By Anica Cunanan, Law Clerk and Darrin Mitchell, Senior Associate, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.
The term voluntary administration has been prevalent in the media this year, even before the significant commercial difficulties experienced during the COVID-19 pandemic. Virgin Australia is the latest major company to head down this path.
Is this the end for Virgin? Can it recover? Can the Government still bail out the company? More importantly, perhaps, should it?
It is critical that the voluntary administration process be understood, not only by businesses but also by creditors, directors and the general public. Unfortunately, this is almost never understood by the media, who are not generally able to understand the difference between voluntary administration, liquidation, receivership, and deeds of company arrangement, let alone between external administrators, receivers and liquidators (which isn’t as simple as you might think).
So here is our cheat’s guide to understanding the voluntary administration process – for Virgin Australia as well as any other company going through this process.
Follow our easy lessons and you will be able to impress your friends at (socially distant) parties!
Our first lesson is on understanding the relevant players, and getting our terminology correct.
Understanding the Players – An administrator, receiver or liquidator?
A “receiver” is only over someone appointed by a secured creditor (generally a bank or other financial institution) or in rare cases, by the Court. Unless appointed by the Court the receiver only acts for the secured creditor. The Receiver’s role is to recover the maximum amount for the secured creditor. The Receiver may still operate the business whilst exploring sale or refinance strategies. Because the directors are not removed from office, and the interests of the ordinary creditors are not otherwise represented, it is not uncommon for the appointment of a receiver to lead to the appointment of a voluntary administrator or liquidator, and vice versa. If a secured creditor thinks that its interests are not being adequately protected then subject to very some important limitations in the Corporations Act 2001 (Cth) the secured creditor may appoint receivers ‘over the top’ of the external administrators appointed by the Company.
An “administrator” or “voluntary administrator” is NOT a “liquidator” or a “receiver”. A voluntary administrator is generally appointed by the company’s directors, if the form the view that the company is, or is about to become, insolvent. This is what has happened in relation to Virgin Australia. An administrator is appointed as an interim position with a view to investigating a company’s affairs and exploring any restructuring proposal before reporting on 3 different options for creditors to consider at a meeting to decide the company’s fate (more on this in a later blog). Virgin Australia’s creditors will have this opportunity at some point in the future.
In relation to Virgin Australia the voluntary administrators who have been appointed by the Company’s Directors are Deloittes – in particular Vaughan Strawbridge, John Greig, Sal Algeri and Richard Hughes. According to the company’s website, the administrators have indicated that they intend to “restructure and re-finance the business and bring it out of administration as soon as possible.”
A “liquidator” is only appointed in order to wind up a company – that is, instead of (or after) a restructuring the company’s affairs. The liquidator’s job is to realise the company’s remaining assets, close the business and pay employees and creditors according to the priorities set out in the Corporations Act 2001 (Cth). Appointing a liquidator and moving to a winding up (or liquidation) of Virgin Australia will be one of the 3 options on the table for creditors of the company at the ‘decision’ meeting which will happen in the coming weeks (although as we will see this process can be delayed in complex administrations). Importantly, other than at the end of the voluntary administration process, creditors can’t appoint a liquidator unless they go to court. Also, a liquidator can’t be appointed by directors, but only by shareholders – and only then if there is no winding up application before the Court. Complicated, isn’t it!
An “external administrator” – this is a trap for young players. This is a generic term which has only in the couple of years become entrenched in the legislation. It refers to any one or more of a voluntary administrator, or administrator of a deed of company arrangement, or liquidator, but not a receiver. This is referred to in section 5-20 of the Insolvency Practice Schedule (Corporations) which can be found in schedule 2 to the Corporations Act 2001 (Cth).
Come back for our next blog on the next steps for Virgin Australia and what employees and other unsecured creditors can expect in the coming days and weeks.
If you would like some more general guidance ASIC has produced some information sheets on the different forms of external administration which you can look at here https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/voluntary-administration-a-guide-for-creditors/.
Also – check out our COVID-19 page for more general advice on the government’s legislative reforms and aids and how these are likely to impact on companies and businesses experiencing financial difficulty during this global pandemic.
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 stephenm@matthewsfolbigg.com.au or jeffreyb@matthewsfolbigg.com.au.
