REASONS FOR JUDGMENT
1 On 12 and 14 September 2001, Messrs Peter Hedge, Greg Hall and Allan Watson ("the first administrators") were appointed administrators of Ansett Australia Limited and the other companies set out in Schedule A to this judgment in accordance with the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) ("the Act"). I will refer hereafter to these companies and to Ansett Australia and Air New Zealand Engineering Services Limited collectively as "the Ansett group". Those appointments occurred as a result of resolutions of the various companies in the Ansett group on 12 and 14 September 2001. The first administrators caused the airline operations of the Ansett group to cease at 2.00am on Friday 14 September 2001.
2 On 17 September 2001, I ordered that Mark Francis Xavier Mentha and Mark Anthony Korda ("the administrators") be appointed joint and several administrators of the Ansett group other than Hazelton Air Charter Pty Limited, Hazelton Airlines Limited, Hazelton Air Services Pty Ltd ("the Hazelton companies"), and that Michael James Humphris be appointed administrator of the Hazelton companies with effect from the time that Messrs Hedge, Hall and Watson gave notice in writing of their resignation as administrators of the Ansett group. On 17 September 2001 Messrs Hedge, Hall and Watson resigned as administrators of the Ansett group and thereupon the administrators were appointed administrators of the companies in the Ansett group and Mr Humphris ("the Hazelton administrator") was appointed administrator of the Hazelton companies. On 4 October 2001, the administrators were appointed administrators of Air New Zealand Engineering Services Limited pursuant to the provisions of Pt 5.3A of the Act.
3 On 5 October 2001, the administrators filed an application in the Court which was expressed to be made pursuant to ss 447A and 447D of the Act and the inherent jurisdiction of the Court. The administrators sought the following orders:
"2. Approval of the Agreement entitled Memorandum of Understanding between the Ansett Group and the Air New Zealand Group and others ('the Agreement').
3. Further or alternatively to paragraph 2 hereof, that the Plaintiffs may properly perform and give effect to the Agreement."
On 8 October, the Hazelton administrator filed an application in substantially the same terms seeking orders that the Court approve the agreement, or alternatively an order that he may properly perform and give effect to the agreement.
4 The parties to the Memorandum of Understanding are the Ansett group set out in Schedule A to the Memorandum of Understanding, the Hazelton companies, the administrators, the Hazelton administrator, Air New Zealand Limited ("Air New Zealand") and its subsidiaries (other than the Ansett group and the Hazelton companies) set out in Schedule B to the Memorandum ("the Air New Zealand group") and each party who is, or was at any time since Air New Zealand acquired full ownership of the Ansett group a director or secretary of any company in the Air New Zealand group or the Ansett group as set out in Schedule C to the Memorandum ("the Directors").
5 I will consider the detail of the Memorandum of Understanding shortly but, for present purposes, it is sufficient to note that it provides for the New Zealand Government to pay the administrators $A150 million for the Air New Zealand group to waive various claims it may have against the Ansett group, and for the administrators and the Hazelton administrator to release Air New Zealand from any claims in relation to a Letter of Comfort dated 8 August 2001 and to release the Directors from certain claims which might be made against them. (Money amounts are expressed in Australian dollars unless otherwise indicated.)
6 At the final hearing of the applications, appearances were announced and submissions were made by the administrators, the Hazelton administrator, the Australian Securities and Investments Commission ("ASIC"), the Commonwealth of Australia, the Australian Council of Trade Unions ("ACTU") and twelve specified unions and their members who were employees of the Ansett group, the Air New Zealand group and ten of the directors and one creditor, E/Wise Solutions Pty Ltd. Only E/Wise Solutions Pty Ltd opposed the Court making orders sought, although there were differing views as to the form of order which should be made.
7 It is helpful to rehearse the events which have led to the making of the applications. The first Ansett airline operation commenced in February 1936 with one aeroplane. In 1979 the Ansett group was taken over by TNT Limited and News Limited. By the 1990s, the Ansett group had grown into a major national airline and was one of the two principal domestic airlines operating throughout Australia. It also flew international routes. Air New Zealand acquired TNT's 50 per cent shareholding in the Ansett group in June 1996 and News Limited's 50 per cent shareholding in the Ansett group in June 2000.
