Reports in local media about the four planes at the centre of a court case involving Vietnam’s VietJet and Fitzwalter Aviation Holdings have been few and far between. Those that have surfaced have been brief and lacking detail–one very one-sided article back in April discussed key details of the case yet failed to name VietJet as the airline involved, for example.
Indeed, this has made it difficult to draw a clear picture of the dispute and subsequently to determine what it might mean for Vietnam’s aviation industry. That said, last week a court in the UK ruled on the case finding mostly in favour of Fitzwalter, with a 74-page judgement detailing the finer nuances of the dispute.
In particular, it has highlighted a number of distinct differences between Vietnamese and international business norms from which foreign firms doing business in Vietnam may be able to glean some valuable insights. With this in mind, this article looks at what happened, how it played out in the court, and what might happen next.
Why was VietJet in court in the UK?
Pre-COVID VietJet made lease agreements with two firms: Natixis and BNP Paribas. VietJet would receive four aircraft, two from each, for which it would make repayments to the lenders with the option to buy the aircraft outright at the end of the lease.
But then COVID-19 hit and in 2021, amid a broad lockdown, flights were grounded with VietJet’s business operations significantly impacted. As a result, it fell behind on its repayments and by the end of September, it was US$8.1 million in arrears on the four planes with its payments between 48 and 118 days past due.
VietJet, subsequently, sought hardship relief from its lenders and at the end of some back and forth, on September 20, a deal was put forward by Natixis, relating to two of the aircraft, that would see repayments delayed to June 2022.
VietJet, however, only notified Natixis that it would accept the offer on October 7, nearly three weeks later. By then, however, it was too late. The leases were in the process of being sold to Fitzwalter Capital Group which was coordinating with BNP and Natixis to have the leases cancelled prior to the acquisition.
Subsequently, lease termination notices were sent to VietJet between October 18, 2021, and October 26 2021 for all four aircraft. The termination notices advised VietJet to ground the aircraft and make them available to be returned to the lessor. They also triggered an option for VietJet to pay out the leases and take ownership of the aircraft, an option it had 30 days to exercise.
Per the original agreement, this would have amounted to US$275 million.
This option, however, was never exercised, and Fitzwalter Capital Group went on to take possession of the leases and then went on to sell the leases to its subsidiary Fitzwalter Aviation Holdings, the claimant in this lawsuit.
But VietJet refused to give back the planes. In fact, it kept using them for more than a year after the lease termination notices had been sent–over the first nine months of 2022, it recorded 4,320 flights with the planes in question but made no rental payments for which it would have been liable for an additional US$21 million.
During that period Fitzwalter sent multiple demand notices and two repossession notices but was unable to recover the aircraft. The firm eventually commenced legal proceedings in the UK on August 22.
This served to give VietJet a jolt in the arm with the airline looking to remedy the legal action by offering to buy the aircraft for US$180 million. This is what the payout would have been had the lease been cancelled in October of 2022 as opposed to when the termination notices were issued in 2021. Fitzwalter declined this offer.
It was shortly thereafter, on November 16, that the Court issued a ‘consent order’ giving Fitzwalter custody over the planes. As a result, over the course of December 2022 and January 2023, the aircraft were deregistered in Vietnam and reregistered in Guernsey. They had not, however, left Vietnam facing a number of additional barriers.
For one, in February of 2023, Silva Star Capital, incorporated in Singapore and a minority stakeholder in VietJet, applied for and received a temporary injunction in Vietnam against the deregistration of the aircraft.
Silva Star, however, was controlled by VietJet’s founder who was also its ultimate beneficiary, according to the Court. The then Vice General Director of VietJet was also one of three legal representatives of Polar Star, Silva Star’s parent company.
In light of this information, Fitzwalter brought contempt of court proceedings against VietJet. This then quickly led to Silva Star withdrawing its claim and the injunction being lifted. That said, three other VietJet shareholders quickly moved in to replace Silva Star as the claimant in basically the same claim against the deregistration of the aircraft.
VietJet then moved to persuade the Civil Aviation Authority of Vietnam–the CAAV–and the Ministry of Transport that the CAAV did not have the authority to issue an Export Certificate of Airworthiness, without which the aircraft could not leave Vietnam.
