Voluntary Administration of Virgin Australia - Lessons for New Zealand

Given the parallels between Australia and New Zealand with regard to each country’s (a) voluntary administration regime, and (b) elections under the Cape Town Convention in relation to insolvency remedies, the process and outcome of the Virgin Australia administration will be of particular interest to aircraft lessors whose portfolios include aircraft that are on lease to New Zealand operators.

Virgin Australia Holdings Limited and certain related entities (Virgin Australia) entered voluntary administration under Australia’s Corporations Act 2001 (Cth) on 20 April 2020. The administrators’ publicly stated intention is to “undertake a process to restructure and refinance the business and bring it out of administration as soon as possible”. To this end, the administrators have begun a sale process for the business and assets of the Virgin Australia group with final binding offers due to be provided by 12 June 2020.

Voluntary administration

The voluntary administration regime of Australia is very similar to its counterpart in New Zealand (under Part 15A of the Companies Act 1993 (NZ)).  In broad terms, the object of the voluntary administration regime in New Zealand is to provide for the business, property and affairs of insolvent companies, or companies that may become insolvent, to be administered in a way that maximises the chances of the company continuing in business (or to get a better return for the company’s creditors and shareholders than would result in liquidation).

One of the key aspects of both the Australia and New Zealand voluntary administration regimes is that a moratorium is imposed on creditors from the commencement of the administration.  During this moratorium, the creditors (including lessors) may not commence or continue proceedings against the company that is in administration.

However, under both regimes, the company’s liability to pay rent and other payments under its lease agreements is not affected by the administration.  Furthermore, the administrator becomes personally liable for rent and other payments becoming due by the company under an agreement made before the administration began and relating to the use, possession or occupation of property by the company.  Both regimes provide for certain exceptions to the assumption of liability by an administrator and these exceptions are broadly similar.

Cape Town Convention

Both Australia and New Zealand have incorporated the Cape Town Convention (the Convention) into their respective domestic law.  In each country, the Convention has effect in place of New Zealand law to the extent that the Convention applies to a matter to which the other law applies (for example, in respect of insolvency remedies).

Australia and New Zealand have each made a declaration that they will apply Article XI, Alternative A of the Convention in its entirety to all types of insolvency proceedings.  Alternative A requires that, upon the occurrence of an insolvency-related event, the insolvency administrator or the mortgagor has a ‘waiting period’ from the date of default to either cure all defaults and agree to perform all future obligations under the relevant agreement or give possession of the relevant aircraft object(s) to the creditor.  Both Australia and New Zealand have declared that the “waiting period” shall be sixty (60) calendar days for the purposes of Article XI(3).

Dynamics in the context of the Virgin Australia administration

In the context of the Virgin Australia administration, the primacy of the Convention over Australian domestic law was expressly acknowledged by the Federal Court of Australia in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 3) [2020] FCA 726 (the Strawbridge Judgment).  The Court stated that the provisions of Article XI of the Convention “prevail over the statutory moratorium in s 440B of the Corporations Act and, as a result, Aircraft Lessors are entitled to possession of their property by 19 June 2020, which is 60 days from the commencement of the administration on 20 April 2020, unless the Administrators cure all outstanding defaults and agree to perform all future obligations under the leases”.

Given the similarities between the Australian and New Zealand regimes in this regard, we would expect the same outcome to be reached in the context of a New Zealand-law administration of a New Zealand entity that has ‘aircraft objects’ (as defined in the Convention) on lease.

Exemption to personal liability under leases

As noted above, an administrator will assume personal liability in respect of rent and other obligations under an existing lease of the company unless it issues a non-use notice within a certain period from the start of the administration (in Australia, this is five business days and in New Zealand, seven days).

There are around 117 leased aircraft and engines in the Virgin Australia fleet and the aggregate monthly rentals for these aircraft and engines are around $40,000,000.  Having regard to the significant debts and obligations that would be required to be assumed by the administrators in continuing to use the leased aircraft and engines and given the substantial reduction in revenue generated by the Virgin Australia fleet as a result of the COVID-19 travel restrictions, the administrators have been unwilling to take on personal liability in respect of these debts and obligations.

As a result, on 24 April 2020, the administrators of Virgin Australia obtained court orders to extend the five business day notice period under section 443B of the Australia’s Corporations Act 2001 (Cth) to 26 May 2020 together with a corresponding exemption from personal liability for obligations under the existing leases of Virgin Australia.  This option would also have been available in New Zealand.

Then, on 25 May 2020, the administrators sought, and were granted in the Strawbridge Judgment, further court orders to extend the notice and exemption period to 16 June 2020.  The extension only applied to certain property, being “aircraft, aircraft engines and other aviation equipment used, occupied or in the possession of the Virgin Australia companies which are the subject of finance and operating leases”.

In granting the 25 May 2020 extension, the Court’s reasoning for its decision included the following:

  • “aircraft, engines and associated equipment are a species of property with peculiar characteristics” the ongoing possession of which is “critical to the continuing viability of any aircraft business”;
  • the Court noted the effort that the administrators have expended in dealing with some 73 lessors to the Virgin Australia companies. This included negotiating with the lessors a set of protocols (the Aircraft Protocols) in relation to the ongoing possession, maintenance and preservation and, where applicable, usage of the aircraft and engines by Virgin Australia.  Key aspects of the Aircraft Protocols include:

a) a limitation on the administrators’ personal liability in relation to the aircraft and engines;

b) a standstill by the relevant lessors in relation to certain rights under the relevant leases;

c) an extension of the time period for the repossession of the aircraft and engines to the period applying under the Convention;

d) payment by the administrators of a usage charge for the aircraft and engines that are being used by Virgin Australia during the administration; and

e) undertakings by the administrators relating to the usage, maintenance, insurance and provision of information in respect of the aircraft and engines.

  • the timing of the extension aligned with that of the sale process being run by the administrators;
  • as the administrators are not willing to take on personal liability for the substantial liabilities in respect of the leased aircraft, engines and equipment, the Court noted that, without the extension, the administrators would then have to give up possession of the relevant aircraft, engines and equipment and as a result the lessors would be entitled to take possession of their property before 19 June 2020 (as otherwise permitted by the ‘waiting period’ under Article XI(3) of the Convention). This would obviously be detrimental to the prospects of Virgin Australia remaining (and being sold) as a going concern;
  • the Court determined that there is unlikely to be any material prejudice to the lessors from the extension. In particular the Court noted that the aircraft are being maintained and, as a result of the COVID-19 restrictions, the return of the aircraft and the engines would not “as a matter of commercial reality … enable the relevant lessors and financiers to derive any better financial return for their property in the short term”; and
  • the Court determined that the extension would be in the best interests of the creditors of Virgin Australia as a whole.

Summary

From a New Zealand perspective, the administration of Virgin Australia and the Strawbridge Judgment is particularly relevant given the similarities with Australia in regard to the voluntary administration regimes and the Convention’s application in each country.  It:

  1. provides useful indications of what may occur in respect of; and
  2. demonstrates the complexity and unique challenges that would likely be faced by an administrator in undertaking,

a voluntary administration of a New Zealand company / airline which leases aircraft and engines which are the subject of the Convention (especially if that company / airline has leased aircraft from a range of different lessors).

In the context of the Virgin Australia administration, interested parties should keep in mind the date of 16 June 2020.  This is the date on which the extended notice / exemption period for the administrators ends.  If on that date, the Aircraft Protocols have not been entered into, it is likely that aircraft lessors will take steps shortly thereafter to repossess their respective aircraft, which will have significant consequences for the prospects of the administration of Virgin Australia.

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