8 The extent of the Ansett group's airline operations and their significance for the Australian economy and the Australian community can be seen from the following statistics and circumstances which existed prior to the appointment of the administrators:
· The Ansett group employed approximately 16,000 people;
· The total wages and salaries paid by the Ansett group annually as at February 2001 was approximately $963 million;
· The Ansett group served over 130 domestic destinations and made approximately 900 flights per day across the Australian network;
· The Ansett group had approximately 130 planes in its fleet;
· In the 2000 financial year Ansett carried over 14.04 million passengers of whom 13.35 million were carried on domestic routes;
· The Ansett group contributed approximately $73.3 million in tax for the financial year ending 30 June 2000;
· The Ansett group carried 111,147 tonnes of cargo per year;
· The Ansett group provided services to numerous regional and rural areas.
9 After Air New Zealand acquired 100 per cent ownership of the Ansett group in June 2000 a new Trans‑Tasman Australasian executive structure was announced. All the directors of the holding companies in the Ansett group were, at relevant times, directors of Air New Zealand, the holding company in the Air New Zealand group.
10 The administrators and the Hazelton administrator are obliged to convene meetings of the Ansett group's creditors and the Hazelton companies' creditors by 12 December 2001 (in accordance with my order of 1 October 2001), so that they may present a report about the various companies' business, property, affairs and financial circumstances at the meetings. The administrators and the Hazelton administrator must, at those meetings, provide the creditors with a statement setting out the administrators' opinion whether it would be in the creditors' interests:
(a) for the companies to execute a deed of company arrangement;
(b) for the administration of the companies to end;
(c) for the companies to be wound‑up.
(Section 439A(4) of the Act).
11 The administrators and the Hazelton administrator are presently actively pursuing the possibility of selling the businesses of the Ansett group and the Hazelton companies as going concerns and are operating the businesses in a limited manner.
12 The administrators are presently faced with difficult and significant financial constraints, having regard to the nature of the assets of the Ansett group, its pre‑administration liabilities and the liabilities which have been incurred, and will continue to be incurred if the administrators continue to carry on the business of the Ansett group, albeit in a limited way. The Hazelton administrator negotiated loans with the New South Wales State Government and the Commonwealth Government and was able to recommence flights by the Hazelton companies on 21 September 2001 on a restricted basis. The Hazelton companies has recommenced operating most of its routes.
13 At the date on which the administrators were appointed, 17 September 2001, the major assets of the Ansett group were as follows:
(a) Debtors. The debtors have a book value of $400 million, but the administrators have assessed their realisable value to be between $60 million and $80 million because of charge backs and airline tickets not honoured.
(b) Equity in leased aircraft. The administrators said that the amount of this equity is incapable of precise quantification at the present time and that following recent events in America it is difficult to obtain any precise valuations of aircraft assets.
(c) Miscellaneous other fixed and aviation assets, the valuation of which cannot be precisely quantified at the present time.
(d) There was no cash available to the administrators on their appointment as the Ansett group's airline operations had ceased on 14 September 2001.
14 The administrators have made a more precise estimate of the realisable value of the unencumbered assets and the equity in the encumbered assets of the Ansett group which has been placed before the Court in a confidential exhibit. For present purposes it is not necessary to disclose that value.
15 The administrators have identified approximately 17,000 creditors of the Ansett group. This number does not take into account frequent flier members who have accumulated unused frequent flier points, as the administrators have not yet determined whether such persons are creditors. The number also does not take into account the holders of unpresented airline tickets with a face value of between $300 million and $400 million as the number of those holders cannot be estimated at the present time.
16 The administrators believe that the total unsecured liabilities of the Ansett group, after allowing a fair value for the leased aircraft assets, is approximately $2 billion. The principal creditors and the amounts owed to them are as follows:
(a) employee entitlements, including wages, unpaid superannuation, annual leave, long service leave, sick pay, rostered days off and redundancies - $686 million;
(b) holders of unpresented airline tickets - $300 million to $400 million;
(c) National Australia Bank - $82 million;
(d) Air New Zealand group loan balance - $81 million;
(e) Credit Lyonnais (an aircraft lessor) - $420 million;
(f) Caltex Australia Ltd and BP Australia - $16 million;
(g) Telstra - $16 million.
