Protea Leasing Ltd. v Royal Air Cambodge Company Ltd., Court of Appeal - Commercial Court, December 12, 2002, [2002] EWHC 2731 (Comm)

Issuing Organization:Commercial Court
Actores:Protea Leasing Ltd. v Royal Air Cambodge Company Ltd.
Resolution Date:December 12, 2002

[2002] EWHC 2731 (Comm) Case No: 1999 Folio 1118




Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 12th December 2002

B e f o r e :


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Mr. Iain Milligan Q.C. and Mr. Akhil Shah (instructed by Slaughter and May) for the claimant

The first defendant did not appear and was not represented

Mr. William Wood Q.C. and Mr. Philip Reed (solicitor advocate) (instructed by Norton Rose) for the second defendant

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I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version may be treated as authentic.

The Hon. Mr. Justice Moore-Bick

Mr Justice Moore-Bick:

1. Introduction

1. The first defendant, Royal Air Cambodge Company Limited (``RAC''), was incorporated in Cambodia on 7th December 1994 to act as the national air carrier of Cambodia. The third defendant, Naluri Berhad, formerly known as Malaysian Helicopter Services Berhad, agreed to become a minority shareholder in RAC and to provide financial and managerial support for the new company pursuant to the terms of an agreement with the Kingdom of Cambodia and RAC dated 28th December 1994 (``the Shareholders' Agreement''). The Shareholders' Agreement provided that the business of RAC would be managed and operated by the second defendant, Malaysian Airline System Berhad (``MAS''), a wholly-owned subsidiary of Naluri, in accordance with the terms of a Management Agreement entered into contemporaneously with the Shareholders' Agreement. It also provided that RAC would be the sole provider of domestic and international airline services within Cambodia.

2. RAC began commercial operations in 1995 employing four aircraft: two Boeing 737-400s and two ATR-72 200s. The Boeings were leased from MAS and the ATRs from the claimant, Protea Leasing Ltd (``Protea''). The ATRs, identified as aircraft Nos 204 and 207, were turbo-prop aircraft manufactured by a French company, Avions de Transport Regional GIE (``ATR''), which established Protea as a separate company for the purposes of leasing, and thereafter selling, the aircraft to its customer. RAC originally took over the leases of these two aircraft from Kampuchea Airlines which had previously been the airline operating in Cambodia, but the contractual arrangements were revised in September 1996 when RAC took a third ATR, aircraft No. 108, on lease from Protea. As a result the relevant contracts for present purposes are to be found in three lease agreements in substantially identical terms each dated 18th September 1996.

3. From the very beginning RAC's financial position was weak, partly because Naluri failed to provide the injections of capital called for by the Shareholders' Agreement. Many of the services that it required to support its operations were provided by MAS under the Management Agreement, but MAS was entitled to recover the cost of those services from RAC together with commission. In the event, RAC's ability to finance its operations depended to a large extent on the willingness of MAS to extend credit to it in steadily increasing amounts. However, in July 1997 an event occurred that was to have serious long-term consequences for RAC. A coup d'état was launched by one of Cambodia's joint prime ministers, Hun Sen, who, after some days of fighting in and around Phnom Penh, ousted his rival, Prince Rannaridh, and obtained control of the government. The coup brought a number of changes in its wake. The chairman of RAC, Mr. Vichit Ith, was replaced by a nominee of the new government, Mr. Pan Chantra. More importantly, however, the new government introduced an ``open skies'' policy, revoking RAC's monopoly status and requiring it to compete with other airlines on both domestic and international routes. Moreover, although the hostilities surrounding the coup were short lived, they had a serious effect on the tourist trade on which RAC depended for much of its income. To cap it all, July 1997 saw the beginning of the so-called `Asian economic crisis' which put additional pressure on RAC's slender financial resources.

