TGIF 1 May 2020: Federal Court discretion and flexibility supports administrators during the COVID-19 pandemic

This week’s TGIF considers a decision of the Federal Court which enabled administrators of Virgin to send electronic notices, conduct electronic meetings and absolved them from personal liability for leases for four weeks due to COVID-19.

Background

On 20 April 2020, administrators were appointed to Virgin Australia Holdings Ltd and 37 of its subsidiaries (together, the Virgin Companies).

Following their appointment, an application was made to the Court for orders with respect to creditor engagement during COVID-19 and, separately, to avoid personal liability with respect to property leased, used or occupied by any of the Virgin Companies for a four week period. The administrators considered that, for reasons including the current COVID-19 restrictions, compliance with certain legislative requirements was impracticable or unfeasible.  

Middleton J was satisfied those orders should be made in accordance with the Court’s discretionary powers pursuant to the Corporations Act 2001 (Cth) (the Act) and made the following observation regarding the impact of COVID-19 on matters before the courts:

“… the COVID-19 pandemic, and the consequent restrictions on the movement and behaviour of people, is a reason to apply flexibility in the application (and perhaps adaption) of existing laws, and to exercise any discretion residing in a court to ensure that the Australian community and economy are supported during this time of crisis”.  

Electronic meetings 

The manner in which meetings may be held are governed by the Insolvency Practice Rules (Corporations) 2016 (Rules). Electronic meetings are permissible so long as the meeting is convened at a physical ‘place’ (such as, for example, the administrators’ offices) with the Court then making orders confirming the meeting can be conducted by video-link or telephone. The administrators advised they were arranging for the meetings to be live streamed through Microsoft Teams, and confirmed the technology provided a question and answer function.  

His Honour was comfortable with this proposal and likened the proposed set-up to a virtual court, where a judge is physically in the courtroom and court attendees electronically connected to the hearing.  

Electronic notice to creditors

The Court was also satisfied that notice to creditors by email was appropriate in light of the large number (10,247) of creditors of the Virgin Companies and the fact that administrators had email addresses for almost all (99.88%) of them.  In his Honour’s view, such an approach would save costs, time and ultimately conserve the assets of the company.

The administrators additionally submitted that email distribution was preferable due to:

1. COVID-19 restrictions, which imposed limitations on access to office premises in order to process notices and replies from creditors;
   
   
2. hygiene safety issues in relation to the administrators’ staff physically handling correspondence; and
   
   
3. current Australia Post delays, which were likely to result in substantial delays in the receipt of hard copy notices.

Information requests from creditors

The default position under the Rules is that administrators must respond to creditor requests for information, reports or documents within 5 business days.

Given the potential number of information requests, the administrators sought, and were granted, an extension of a further 5 business days to respond to queries from creditors. The Court agreed this was appropriate due to the magnitude of the business, the significant number of creditors and logistical difficulties faced by the administrators’ staff liaising with management and employees as a result of the COVID-19 pandemic.

Property Leased, Used or Occupied

Following their initial investigations, the administrators identified 144 aircraft and other aviation equipment subject to leasing arrangements, together with real property leases with 81 landlords.  An extension was sought by the administrators to the 5 business day period by which they were required to give notice to lessors as to whether they intended to retain or give up possession of that property.  Failing to provide notice within that period would result in the administrators being personally liable for rent.  

The Court agreed to allow the administrators an extension of four weeks to provide such notice given that the complexity of the company’s affairs meant there was insufficient time available to determine whether to remain in possession of such property.   His Honour accepted that the further time would assist the administrators to identify precisely which assets were necessary to enhance the value of the business and maximise the prospect of a sale as a going concern which, ultimately, was in the best interest of creditors as a whole.

Comment

The COVID-19 pandemic, and the government restrictions in place, present novel and challenging issues for external administrators on appointment.  These include how to comply with statutory obligations, engage with creditors and make timely decisions on the future of a business operating in an unprecedented environment.

This decision should provide comfort to practitioners that courts will be flexible and exercise discretion to assist the administration process during COVID-19 as much as possible. Ultimately, the objective remains to facilitate a course which is in the best interest of creditors.