In relation to these liabilities, the administrators note that:
· No wages are owing to employees as wages were paid in full by the first administrators from advances of $32 million made by Air New Zealand to the first administrators after the commencement of the administration;
· They presently estimate that the maximum exposure of the Commonwealth Government under the proposed employee entitlement scheme may be $351 million;
· The amount due to Credit Lyonnais will be reduced if its aircraft are assigned or sold.
17 At the date on which the Hazelton administrator was appointed, 17 September 2001, the major assets of the Hazelton companies were as follows:
(a) cash of approximately $2.2 million;
(b) debtors with a book value of approximately $8 million which included a doubtful debt of approximately $6 million to Ansett and $0.8 million for charge backs and airline tickets not honoured;
(c) equity in leased aircraft which is incapable of precise quantification at the present time;
(d) equity in owned aircraft of approximately $1.6 million;
(e) miscellaneous and other fixed and aviation assets, the valuation of which cannot be precisely quantified at the present time.
18 The Hazelton administrator believes that the total unsecured liabilities of the Hazelton companies, after allowing a fair value for the leased aircraft assets, is approximately $100 million. The principal creditors and the amounts owed to them are as follows:
(a) employee entitlements, including wages, unpaid superannuation, annual leave, long service and redundancy payments - $6.95 million;
(b) holders of unpresented airline tickets - approximately $0.4 million;
(c) financiers of aircraft, lease termination costs - approximately $78.8 million;
(d) Ansett - approximately $19 million;
(e) G E Engines - approximately $1 million;
(f) unsecured creditors - approximately $7.5 million.
19 The administrators took the view that it was imperative for the Ansett group to recommence flying operations as soon as practicable to minimise the damage which its cessation of operations had caused to the goodwill of its business. The administrators developed a strategy for recommencing Ansett operations which became known as "Ansett Kick‑Start". The aim of this project was to recommence flying a limited number of aircraft on the main trunk routes so as to preserve the name, mark and goodwill of Ansett. A business plan was prepared which involved the flying of eleven A320 aircraft. The administrators reached agreement with employees to limit the employees' working conditions to the revenue which could be generated from the limited operations. Support for the project was obtained from the Commonwealth Government which agreed to provide an indemnity to the administrators to fund the repayment of the value of tickets which were issued for the resumed operations, but which could not be used if the flying operations ceased and the administrators had insufficient assets available to refund the value of the tickets issued and not used.
20 The administrators said that Ansett Kick‑Start would operate at a modest trading loss but that the losses were worth incurring for the following reasons:
(a) the value of the name, reputation and goodwill of Ansett would be preserved;
(b) if the Ansett aviation assets were sold on a liquidation basis their realisable value would be diminished significantly in an amount greater than the projected trading losses;
(c) Ansett Kick‑Start met the objects of Pt 5.3A of the Act to maximise the chances of the Ansett business remaining in existence or, if that is not possible, to maximise the return to creditors on a sale of the business assets;
(d) Although Ansett Kick‑Start was justified as a stand alone project it was part of the larger project envisaged by the administrators to reconstitute Ansett in a new but reduced form which had been referred to as "Ansett Mark II".
The projected trading losses have been calculated by reference to additional variable costs such as payments for leased aircraft, employees and fuel and are expected not to exceed $15 million. At the present time, Ansett Kick‑Start is cash-flow positive.
21 A committee of creditors has been appointed in respect of each company in the Ansett group and the Hazelton companies. The committees of creditors represent creditors with debts due of approximately $800 million which, at present, is of the order of 40 per cent of the total of unsecured creditors (after deduction of the estimated value of security held by lessors). The committees represent, directly and indirectly, approximately 15,000 creditors by number, of whom approximately 14,500 creditors are employees who are represented by twelve unions.
22 I turn to the circumstances which led to the execution of the Memorandum of Understanding dated 3 October 2001 by the Ansett group, the Hazelton companies, the administrators, the Hazelton administrator, the Air New Zealand group and the Directors.
