By Stephen Dickens, Partner

The Federal Court, in the second significant case arising out of the Virgin collapse, has made extraordinary limited recourse and limited liability orders on application by the Administrators.

Justice Middleton of the Federal Court of Australia in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717 has, pursuant to section 447A(1) of the Corporations Act 2001 (Cth) (Corporations Act), altered the usual statutory framework for the conduct of voluntary administrations  under Part 5.3A in a fundamental way.

The circumstances and background of the administration of the Virgin Companies was set out shortly in our previous article at: https://www.millsoakley.com.au/thinking/administrators-tasks-during-covid-19/.

Following the first, more orthodox, application by Administrators, seeking, amongst other things, a 4-week extension of the time provided in section 443B of the Corporations Act, the Administrators have returned to the Federal Court seeking further orders, some of which were far more extraordinary.

The latest application has seen the limits of section 447A pushed further than ever before.

Application

The Administrators applied for, amongst others, the following orders:

1. extending the period for the convening of the second meeting of creditors of each of the Virgin Companies, for about 3 months, to 18 August 2020;
2. permitting the second meeting of the creditors of each of the Virgin Companies (Second Meetings) to be convened at any time within the Convening Period;
3. limiting the Administrators’ personal liability with respect to obligations entered into after their appointment including with respect to:
   1. specific charter flights provided to a particular customer, Rio Tinto Services Limited (Rio Tinto);
   2. future arrangements to be entered into by the Administrators in connection with the operation of the Virgin Companies’ business;
   3. the Commonwealth’s JobKeeper programme (JobKeeper);
   4. inter-company loans between various entities within the Virgin Companies;
4. directions that the Administrators would be justified in offering a conditional credit to customers of the Virgin Companies who have been unable to take flights booked with the Virgin Companies because those flights were cancelled in response to the COVID-19 pandemic;
5. modifying the requirement in section 438B(2) that the directors of each of the Virgin Companies provide a report as to the company’s activities and property, and instead requiring that a single report be prepared for Virgin and various of the Virgin Subsidiaries;
6. that the members of the committee of inspection be given leave to derive a profit or advantage from the external administration of each of the Virgin Companies; and
7. dispensing with the requirement that the Administrators open and operate a separate bank account for each of the Virgin Companies.

Whilst seeking a range of orders, this article focuses on the extraordinary limited recourse and limited liability orders sought by the Administrators (emphasised above), and, in particular, future (unidentified) arrangements likely to be entered into by the Administrators.

Those future arrangements were described as falling within the following general classes:

1. aircraft finance leases and aircraft operating leases (the ‘Aircraft Leases’);
2. alliance agreements;
3. procurement contracts, including:
   1. in-flight services agreements;
   2. ground handling agreements;
   3. operational systems agreements;
   4. fuel agreements;
   5. maintenance and parts agreements;
   6. IT agreements;
4. trade mark licence agreements;
5. airport agreements;
6. cargo agreements;
7. charter agreements;
8. corporate sales agreements;
9. industry/agency agreements;
10. insurance arrangements; and
11. training agreements.

The usual framework for an Administrator’s liability

Section 443A of the Corporations Act relevantly provides:

“The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for:

1. services rendered; or
2. goods bought; or
3. property hired, leased, used or occupied; or
4. the repayment of money borrowed; or
5. interest in respect of money borrowed; or
6. borrowing costs.”

Section 443A is a central feature of the legislative scheme governing external administration.

As pointed out in the submissions made by the Commonwealth Government (acting through the Attorney General’s Department who has responsibility for administering the Commonwealth’s Fair Entitlements Guarantee Scheme (FEG)) typically, administrators have previously been relieved of personal liability (beyond the extent to which the company’s assets are sufficient to meet the debt) in relation to a specific contract (such as a funding agreement).  In appropriate cases, on occasion, the power has been exercised in relation to a specific class of contracts, such as leases, or particular types of construction contracts.

In any event, the power under section 447A(1) of the Corporations Act has not previously been exercised on the scale sought by the Administrators in this application.

Decision

Once again, and without opposition (FEG ultimately did not oppose the application, but rather, encouraged caution) the orders sought by the Administrators’ were made, that their personal liability be limited with respect to obligations entered into after their appointment and further, with respect to ‘future arrangements’ likely to be entered into by the Administrators in connection with the operation of the Virgin Companies’ business.

At paragraph 93 of Justice Middleton’s reasons for judgment, his Honour recognised the “extraordinary nature” of the orders sought.

His Honour (at [94]) went on to note that “there are national interests at stake having regard to the fact that that Virgin is one of two national airlines, and is facing severe restrictions on its operations by virtue of the COVID-19 pandemic.  Then there is the fact that Virgin employs thousands of people, whose lives have been dramatically impacted by Virgin entering into administration.”

Notwithstanding those particular circumstances, the Court was careful to emphasise that “the Court’s main concern is to consider what is in the best interests of creditors as a whole, particularly in the circumstances of the current uncertainty that arises from the COVID-19 pandemic”.

Importantly, the Court noted that there is no obligation for any supplier or creditor to enter into any ‘future arrangement’ with the Administrators and the Court made ancillary orders that notification of the orders must be given to any contemplated contractual counterparties, which is understandably an appropriate and reasonable measure.

At [107] his Honour also pointed out the unattractiveness of the situation if the orders were not  made, saying “the alternative, which would involve separate negotiations with each relevant counterparty and the need to approach the Court on multiple occasions as each large-scale agreement is entered into by the Administrators, is apt to be inefficient, expensive and disadvantageous to the administration of the Virgin Companies.”

Conclusion

Whilst the case clearly involved a novel use of section 447A(1) to limit the operation of section 443A, it seems unlikely any future Court will grant such similar orders, absent circumstances as unique and significant as the existence of a pandemic and the administration of a large listed company with national interest considerations.

At the hearing of the application (on 15 May, in a hearing recorded and available to view on the Court’s website) his Honour stated (with respect to the limited liability / limit recourse orders) that ”it shouldn’t be seen as a precedent that would apply to all circumstances of future administrations”.

That said, whist the Court has shown a preparedness to expand the existing boundaries of section 447A in the unique case of the Virgin collapse, it has not done so without checks and balances considered appropriate in the circumstances.

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.