ISLAMABAD: Pakistan International Airlines Corporation Limited (PIACL) is said to have reached out-of-court settlement in $26 million dispute with Asia Aviation Capital Limited (AACL) on two aircrafts, on the advice of legal counsel as PIA’s position in the case was quite weak, well informed sources told Business Recorder.

Sharing the details, sources said, Ministry of Aviation informed the ECC on October 27, 2023 that the PIACL obtained two A320 aircrafts AP-BLY (MSN 2926) and AP-BLZ (MSN 2944) on lease for six years from AACL in 2015.

As per industry practice, the lease agreement required that the aircraft would be redelivered after necessary maintenance at a certified maintenance and repair facility (MRO). Accordingly, on the expiry of lease, PIACL positioned the aircraft at FL Technic MRO, Jakarta in September and October 2021.

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It was planned that the aircraft would be redelivered in six to eight months. However, this schedule could not be followed which led to exchange of claims and counter claims between AACL and PIACL as to the responsibility for the delay, actual amount of the lease rent, penalties and interest to be paid to AACL.

The dispute in relation to the payment of lease rent led to litigation on two previous occasions, i.e., in 2019 and 2021 as a consequence of which PIACL was forced to pay $ 12.058 million to AACL.

“Since April 2022, PIACL tried extensively to reach out to AACL through inter- alia visits by senior officials to their headquarters at Kuala Lumpur, but they remained largely unresponsive,” the sources added.

On September 11, PIACL received a Court Notice through AACL’s UK based counsels Herbert Smith Freehills for immediate payment of $31.3 million against outstanding rent, re-delivery rent, maintenance reserve and interest charges for the two aircraft.

PIACL acknowledged the Court Notice and on its instructions, PIACL’s UK based counsels Norton Rose & Fullbright sought time from High Court of Justice, England and Wales, London to reply to AACL claims. Accordingly, next date of hearing was fixed for October 30, 2023.

Ministry of Aviation further noted that at the same time, PIACL’s counsels had categorically opined that PIACL’s position in this matter was quite weak. They had recommended that PIACL may find an out-of-court resolution with AACL not only with respect to the claimed amounts but also future liabilities with regard to rental payments and re-delivery of the aircraft.

The envisaged settlement could be one of the three modes, i.e., payment of cash, maintenance buy out or purchase of one or both aircraft. They further opined that since AACL’s claim does not involve factual controversy, it may be decided on a summary judgment for which the case could be heard in around six weeks.

According to sources, it was self-evident that an adverse decision against PIACL was likely to result in binding compulsion to pay the claimed amount and its failure to do so may lead to impounding of its aircraft or attachment of its properties. Moreover, the lease of two aircraft would not end and the rent and other re-delivery related liabilities of the aircraft would continue and subsequent claims would continue to incur.

Taking cognisance of the matter, PIACL Board recommended a two members team headed by Secretary Aviation for negotiation with AACL for out-of-court settlement in the larger interest of the company.

On submission of this recommendation, Prime Minister allowed the negotiation team to proceed to Kuala Lumpur on October 9, 2023. After having five rounds of negotiation with Chief Executive Officer, Air Asia Aviation Group on 9, 10th and 11th October, the negotiation team succeeded to convince them to settle the matter at a consolidated amount of $ 26 million which included transfer of title of two aircraft in two instalments.

Ministry of Aviation apprised that the negotiation team brought the upshot of negotiations into the notice of the caretaker Prime Minister through a video conference held on October 11, 2023 which was inter alia attended by Minister for Privatisation, Advisor to Prime Minister on Aviation and Establishment, Additional Secretary PM Office and senior officers from the Ministry of Aviation and PIACL.

The caretaker Prime Minister was apprised of the outcome of the negotiations leading to final settlement at $26 million. This amount included the cost of two aircrafts which had lately been assessed at $ 20.75 million by IBA valuations, a renowned international aircraft evaluator, It was explained that given this assessed value of aircraft, and that AACL was waiving off rent (partly), rent penalty, maintenance reserve and late payment interest, settlement at $ 26 million was in the best interest of PIACL. Further, given previous history, AACL insisted that at least 50 per cent of this amount shall be paid by October 30, 2023 while remaining shall be paid by November 30, 2023.

Following possible consequence of missing this opportunity were also shared with the ECC: (i) in view of PIACL’s counsel advise, a court judgment can result in binding compulsion on PIACL to pay $ 31.3 million in full and given that PIACL does not have means to pay this amount, it will require government support; (ii) if such government support is not given, the court order is likely to be enforced by either impounding PIACL’s other aircraft or by attaching PIACL assets including its hotels; (iii) moreover, lease of the two aircraft will not end and PIACL will continue to accrue around $1 million per month which the lessor can subsequently claim through courts. This rent will continue till the aircraft are redelivered to the lessor which will require time and additional payments of around $ 15 million as maintenance buyout settlement.

Ministry of Aviation sought permission of ECC to allow PIACL to sign settlement agreement with Asia Aviation Capital Limited in accordance with the letter of intent and Finance Division be directed to arrange grant of Rs 7.3 billion through Technical Supplementary Grant urgently enabling PIACL to clear outstanding dues of M/s AACL with transfer of title of two A-320 aircraft presently grounded at Jakarta, Indonesia before the agreed dates.

During the ensuing discussion, it was observed that proposal regarding allowing PIACL to sign settlement agreement with Asian Aviation Capital Limited (AACL) did not come under purview of the ECC in light of its Charter. It was further, observed that provision of requisite funds to PIACL through Technical Supplementary Grant (TSG) was not possible due to limited fiscal space. It was suggested that said funds may be arranged through bridge financing between PIACL and Pakistan Civil Aviation Authority subject to its recoupment by PIACL, on subsequent arrangement of financing.

After detailed deliberations the Economic Coordination Committee did not approve the proposal of Ministry of Aviation. The ECC, however, agreed, in principle, for a bridge financing of Rs 8 billion between PIACL and Pakistan Civil Aviation Authority for settlement and transfer of title of two A-320 Aircrafts AP-BLY, AP-BLZ and to meet immediate working capital requirement.

The ECC further directed that since the settlement agreement between PIACL and Asia Aviation Capital Limited is in accordance with letter of intent it does not fall within the purview of ECC; therefore, Ministry of Aviation should deal with it at its own level.

Copyright Business Recorder, 2023