23 On 8 August 2001, Air New Zealand Ltd wrote a letter to the directors of Ansett Holdings Limited, Ansett International Limited and Ansett Australia Limited in the following terms:
"Dear Sirs,
Letter of Comfort
In its capacity as the ultimate parent company and sole beneficial shareholder of the Companies, Air New Zealand Limited ('ANZ') hereby confirms to you that it is its current policy to take such steps from time to time as are necessary to ensure that its wholly owned subsidiaries (including the Companies) are able to meet their debts as they fall due.
We will advise you promptly in the event of any change in this policy.
The previous paragraphs set out our bona fide intention in respect of the matters mentioned, but shall not create any contract between us and any of you, nor a guarantee nor indemnity in respect of our obligations hereunder, enforceable at law or in equity.
Notwithstanding the previous paragraph, we will make available to you on request in writing from time to time advances for the sole purpose of enabling you to pay working capital liabilities incurred by you in respect of property or services purchased or sold in the ordinary course of your business, subject to the following conditions:
a) the maximum aggregate amount of all such advances (whether or not they remain outstanding at any particular time) shall not exceed the equivalent of A$400 m;
b) such advances will continue to be available to you until withdrawn and such withdrawal has been notified in writing to you by Air New Zealand (provided that such withdrawal shall not take effect earlier than 4 weeks after the date that notification is given); and
c) in making a request for an advance you will be deemed to represent, warrant and undertake to us that the advance is required, and will be applied, to pay working capital liabilities of yourself incurred in respect of property or services purchased or sold in the ordinary course of your business.
This Letter of Comfort is governed by New Zealand law."
24 Central to the issues which led to the execution of the Memorandum of Understanding were:
· claims under the Letter of Comfort;
· identification of claims which might be made against Air New Zealand Ltd and directors and officers of companies in the Air New Zealand group and the Ansett group.
25 After the administrators were appointed, they made enquiries in relation to the general financial position of Air New Zealand and concluded that it might be counter‑productive for the Ansett group to issue legal proceedings seeking hundreds of millions of dollars from Air New Zealand at a time when it was financially distressed. On 12 September 2001, Air New Zealand had written down its investment in the Ansett Group by $NZ1.32 billion. The administrators were concerned that if they issued legal proceedings, the proceedings might lead to Air New Zealand being placed in an insolvency administration under New Zealand law which would preclude any monetary settlement from Air New Zealand. The administrators also formed the preliminary view that Air New Zealand could only survive if it could disentangle itself from the Ansett group quickly.
26 The administrators realised that they required funds to implement Ansett Kick‑Start, that is the resumption of limited operations, and to develop a longer term strategy for Ansett Mark II.
27 The administrators concluded that if they could negotiate a speedy commercial settlement of Ansett group claims against Air New Zealand under the Letter of Comfort, the Ansett group had the best chance of remaining in existence, or maximising the return to creditors if it could not remain in existence.
28 The administrators obtained legal advice as to the potential claims which the Ansett group had against the Air New Zealand group and the directors. The administrators were advised that the Ansett group had claims against Air New Zealand arising out of the Letter of Comfort and that theoretically there may be claims against the director of companies in the Ansett group pursuant to provisions of the Corporations Act, the Trade Practices Act 1974 (Cth) and at common law. However, the administrators were advised that until all their investigations into the business, property and financial circumstances of the Ansett group were completed, it was not possible to obtain detailed advice in relation to the theoretical claims to which I have referred. However, the administrators received specific advice about their prospects of proceeding against Air New Zealand arising out of the Letter of Comfort. That advice has been placed before the Court in a confidential exhibit but, for present purposes, it is not necessary to consider the detail of that advice other than to note that it has been given.
29 Shortly after their appointment, the administrators met with members of the board of Air New Zealand. At that time they were aware that Singapore Airlines Limited ("Singapore Airlines") owned 29 per cent of the capital of Air New Zealand and Brierley Investments Ltd owned 30 per cent of the capital. The administrators formed the view that if Ansett Mark II was to be developed, it must be managed by a leading airline operator such as Singapore Airlines. The administrators were also aware that Singapore Airlines and Brierley Investments Ltd were in the process of considering whether to inject further capital into Air New Zealand. The significance of that fact was that without a capital injection the administrators considered that there was no prospect of Air New Zealand paying money to the Ansett group pursuant to the Letter of Comfort.