4. It will be necessary to consider RAC's financial position in greater detail at a later stage, but it is sufficient for present purposes to say that following the events of July 1997 the overriding concern of its management was to keep the company going in the hope that it would eventually prosper. Some creditors, such as suppliers of fuel and ground services, had to be paid promptly to enable it to continue in operation at all. Others could more easily be kept waiting. Throughout the period with which this case is concerned the two main creditors in terms of recurring liabilities were the lessors of the aircraft, MAS and Protea. Both Boeing aircraft had been flown out of Phnom Penh during the coup when fighting erupted around the airport and only one had subsequently been returned. However, the rental payment on that aircraft was US$500,000 a month, more that the rental payable for all three ATRs. Many of the issues in this case revolve around the way in which RAC made use of the limited funds at its disposal during the two years following the coup.

5. Although the management of RAC had hoped that the tourists would return after the coup and that passenger demand would rise towards the latter part of 1997 and into 1998, it soon became clear that there was not going to be a quick recovery. Passenger numbers did not rise as quickly as had been hoped and revenues did not recover. By the time of the coup RAC had already become indebted to MAS in a sum in excess of US$18 million, but it had managed to keep up the payments due to Protea in respect of the ATRs. After the coup the position deteriorated further: RAC was unable to pay its current debts as they fell due and began to fall behind in payments to Protea. In January 1998, despite having just negotiated more generous payment terms with Protea, RAC began to suggest that Protea should accept redelivery of one aircraft and after some negotiation Protea did eventually agree in September 1998 to take one of the ATRs back. Almost immediately RAC began to press for the return of a second aircraft and further negotiations ensued. Arrangements for the return of two aircraft were well advanced when the Cambodian government intervened, indicating that it would support RAC financially. However, nothing came of that and Protea finally lost patience. On 12th February 1999 it gave notice of termination under the leases of aircraft Nos 204 and 207 and on 16th April 1999 notice was given to terminate the lease of aircraft No. 108.

6. In this action Protea's primary claim is to recover from RAC amounts due in respect of outstanding rent for the three aircraft together with sums due on early termination in accordance with the terms of the leases. RAC effectively ceased trading in about October 2001 and although it served a defence and counterclaim, it subsequently ceased to take an active part in the proceedings and did not appear at the trial.

7. The collapse of RAC makes it unlikely that Protea will recover any significant amount from that source and that no doubt explains why it has also pursued claims against MAS and Naluri. Its claim against MAS is in substance a claim for damages for inducing breach of contract, although, as will become apparent, it is not one to which the principles of English law apply. The complaint in a nutshell is that MAS, acting primarily through certain employees whom it sent to Phnom Penh as secondees to manage the business of RAC, failed to manage the business in RAC's best interests as required by the Management Agreement and thereby caused RAC to default on its obligations under the three ATR leases. Protea's principal contention is that MAS preferred its own interests to those of RAC by causing funds that could and should have been used to meet RAC's commitments to Protea to be used to pay debts due from RAC to itself.

8. Protea made a similar claim against Naluri on the grounds that it exercised control over MAS and RAC, but that claim was compromised shortly before the trial and nothing further need be said about it.

2. The commercial background

9. Before turning in more detail to the claims against RAC and MAS respectively it is necessary to say a little more about the way in which the business of RAC was conducted and about its relationship with Protea and ATR following the coup d'état in July 1997.

10. Prior to the coup MAS had sent seconded employees to Phnom Penh in order to assist in the management of RAC's business and to train the Cambodian staff. One of these was an accountant, Mr. James Stickney, who was seconded to RAC in December 1996, originally for a limited period expiring at the end of July 1997. In February 1997 he was designated Vice-President, Finance, but during this initial period of his employment with RAC Mr. Stickney's responsibilities were mainly directed to establishing accounting systems and producing up to date financial statements. Between February 1997 and early July that year the Chief Financial Officer was a Cambodian, Mr. George Tam. He left RAC when the change of management took place following the coup. The Chief Operating Officer prior to the coup was Mr. David Chew, who was also a secondee from MAS.

11. Following the coup Mr. Pan Chantra was appointed chairman and chief executive officer of RAC. Mr. Stickney, who had been evacuated from Cambodia when the coup erupted, returned to Phnom Penh to complete his original assignment. He did not like working in Cambodia and wanted to return to Malaysia as soon as possible, but it seems that MAS was unable to find a suitable replacement for him and in the end he remained there until the end of July 2000. After George Tam left RAC the post...

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