Grounded: Virgin Australia Reaffirms the Australian Takeovers Panel’s Narrow Role in Distressed Transactions

Administration Under Australian Law

In Australia, administration is a process regulated by the Corporations Act 2001 (Cth) and effectively involves an external administrator being appointed to an insolvent company, with the aim of quickly determining the way forward for the company. After completing its investigations, the voluntary administrator will provide creditors with its opinion as to whether to end the administration and return the company to the directors' control, approve a Deed of Company Arrangement ("DOCA") or wind up the company and appoint a liquidator.

The Sale and Recapitalization Process for Virgin Australia Group

Virgin Australia Group―one of Australia's two main airline carriers―succumbed to COVID-related business pressures which led to it being suspended from trading on the Australian Securities Exchange ("ASX") in mid-April this year and entering into administration a few days later. What followed was a highly publicized, competitive sale process conducted by the administrator. On 2 June, the contest was whittled down to two preferred bidders—Cyrus Capital Partners L.P. and Bain Capital (Bain Capital Private Equity LP, Bain Capital Credit LP and their related entities). Ultimately, in late June, the administrators announced that they had signed a binding deal with Bain Capital for the sale of Virgin Australia Group by way of a DOCA. Whilst the binding implementation deed was not disclosed, the announcement indicated that no return to Virgin Australia Group's shareholders was anticipated

Aggrieved Bondholders Race Off to the Panel

Shortly after the Bain deal was signed, two of Virgin Australia's substantial bondholders—unsecured creditors who stood to recover very little return of their initial investment―applied to the Panel.

The Panel's main power is to make declarations of 'unacceptable circumstances'. This concept is not defined and is intended to be interpreted broadly—it can include the effect of circumstances on the control or potential control of a company and circumstances which are otherwise unacceptable having regard to the purposes of Chapter 6 of the Corporations Act.

The bondholders argued that the circumstances of the sale process were unacceptable due to the cumulative uncompetitive effect of the confidentiality agreement (which, in effect, operated as a lock-up device by unreasonably restraining the bondholders from meeting with other key stakeholders) and the terms of the agreement signed with Bain Capital and the administrators' conduct (in failing to meaningfully engage with the bondholders and restricting them access to key Virgin stakeholders), which precluded an alternative DOCA being presented to Virgin's creditors.

Shortly after submitting their Panel application, the bondholders applied to the Federal Court for a variation of certain confidentiality orders which applied to aspects of the administration process. Ultimately, the Federal Court dismissed that application, following which the bondholders sought leave to withdraw their Panel application, to which the Panel consented.

Was the Panel the Appropriate Forum to Consider the Bondholders' Allegations?

In considering this question, the Panel said it had reviewed the history of Panel decisions in relation to the affairs of companies in administration or otherwise in financial distress. These decisions effectively began with Pasminco Ltd (Pasminco Ltd (Administrators Appointed) [2002] ATP 6) back in 2002, where the Panel said that, as control of Pasminco had passed to its administrators, it was no longer appropriate for the takeovers provisions (of the Corporations Act) to apply to the reconstruction matter before the Panel. Although the Panel in Pasminco said its decision was not intended to be a watershed nor set a precedent that future Panels would feel bound to follow, subsequent applicants have continued to refer to this decision.

Indeed, the Virgin parties (the Virgin companies and the Administrators) submitted that the circumstances alleged by the bondholders related to the administration and were not circumstances falling within the purview of Chapter 6 relating to control transactions. The Panel in Virgin Australia referred to its earlier decision in Kaefer Technologies Limited 02 [2004] ATP 16, noting at [37] that:

"The Panel's jurisdiction does not extend to regulating the affairs of companies in administration or conduct of company administrators under Part 5.3A. Any alleged impropriety in the conduct of a company administration is a matter for ASIC and/or the courts. Such an action may be brought by ASIC, in its discretion, or by disaffected shareholders or creditors."