30 On 23 September 2001, the administrators and their legal adviser met with Mr James Farmer QC, the Acting Chairman of Air New Zealand, and with Air New Zealand's legal and financial advisers. During that meeting, the administrators were informed of a number of matters concerning Air New Zealand, of which the following matters are relevant for present purposes:
· the Ansett group had been losing $1.3 million EBIT for each day of operation prior to the appointment of the administrators;
· the Ansett group had jeopardised the ongoing financial security and viability of Air New Zealand;
· Air New Zealand could not survive without a capital injection and it could not expect any capital injection unless it could resolve its position with the Ansett group;
· unless Air New Zealand could make significant progress to settle its disputes with the Ansett group by 3.00pm that day, the directors of Air New Zealand would apply to the New Zealand Government to appoint a statutory manager that day;
· if Air New Zealand was placed in statutory management, the Ansett group would not recover any money from Air New Zealand under the Letter of Comfort;
· unless the Air New Zealand group honestly believed that a settlement with the administrators was likely, and that was a reasonable view to hold, they would support placing Air New Zealand into statutory management because there was a substantial risk of loss to creditors of Air New Zealand;
· Singapore Airlines would not assist in the management of the Ansett group unless and until the disputes between Air New Zealand and Ansett were resolved.
31 The administrators and the Air New Zealand representatives discussed the commercial issues relating to these matters and other matters at length. There was discussion about the administrators' proposal for Ansett Mark II. There was also further discussion about the Letter of Comfort. Air New Zealand took the position that it should be treated as having paid or credited as having paid sums totalling $160 million in respect of any possible liability under the Letter of Comfort. Air New Zealand was, therefore, of the view that the maximum amount due under the Letter of Comfort was $216 million. The administrators disputed this proposition.
32 Ultimately, Air New Zealand came up with an offer of a payment of $150 million and said that if the administrators pushed for more money, the Air New Zealand group would collapse. The administrators considered the offer and concluded that it should be accepted. Thereafter a process of drafting the Memorandum of Understanding in consultation with interested parties was undertaken.
33 One of the issues which arose for the administrators was the concern that if they received any payment from Air New Zealand, and it subsequently became insolvent, the administrators might be required to disgorge the payment as a preference. The administrators, therefore, required that either the payment be made by the New Zealand Government or that the New Zealand Government give the administrators an appropriate indemnity. On 3 October 2001, the New Zealand Government agreed to give the administrators the indemnity.
34 On 3 October 2001, the administrators convened a meeting of committees of creditors of the companies in the Ansett group. Of the thirty‑two different members in total of all the committee of creditors, thirty members were present and two members did not attend. The administrators explained to the meeting the background to the Memorandum of Understanding and its provisions were discussed clause by clause. The administrators informed the meeting that they recommended the terms of the Memorandum of Understanding to creditors and that it was their belief that the Memorandum of Understanding was the best commercial result that could be achieved with Air New Zealand in the present circumstances. The following resolution was passed:
"That this Committee of Creditors' meeting does not oppose the orders or directions being sought in the Federal Court by the Voluntary Administrators as contemplated by clause 16 of the Memorandum of Understanding."
No creditor voted against the resolution and four creditors abstained from voting.
35 Although the Memorandum of Understanding is expressed to be made on 3 October 2001, it was executed by the administrators in Melbourne at about midnight on 4 October 2001 and by the Air New Zealand group in the early hours of the morning of 5 October 2001 (New Zealand time) in New Zealand.
36 The Memorandum of Understanding does not deal with the apportionment of the $150 million between the various companies in the Ansett group including the Hazelton companies. The administrators and the Hazelton administrator have agreed that the determination of the manner of that apportionment will be made jointly by the administrators and the Hazelton administrator and will take account of the interests of the creditors in the Hazelton companies who are not creditors of other companies in the Ansett group. The administrators and the Hazelton administrator have agreed that if they cannot resolve the issue of apportionment, they will seek to have it determined by the Court.
