The shift we needed: The fight to save Virgin already changing corporate rescue laws in Australia...and the best is yet to come

In previous commentary, we have looked at how COVID-19 has sparked a unique – and unexpected – opportunity to introduce greater flexibility in Australia’s corporate rescue laws under Part 5.3A of the Corporations Act of the kind that many in the industry have been calling for over the last decade.  

As we discussed, the specific legalities for doing so are by making an application under section 447A of the Corporations Act and section 90-15 of the Insolvency Practice Schedule, which permits the court, if the circumstances so require, to modify any aspect of the voluntary administration process that would ordinarily apply.

The scope of the court’s discretion is immense.  And with so many businesses across every sector of the economy under severe financial pressure due to COVID-19 and desperate to batten down the hatches to have a hope of trading on when the peak of the crisis is over, we have the ‘perfect storm’ of community sentiment and public policy that may drive the courts to use this discretion to reshape the corporate rescue process in Australia.    

This month saw the first tentative indication of what we can expect as the financial pressure on companies intensifies in coming months, with the Federal Court in Re CBCH Group Pty Ltd (No 2) [2020] FCA 472 deferring the personal liability for rent that administrators would ordinarily face while a company is in voluntary administration for a two week period to give the administrators breathing room to investigate a mothballing strategy and an eventual sale of the company’s business.

In our original post, we foreshadowed a likely influx of subsequent court applications looking to push the boundaries even further.  For all the talk of easing social distancing measures in the next few months, it would be a mistake to think that this will mean the pressure on businesses will instantly lift in lock-step.  Indeed, once the Australian Government’s fiscal and support measures come to an end, the fight to continue trade for many businesses will become even more profound.  It is sobering to think that the peak insolvency period in Australia is still another four to six months away. 

In just three days, the influx of section 447A/section 90-15 applications has already begun to manifest.  

Yesterday, the Federal Court published its reasons for decision in Re Techfront Australia Pty Ltd (administrators appointed) [2020] FCA 542, with the administrators obtaining orders permitting electronic notifications to, and meetings of, creditors and, similar to Re CBCH, delaying the administrators’ personal liability for rent for up to two weeks. 

And today, the administrators appointed to Virgin Australia successfully obtained orders (apart from similar modifications to permit electronic notification and meetings) deferring their personal liability for rental payments for a month – a further two week period beyond what we saw in the earlier decisions and representing a significant deferral of landlords’ ordinary rental entitlements. 

Let’s not forget that this is just the first week of Virgin’s administration.  As the administrators continue their investigations and look at options for a restructure – with the states not having yet ruled out a last-minute contribution to new financing – additional court applications which may have an even greater impact on the immediate enforcement rights of landlords and existing secured creditors (with a view to ensuring an ultimate outcome in the interests of all parties) to give administrators time to solidify a rescue plan seems inevitable.  

Those are the kinds of ‘cram downs’ on the rights of owners and secured creditors that automatically apply under the United States Chapter 11 process.  

For over a decade, there have been calls in Australia for Part 5.3A to incorporate similar rules in an effort to balance the interests of all stakeholders in a company – from employees and suppliers to communities that depend on the coffee shops, markets, sports stores and entertainment businesses that have so clearly been seen to be the lifeblood of our regions as COVID-19 has infiltrated our lives; a way of life that holds us together.  The concern is that Australian law has stigmatised business failure and stifled an entrepreneurial culture of the kind seen in the United States – the great belief in the American Dream.  

And in Virgin’s case, at stake is another important public interest – a second airline competitor in Australia to keep the pressure on lower airfares and more attractive destinations when the possibility and appetite for travel eventually recovers.  

If the anticipated further modifications to the voluntary administration process in Virgin come to fruition – and this trend continues as other companies, from large enterprises to SMEs across multiple sectors are tipped over the edge into administration in coming months – the time will come when, in a post COVID-19 world, the Australian Government will face calls for permanent changes to make our corporate rescue laws more flexible and move away from the traditionally strong creditor-dominated, anti-debtor culture so familiar to us.  

And that is just the kick-start the Australian economy will need as we seek to indeed come out the other side of this better and stronger.