Wisdom of Solomon for insolvencies: Law Reporter

Problems for administrators of companies which are insolvent - balancing interests of different groups.

With agitation mounting for further protection to be given to employees and other creditors following the collapse of major companies such as Ansett Airlines, there is little surprise in the news that courts are being asked to evaluate various propositions put to administrators/receivers of such companies in order to allow those companies to continue to trade or to get the best possible financial result for the benefit of all concerned. The saga of Ansett Airlines continues as this note is being written with the announcement of a competitive takeover offer of Ansett. The administrators of the Ansett group, Arthur Andersen, will no doubt have further interesting tasks to perform in dealing with such proposals as well, as with other issues, arising from the existing battle for control. In the meantime, Justice Alan Goldberg in the Federal Court has been hearing a string of cases in which the administrators, creditors and others involved with Ansett in effect "do battle" in evaluating what steps can or cannot be taken in ensuring that the administration continues with sufficient pace to allow Ansett to survive (in part) and to provide comfort to those with interests in the company's assets. In one of the recent cases - The matter of Ansett Australia Ltd & Ors and Mentha & Anor ((2001) 19 ACLC 1678), Justice Goldberg had to evaluate just how much leeway he provided the administrators in accepting a payment from Air New Zealand of a significant sum of money (which it was alleged by Ansett was owed to it) to allow it to continue to trade knowing that this arrangement may well impact on future claims. The facts of the case are taken from the CCH Report.

The administrators of the Ansett group (Mentha and others) and the Hazelton group of companies entered a memorandum of understanding (MOU) with Air New Zealand Limited (ANZ) and its subsidiary. Under this the New Zealand Government agreed to pay the administrators $150 million Australian. Ansett for its part agreed to accept the sum in exchange for any claims that the Ansett group (including the Hazelton group) might have against ANZ. An application was made to the Federal Court for it to approve the MOU. The application was not opposed except by one creditor. It was the administrators' view that it was imperative for Ansett to recommence flying operations to minimise the damage that had been caused by ceasing operations. They concluded that if they could negotiate a commercial settlement of the Ansett group's claims against ANZ quickly then a revised Ansett would have the best chance of remaining in existence. The MOU was conditional on the court giving approval to the terms it contained and making orders to that effect on or before 12 October 2001.

There was evidence before the court that if the MOU did not become unconditional by that date - ie 12 October - the prospects of any claims by the Ansett group of achieving substantial payments from ANZ were minimal. The creditors challenging the actions were joined in the court by representatives of ANZ, the Australian Council of Trade Unions, the Australian Government, the Australian Securities and Investments Commission and others. This is a very important issue. To what extent should a court "approve" a compromise resolution of debts owing in the hope that the proposal would provide significant funds to the company, which was bleeding badly, to allow it to continue to operate at least in part? In a very interesting judgment (delivered almost ex tempore), Justice Goldberg reviewed the facts surrounding the attempts to rescue the Ansett group, the nature of the MOU and other material. Of course, ANZ's position was pretty fragile as well. It advised the court that if the deal was not accepted quickly it might be placed under statutory administration in New Zealand (similar to administration under the Australian law) with the result that no further funds might be forthcoming pending the resolution of its financial position. This final resolution might take years.

An administrator appointed under the Corporations Act has extraordinary powers. It was clear that the administrators had the power to enter the MOU. Generally speaking when administrators go to the court for orders under the Act (eg section 479) they receive guidance from the court rather than binding decisions which take effect of law. Justice Goldberg described what usually happens in these words: "Essentially what a court is doing when giving directions under provisions such as [these] in relation to a question whether an administrator ... should enter into an agreement, or whether an administrator ... should give effect to an agreement, is to provide the administrator ... with protection against claims that he or she acted inappropriately or unreasonably in entering into, and performing, the agreement." (para 62) In his view the administrators in deciding to compromise the relevant claims and to give the releases "exercised a commercial judgment by considering and weighing the benefits and advantages to the Ansett group's creditors in agreeing to that course against the disadvantages of not giving the releases, not receiving immediately the sum of $150 million but keeping open the opportunity to take legal proceedings against [ANZ] ... and against the directors ...". (para 64)

Goldberg J examined a number of authorities and noted that the courts will normally pay regard to the commercial judgment of liquidators (and administrators). The legislation entrusts to administrators the conduct of administrations although they are subject to the supervision of the court. He also noted that while the courts will not pronounce on the commercial prudence of a particular transaction, they will in an appropriate case protect the administrator from claims that they have acted unreasonably in entering those transactions provided the administrator has made full and fair disclosure to the court of the relevant material. On the evidence before him, Goldberg J was satisfied that the administrators were seeking to maximise the chances of the Ansett group, or as much as possible of its business, of continuing in existence, and that if it was not possible for the Ansett group to continue in existence to provide the business, property and affairs of Ansett to be administered in a way which resulted in a better return to the Ansett creditors. The administrators of Hazelton (a different group of companies) had also been "presented with a window of opportunity which, on the evidence before me, will, in all probability, not reappear if the administrators are not put in a position to perform the MOU ...". (para 71)

The judge further noted that insofar as actions against the directors of ANZ were concerned this was a matter for the future and there is no possibility for him assessing what causes of action would be brought and to provide any realistic assessment of the result. What was relevant for him was that extensive investigations would have to be pursued before any decision was made whether proceedings against directors could be brought by someone such as ASIC or the administrators. In all the circumstances in approving the MOU the court was not settling the terms nor was it in any way ruling on the future of any actions that might be brought against the directors or others. The order of the court was that under the Corporations Act it approved the MOU pursuant to that relevant section allowing the administrators to take such action under the MOU as was necessary. We will no doubt see many more cases involving failed companies such as Ansett in the future in which there will be battles between different groups of creditors and others. The question of whether directors of any of the companies were in breach of their duties is a matter that will no doubt take a long time to investigate (as Justice Goldberg has suggested). In the meantime, these directors like all persons in all matters must be treated as innocent until proven guilty. We cannot afford to create a witchhunt mentality in this community where reversal of the onus of proof is the standard moving forward. There has been no justification provided to me, or to any Law Reform Commission which has reported on these issues in the context of the commercial law as has been suggested by some pressure groups in the community seeking quick "reforms" or results. Those quick reforms and results will only bring greater pain and catastrophe in the future.

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