restructuring & special situations insight 27 Jul 2020 Virgin in the Atlantic vs the Pacific: Australia's equivalent of the UK's new restructuring plan?

In light of recent COVID-19 related financial difficulties, Virgin Atlantic in the UK (VA) and Virgin Australia are both going through restructuring processes to recapitalise those respective airlines.  Both restructurings are being closely watched by the global market.  In the UK, VA has launched a proposal to implement a solvent recapitalisation using, for the first time, the UK's new restructuring plan (Restructuring Plan).  In contrast, in Australia, voluntary administrators have been appointed to Virgin Australia and are in the process of effecting a sales process through a deed of company arrangement (DOCA).  A key question is: in Australia, do we already have equivalent processes to the key mechanisms provided by the Restructuring Plan, such as cross-class cram down (discussed below), and would the availability of such a mechanism make a fundamental change to the restructuring toolkit in the context of Virgin Australia, for example?

On 14 July 2020, VA announced that it had launched the first Restructuring Plan under the new Part 26A of the Companies Act 2006 in the UK to implement a solvent recapitalisation (see our article: Virgin Atlantic first to launch UK's new Restructuring Plan). The Restructuring Plan is an alternative to the UK's existing scheme of arrangement procedure, although it contains some features of the US Chapter 11 process, including the ability to bind dissenting classes of creditors who vote against a Restructuring Plan (referred to as 'cross-class cram down').  Complimenting the Restructuring Plan, the UK has also introduced ipso facto provisions which will apply to contracts for goods and services in the context of a Restructuring Plan in addition to existing insolvency and restructuring processes such as administration, liquidation and company voluntary arrangements (CVA).  The intention of the ipso facto provisions is to assist companies to preserve business critical contracts with a view to facilitating a restructuring.  Notably, unlike the ipso facto regime in Australia, this does not extend to schemes, notwithstanding the fact that the new Restructuring Plan is a close counterpart to the scheme.

The UK's existing scheme of arrangement procedure is similar to creditor schemes of arrangement in Australia, particularly since the more expansive view of class composition taken by the NSW Court of Appeal in the Boart Longyear scheme in Australia in 2017.  The purpose of the cross-class cram down mechanism is to ensure that the restructuring can be implemented efficiently and to avoid out of the money creditors from seeking to extract value from a restructuring by virtue of their ability to withhold their consent.  The new Restructuring Plan legislation could possibly also be used to 'cram up' senior creditors, that is, in circumstances where creditors are being kept whole through a restructuring process, they can be disenfranchised and bound to the new restructuring.  However, there are a number of practical difficulties with this so it will be interesting to see if and how it will be used in practice.

The cross-class cram down mechanism is a key difference to the existing scheme of arrangement process (in both the UK and Australia), which can bind dissenting creditors who are outvoted by creditors in the same class but does not allow cross-class cram down.  That is, each class of creditor who is being compromised by the scheme must vote in its favour.  In the context of VA's Restructuring Plan, we do not yet know whether a cross-class cram down will be relied upon. That will only become clear once creditors have voted on the proposals. 

In contrast to VA's UK restructuring, Virgin Australia is in voluntary administration pursuant to Part 5.3A of the Corporations Act 2001.  The voluntary administrators are proposing a DOCA to implement the proposed restructuring, a recapitalisation and sale of the Virgin Australia group to Bain Capital.  In the context of cross-class cram downs, a DOCA (of the kind being used by Virgin Australia) facilitates a form of cram down of dissenting creditors because it binds all unsecured creditors, even those who may have voted against the proposal.  Therefore a majority of creditors (being 50% in value and in number) may vote in favour of a DOCA and bind the minority creditors to the transaction.  A company in voluntary administration also has the benefit of the Australian ipso facto regime for contracts entered on and from 1 July 2018.

However, unlike the UK's new Restructuring Plan, a DOCA does not bind secured creditors or owners of property if they do not vote in favour of the DOCA and does not facilitate the release of third party claims (that is, claims held by the company's creditors against persons other than the company).  A DOCA also requires the company to have entered into an insolvency process (by virtue of voluntary administrators being appointed), which may attach a greater stigma than using a process that does not involve a formal appointment of this kind.  A creditor scheme is another tool available in the Australian restructuring toolkit which does not have these limitations because it is not a formal insolvency process.  A creditor scheme can bind secured creditors, release third party claims and attracts the application of the ipso facto regime.  However, as mentioned above, a creditor scheme does not facilitate any form of cross-class cram down. 

A cross-class cram down mechanism of the kind contemplated in the UK's new Restructuring Plan would be a useful tool in the Australian restructuring toolkit and would provide more flexibility for implementing a restructuring than the existing DOCA and creditor scheme regimes alone. It is relevant to consider that the UK has its own equivalent of the DOCA, being the CVA (which has additional mechanisms to deal with landlords that are not available under a DOCA) as well as creditor schemes, but it nevertheless concluded that the Restructuring Plan and associated cross-class cram down mechanism remained a worthwhile reform. 

In the context of Virgin Australia, a cross-class cram down does not appear to be a tool that would have significantly altered the course of the restructuring in the context of dealing with unsecured bondholders, given that the DOCA regime or the voluntary administration regime more generally, is available to compromise unsecured bondholders.  However, it may have been useful to deal with unsupportive secured creditors or lessors as a part of the broader restructuring.