Institute of Judicial Studies Seminar

Court involvement in voluntary administration – Ansett Administration

Presentation by Leon Zwier, PartnerArnold Bloch Leibler

November 2007

Ansett Airlines collapse

• Size and complexity:

– 14 businesses with 15,000+ employees

– Group revenue for the year was AUD3.2 billion

– overheads of AUD200 million

– serviced over 130 domestic destinations

– 134 aircraft

– no cash at bank on appointment

– no senior management

– fiercely competitive market

• Media:

– frenzied coverage

– press conference every day for the first 21 days of the administration

Ansett Airlines collapse cont…

• Politics:

– federal election in November– interface between Unions, Labor and Liberal

• Entanglement with Air NZ:

– Letter of Comfort– Memorandum of Understanding– Insolvent trading issues

• Regulators:

– ACCC– CASA– ASIC– APRA

Ansett Airlines collapse cont…

• Property:

– complex leaseholds including Sydney and Melbourne airport terminals

– aircraft leases with complex tax structuring

– 550 leasehold properties

Court involvement in Ansett Administration

• Courts, particularly the Federal Court, played a significant role throughout the Ansett Administration.

• Courts given an overarching supervisory role in voluntary administration (ss 447A - 447E).

• The Ansett Administrators were required to make many Court applications, often under very tight time constraints, to conduct the Administration within the timeframes stipulated in Part 5.3A.

• The Court was regularly prepared to tailor Part 5.3A to meet the unique circumstances of the Ansett administration.

• Courts need to be able to act quickly to facilitate the achievement of the objectives of voluntary administration.

Meetings / replacement of administrators

• Employees formed the largest creditor bloc in Ansett.

• Practical difficulty in having 15,000+ employees attend and vote at meetings of creditors.

• Initial administrators (PWC) resigned over a conflict of interest (Air NZ).

• Court ordered:

– unions could attend and vote as proxies for employees; and– Mentha and Korda appointed administrators with effect from the date

of resignation of the PWC administrators.

(Re Ansett; Rappas v Ansett Australia Ltd (2001) 39 ACSR 296)

Effect of the moratorium – aircraft leases

• Owner and lessor of aircraft used in Australian air freight industry made urgent application to recover possession of leased aircraft.

• Desperate need to access aircraft to alleviate Melbourne – Perth freight backlog.

• Administrators at an advanced state of negotiating sale of Ansett freight business.

• Court weighed competing public interests of the national freight needs and the object of Part 5.3A and ordered interim possession to the lessor.

(Re Ansett; Intrepid Aviation v Ansett Australia Ltd (2001) 39 ACSR 255)

Commercial settlement with Air NZ

• Administrators and Air NZ entered into Memorandum of Understanding (MOU).

• MOU provided mutual releases of claims between Ansett and Air NZ.

• MOU conditional on Court approval.

• Court approved MOU:

– legal issues concerning the release of un-investigated claims; and– not merely a matter of commercial judgment for the Administrators.

• Court satisfied that MOU in the interests of the Ansett Group and its creditors.

• Court provided Administrators with protection against claims that they acted inappropriately or unreasonably in entering into MOU.

(Re Ansett Australia Ltd; Re Hazelton Air Charter (2001) 39 ACSR 355)

Employee entitlements – SEESA

• Substantial part of Ansett’s workforce stood down following appointment of Administrators.

• Administrators believed it could take years to realise assets – this would delay payment of employee entitlements.

• Commonwealth Government announced that it would secure a minimum level of employee entitlements immediately provided that it was repaid at the same priority as the employees whose entitlements were met (SEESA scheme).

• The Administrators applied to the Court for approval of the SEESA scheme. The Court approved the SEESA scheme thereby entrenching the Commonwealth’s priority.

• GEERS scheme introduced as a result of the Ansett collapse.

