risk of unexpected outcomes and loss of control over key assets for security providers.
- Lender Protection in Security Agreements: This decision is favourable to finance parties, setting out the position that rights that are assigned by way of security can be exercised immediately. For restructuring professionals, the case is a reminder to review security documents closely in distressed scenarios. This is particularly relevant for debt funds acquiring distressed assets. The ability to exercise assigned rights early can be a powerful tool in negotiations and may facilitate the preservation of assets.
As always, careful drafting and seeking legal advice early on is essential.
If you wish to discuss any of the points mentioned in this article, please contact one of our experts.
Thank you to Claire Dowle and Eleanor Steele for creating this article.
