Jet Midwest, Inc. v Regional Express Holdings Limited trading as Regional Express Airlines

Supreme Court of NSW|2024-10-18|Before: Stevenson J

Solicitors: Norton White (Plaintiff/Applicant) White & Case (Defendant/Respondent) File Number(s): 2024/264848

JUDGMENT

The plaintiff, Jet Midwest, Inc, is a corporation based in Kansas City, in the State of Missouri.
On 15 October 2019, Jet Midwest entered a contract with the proposed second defendant, Rex Investment Holdings Pty Ltd ("Rex Investment"), for the sale of four SAAB 340B aircraft, and their component parts "as is, where is", for a purchase price of US$2 million. Rex Investment is a wholly owned subsidiary of the first defendant, Regional Express Holdings Ltd ("Regional Express"). At the date of the agreement, the aircraft were in storage in Arizona.
Rex Investment paid a deposit of US$200,000. That deposit is currently held in an escrow account.
Rex Investment did not pay the balance of the purchase price.
Components of the aircraft were shipped to Wagga Wagga Airport. Regional Express was named as the consignee.

The legislative structure

The administration of the companies is dealt under Pt 5.3A of the Act.
The object of that part is: [1] "…to provide for the business, property and affairs of an insolvent company, to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company, or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company."
Section 440D of the Act provides: "(1) During the administration of a company, a proceeding in a court against the company, or in relation to any of its property, cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes."
So far as concerns leave under s 440D, the starting point is that: [2] "The purpose of the requirement of leave is to freeze civil proceedings against the company in voluntary administration, so that the administrator can formulate a rational plan for future action."
This reflects the "undesirability of an administrator being distracted from his or her statutory duties and being required to incur the expense associated with litigation". [3]
The Court is cautious about granting leave to proceed against a company in administration. [4]
A stricter approach is taken in applications for leave to proceed against a company in administration than is taken in relation to applications for leave to proceed against a company during a Deed of Company Arrangement, [5] or in winding up. [6]
The idea behind s 440D is to enable administrators to work out, within the time frames specified in Pt 5.3A, whether the company can avoid going into liquidation and to "maximise the chances of the beleaguered company staying alive". [7]
During the period of a company's administration there are restrictions on the exercise by third parties of their property rights.
Relevantly, during the administration of a company, an owner of property cannot take possession of its property or otherwise recover it. [8]
On the other hand, by reason of s 442C of the Act, [9] an administrator cannot dispose of the property of a third party without that party's consent or leave of the court.
Section 442C further provides: "(3) The Court may only give leave under paragraph (2)(c) if satisfied that arrangements have been made to protect adequately the interests of the secured party, owner or lessor, as the case may be. (4) If the administrator proposes to dispose of property under paragraph (2)(a), the Court may, by order, direct the administrator not to carry out that proposal. (5) The Court may only make an order under subsection (4) on the application of: (a) if paragraph (1)(a) applies - the secured party; or (b) if paragraph (1)(b) applies - the owner or lessor, as the case may be."

The Administrators' plan

The Administrators have commenced a process for the recapitalisation or sale of the businesses and assets and have formed a view that the sale of the Rex companies and all their assets is likely to be in the best interests of creditors as it is likely to lead to the businesses continuing to trade. The parties referred to this as the "Sale Process".
The Administrators' view is: [10] "… that the appropriate course is for them to make an application under s 442C of the [Act] in respect of any transaction which may involve the disposition of the property of Jet Midwest, with any leave under s 442C(2)(c) being subject to a condition that the Administrators account to [Jet Midwest] from the sale proceeds for the value of any of its property which is sold … The Administrators accept that they cannot sell any property of Jet Midwest without its consent or an order of the Court pursuant to s 442C."