(Re Ansett Australia Ltd (2001) 40 ACSR 389)

Dividing the spoils

• Dispute arose between the Administrators of the Ansett Group and the Administrator of Hazelton Group concerning the proper apportionment of the Air NZ settlement moneys paid under the MOU.

• Complex legal and factual issues to determine and quantify the extent of the Hazelton Group’s interest in the fund.

• The Court ruled upon the proper principles that governed apportionment and stood the matter over to enable the parties to file material regarding the claims that had been given up under the MOU.

(Re Hazelton Air Charter; Humphris v Mentha (2002) 41 ACSR 472)

Getting paid

• Section 449E of the Act provides that Administrators remuneration be fixed by:

– resolution of creditors at a duly convened meeting; or

– the Court.

• Administrators sought an order that the committee of creditors be authorised to fix their remuneration.

• In the context of such a “complex and extensive” administration, the Court granted the order sought.

(Re Ansett Australia Ltd (2002) 40 ACSR 409)

Giving notice (to four million creditors…)

• A voluntary administrator is required to give notice (including a report) to all creditors of the meeting to determine the company’s future.

• Due to the size of the Ansett administration, giving notice may have cost up to AUD28 million.

• The Administrators sought orders under section 447A altering the prescribed manner of giving notice (including through the use of dedicated websites) to reduce costs.

• The Court balanced the importance of giving creditors adequate notification against the costs and substantially granted the orders sought. This resulted in a huge saving in the Administration’s costs.

(Re Ansett Australia Ltd (2002) 40 ACSR 419)

To trade or not to trade…

• The Administrators re-started the mainline airline business in an attempt to sell it as a going concern.

• The Administrators and Tesna entered into a sale agreement in November 2001 with settlement on 31 January 2002.

• The Administrators and Tesna agreed to extend the settlement date a number of times to keep the sale alive.

• This involved trading the business at a considerable loss – up to AUD6 million per day.

• Administrators sought an order from the Court under section 447D that it was proper and justifiable to continue to trade the business.

Continued trading cont…

• The Court declined to make the order sought because it related to the making of a commercial decision within the discretion of the Administrators.

• The Court held that the decision was within the power of the Administrators – the Administrators had to balance the twin objects of voluntary administration (business preservation and maximising creditor returns).

(Re Ansett Australia Ltd (2002) 115 FCR 409)

Canberra Airport

• Canberra Airport applied to the Court for leave to take possession of Ansett’s terminal at Canberra Airport (which was leased to Ansett).

• The application was made only days before the second meeting of creditors.

• The Court dismissed Canberra Airport’s application as to grant it may have pre-empted the full range of options that would otherwise have been open to creditors voting at the meetings.

(Canberra International Airport Pty Ltd v Ansett Australia Ltd (2002) 41 ACSR 309)

Sydney Airport

• On 27 March 2002 the creditors of Ansett resolved to enter a deed of company arrangement.

• Under s 444B of the Act, Ansett had 21 days to execute the deed.

• At the same time, the Administrators were in the process of selling Ansett’s lease of the Sydney Airport terminal.

• Question arose regarding whether the execution of the deed of company arrangement would trigger a “buy-back” provision in the lease.

• The Administrators were concerned that if the “buy-back” provisions were triggered in the lease, they would not be able to pursue a competitive sale process in relation to the terminal lease.

Sydney Airport cont…

• In order to maximise the chances of selling the terminal through a competitive process, the Administrators sought a Court order to extend the period within which they had to execute the deed.

• The Court declined to exercise its discretion to extend the time for execution of the deed on the grounds that the extension would disturb the fundamental structure of Part 5.3A by prolonging the administration in order to avoid a result that execution of the deed might bring about.

(Re Ansett Australia Ltd; Mentha v Sydney Airports Corporation Ltd (2002) 41 ACSR 352)

Fixing deeds

• On the floor of the second creditors’ meeting, the solicitor for the trustees of the Ansett superannuation funds claimed that a Court could not vary a deed of company arrangement as a matter of law.

