Humphris, in the matter of Hazelton Air Charter Pty Limited v Mentha

REASONS FOR JUDGMENT 1 An issue has arisen between the administrator of Hazelton Air Charter Pty Limited, Hazelton Air Services Pty Limited and Hazelton Airlines Limited (all administrator appointed) ("the Hazelton group") and the administrators of the companies in the Ansett group of companies set out in the Schedule to these reasons ("the Ansett group") in relation to their respective entitlements to the sum of $150m paid to the administrators of the companies in the Ansett group ("the Ansett administrators") by or on behalf of Air New Zealand Limited pursuant to a Memorandum of Understanding dated 3 October 2001 ("the Memorandum"). 2 On 19 October 2001, the Hazelton administrator filed an application pursuant to the provisions of s 447A(1) and s 447D(1) of the Corporations Act 2001 (Cth) ("the Act") in which he sought orders that the Court give directions as to, and/or determine, the manner of apportionment between the Hazelton group and the Ansett group of the sum of $150m paid to the Ansett administrators, as administrators of the Ansett group, pursuant to the Memorandum and direct that the Ansett administrators pay to the Hazelton administrator such sum as the Court determines to be apportioned to the Hazelton group. In the course of the hearing the Hazelton administrator, by leave, amended the application to provide that it was made pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) and to seek pursuant to s 21 of the Federal Court Act a declaration as to the manner of apportionment of the $150m between the Hazelton group and the Ansett group. 3 In proceeding number V 3060 of 2001, which was instituted on 2 November 2001, the Ansett administrators sought directions as to the allocation of the $150m paid pursuant to the Memorandum. 4 The circumstances giving rise to the applications are as follows. The Hazelton group became subsidiaries and part of the Ansett group of companies on 30 April 2001 on the completion by the Ansett group of an on‑market takeover of the Hazelton group. At that time the Ansett group was a wholly‑owned subsidiary of Air New Zealand Limited. 5 As a result of an order made on 17 September 2001, the Ansett administrators were appointed administrators of the companies in the Ansett group (with one exception where the appointment occurred subsequently on 4 October 2001) and the Hazelton administrator was appointed administrator of the companies in the Hazelton group. 6 On 5 October 2001, the Ansett administrators filed an application in the Court seeking an order that the Court approve of the Memorandum, or alternatively an order that the Ansett administrators may properly perform and give effect to it. On 8 October 2001, the Hazelton administrator filed an application in substantially the same terms. The parties to the Memorandum were the Ansett group, the Hazelton group, the Ansett administrators, the Hazelton administrator, Air New Zealand Limited and its subsidiaries (other than the Ansett group and the Hazelton group) set out in Schedule B to the Memorandum ("the Air New Zealand group") and each party who was at any time since Air New Zealand acquired 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"). 7 The events and circumstances giving rise to the negotiation and execution of the Memorandum are set out in In the matter of Ansett Australia Limited and Mentha [2001] FCA 1439. The approval of the Memorandum by the Court was sought as a matter of urgency for the reasons set out in that judgment. The Memorandum provided that the Air New Zealand group and the directors would procure the New Zealand Government to pay on behalf of the Air New Zealand group to the Ansett administrators the amount of $150m. The Memorandum provided further that in consideration of that payment and an agreement by the Air New Zealand group and the directors not to prove in the administration or liquidation of the Ansett group (which included the Hazelton group for the purposes of the Memorandum) and to waive certain entitlements to certain amounts, the Ansett administrators, the Hazelton administrator, the Ansett group and the Hazelton group would accept the payment of $150m, the agreement not to prove and the waiver of entitlements in full satisfaction of any outstanding liability or rights under a Letter of Comfort dated 8 August 2001 from Air New Zealand Limited to the directors of three companies in the Ansett group. 8 At the time the application for approval of the Memorandum came before the Court, the Hazelton administrator and the Ansett administrators had not agreed as to the manner in which the $150m was to be apportioned between the Ansett group and the Hazelton group. At the hearing of the application for the Court to approve the Memorandum, the following statement was read to the Court as a statement agreed to be binding upon the Ansett administrators and the Hazelton administrator: "The manner of apportionment of the amount being paid to Messrs Mentha and Korda as Ansett Administrators between the various companies in the Ansett Group (which includes the Hazelton Group) has yet to be determined. That determination will be made jointly by the Ansett Administrators and Mr Humphris as administrator of the Hazelton Group, and will take account of the interests of those creditors of the Hazelton Group who are not creditors of other companies in the Ansett Group. Failing agreement the matter will be brought before the Court for determination." 9 On 12 October 2001, the Court ordered that it approved the Memorandum and that the Ansett administrators and the Hazelton administrator may properly perform and give effect to it. In accordance with the Memorandum $150m was paid to the Ansett administrators. 