37 I have annexed the Memorandum of Understanding as Schedule B to these reasons as it is the whole of the document which is the subject of the application before the Court and all its provisions should be read so as to gain an understanding of its scope and content. However, it is desirable to explain and summarise the more significant provisions in it. In summary, it provides for the payment of $150 million by the New Zealand Government on behalf of the Air New Zealand group to the administrators of the Ansett group, and for the release by the administrators and the Hazelton administrator of the Air New Zealand group and the Directors from all claims arising out of the Letter of Comfort and from certain claims arising out of, or relating to, in general terms, the management and affairs of the Ansett group (which includes the Hazelton companies).
38 I draw attention to the following provisions in the Memorandum of Understanding:
(a) The Memorandum is conditional upon a number of conditions precedent, the only outstanding condition being the approval by the Court of the terms of the Memorandum or the Court making orders or directions to the same effect on or before 12 October 2001: cl 6.1;
(b) the payment by the New Zealand Government of $150 million to the administrators within one business day of the Court order approving the terms of the Memorandum or making orders or directions to the same effect: cl 9;
(c) the Air New Zealand group and the Directors will not prove in the administration or liquidation of the Ansett group and waive all entitlements to be repaid funds advanced, outstanding trade debts or other monies owed with certain exclusions: cl 11;
(d) the administrators, the Hazelton administrator and the Ansett group release the Air New Zealand group and the Directors from all claims arising out of, or relating to, the Letter of Comfort: cl 12;
(e) the administrators and the Hazelton administrator release the Air New Zealand group and all the Directors from all claims arising out of, or relating to:
(i) the management or affairs of the Ansett group;
(ii) any claims arising at common law, in equity or pursuant to statute;
(iii) any claims arising in the administration of the Ansett group;
(iv) any transactions or dealings between any company in the Ansett group and any company in the Air New Zealand group,
cl 13;
(f) Air New Zealand and the Directors release the Ansett group, the administrators and the Hazelton administrator from all claims they may have on any account whatsoever: cl 14;
(g) the parties acknowledge that the Memorandum does not affect any rights or powers of, or causes of action, the ASIC may have in relation to any party: cl 20;
(h) the parties will use all reasonable endeavours to encourage and promote the participation of Singapore Airlines in the management of the new restructured Ansett business: cl 21.
39 The administrators are of the opinion that the Memorandum contains a number of substantial benefits to the Ansett group and its creditors but also have some concerns about the Memorandum to which I shall refer.
40 I summarise the benefits perceived by the administrators:
(a) the Ansett group will receive from the New Zealand Government a significant payment which it might not be able to recover from the Air New Zealand group itself;
(b) the settlement of claims, or potential claims, of the Ansett group ensures the recovery of significant funds without recourse to lengthy, costly and uncertain litigation and without the danger that those funds might subsequently be clawed back if the Air New Zealand group subsequently goes into liquidation or into a similar insolvency regime;
(c) the releases do not cover failure by the Air New Zealand group or the Directors to exercise their powers and discharge their duties in good faith in the best interests of the Ansett group and for a proper purpose (within the meaning of s 181 of the Act), or reckless conduct or improper use of position;
(d) the releases do not cover insolvent trading type claims against the Directors and the Air New Zealand group as holding company if the Ansett group is placed into liquidation: see ss 588M and 588V of the Act;
(e) as a result of the warranties given by the Directors, if the administrators have been misled about the financial position of Air New Zealand, the releases become inoperative;
(f) the releases do not prevent the administrators from bringing actions against auditors or other advisers to the Ansett group;
(g) the Memorandum does not affect any action by ASIC;
(h) a cash injection is obtained which will enable the Ansett Kick‑Start process to continue and will assist in the development of the Ansett Mark II project;
(i) the Ansett Mark II project has prospects of enhancing the value of the Ansett group assets and will also have the potential of minimising claims of creditors by providing employment for 5,000 to 8,000 of the present employees.
The Hazelton administrator has relied on the information conveyed to him by the administrators that they consider it is in the interests of the creditors in the Hazelton companies, who are also creditors of the Ansett group and in the interests of the entire administration of the Ansett group that effect be given to the provisions of the Memorandum.