• The Administrators’ lawyer responded and said that the Court could vary a deed by virtue of a “magical provision”.

• The dispute was brought urgently to the Supreme Court. Justice Warren agreed with the Administrators that a deed could be varied by the Court:

“…it is difficult to comprehend that the trustees were not alert to the “magical provision” adverted to by the solicitors for the administrator, namely, s 447A”

(Re Ansett Australia Ltd; Korda v Ansett Ground Staff Superannuation Plan (2002) 41 ACSR 598)

Superannuation litigation

• The trustees of the Ansett Superannuation funds commenced proceedings in the Supreme Court to determine:

– whether Ansett was required to make further contributions to the funds; and

– if so, whether such contribution was afforded priority under section 556 of the Corporations Act.

• If the trustees’ claim was upheld, it would have had far reaching ramifications for the entire administration.

• The Court accepted the Administrators’ position that the obligations to “top up” the funds did not rank to priority.

Superannuation litigation cont…

• The Court of Appeal dismissed an appeal by the trustees on the ground that the question raised was hypothetical: section 556 of the Corporations Act only applies in a winding up.

• The trustees also brought separate proceedings in the Federal Court seeking declarations that the Ansett Deed of Company Arrangement was unfairly prejudicial. Those proceedings were settled during trial and a simultaneous Court ordered mediation.

(Ansett Australia Ground Staff Superannuation Plan v Ansett Australia (2002) 174 FLR 1; (2003) 176 FLR 393 (Court of Appeal);

(2004) 49 ACSR 1 (approval of settlement))

IATA v Ansett

• Ansett was a member of the IATA Clearing House.

• The Clearing House provides an administrative service for international air transport enterprises by clearing transactions between members arising under various Multilateral Interline Traffic Agreements.

• This involved effecting monthly multilateral set offs of accounts between members.

• The Administrators contended that because IATA’s Clearing House regime provided for a distribution of Ansett’s property inconsistent with that stipulated by the Deed of Company Arrangement, the Clearing House Regime should yield to the Deed.

• The Administrators relied upon the House of Lords decision in British Eagle v Air France [1975] 1 WLR 758.

IATA v Ansett cont…

• IATA argued that the Clearing House regulations negated the existence of any debts or other form of property ever arising between participants of the Clearing House. Accordingly, the multilateral netting effected by the Clearing House did not deprive Ansett of any relevant “property”.

• IATA also argued that the principles in British Eagle were confined to companies in liquidation and did not apply to deeds of company arrangement.

• The Supreme Court at first instance accepted that the Clearing House Regulations precluded the existence of any debts or other chose in action.

IATA v Ansett cont…

• The Court of Appeal allowed Ansett’s appeal and defined the principle as follows:

“…the principle itself rests in the broader conception that the whole of the debtor’s estate should be available for distribution among creditors in accordance with whatever regime for the distribution of property may apply according to the laws of insolvency.” (Nettle JA)

• IATA appealed to the High Court of Australia whose judgment is currently reserved.

(Re Ansett Australia Holdings Ltd; International Air Transport Association v Ansett Australia Holdings Ltd (2005) 53 ACSR 501; (2006) 60 ACSR 468 (Court of Appeal))

Pooling directions

• The business and affairs of the 39 companies comprising the Ansett Group under administration were heavily intertwined.

• The Administrators wished to pool the assets and liabilities of the Ansett Group companies into the trading entity to reduce the costs to creditors of unravelling the Group’s affairs on an individual company basis.

• The Administrators sought directions from the Court that would enable them to vote at the creditors’ meetings despite the fact that their votes would in some instances be contrary to the interests of certain creditors and beneficiaries.

Pooling directions

• Following a series of hearings and after allowing the Administrators to adduce further evidence concerning the effect of pooling on creditors, the Court granted the orders sought.

(Re Ansett Australia Ltd (2006) 56 ACSR 718)