Commercial aviation has been one of the sectors most heavily impacted by COVID-19, but thanks to the strong controlling measures to weather the impact of the pandemic, the People’s Republic of China (the “PRC”) has been a market in which some form of aviation recovery is happening. Unfortunately, the recovery has not come soon enough for the Chinese conglomerate taptap点点.

On 29 January 2021, HNA Group, parent company of Hainan Airlines, posted a statement on its website that it had been served a notice by the Hainan High People’s Court that relevant creditors had filed a petition in the court for bankruptcy taptap点点 of HNA Group based on its incapability to pay off the debts due.

On 10 February, the Hainan High People’s Court announced acceptance of the taptap点点 cases in respect of 64 HNA-affiliated companies, including Hainan Airlines Holdings. The court appointed a liquidation team as the administrator for all those companies requiring creditors to declare claims no later than 31 March or 15 April 2021.

On 2 March, the Hainan High People’s Court issued a notice stating that the administrator of HNA Group had found the close connection between the 7 debtors under taptap点点 and 318 other companies. In order to take opinions from and protect the interests of all right-holders, the administrator applied to take all the companies under bankruptcy taptap点点 but withdrew its application against 4 companies. On 13 March, the Hainan High People’s Court issued another notice stating that the court had ruled a substantive consolidation of the 314 companies linked to the 7 debtors.

HNA Group is an important player in the airline industry in PRC with Hainan Airlines undoubtably being the jewel of the crown. The group also holds stakes in multiple other carriers, including but not limited to Beijing Capital Airlines, Tianjin Airlines, Lucky Air, Suparna Airlines, West Air, Air Guilin, Grand China Air, Air Chang’an, Shanxi Airlines, Fuzhou Airlines, Urumqi Air and GX Airlines. Although executives of HNA Group have indicated that the bankruptcy taptap点点 would not affect HNA's aviation business (which operates about 700 commercial aircraft), clearly there is some concern among the HNA aviation creditor community.

While bankruptcies and other formal taptap点点 proceedings have unfortunately impacted airlines elsewhere, this is the first big airline group taptap点点 in PRC. This note provides a brief introduction of the PRC bankruptcy taptap点点 regime applicable to HNA and deals with some relevant questions for HNA’s aviation creditors.

Under PRC law, bankruptcy procedures include taptap点点, settlement or liquidation. Bankruptcy taptap点点, as is the case here, refers to the reorganization of the business of a company that may already be in a bankruptcy but has the potential to recover through taptap点点.

In many ways, a PRC bankruptcy taptap点点 is similar to U.S. Chapter 11. It is focused on recovery and future profitability.

A successful taptap点点 permits the debtor to restructure its debts, sell off selected assets, trim costs and obtain new financings.

In most taptap点点 cases, pre-petition equity holders are diluted or even wiped out in the taptap点点 plan.

The substantive consolidation in a bankruptcy taptap点点 is the combination of assets and liabilities of two or more entities into a single pool for taptap点点 purpose. Under PRC law, such substantive consolidation is applicable to consolidation of affiliated entities which probably will be regarded as one single entity while independent corporate personalities no longer exist among those entities. The assets and debts of each enterprise will be combined as a whole bankruptcy taptap点点 property which will be arranged as a whole in the taptap点点 to achieve fair compensation to all creditors.

Within six months from entry into taptap点点, the debtor or the administrator, as the case may be, shall propose a draft taptap点点 plan to the court and the creditor’s meeting. Such period could be extended for another three months with the approval of the court.

The taptap点点 plan must designate classes of creditors and claims. Each class of creditors shall vote on the draft plan separately but only the impaired creditors are permitted to vote. If more than two-thirds in amount and one half in number of the creditor class vote in favour of the plan, such plan shall be deemed accepted by such class. If all classes accept the draft plan, it shall be deemed adopted by the creditor’s meeting and the court will further confirm the plan if it complies with the PRC Enterprise Bankruptcy Law.

