Sham creditors’ meeting to seal Virgin Australia sale

The pending sale of Virgin Australia to Bain Capital will mark a new beginning for the carrier. Picture: Lyndon Mechielsen

Bain Capital should on Friday take formal ownership of Virgin Australia after a creditors’ meeting which from day one was destined to be a sham, because the deal was already completed in late June.

Unsecured bond holders will be disappointed because their plan offered an alternative, with a higher return for them but less certainty for the survival of the airline.

The creditors’ meeting will determine how soon Virgin emerges from four months in administration under new owners Bain, which has paid $3.5bn for the airline.

Votes in favour of Bain’s deed of company arrangement (DOCA) are certain, and it has been promoted as the fastest path to recovery. The alternative option, an asset sale, would take much longer. Asset sales are done outside the corporate entity which means no JobKeeper payments and another $49 million washed against the wall. The unions are unlikely to let that happen.

Formal court approvals must now be handed down.

Because the Virgin board didn’t call in administrators Deloitte until late April, after the domestic airline industry was shut down, there was no cash to work with and in the scheme of things Deloitte’s Vaughan Strawbridge has done a brilliant job.

Whether Bain makes any money from the $700m cash it will hand over won’t be known for a few years yet and obviously it is in the hands of governments as to just when borders are reopened.

The airline will remain in administration for the next few weeks to finalise a string of contract changes to reduce the $6.8 billion in debt.

Clearly Bain is taking over at the worst possible time in the history of Australian aviation.

Concerns about the Virgin name will be put to rest with a statement from Sir Richard Branson offering his support for the airline’s recovery and Bain’s efforts.

There will be more job cuts following the 3000, or one third of the workforce, already gone.

But given the fact Virgin entered the pandemic in a fragile state with too much debt and an unworkable board the good news is the airline looks like surviving.

Qantas’s Alan Joyce will not take his foot off its neck but has offered a lifeline of sorts by already declaring he will charge his own passengers top dollar for their flights when the industry returns.

Deloitte’s Strawbridge has managed the program with minimal input from the federal government, with the exception of $49.3 million in JobKeeper payments and $1.2 billion in subsidies on flights during the lockdowns.

That was the end of the government involvement in the administration, which is of course how it should be.

Virgin was big enough to pay Strawbridge’s team $26.8m, Clayton Utz et al $8.7m and Morgan Stanley, KordaMentha, Houlihan Lokey et al $16 million - or $51.5 million in total.

Not many companies could pay those bills, which is why the government is looking at insolvency reforms.

On September 25, the current holiday given to directors who allow companies to trade while they are insolvent, and an amnesty on statutory demands, will end.

The latter are rules which mean if you issue a statutory demand for the $3000 you are owed by a company, and you don’t get paid for 28 days, you can wind them up.

Big companies with boards backed by expensive insurance policies will tend not to trade while they are insolvent, but some do.

Small companies will do so because more often than not the business owner’s entire life is based on the company’s finances, right down to home mortgages.

Insolvencies are down this year thanks to JobKeeper but are destined to soar next year as those payments disappear, and it is this end of the market which is looking for some relief.

Chapter 11, which is a debtor-led process, is also court led, which means the lawyers take control and with Virgin, Deloitte’s Strawbridge has shown that wasn’t necessary.

Smaller companies have less money to play with.

The government has to put an end to the statutory demands relief at some stage, just as JobKeeper payments are also winding down.