JOLCO investors score win in English court

A judge in the English High Court has ruled in favour of FW Aviation, an entity associated with UK investment firm FitzWalter Capital, in a dispute with VietJet. The case centred on four Airbus A320s that were leased to VietJet under a JOLCO arrangement and continued to operate after defaulting on rental payments.

Following VietJet’s failure to pay rent, the leases were formally terminated in October 2021, and security interests passed to FW Aviation. However, VietJet initially didn’t recognise the termination, refusing to return the aircraft and continuing to use them in operations throughout 2022.

Subsequently, FW Aviation was able to repossess the aircraft. It brought proceedings in the English High Court seeking various remedies, including an order requiring VietJet to pay: (a) $165 million representing ‘Termination Sums’ provided for in the relevant leasing arrangements; and (b) a further $16.7 million of unpaid rent for the interim period when the aircraft had been sold but not returned.

Under the JOLCO arrangement, a default triggered the obligation to pay the ‘Termination Sums’, broken down into $108 million for two aircraft and $57 million for the other pair. VietJet sought to argue that the relevant provisions were unenforceable penalty clauses.

Keir Baker, Associate at Morgan Lewis, explains: “Under English law, there’s a legal doctrine that prevents the enforcement of so-called ‘penalty clauses’, which – in effect – are clauses deemed punitive or 'draconian' because they impose disproportionate obligations. VietJet essentially argued that the ‘Termination Sums’ went beyond what the lessor could claim was necessary to protect a legitimate interest.”

 

How JOLCOs work – and why payment matters

 

JOLCO deals rest on a careful balance between borrowed funds and investor equity. In practice, banks lend money to a special-purpose vehicle (SPV) that represents the interests of Japanese investors who supply the equity in return for valuable tax breaks. The airline’s rent payments flow through that vehicle to service the bank loans.

“This means (as the Judge found) that the “entire viability” of JOLCO Structures relies on prompt rent payments; otherwise, the SPV cannot pay back the loans. This could collapse the whole structure, including losing the Japanese investors their expected investment return and the tax benefits,” Baker explains.

The ‘Termination Sums’ that VietJet was challenging had two purposes. First, to clear the remaining loan balance and second to reimburse the Japanese investors for the lost tax benefits and expected investment returns .

The judge found that the Termination Sums were appropriately balanced against the legitimate interests that they protected.

“Among other things, the Judge took account of the particular ‘vulnerability’ of the Japanese investors’ position if VietJet defaulted,” explains Baker.

 “He also noted that VietJet was a ‘sophisticated commercial actor with significant experience in aircraft financing,’ including familiarity with the JOLCO structure, how it worked, and the relevant tax and financing elements.

He ultimately concluded that the ‘Termination Sums’ requirement did not impose a detriment out of all proportion to the identified legitimate interest.”

VietJet has been granted permission by the Court of Appeal to challenge the order of Mr Justice Picken. The appeal, approved on 12 May 2025, is currently awaiting a hearing, and is scheduled to take place by 15 June 2026. The outcome of this appeal may determine whether this latest ruling takes effect.

Last week, VietJet missed a court-ordered deadline to pay $60.5 million of the $181.7 million owed, according to a statement provided by FitzWalter Capital Ltd to Bloomberg.

 

The Ishka View

 

The ruling provides legal clarity and reassurance for lessors and financiers using JOLCO structures: termination payment provisions are enforceable.

That the judge landed on the side of investors and financiers reinforces the viability of the JOLCO structure. For airlines, they are unlikely to be deterred from engaging in JOLCOs in the future, given that this model continues to offer cheaper financing and more attractive lease rates.

Other market participants will also take heart from the judge’s reasoning.

Peter Sharp, Partner at Morgan Lewis, explains: “This will primarily be parties involved in structures that have similarities to the JOLCO Structure. But there are things to like for the aircraft leasing community more generally, too.

“While JOLCO Structures do have their own features, there are aspects of the Judge’s reasoning that may be deployed to substantially validate lessors’ positions in customary claims for debt/damages under more conventional leasing arrangements, which defaulting airlines often seek to defend by arguing that certain remedies (such as default interest) are unenforceable penalty clauses”.

For now, this is a clear win for investors, providing certainty around the structure’s security and confirming that tax benefits are a fundamental part of JOLCO deals.

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