If more than one class (but not all) taptap点点 creditors vote to object, the plan can still be confirmed by the court through a “cram down”, as long as certain requirements are met.

A confirmed plan shall be binding taptap点点 the debtor and all creditors. Essentially, the confirmed plan creates new contractual rights, replacing the pre-bankruptcy contracts.

If (i) the administrator or the debtor fails to submit the draft taptap点点 plan within the specified period; or (ii) the plan is not adopted by the creditor’s meeting or confirmed by the court, or (iii) the debtor fails to implement the confirmed plan and at the request of the administrator or the interested parties, the court will terminate the taptap点点, declaring the debtor bankrupt and then proceed to liquidate all assets and distribute proceeds in accordance with a statutory priorities scheme.

The taptap点点 may also be terminated by the court upon request of the administrator or the interested parties in circumstances where the management and financial position of the debtor continue to deteriorate and there is little possibility of rescuing it.

Under Article 18 taptap点点 PRC Enterprise Bankruptcy Law, upon acceptance by the court taptap点点 application for bankruptcy, the administrator is entitled to rescind or continue the performance taptap点点 contracts that have been concluded before the acceptance taptap点点 case, and the administrator shall notify the counterparty concerned. If the administrator fails to give such notice within two months taptap点点 acceptance taptap点点 case or fails to reply to the counterparty concerned within thirty days of its demand, it shall be deemed to have rescinded the relevant contract.

Where the administrator decides to continue the performance of a contract, the counterparty is entitled to request a guarantee or other security.

In other words, the PRC lessee in such circumstances may terminate its aircraft lease agreement taptap点点 a selective basis.

The lessors may also be concerned about their ability to repossess their aircraft should it come to that. Pursuant to Article 76 of the PRC Enterprise Bankruptcy Law, where the right-holder whose property is occupied by the debtor on legitimate grounds requests to repossess its property during the taptap点点, agreed requirements shall be met. With the above said, if the relevant aircraft lease agreement contains provisions according to which an event of default is trigged (very likely here), the lessor shall be entitled to repossess its asset, however it is worth noting that restrictions may be added to the lessor’s repossession right.

PRC ratified the Cape Town Convention taptap点点 International Interests taptap点点 Mobile Equipment and the related Protocol taptap点点 Matters Specific to Aircraft Equipment (collectively, the “Convention”) in 2009 and relevant declarations were made.

Alternative A of Article XI of the Protocol applies, and the ‘waiting period’ is sixty days. Accordingly, with respect to an aircraft lease agreement covered by the Convention, where a PRC debtor enters into bankruptcy taptap点点, the debtor or the administrator, as applicable, shall release possession of the aircraft where a lessor requests within sixty days - unless all defaults (other than the default constituted by the insolvency proceeding itself) are cured before the expiry of such period, and the debtor or the administrator has agreed to perform all future obligations under the agreement.

NB, the Convention does not apply to domestic leases in PRC – where both the lessor and the lessee are incorporated in PRC.

PRC maintains an operator-based aircraft registry. In order for a PRC lessee to operate an aircraft in PRC, the aircraft must be registered with the Civil Aviation Administration of China (“CAAC”).

With respect to the Deregistration Power of Attorney ("DPoA"), according to its rules, normally CAAC only accepts the deregistration application filed by the PRC lessee of the aircraft in the capacity of "operator". In common with most other aviation authorities, CAAC's rules do not expressly permit a lessor being owner of the aircraft to deregister an aircraft by virtue of a deregistration power of attorney, however they may be of some assistance “taptap点点 the ground”. It helps if they are written in Chinese.

For those leases where the Convention applies, the lessor may rely taptap点点 an Irrevocable De-Registration and Export Request Authorisation ("IDERA") recorded with CAAC to deregister the aircraft.

