Voluntary administration in a global pandemic: a time for flexibility

By Mark Petrucco, Wayne Kelcey, Kath Payne, Megan Scott and Camille Gray

The recent weeks have seen a number of major corporates enter voluntary administration, including Virgin Australia, Techfront Australia, Collette by Collette Hayman and Carriageworks Sydney, as a result of pre-existing distressed financial positions that were exacerbated by the consequences of the COVID-19 pandemic. The uncertainty that COVID-19 has brought, particularly the restriction on gatherings and the shutdown of non-essential services, created challenges for administrators looking to restructure businesses and maximise returns for creditors.

In a series of recent decisions, the courts have recognised the immediate challenges facing administrators and have exercised their discretion in adapting and modifying the voluntary administration regime under the Corporations Act 2001 (Cth) (Act). The decisions demonstrate the flexibility of the regime between maximising the chances of business recovery, and minimising any prejudice to specific creditors.

In this article, we review the decisions in:

• Strawbridge (Administrator), in the matter of Virgin Australia Holdings Ltd (Administrators appointed) & Ors [2020] FCA 571 (Virgin Proceedings) (the administration of Australia’s second largest airline).
• Strawbridge (Administrator) in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 (Collette Proceedings) (the administration of a national fashion and accessories house).
• Eagle, in the matter of Techfront Australia Pty Limited (administrators appointed) [2020] FCA 542 (Techfront Proceedings) (the administrations of a major media technology provider, with a focus in the Australian sports industry).

Key takeaways

• The courts recognise the challenges faced by administrators during the COVID-19 pandemic, and will make orders to aid the conduct of the administration.
• The courts are willing to extend the relief from personal liability for property used during complex administrations, to allow administrators sufficient time to conduct their investigations and form a view on certain property.
• The Government has recently released an instrument permitting creditor meetings to be conducted entirely electronically, and notices to be sent via email.

Power to modify provisions of the voluntary administration regime

Section 447A of the Act provides that the court may make such order as it thinks appropriate about how Part 5.3A (the voluntary administration regime) is to operate. It is widely accepted that this section gives the court the power to modify the operation of the voluntary administration regime.

Administrator’s personal liability

Section 443A of the Act provides that an administrator is personally liable for general debts incurred during the course of the administration.

Section 443B of the Act provides that an administrator is personally liable for payments for property used, occupied by, or in the possession of the company in administration. This includes leases for real or personal property (such as aircraft). Personal liability can be avoided under section 443B(2) if, within five business days after the administration commences, the administrator gives notice to the lessor that it does not propose to exercise its rights in relation to the property (that is, use the property). The rationale behind the five-day period is that an administrator should have a short, ‘risk-free’ period to assess whether the property is necessary as part of the rescue plan for the business, or to otherwise let the property be taken back by the lessor after five days, thereby reducing the prejudice to that lessor/creditor.

In smaller administrations, this decision can usually be made within five days. However, in complex administrations, where there may be hundreds of leases, it is very difficult to make a proper assessment in the time provided. Given the potential for enormous personal liability, often it is not a risk an administrator (and those indemnifying him or her) are willing to take. The consequence is that they will disclaim the property (by serving notice) which may later have an impact on the ability to restructure the business.

All three cases concerned an application by the administrators for an extension of the period of relief from personal liability under section 443B of the Act, while the administrators urgently conducted their investigations. In the Collette Proceedings, relief from personal liability was sought concerning 93 real property leases nationally. In the Virgin Proceedings, relief from personal liability was sought for a period of approximately five weeks, for real and personal property leases (mostly aircraft and engines) to the value of $3 billion. In the Techfront Proceedings, relief was sought from personal liability for up to 14 days for a number of real and personal property leases.

In the Collette Proceedings, Justice Markovic observed that the Act gives the court ample power to alter the operation of section 443A and 443B and noted when considering an extension of this type, it is important to balance the interests of different creditors. These remarks were adopted in the Virgin Proceedings[1]. In the Techfront Proceedings, Justice Farrell also adopted Justice Markovic’s remarks in the Collette Proceedings that the court has power to alter the operation of section 443B and that the rationale for any alteration is because the administrator has had insufficient time to conduct necessary investigations to decide whether to retain or give up possession of leased property.[2]  Similarly, in the Virgin Proceedings, Justice Middleton made reference to Justice Finkelstein’s rationale in Silvia v Fea Carbon Pty Ltd (ACN 009 505 195) (admins apptd) (recs and mgrs apptd) [2010] FCA 515, that a number of factors may be relevant in making such an order, including the administrators’ inability to form a view within five business days as to whether it was necessary or desirable to exercise rights over company property to maximise the return to creditors.[3]

In each case, the administrators were successful in their application, with the pandemic being a large factor.