41 The administrators have a number of concerns. In particular they have not had the time or opportunity to conduct any adequate investigation into the claims which are the subject of the releases. They are not presently aware of any wrongdoing by the Directors but they have not examined in any detail or at all whether the Directors have breached their duty of care or have committed acts, the subject of the claims released. The administrators are concerned that they are giving up claims which they have not been able to quantify. The administrators have not independently satisfied themselves that Air New Zealand's representations about its financial position are true.
42 Further, the administrators are not satisfied that Air New Zealand is entitled to claim that it has paid or ought to be credited with $160 million of its liability under the Letter of Comfort. The administrators have not independently satisfied themselves that all of Air New Zealand representations about its financial position are true.
43 The final concern expressed by the administrators is significant. Mr Mentha said:
"It is always safer and prudent for an insolvency practitioner not to settle claims without a thorough investigation."
44 It can therefore be seen, and I am satisfied, that the administrators have formed a considered commercial decision that it is in the interests, and for the benefit, of the Ansett group and its creditors that they enter into the Memorandum of Understanding which involves, in particular, the receipt of $150 million, the giving up of any further claims under the Letter of Comfort and the giving up of certain claims which the Ansett group might have against Air New Zealand and the Directors. The administrators have set out in some detail the reasons why they have reached this conclusion. The matter of concern to the administrators is that they are giving up claims which they have not been able to quantify, although they have not presently found any evidence of wrongdoing by the Air New Zealand group or its directors. However, those claims are contested and there is no basis at the present time for assessing the likely prospects of recovery from the Directors.
45 Thus far, I have considered the material which was available to the administrators and the Hazelton administrator before they executed the Memorandum of Understanding and the basis upon which they executed the Memorandum of Understanding. Evidence was led before the Court from a number of Air New Zealand witnesses which was directed to the submission made by the Air New Zealand group, and the directors for whom an appearance was announced, that the Court should approve the Memorandum of Understanding. The Air New Zealand group evidence sets out in considerable detail the history of the relationship between the Air New Zealand group and the Ansett group, the manner in which the Ansett group has been managed and administered in recent times and the financial difficulties which have arisen for both the Ansett group and the Air New Zealand group. It is not necessary to analyse in any detail how those financial difficulties emerged. It is sufficient that they did emerge.
46 At the beginning of 2001, the directors on the Air New Zealand and Ansett boards were faced with deteriorating trade performances by both Air New Zealand and Ansett. It became apparent that Air New Zealand had significant capital requirements. At an Air New Zealand board meeting on 18 July 2001, the Chief Executive Officer reported a group loss of NZ$132.6 million of which the Ansett group was responsible for NZ$108 million. At that meeting, one of the Directors requested that a Letter of Comfort be provided by Air New Zealand to Ansett Holdings Limited to a level of $200 million. That proposal was left to be reviewed once the accounts of the current financial year were available. There were a number of commercial proposals which were being considered, some of which involved the participation of Qantas and Singapore Airlines. It is not necessary to consider those proposals in any detail.
47 At an Air New Zealand board meeting on 8 August 2001, it was agreed that a Letter of Comfort capped at $100 million be issued by Air New Zealand to the three principal Ansett companies. At that time, the Directors considered that if Air New Zealand had to meet its obligations under the Letter of Comfort, Air New Zealand's assets would still significantly exceed its liability. Mr Farmer said that Air New Zealand at that stage was continuing to support the Ansett group because of the strategic growth objectives which had influenced the purchase of the Ansett group and which was seen by the Directors to be fundamental to Air New Zealand's business plans. At that stage, equity was not an immediate problem for Air New Zealand.
48 At an Air New Zealand board meeting on 6 September 2001, it was identified that Air New Zealand needed a capital injection of up to NZ$800 million to support the continuation of Air New Zealand and the Ansett group's trading in the medium term. However, on 7 September 2001, Mr Farmer was informed that the shareholders' funding support and the possibility of Government backing was dependent upon Air New Zealand achieving a clean sale of Ansett and effectively insulating itself from further Ansett losses. Mr Farmer communicated this fact to the independent Air New Zealand directors. By 10 September 2001, commercial negotiations that had been entered into with Qantas were terminated and, according to Mr Farmer, on 12 September 2001, the Air New Zealand directors had no alternative available to them other than to place the Ansett group into voluntary administration and write down Air New Zealand's investment in the Ansett group by NZ$1.32 billion.
