Early Termination Rights and the Modern Meaning of “Financial Institution” in Aircraft JOLCO Structures – Commentary on VietJet Aviation JSC v FW Aviation (Holdings) 1 Ltd ([2025] EWCA Civ 783)

1. Introduction

The Court of Appeal’s decision in VietJet Aviation JSC v FW Aviation (Holdings) 1 Ltd (hereafter “VietJet”) tackles three recurring problems in cross-border asset finance:

1. When, and by whom, aircraft leases arranged through Japanese Operating Lease with Call Option (“JOLCO”) structures may be terminated for lessee default.
2. The scope of the expression “bank or other financial institution” in modern syndicated loan agreements and security trusts.
3. How the “business of making or managing investments” carve-out in Article 22(5)(a) of the UK–Japan Double Tax Treaty (“DTT”) should be applied to distressed-debt vehicles.

The appellant, Vietnamese carrier VietJet, resisted FW Aviation’s (and its affiliate FWC’s) attempts to repossess and sell four Airbus A321 aircraft financed in 2018-2019. Picken J had found for the finance parties on liability and quantum (USD 181 million). VietJet appealed on five grounds; all were dismissed. The Court’s reasoning now stands as the leading authority on:

• Early enforcement – confirming that a security trustee can serve termination notices before a loan “Enforcement Event” where the security assignment is absolute in form.
• Meaning of “financial institution” – endorsing the wide, business-activity test from Argo Fund v Essar Steel and rejecting narrower “bank-like” notions.
• Article 22(5) DTT – holding that a trader in distressed loans is not in the “business of making or managing investments” and so retains treaty benefits.

2. Summary of the Judgment

Lord Justice Popplewell (with Zac­aroli LJ and Asplin LJ concurring) upheld Picken J on each appellate ground:

1. Termination Notices valid. Clause 3 of the Security Assignment gave the Security Trustee an immediate right to terminate the leases on non-payment; clause 7’s “Enforcement Event” trigger applied only to additional foreclosure/sale powers, not to the assigned lease rights.
2. FWC a “financial institution”. The Court applied the Argo definition (“legally recognised entity whose business concerns commercial finance”), emphasising that updated LMA wording was intended to broaden, not narrow, eligible assignees and successor trustees.
3. DTT Article 22(5). FWC’s trade was the purchase of distressed loans for enforcement – a trading (not investment-managing) business; thus the treaty exemption applied.
4. Article 11(7) anti-abuse. No evidence that the main purpose of the assignment was to secure treaty benefits, and in any event the loans had already accelerated so no interest withholding could arise.
5. Attribution of shareholder litigation. The Court refused even to consider this ground: VietJet sought to appeal an “unappealed reasoning” rather than an order, outside s 16 Senior Courts Act jurisdiction.

3. Analytical Overview

3.1 Precedents Cited and their Influence

• The Argo Fund Ltd v Essar Steel Ltd [2006] EWCA Civ 241 – cardinal for the breadth of “financial institution”. Popplewell LJ treats Argo as settled meaning, reinforced by subsequent LMA drafting.
• Sunport Shipping v Tryg Baltica (The Kleovoulos of Rhodes) [2003] EWCA Civ 12 – principle that where wording previously construed by courts is reused, the same meaning is presumed.
• Nuclear Electric Plc v Bradley [1996] 1 WLR 529 and Marson v Morton [1986] 1 WLR 134 – relied on to distinguish trading from investment income under UK tax law when interpreting Art 22(5).
• Lake v Lake [1955] P 336 and Cie Noga d’Importation [2003] 1 WLR 307 – guidance on appellate jurisdiction; used to dismiss Ground 5.
• OECD Model Convention Commentary (2005) – supplied context for treaty-shopping and anti-abuse clauses.

3.2 Court’s Legal Reasoning

a) Termination Rights (Ground 1)

• Clause 3 effected an absolute security assignment of “Assigned Property,” explicitly including “all rights … to terminate the leasing of the Aircraft”.
• Clause 7 begins “Without prejudice to any other rights…” – signalling additional remedies, not limitations.
• Commercial coherence: lenders needed day-to-day control (inspection, maintenance covenants) before a loan default because JOLCO owners are passive Japanese investors.
• To require an Enforcement Event would create a “lacuna”: by cl 3.5(b) only the Security Trustee may exercise any co-extensive right affecting aircraft value; if clause 3 were frozen until loan acceleration nobody could act.

b) “Financial Institution” (Ground 2)

• The three-limb structure of LMA cl 17.1 (“bank or financial institution or trust/fund/other entity…”).
• Legislative history: LMA dropped the word “other” after Argo (2001), intending to avoid confinement to “bank-like” bodies.
• Overlap is deliberate; using “to … to” does not render limbs mutually exclusive.
• FWC – a single-purpose vehicle buying distressed loans to realise security – fits Argo’s test. Its form (a U.K. private company) is irrelevant; its business is commercial finance.

c) DTT Interpretation (Grounds 3-4)

• Treaty terms interpreted per Vienna Convention art 31-32 as a “single combined operation”.
• “Business of making or managing investments” must be construed by domestic tax meaning (Article 3.2) – UK law draws a bright line between trade and investment.
• FWC’s activity – enforcement/trading of debts – is akin to dealing stock in trade. Banks/insurers exception in Art 22(5) aligns with UK authorities (Nuclear Electric).
• Art 11(7) “taking advantage” is an anti-abuse concept. No interest was payable (loans accelerated); incorporation in England not abusive.

d) Jurisdiction on Ground 5

• Appeal lies against orders, not reasons. Noga principle prevented the Court from disturbing Picken J’s reasoning absent an appeal against the relief-from-forfeiture order itself.
• Re W (A Child) distinguished: that route depends on ECHR violations; none alleged here.

3.3 Likely Impact

• Aircraft finance: Lessors, lenders and credit funds gain confidence that immediate repossession is possible on rent default even where loan acceleration has not yet occurred – particularly critical for Cape-Town-registered assets.
• Loan trading market: Confirms that hedge-fund-style SPVs qualify as “financial institutions” for assignment and agency clauses, simplifying distressed-debt transfers.
• Tax structuring: Distressed-debt traders remain eligible for treaty benefits under Art 22(5) – curtailing attempts by borrowers to challenge assignments on withholding-tax technicalities.
• Drafting practice: Expect explicit drafting in security assignments clarifying any desire to limit early termination rights; otherwise the VietJet default rule will prevail.
• Litigation strategy: Ground 5 underscores that appellate courts will not entertain “reason-only” challenges; parties must seek declaratory orders below if future proceedings may be affected.

4. Complex Concepts Simplified

5. Conclusion

The Court of Appeal has delivered a robust, commercially attuned judgment that harmonises finance-market expectations with doctrinal clarity. By:

• Separating assigned lease rights from post-Enforcement Event remedies,
• Anchoring “financial institution” to business substance,
• Embedding UK tax concepts into treaty interpretation,

VietJet offers lenders, SPV owners and distressed-debt funds a road-map for rapid enforcement and reliable transferability of aircraft loans. Borrowers should take note: mere technical defences rooted in withholding-tax clauses or restrictive readings of “financial institution” are unlikely to avail them. Future disputes may pivot instead on factual contests (commercial reasonableness of sales, good-faith enforcement) rather than formalistic attacks on standing or notice.

In the wider legal landscape, the case reaffirms that English courts give weight to industry-standard forms (LMA, JOLCO templates) and prior appellate interpretations, ensuring predictability in global asset finance. The judgment will likely be cited beyond aviation – in shipping, rail, and structured credit – wherever security assignments and treaty benefits intersect.