10 The Ansett administrators and the Hazelton administrator have undertaken negotiations in an attempt to agree upon the apportionment of the $150m, but have been unable to agree as to the method of apportionment or the amount to be received by the Hazelton group. The Ansett administrators acknowledge that the Hazelton administrator and the Hazelton group have a legitimate claim on the fund of $150m and an interest in it and accept that they hold the amount of $150m in trust for the Hazelton administrator and the Hazelton group as well as for themselves and the Ansett group. However, the parties are unable to agree as to the amount of their respective interests in that fund. 11 During October 2001, the Hazelton administrator required access to the entitlement of the Hazelton group in the $150m to assist in the provision of working capital to keep the business of the Hazelton group running. As a result, an interim arrangement was reached between the Ansett administrators and the Hazelton administrator whereby $1,545,000 was paid by the Ansett administrators to the Hazelton administrator on account of his entitlement to be paid a portion of the $150m. Such payment was made without prejudice to the ultimate determination of the issue and on the basis that the Hazelton administrator would not be personally liable to repay any part of the sum of $1,545,000 unless, as administrator of the Hazelton group, he had assets available to do so after making provision for all priorities and liabilities of the kind provided for in s 556(1) of the Act. This arrangement was recorded in an order of the Court on 2 November 2001. 12 The following provisions in the Memorandum are central to the determination of the present issue: "Payment of AUD150M from New Zealand Government (on behalf of the Air New Zealand Group) 9 The Air New Zealand Group and the Directors will procure the New Zealand Government to pay (on behalf of the Air New Zealand Group) to the Voluntary Administrators [defined as the administrators of the Ansett group other than the Hazelton group] AUD150M net of all New Zealand taxes (including GST) within one (1) business day of the fulfilment of the Conditions Precedent, such payment to be made in a manner reasonably required by the Voluntary Administrators so that it is not required to be disgorged on any insolvency or statutory management of any company in the Air New Zealand Group. 10 If the New Zealand Government fails to pay AUD150M in accordance with Clause 9 this Memorandum of Understanding is automatically terminated. Air New Zealand Group waives all claims 11 In consideration of the release in Clause 12, the Air New Zealand Group and the Directors will not prove in the administration or liquidation of the Ansett Group [defined as including the Hazelton group as well as the Ansett group] and waive all entitlements to be repaid funds advanced, outstanding trade debts or any other money owed whatsoever arising, accruing or falling due prior to the date of fulfilment of the Conditions Precedent (but excluding any claim for unreturned aircraft assets as referred to in Clause 24). As at the date hereof, the Air New Zealand Group claim that the amount owing to the Air New Zealand Group from the Ansett Group is AUD160,389,090 as set out in Schedule D together with other amounts relating to the payment of wages and salaries. Release of Letter of Comfort claim 12 In consideration of the payment in Clause 9 and the agreement not to prove and waiver in accordance with Clause 11, the Voluntary Administrators, the Hazelton Voluntary Administrator and the Ansett Group will accept the payment in Clause 9 and the agreement not to prove and waiver in accordance with Clause 11 in full satisfaction of any outstanding liability or rights under the Letter of Comfort dated 8 August 2001 from Air New Zealand Limited to the Ansett Group and, subject to receipt of the payment in Clause 9, the Voluntary Administrators, the Hazelton Voluntary Administrator and the Ansett Group release the Air New Zealand Group and all of the Directors from all actions, claims and demands arising out of and/or relating directly or indirectly to the Letter of Comfort, whether or not the Voluntary Administrators, the Hazelton Voluntary Administrator or any company in the Ansett Group are presently aware of the existence of such action, claim or demand. Nothing in Clause 22 shall apply to this Clause. 12A For the avoidance of doubt, upon payment of AUD150M in accordance with Clause 9, the Ansett Group will have no claims against the Air New Zealand Group and the Directors arising out of and/or relating directly or indirectly to the Letter of Comfort. Conditional Release of Directors 13 Subject to Clause 22 and to receipt of the payment referred to in Clause 9, the Ansett Group, the Voluntary Administrators and the Hazelton Voluntary Administrator release the Air New Zealand Group, and all of the Directors from all actions, claims and demands arising out of and/or relating directly or indirectly to: 13.1 the management or affairs of the Ansett Group; 13.2 any claims arising at common law, in equity or pursuant to statute including but not limited to the Corporations Act, the Corporations Law and the Trade Practices Act; 13.3 any claims arising in the administration of the Ansett Group; 13.4 any transactions or dealings between any company in the Ansett Group and any company in the Air New Zealand Group in all cases whether or not any company in the Ansett Group or the Voluntary Administrators are presently aware of the existence of such action, claim or demand. This release does not operate to prevent or in any way hinder the return to the owner of aircraft assets or documents as contemplated by Clause 24. Release of Ansett Group 14 Subject to receipt of the payment referred to in Clause 9, the Air New Zealand Group and each of the Directors release the Ansett Group, the Voluntary Administrators and the Hazelton Voluntary Administrator from all actions, claims and demands whatsoever which any of them may have on any account whatsoever, including any loans which may be owing. This release does not operate to prevent or in any way hinder the return to the owner of aircraft assets or documents as contemplated by Clause 24. … Deed of Company Arrangement 18 The Voluntary Administrators will take all reasonable steps to propose and recommend (as the case may be) that each company in the Ansett Group enters into a Deed of Company Arrangement which will: 18.1 acknowledge and incorporate the terms of the Memorandum of Understanding or if in existence the Proposed Agreement; and 18.2 seek to 'pool' all of the assets and liabilities of the Ansett Group so that for the purposes of the Deed all Ansett Group companies are treated as one company. … Employee Entitlements 23 The Voluntary Administrators will use their best endeavours to ensure that the priority creditors are paid all of their entitlements in full." 13 It is also necessary to refer to the terms of the "Letter of Comfort". It is dated 8 August 2001 and is signed for and on behalf of Air New Zealand Limited. It is in the following terms: "To: THE DIRECTORS Ansett Holdings Limited (ABN 085 117 635) Ansett International Limited (ABN 080 622 460) Ansett Australia Limited (ABN 004 209 410) (the 'Companies') 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." 