In the Collette Proceedings, Justice Markovic observed that the pandemic has created a difficult and unpredictable environment hindering the administrators’ ability to assess the company’s liabilities properly.[4] The extension of the notice period was appropriate to give the administrators further time to assess what was best for creditors given the ever-changing physical, legal and economic impacts of the pandemic.[5] In the Techfront Proceedings, Justice Farrell acknowledged that although the administrators were attempting to trade on a ‘business as usual’ basis subject to the pandemic restrictions, these restrictions delayed the conduct of the administration.[6] In the Virgin Proceedings, Justice Middleton observed that although existing laws must be adhered to and enforced by the courts, the pandemic is a reason to apply flexibility of existing laws and any discretion residing in a court.[7] His Honour also accepted that the administrators would require further time to assess the ongoing value to Virgin Australia of the various property subject to the leases. Having the creditors’ best interests in mind, his Honour considered that an extension of time under section 443B of the Act would maximise the prospect of preserving Virgin Australia’s business with a view to its sale or restructure.[8] In balancing the interests of specific creditors affected by the orders, his Honour gave permission to creditors to apply to the court to vary the operation of the order.

Convening and conducting meetings

The federal and state governments’ response to the pandemic has created practical difficulties in convening and holding meetings of creditors in the conventional (in person) manner.

Convening and conducting meetings

In the Virgin and Techfront Proceedings, applications were made to hold creditor meetings via video-link or telephone (instead of in person). In the Virgin Proceedings, Justice Middleton resolved any doubt in finding the requirement to nominate a ‘place’ in the notice of meeting under rule 75-15 of the Insolvency Practice Rules (IPR) was met by specifying the administrators’ office address, with consequential orders being made that the meeting be conducted entirely electronically and that no one attend the ‘physical’ place of the meeting. His Honour also made orders requiring creditors to submit special proxies in advance of the meeting, should they wish to vote on any resolution.

Electronic communication of notice of meeting and reports

Orders were also sought by the administrators to permit them to give notice of meetings and creditor reports via email.  In the Virgin Proceedings, Justice Middleton observed that it is now commonplace for orders to be made permitting external administrators to give notices to creditors by email and other electronic publication.[9] Citing Justice Brereton in In the matter of BBY Limited [2015] NSWSC 974, the reason for making such orders was to save costs and time thus conserving the limited available assets for the benefit of creditors.[10] In the Techfront Proceedings, Justice Farrell noted that it was clearly desirable for such orders to be made to facilitate the administration and that the court must do all it can to facilitate the continuation of the economy.[11]

Recent legislative changes

Since the decisions in Virgin and Techfront, the government released an instrument on 5 May 2020, expressly permitting creditor meetings to be held electronically, without the need for a physical meeting[12]. At these meetings, voting must be conducted via poll (not on a show of hands). All notices are permitted to be sent electronically, without the need for a court order permitting this approach. The instrument applies until 6 November 2020.

Forming committees of inspection

In the Virgin Proceedings, the administrators sought orders validating their proposal that the members of the committee of inspection be selected by the administrators (as opposed to nominated by the creditors). As part of the proposal, creditors would then vote on the administrators’ selection. Justice Middleton expressed that he had no doubt the court has the power under the Insolvency Practice Schedule (IPS) to make these orders.[13] He agreed with the administrators that there were practical limitations on the administrators being able to put resolutions to creditors to be voted on at the first meeting of creditors.[14] The administrators’ proposal was regarded as a practical and efficient manner in which to proceed.[15] In the Techfront Proceedings, the administrators sought orders that a meeting of committee of inspection may be convened by electronic notice sent to members and that a meeting may be held via video-link. The court confirmed that any resolutions passed at meetings convened via video-link would be valid.[16]

Conclusion

These decisions highlight the flexibility of the voluntary administration regime, and the court’s attitude to making practical orders to facilitate the conduct of administrations. Although the court must balance the prejudice to any specific creditor, the decisions reflect the object of the regime in maximising the chances of restructuring the business, and if that can’t be achieved, maximising the return to creditors as a whole.

[1] Justice Middleton in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) [2020] FCA 571 (Virgin Proceedings) [44]-[45] applying Justice Markovic in Strawbridge (Administrator), in the matter of CBCH Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 472 (Collette Proceedings) [39], [52] and [57].
[2] Eagle, in the matter of Techfront Australia Pty Limited (administrators appointed) [2020] FCA 542 (Techfront Proceedings) [42].
[3] Virgin Proceedings [46].
[4] Collette Proceedings [48].
[5] Collette Proceedings [52].
[6] Techfront Proceedings [14].
[7] Virgin Proceedings [5].
[8] Virgin Proceedings [49].
[9] Virgin Proceedings [27].
[10] Virgin Proceedings [28].
[11] Techfront Proceedings [28].
[12] See Corporations (Coronavirus Economic Response) Determination No.1 2020.
[13] Virgin Proceedings [35].
[14] Virgin Proceedings [34].
[15] Virgin Proceedings [36].
[16] Techfront Proceedings [39].