(On a side note, it also tried to have this correspondence excluded from the proceedings in the UK citing state secrecy.)
Regardless, the CAAV confirmed in December of 2023 that the planes were, in principle, approved for export and subsequently, on March 4, one of the planes was flown from Hanoi to Ho Chi Minh City. It was, however, to stop there with a judge in Hanoi requesting more information on the export procedures, which effectively led to the export of the aircraft being aborted.
This was followed, on April 3, by the Vietnam Customs Authority giving, in principle, approval for the aircraft to be exported only for one of the three shareholders pursuing the case in Hanoi, to ask the courts to complete on-site inspection of the aircraft before they were shipped out. This was granted and again the planes were unable to leave Vietnam, pending said inspection, which is where they were on July 31 when the UK court handed down its judgement.
So, what did the Court say?
Basically, VietJet had argued that the lease terminations were invalid on the grounds that Fitzwalter didn’t have the authority to end the leases. This part of the judgement is extremely technical and digs deep into the contract between VietJet and the lessors. It does, however, find that the leases were lawfully terminated.
That said, VietJet has also argued that it already had an agreement in place to extend its lease with Natixis. This agreement, however, the court found was contingent on approval from Natixis’ shareholders which VietJet never received. It also noted that VietJet had not mentioned the agreement until almost a year later, in September of 2022, which the court also found to be telling.
“Had there, in fact, been a concluded agreement, VietJet would have been bound to raise it much earlier. The fact that VietJet did not do so confirms the fact that there was no such agreement,” the judgement reads.
Aside from these two claims, VietJet had also requested relief of forfeiture–essentially to remedy any outstanding debts and keep a hold of the planes.
This was rejected by the courts which cited VietJet’s decision to continue to use the aircraft after receiving the termination notices, and its failure to pay any rental payments for over two years in spite of earning income from the continued use of the aircraft.
It also noted that efforts to prevent the export of the aircraft appeared to be so that the airline could claim said relief from forfeiture and compel Fitzwalter to release the aircraft to the airline. A reality the Court did not look favourably on.
“This misconduct is not only so closely connected with VietJet’s application for relief from forfeiture, but also so egregious, that VietJet should be precluded from the relief sought,” the judgement reads.
What will all of this cost VietJet?
The judgement doesn’t give a figure and suggests that the parties sort it out among themselves. That said, Fitzwalter was looking for US$275 million from the terminated leases as well as claiming termination costs and swap breakage loss, as well as the cost of preparing the aircraft to be returned.
That’s not to mention reputational damage not just for VietJet but for Vietnamese aviators more broadly. The Aviation Working Group, a body that monitors the implementation of the Cape Town Convention on aviation leasing and scores countries by their level of compliance, added Vietnam to a watchlist back in April. This judgement could see Vietnam’s score lowered which typically means higher risk and subsequently higher borrowing costs. This is made all the more significant in that Vietnam’s aviation industry is already, broadly, struggling.
Furthermore, some heed should also be given to VietJet stocks which lost about 5 percent of their value between July 31 and August 12.
VietJet did, however, seek to assuage investor concerns in an information disclosure on August 8.
“…The judge ruled largely in favour of FWA in the first instance, despite VietJet being able to demonstrate the underhand scheme and bad-faith conduct of FWA and the whole Fitz Walter group, as well as its unjust exploitation of the pandemic and off-market conduct generally,” it reads.
The company goes on to say it will appeal the judgement and claims this “will not affect operational stability and financial stability”. An appeal notwithstanding, it’s not clear how that might be.
This did, however, see the stock price stabilise, though it’s worth noting that foreign investors have continued to exit the stock en masse–from the 8th to the 12th foreign investors net-sold just over US$39.4 million worth of shares in VietJet.
What’s next?
In the case of Fitzwalter Aviation Holdings versus VietJet, there are broad insights to be gleaned for foreign firms into Vietnamese business practices compared to international business norms. From how creditors are managed, to the role of government in commercial disputes, to communication practices, doing business in Vietnam may not be as straightforward as it is in other parts of the world.
In this respect, a deeper understanding of doing business in Vietnam before entering the market can be a valuable asset and one way to develop this understanding is by making sure to subscribe to the-shiv.