In re AirAsiaX, AirAsiaX (“AAX”) filed an originating summons (“OS”) to the High Court to seek an order to convene a meeting of the creditors for the purpose of approving its proposed scheme of arrangement (“Scheme”). The OS was filed pursuant to section 366(1) of the Companies Act 2016 (“CA 2016”) which provides for the power of court to order compromise or arrangement with creditors and members. A number of creditors, including the airport operator, lessors of aircraft, and a manufacturer of aircraft, however, intervened in the OS proceedings to object to the Scheme.

The Scheme was apparently part of a wider debt restructuring exercise with the objective to avoid liquidation of AAX. If sanctioned, it was intended to rehabilitate AAX by, inter alia, implementing a capital reduction and share consolidation exercise, and raising capital via a fresh subscription of shares, by way of a rights issue and new investor subscriptions.

Under the Scheme, the Scheme Creditors would share pari passu a general pool of RM200 million (“General Pool”) in the following manner:

• The Unsecured Scheme Creditors with unsecured debt would participate in the General Pool;
• The Scheme Creditors holding securities would participate in the General Pool for the shortfall after realizing the securities or after deducting the value of such securities.

The proposed capital reduction would entail a 99.9% reduction of the issued share capital of AAX, while the proposed share consolidation would consolidate every 10 ordinary shares into 1 ordinary share. Should fresh cash be injected into AAX, the existing shareholders’ shareholding would be diluted. The full particulars of the Scheme, the intended rehabilitation of AAX and the revised business plan would be made available in the Explanatory Statement which would only be issued together with the notices summoning the court-convened meetings.

As at the Cut-Off Date (30.6.2020) the total estimated debts and liabilities owed to the Scheme Creditors were about RM64.15 million (“Scheme Debts”), which comprised:

• Liabilities that AAX had incurred or would incur under guarantees issued in favour of lessors of 27 aircraft leased to the Leasing Subsidiaries, and
• Debts, compensation and/or penalties arising from breaches and defaults, and the early termination of contracts, agreements and/or arrangements, including lease rentals and aircraft purchase commitments.

On the issue of classification of Scheme Creditors, after revising the classes several times, the classes of Scheme Creditors at the time of the application to the court consisted of:

• Secured Class A creditors having security over the assets of AAX; and
• Unsecured Class B creditors.

The lessors of aircraft raised a common objection, namely, that they had been wrongfully classified as secured creditors when they were in fact and in law unsecured creditors. The airport operator, on the other hand, who was without dispute a secured creditor claimed that it ought to be placed in a separate class from the lessors and Airbus. Airbus, which was the largest creditor in terms of value, did not, according to the court, submit on its status as secured creditor or otherwise. According to the court, ‘[24]…[the] learned counsel for Airbus had in fact turned to learned counsel for AAX when the Court asked if Airbus in fact considered itself as “secured creditor”’.

On the issue whether the Scheme comes within the term “compromise or arrangement” in section 366(1) of the Companies Act 2016, the court noted that ‘[81] The Act does not provide a definition for the word “compromise” or “arrangement”’, that ‘[85]…the “arrangement” ought to be given its widest possible meaning and must deal with an arrangement between the company and its creditors inter se as debtor and creditor.’ On the facts, the court held that ‘[93]…given…that the marginally better position provided for under the Scheme to the Scheme Creditors compare to the liquidation of AAX is sufficient for the Scheme to constitute a “compromise” or an “arrangement”’.

On the issue whether AAX was to be considered “hopelessly insolvent” and, therefore, the court should reject the proposed Scheme, the court noted that:

‘[109] There is no doubt that under the Scheme, the entity, AAX post-scheme will be completely debt free with no liabilities and with fresh capital to meet its operation. In fact, in this application, AAX has referred to a proforma balance sheet showing that AAX is a
solvent company post-scheme and anticipates to derive profits once the pandemic is over. Thus, it cannot be said that such a company is “hopelessly insolvent” by whatever definition of
“insolvency”.

[110] It is true that AAX‟s past performance records and its financial positions up to the filing of this OS show that AAX is indeed hopelessly insolvent…But this is precisely the reason compelling AAX to make the application for the approval of the Scheme.

[111] As regard the contention that the business of AAX post-scheme is not viable or feasible given the past performance and the figures forecasted, I agree …[that this]
Court simply has no role nor the expertise to make such a commercial assessment [i.e. to assess AAX’s financials to determine that the business model is flawed and cannot be salvaged]. The viability or otherwise of AAX post-scheme is best left for the Scheme Creditors who are in the airline industries to decide.

[114] Similarly, it is not for this Court at this juncture to speculate as to whether AAX will or will not be able to raise the necessary funding. There are expressions of interest shown at this stage to subscribe for the shares. Whether RM 300 million is sufficient is a commercial decision for the creditors and is not a function of this Court.

[115] Based on the aforesaid, I disagree that this OS ought to be dismissed on the ground that AAX is a hopelessly insolvent company.’

On the alleged lack of bona fide of the OS:

‘[145] There is…no evidence of actual dishonesty shown. Also, the latest classification of creditors by AAX via the Third Revised Scheme cannot be said to be either arbitrary or capricious.’

The court noted an overwhelming majority of creditors in favour of the proposed restructuring. Further, the court stated that:

‘[150] …I do not think that it is necessary for AAX to exhibit all the documents to support their selection of the creditors in each class of creditors at the Convening Stage…It will be placing too onerous a duty on the scheme company if a requirement is imposed on the scheme
company to substantiate the selection of each of the creditors in a particular class at the Convening Stage.’

The court came to the conclusion that:

‘[153] Accordingly, I am not prepared to hold that the OS filed by AAX is
an abuse of process or not bona fide. Neither do I find that there is material non-disclosure in the application.’

On the issue of classification of creditors, the court noted that:

‘[155] It is also common ground that AAX is for all intent and purposes an insolvent company.

[158] At the Convening Stage, the principal jurisdiction question for the Court is the identification of the classes and to ensure that each class is properly constituted so that the meetings for each of the classes can be properly convened. To me, this can only be
achieved if the issue pertaining to the constituent or composition of the classes is taken at the Convening Stage.

On the issue whether the lessors should be treated as secured creditors, the court after considering the definition of the term “secured creditor” in the Insolvency Act 1967, concluded that ‘[181]…AAX cannot treat the Lessors who had paid the “security deposits” and “maintenance reserves” as secured creditors and classified them under Class A creditors. They do not come within the definition of “secured creditors” under s. 2 of the Insolvency Act 1967.’ On the other hand, the court noted that it was not disputed that the airport operator was a secured creditor, and therefore, the airport operator and Lessors should be placed in two separate classes.

On the issue whether Airbus should be treated as a secured creditor, the court noted that there were “cash deposits” held by Airbus which were in substance “pre-delivery payments” or progress payments made in advance of delivery of the aircraft. As such, Airbus should be treated as an unsecured creditor.

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