49 There was also evidence from Mr McDonald, the Treasurer of Air New Zealand, which set out in some detail the advances which Air New Zealand had made to the Ansett group prior to the commencement of the administration. Mr McDonald said that as at 3 October 2001, the amount claimed by Air New Zealand from the Ansett group was $160,389,090.02. That amount was reviewed and reconciled to an amount of $112,948,751. It was apparent from Mr McDonald's evidence that as a result of the write down of NZ$1.32 billion there was a breach of covenants by Air New Zealand in its banking agreements. Air New Zealand's banks accordingly have the right to demand payment of their debts which total NZ$590 million. Air New Zealand has insufficient cash to satisfy those demands if they are made. Mr McDonald said that the co‑operation of the banks is vital to Air New Zealand's ability to continue trading and that the banks have made it clear that their co‑operation is dependent upon no further payments being made by Air New Zealand to the Ansett group. Mr McDonald has made it clear that the continued co‑operation of the banks is dependant upon the implementation of the Memorandum of Understanding.
50 Air New Zealand has also presented evidence from independent financial consultants to the effect that the continuing ability of Air New Zealand to carry on business and its ability to obtain recapitalisation from the New Zealand Government is dependent upon the Memorandum of Understanding being implemented. Heads of Agreement have been entered into between the New Zealand Government and Air New Zealand which provide for the New Zealand Government to subscribe capital in Air New Zealand and to make a loan to it. It is a condition precedent to the implementation of the Heads of Agreement that the Memorandum of Understanding becomes unconditional by 12 October 2001.
51 Air New Zealand has also entered into a shareholders support agreement with Singapore Airlines and Brierley Investments Ltd which is intended to support the Heads of Agreement entered into with the New Zealand Government.
52 The evidence of the independent financial consultants was that Air New Zealand cannot survive without an immediate and substantial injection of equity capital, that the only source of that capital is the New Zealand Government and that if the Memorandum of Understanding does not become unconditional, there is a high probability that Air New Zealand will be placed in statutory management.
53 In summary, the evidence tendered by Air New Zealand supports the proposition that if the Memorandum of Understanding does not become unconditional by 12 October 2001, the prospects of any claims made by the administrators of the Ansett group achieving substantial payments from Air New Zealand will be problematic. Further, there is nothing in the Air New Zealand evidence which would warrant the administrators revising their statements that they have not presently found any evidence of wrongdoing by the Air New Zealand group and the Directors. The Air New Zealand evidence demonstrates that there was continuing support for the Ansett group and significant attempts made to resolve the financial and commercial difficulties facing Air New Zealand and the Ansett group prior to 12 September 2001.
54 It is not necessary for me in the present proceedings, to make any findings as to the actions taken by the Air New Zealand group and the conduct of the Directors. It is sufficient, for present purposes, to note that the Air New Zealand evidence supports the reasons advanced by the administrators and the Hazelton administrator for concluding that it was appropriate to execute the Memorandum of Understanding and, in particular, accept the sum of $150 million and give the releases.
55 What is clear from the evidence filed on behalf of the Air New Zealand group is that if the Court does not approve the Memorandum of Understanding or approve of the administrators entering into the Memorandum of Understanding, the Air New Zealand group will most likely be placed under statutory administration. The relevance of that fact to the applications is not so much the consequences for the Air New Zealand group but, rather, the result that there would be an inability of the administrators and the Hazelton administrator to receive any funds from the Air New Zealand group, certainly in the short to medium term. They would be left with claims against a company under statutory administration. In such circumstances, a moratorium would exist in respect of the exercise of rights and claims against the company: Corporations (Investigation and Management Act) 1989 (NZ).
56 There is also a timing issue involved. It is apparent from what the administrators have said that there is an immediate need for an injection of funds into the Ansett group in order to enhance the value of its assets for the benefit of its creditors. If funds are not received fairly immediately, then any future claims which may be made against the Air New Zealand group or the Directors in relation to the subject‑matter of the releases in the Memorandum of Understanding will be of no value to the administrators in seeking to achieve their immediate objective of enhancing the value of the assets of the Ansett group and seeking to maximise the returns for creditors.