By Anica Cunanan, Law Clerk and Darrin Mitchell, Senior Associate, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.
In our first article on the voluntary administration of Virgin Australia we looked at the appointment of the voluntary administrators and the impact the appointment would initially have on the company.
We also looked at the role of receivers and external administrators including liquidators, and voluntary administrators, defining the roles that the different types of administrators can play in the restructuring of a company in distress. Our first article can be found here.
Virgin Australia is at present under voluntary administration. There are three possible outcomes when a company enters voluntary administration. Either the company is returned to the directors (which is rare); enters into a deed of company arrangement (‘DOCA’), or it is placed into liquidation. The decision is ultimately up to the creditors at the second meeting under the administration.
When a company is in administration, the administrator’s role is to investigate the company’s financial affairs and through this information, deal with any proposal for a DOCA on behalf of creditors of the company. The administrator will recommend the best plan for the creditors of the company, by comparing the outcome under any proposed DOCA, with that which is likely in a winding up. If the company is continuing to trade (like Virgin Australia) then the administrator takes on the responsibility for any decisions which need to be made, together with any liabilities incurred during this time.
By contrast, when a company is in liquidation, it will not normally continue to trade, except to the extent required for a sale of the company’s assets and business. Ultimately a liquidated company will become deregistered and cease to exist. A “liquidator” is required to realise the company’s assets and distribute the proceeds among the creditors of that company.
Voluntary Administration Process and Virgin Australia
Due to the negative connotations of voluntary administration and liquidation, companies may try to avoid it, even when insolvent. However, this will generally only make matters worse, and expose directors to greater claims for insolvent trading (among other personal liabilities). Being proactive and taking early steps will give the best chance for either a successfully recovery or a less painful liquidation. A voluntary administration can be the vehicle to the survival of a business albeit sometimes in a different form.
The directors of Virgin Australia were reportedly faced with almost seven billion dollars of debt owed to 12,000 creditors and with travel bans in place; the company faced a bleak future.
The voluntary administration step was taken by Virgin Australia in hopes that it can continue flying and find a way to recapitalise the business. ABC News, reported that Administrator Vaughan Strawbridge, expressed that they were “progressing well on some immediate steps” in respect to a number of parties that have already shown interest in the business with an information memorandum issued by the administrators. To allow the administrators additional time to review the company’s position, the administrators will seek to extend the time to hold the second meeting of creditors to decide Virgin Australia’s fate, until August 2020.
The first stage of the voluntary administration process is for the Administrators to call a meeting of the company’s creditors. The Administrators must advertise the meeting on ASIC’s website and advise as many as practical of the company’s creditors in writing.
Although the administrators were appointed by Virgin Australia’s directors, the creditors can vote at this first meeting to replace the administrators. At the meeting the administrators retained their appointment.
The administrators also ascertained whether the creditors wanted to form a committee of inspection. This committee is essentially formed form the body of creditors to assist and advise the administrators during the voluntary administration process and allows the creditors to keep a very active role in the process. The creditors elected to form a committee.
The administrators are now required to proceed to review the financial position of Virgin Australia and consult with the directors on a plan to continue the company’s business, perhaps with the further investment of existing shareholders or additional investment. Creditors of the company will then be asked to consider the proposals moving forward.
What does this mean for Virgin Australia? We will see this in the coming weeks and we will continue to monitor the effect that the decisions made during the voluntary administration has on the company and its creditors and update you as the administration proceeds.
Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery. If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery practice and procedure, please contact Stephen Mullette or Jeffrey Brown on (02) 9806 7459 or (02) 9806 7446, or email firstname.lastname@example.org or email@example.com.