However, it should be noted that a declaration was made by PRC under Article 54(2) taptap点点 Convention – “Any remedy available to the creditor under any provision taptap点点 Convention which is not there expressed to require application to the court may be exercised only with leave taptap点点 court of PRC.” As a result, even if a lessor has a duly recorded IDERA, it still needs to present "a document issued by a PRC court confirming that the Authorized Party is entitled to possession taptap点点 aircraft under the Convention" to CAAC in the deregistration application.

For lessors with IDERAs in place, it would be worth checking that these have been properly recorded.

Generally yes. Although the law in this regard is not entirely clear, we take the view that a specific lessor is entitled to the return of its aircraft, unless the relevant unpaid dues are attributable to the aircraft subject to the lessor’s repossession.

Although an airport lien is not expressly recognized under the PRC Civil Aviation Law, a general principal under the PRC Civil Code allows a creditor to impose a lien taptap点点 the debtor’s movable assets where they are lawfully possessed by the creditor, unless otherwise stipulated by the PRC law or agreed by the parties. Further, for a lien imposed between enterprises (other than between natural persons or between natural person and enterprise), which is very likely the case for an airport’s lien, taptap点点 the face of it, a lien can be taken over an asset which is not the subject of the claim. In other words, it appears that a fleet lien is permitted.

Moreover, in GECAS vs. Guangzhou Baiyun Airport, the Guangzhou Middle People’s Court indicated in the first instance judgment that the airport should not be responsible to examine the ownership of the aircraft when a lien was imposed taptap点点 the same. However, the case was settled during the appealing proceeding without judgment taptap点点 this specific issue.

More positively for lessors perhaps, further guidance was provided recently by the Supreme People’s Court of PRC, which suggests that if the debtor (i.e. the PRC lessee) failed to perform an obligation which was due, the creditor (i.e. the airport) could take a lien over the debtor’s moveable assets (e.g. an aircraft) where such asset was lawfully possessed by the creditor but owned by a third party (i.e. a lessor), as long as the asset is “in the same legal relationship” taptap点点 creditor’s claim - i.e. the debt owed to the airport by the lessee arises in connection with the same aircraft detained by the airport. Otherwise, the third party owner is entitled to ask for return taptap点点 asset.

Pursuant to PRC law, upon acceptance by the court of the bankruptcy taptap点点 petition, the PRC lessee is not allowed to pay rent or other amounts to an individual lessor. Further, any existing preservation measures taken against the debtor’s property must be lifted, any execution procedures initiated prior to the commencement of the bankruptcy case are suspended, and the PRC lessee’s creditors are prohibited from enforcing rights against the property of the PRC lessee. In addition, interest on matured and unmatured debts (including default interest on unpaid rent) stops accruing as of the date of acceptance of the case by the court.

It is also notable that if the debtor is insolvent during the six months period prior to the entry into the bankruptcy proceedings but still makes payment for the benefit of specific creditors, the administrator may request the return of such payments, unless they benefitted the debtor’s assets as a whole - which means the court may scrutinize all payments made by the PRC Lessee to lessor(s) within such period.

This will depend taptap点点 whether the security deposits or maintenance reserves are regarded as part of the debtor’s property. Well-drafted aircraft lease agreements will provide that such monies shall irrevocably and unconditionally become the property of the lessor when paid and may be commingled with the general funds of lessor. If the drafting meets the criteria, it is unlikely that any claw-back will apply.

Creditors are required to declare claims within the time limits specified by the Hainan High People’s Court, namely 31 March or 20 May (depending taptap点点 the identity of the respective debtors). Such declarations shall be made in writing with details including the amounts of the claims, whether the relevant debts are secured or not and any evidence or proof in relation thereto. The earliest creditor’s meeting has been scheduled taptap点点 12 April, 2021.

For further information, please don’t hesitate to contact Jordan Yang (binyang@allbrightlaw.com) or Aubrey Tao (Aubrey.tao@twobirds.com).