By Stephen Dickens, Partner

Virgin gets some good news! The Federal Court in the first significant legal case arising out of the Virgin collapse has again highlighted the need for flexibility in the application of insolvency laws during the COVID-19 crisis

Consistent with recent decisions dealing with the effect of COVID-19 on the performance of statutory tasks required of insolvency practitioners, the decision by Justice Middleton of the Federal Court of Australia in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) [2020] FCA 571, further demonstrates that the Courts are prepared, as a matter of discretion and flexibility, to try to assist administrators who sensibly seek amended regimes pursuant to section 447A(1) of the Corporations Act 2001 (Cth) (Corporations Act) and section 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), but bearing in mind the need to facilitate the  best interests of creditors.

Facts

The COVID-19 pandemic led to an abrupt and substantial downturn in the operations and revenue of Virgin Australia Holdings Ltd (Administrators Appointed) and 37 of its subsidiaries (together, the Virgin Companies).

As a result, on 20 April 2020, Vaughan Strawbridge, Salvatore Algeri, John Greig and Richard Hughes of Deloitte (together, the Administrators),  were appointed as joint and several administrators of the Virgin Companies.

Since their appointment, the Administrators have had to investigate and manage what is a very complex set of administrations, and to deal with a significant number of stakeholders.  They have identified over 10,000 known creditors of the Virgin Companies (other than bondholders); but the total number of creditors (other than bondholders) could ultimately exceed 12,000 with a total indebtedness of over $7 billion.  There are also over 140 aircraft in the group, and more than 80 real property lessors.

The Administrators are in the process of assessing viable options to continue to keep the business operating and to maximise the prospect of a sale of the business and assets of the Virgin Companies as a going concern.  There are, apparently, a number of potential buyers in the wings.

Application

As a consequence of the significant scale and complexity of the operations of the Virgin Companies, as well as the COVID-19 pandemic, the Administrators applied to the Court to seek orders:

1. permitting meetings of the creditors to be conducted exclusively by video-link or telephone;
2. permitting notices to be sent by email to creditors;
3. permitting meetings of the committee of inspection to be held exclusively by video-link or telephone;
4. for the formation of a single committee of inspection for the Virgin Companies, with the members of the committee of inspection to be selected, in the first instance, by the Administrators and, thereafter, for those selections to be ratified by the creditors;
5. permitting the Administrators to have 10 business days to respond to requests for information from creditors (being an increase from the statutory default period of 5 business days); and
6. for a 4 week extension of the time, in section 443B of the Corporations Act, in which the Administrators are to give notice to lessors of property leased by the Virgin Companies as to whether to retain or give up possession of that property, together with a corresponding extension of the period in which the Administrators do not have personal liability for obligations under those leases.

Impact of COVID-19

In addition to the already complex nature of the administration, Mr Strawbridge deposed that the COVID-19 pandemic has made the Administrators’ investigations into the affairs of the Virgin Companies more challenging.  For example, as a result of working from home and social distancing arrangements, liaising with the Virgin Companies’ officers and employees has been, and is to be, done by telephone and email.

Decision

The orders sought in paragraphs (a) to (c) above were substantially similar to those sought in the recent decision of Eagle, in the matter of Techfront Australia Pty Limited (administrators appointed) [2020] FCA 542.  The administrators in that matter also sought a two week extension of time within which to give the notice under section 443B of the Corporations Act.

A Court has a broad power under section 447A of the Corporations Act and 90-15 of the IPS, to make such orders as it thinks appropriate or fit in relation to the external administration of a company. That involves a very wide discretion.

Utilising those powers, Justice Middleton granted the orders sought by the Administrators.  The orders were framed in such a way so as to permit persons who are affected by the orders (such as lessors of the property) to apply to the Court for a variation, if considered necessary.

While holding meetings by video-link or telephone might, in the ordinary course of business, seem commonplace, those mediums, to the exclusion of a physical meeting, are certainly not ordinarily contemplated under the existing administration regime.

Further, the Court recognised that issues may arise as to the length of the extension provided (4 weeks) under section 443B, as the Virgin Companies would, in that period, remain in possession of property the subject of leases held by the Virgin Companies, including both real property leases and chattel leases.

Prominent amongst those are the lessors of certain planes which make up the Virgin Companies’ fleet.  Clearly, whether an aircraft is being utilised or is grounded is of particular concern, in circumstances where the Administrators have no personal liability during the extended period.

Conclusion

The case demonstrates the willingness of the Courts to deploy their broad powers to assist voluntary administrators in the performance of their important statutory tasks during the COVID-19 pandemic, and facilitate the due and timely administration of companies consistent with the objects of Part 5.3A of the Corporations Act 2001 (Cth), picking up on Justice Perram’s comments in Capic v Ford Motor Company of Australia Limited (Adjournment) [2020] FCA 486 that the Courts must do all they can to facilitate the continuation of the economy, or as Justice Middleton put it (at [5]):

“…the COVID-19 pandemic, and the consequent restrictions on the movement and behaviour of people, is a reason to apply flexibility in the application (and perhaps adaptation) of existing laws, and to exercise any discretion residing in a court to ensure that the Australian community and economy are supported during this time of crisis.”

If you require assistance regarding any of the issues mentioned in this article, or for further information, please do not hesitate to contact our national Commercial Disputes and Insolvency team.