14 At the time the Memorandum was entered into, neither the Ansett administrators nor the Hazelton administrator had the opportunity to undertake a detailed examination or investigation of the claims which they might have under the Letter of Comfort and against Air New Zealand Limited and the directors. The Hazelton administrator said in this proceeding that in order to be able to determine the merits of any claim under the Letter of Comfort, the provision of a considerable amount of additional information was required which he then identified and which included an understanding of the circumstances under which the Letter of Comfort was prepared, the identification of the individuals in the Hazelton group (if any) who received the Letter of Comfort and whether they acted upon it, and whether the Hazelton group was the recipient of funds advanced in accordance with the terms of the Letter of Comfort. An amount of $32m was advanced to the Ansett administrators and their predecessors in order to enable the payment of employees' wages. According to Mr Mentha, one of the Ansett administrators, their predecessors had instructed solicitors to make a demand upon Air New Zealand Limited to make further advances under the Letter of Comfort. Twelve million dollars was advanced to the Ansett administrators and $210,961.08 of this money was allocated to the Hazelton group on the basis of its proportion of the total payroll. 15 In the course of the hearing, a number of bases for apportionment were put to the Court by the parties. The Hazelton administrator's initial proposal was that the sum be apportioned in proportion to the respective unsecured liabilities of each of the Ansett group and the Hazelton group which were identified. The Hazelton administrator believed that this was the most equitable basis for apportionment as it was commercial, pragmatic, transparent, realistic and fair. 16 The Ansett administrators initially approached the matter on the basis that the settlement with Air New Zealand Limited was reached on an undifferentiated group basis and that the apportionment should treat the Hazelton group as undifferentiated parts of the total Ansett group. The Ansett administrators proposed that the apportionment be on the basis of known employee entitlements. The Ansett administrators proposed that they would increase these payment to the Hazelton group to a maximum of $4.5m if the Hazelton employees were not paid all of their entitlements in full. The purpose of so doing was to ensure that the Hazelton employee entitlements were paid pari passu with the Ansett group employee entitlements. There were other terms of the Ansett administrators' proposal which it is not necessary to set out in any detail. 17 The parties identified a number of possible bases by reference to which the apportionment of the $150m could be determined: (a) a comparison of the total gross liabilities of the Ansett group and the Hazelton group; (b) a comparison of the net liabilities of the Ansett group and the Hazelton group; (c) a comparison of the employee entitlements of the Ansett group and the Hazelton group which were entitled to priority payment. This basis was supported by the Australian Council of Trade Unions and twelve unions ("the ACTU") which represented the interests of employees and former employees of the Ansett group; (d) a comparison of the trading losses of the two groups during the period of their respective administrations; (e) mathematical equality according to the number of claimants to the fund; (f) a comparison of the claims released under the Letter of Comfort. 18 A substantial body of evidence was led by the parties to demonstrate the figures which would be derived by using these bases of apportionment. I put on one side for later consideration the comparison of the claims released. A number of the calculations were controversial, such as the liabilities which might be incurred, or the recoupments which might be obtained, on the termination of various aircraft leases. There was also controversy as to the basis of determining the quantum of employee entitlements. Differential bases were proffered, namely on a most likely outcome basis and on a liquidation basis. Adopting one or another of these bases resulted in different amounts for total liabilities and net liabilities. The determination of a number of these items was dependant upon matters which are at the present time subject to considerable variation and speculation depending upon future outcomes. A particular area of controversy was the calculation of aircraft leases and remediation costs. A different proportion of the $150m was derived for the Hazelton group depending upon which basis was adopted. 19 The following table shows the indicative portion of the $150m which would be due to the Hazelton group depending upon the basis chosen. These amounts are only indicative because there was disagreement between the parties as to the calculation of some of the figures from which they were derived. Nevertheless, for present purposes, the table is sufficient to identify the relative outcome depending upon the basis used. Basis Hazelton Ansett % Amount Net liabilities $40.202m $2.116m 1.864 $2,796,000 Total liabilities $61.68m $3.131m 1.932 $2,898,000 Employee entitlements $1.768m $779m 0.226 $339,000 Total creditors $50.136m $2.836m 1.737 $2,605,500 Trading losses $10,956,471 $175m 5.89 $8,835,000