Kaefer did highlight a possible scenario in which the Panel may consider intervening in an administration, namely (as referenced at [38] in Virgin Australia):

"… if the administration was a device to allow parties to attain a goal relating to control through voting power without a bid, scheme of arrangement, substantial acquisition or other transaction involving shareholder participation."

In Virgin Australia, the bondholders did not allege that the administration was such a device.

The Panel further said at [39] that, in its view:

"… there is nothing in the Corporations Act that prohibits the Panel from conducting proceedings … in relation to the affairs of a company in administration. That said, proceedings will generally be unlikely to be conducted where a company is in administration, and no equity value remains in its shares. The exercise of discretion to conduct proceedings depends on whether we consider there is any reasonable prospect that we would declare the specific circumstances before us to be unacceptable circumstances taking into account relevant public interest considerations."

This position seems grounded in the 2018 decision in Quantum Graphite Limited (subject to Deed of Company Arrangement) [2018] ATP 1, in which it said the following (as recited at [39] in Virgin Australia):

"We were mindful that the purposes of Chapter 6 may have limited relevance where a company is insolvent and no equity value remains in the shares. We were also concerned not to inappropriately obstruct action by the administrator to bring the company back to solvent operation."

The Panel in Quantum Graphite did conduct proceedings as credible allegations of potentially serious unacceptable circumstances were raised on matters within the Panel's jurisdiction (disclosure, control over voting power of shares, potential breach of the takeovers prohibition in section 606). Further, it was not clear that the Quantum shares had no value.

While, in Virgin Australia, the Panel did not decide whether to conduct proceedings as the application was withdrawn, the Panel's following observations are relevant to distressed scenarios going forward:

• The safeguards that the Panel typically expects to apply to lock-up devices are there to maximize value—however, the Panel queried that where the target is an insolvent company that is cash constrained, certainty of a transaction becomes more important.
• The Panel's preliminary view was that it would not be in the public interest to obstruct or delay Virgin's administration—the importance of speed and certainty of execution was recognized, with a view to successfully recapitalize Virgin. Also, the bondholders had other avenues open to them (the court process and the second creditors' meeting).

Section 444GA: A Lingering Question

Many recent restructuring transactions involving Australian-listed companies in administration have been implemented by way of a section 444GA share transfer. This allows the administrator of a DOCA to transfer shares in the target―for nil consideration―with the consent of shareholders or the leave of the court (where the court is satisfied that the transfer would not unfairly prejudice the interests of shareholders of the company). Where a party will acquire more than 20% of the target under the transfer (and so exceed the takeovers prohibition in section 606), Australian Securities and Investments Commission relief will be required.

While it is presumed that the Bain Capital transaction—if approved by creditors—would see Bain Capital acquire the Virgin Australia Group by way of a section 444GA transfer, as the Panel did not have the binding implementation agreement, the Panel said that it was not in a position to determine if there were aspects of the Bain Capital transaction that squarely lay within its jurisdiction.

In time it will be interesting to see whether a section 444GA transfer resulting in a 100% change of control of a listed company would fall within the Panel's jurisdiction. If those transactions are within the Panel's jurisdiction, given its narrow role in relation to companies in administration, it remains unclear whether the Panel would be minded to conduct proceedings.

Moreton Resources

A few days after the bondholders submitted an application in Virgin Australia, a former director of Moreton Resources Limited—an ASX-listed company in administration—applied to the Panel raising allegations with respect to the administrator's appointment, the disclosure of financial benefits in the administrators' report and alleged association between substantial shareholders of Moreton.

Ultimately, after noting that there was an insufficient body of material to examine certain of the allegations, the Panel concluded that there was no reasonable prospect that it would make a declaration of unacceptable circumstances. In reaching this view, the Panel confirmed that the material before the Panel was not determinative as to whether there was any equity value in Moreton, while also noting that Moreton's administration was bona fide (with Moreton having been in a prolonged period of likely insolvency) and therefore not a 'device' to allow a person to gain control of Moreton or subvert the operation of Chapter 6.

Jones Day advised Cyrus Capital Partners L.P. in relation to the sale process conducted by the Administrators appointed to Virgin Australia.