The Administrators' position concerning the components of the SAAB aircraft

The Administrators have prepared a "SAAB Search Spreadsheet" which indicates that there appear to be in the possession of Regional Express a number of engine parts, "Line Replaceable Units", and propeller gearbox modules, and that these components "are used on a wide range of aircraft currently in service in the regional airline fleet operated by the Rex Companies". [11]
The Administrator' position is that "[a] sale of the business and all assets of the Rex companies will include the transfer or assignment of all of the aircraft owned or leased by the Rex Companies, which are likely to include a number of parts which are referred to in the SAAB Search Spreadsheet and which appear to be [Jet Midwest's] property". [12]
One of the Administrators, Mr Adams Nikitins has deposed: "From the investigations I explain below, the Administrators have identified that [Regional Express] has some property in its possession, which appears to be the property of [Jet Midwest]. However, these investigations are ongoing. When the Administrators conclude their investigations and have a comprehensive list of any property and assets that are in the possession of [Regional Express] and appear to be owned by [Jet Midwest], then the Administrators will determine whether they will: (a) seek written consent from [Jet Midwest] pursuant to s 442C(2)(b) of the [Act] to dispose of any such property and account to [Jet Midwest] for the proceeds of that disposal by way of an agreed procedure; (b) seek leave of the Court pursuant to s 442(2)(c) of the [Act] to dispose of the property and, if successful in that application, account to [Jet Midwest] the proceeds of that disposal; or (c) where possible, deliver up to [Jet Midwest] any such property."
On 17 October 2024, the Administrators, through their solicitor, gave Jet Midwest, through its solicitor, the following update: "The purpose of this letter is to update your client on the ongoing investigations and enquiries of the Administrators and the Company's progress regarding the stocktake. The Company has completed a stocktake of the parts and components, which were identified in a shipping container in its Wagga Wagga facility (Facility) … The Administrators were notified of the completed stocktake on the afternoon of Tuesday, 15 October 2024 … The stocktake identifies that the parts and components (Parts) that are located at the Facility consist of line replaceable units and propeller blades. We confirm that the Parts have been separated and quarantined at the Facility. The Administrators have instructed the relevant employees of the Company responsible for the Parts not to handle or move these. Should you confirm that the Parts in Annexure A are your client's property, the Administrators are willing to make these parts available for your client's immediate collection. The Administrators have otherwise instructed the Company to quarantine, count and put aside any items located at PT Nusantara Turbin Dan Propulsi (NTP)'s storage facility, which are identified as your client's property. The Administrators have issued a general instruction to the Company not to make use of any of your client's property which is at NTP's storage facility and not logged on the Company's IAS. We confirm that the stocktake of the Facility at Annexure A and parts put aside at NTP do not represent the conclusion of the Administrators' investigations in respect of your client's property, which are continuing in as efficient and thorough manner as possible." (Emphasis in original.)

The Administrators' proposed application under section 442C

As I have set out, this is the course that the Administrators propose to take.
As the Administrators accept that it appears that Regional Express is in possession of Jet Midwest's property, and indeed is using that property as incorporated into its fleet, it is clear enough that the Administrators are bound to take this course as part of the Sale Process.
As is set out in the Administrators' letter of 17 October 2024, the Administrators have already informed Jet Midwest that they will make the particular components referred to in Annexure A of that letter available to Jet Midwest for its immediate collection.
Insofar as there are components of the SAAB aircraft that are not amongst those items, unless the Administrators can come to an agreement with Jet Midwest, they must obtain the Court's leave under s 442C. That leave will only be given if the Court is satisfied that arrangements have been made adequately to protect Jet Midwest's interests. [13]
As Mr Nikitins has set out in the material to which I have referred, the Administrators propose to seek the Court's leave to dispose of Jet Midwest's property and account to Jet Midwest for the proceeds of any sale.
The Administrators accept that they will have to adduce evidence to justify any disposal of Jet Midwest's property and that such evidence may well have to include valuation evidence.
One would think that the Administrators will be highly motivated to come to an arrangement that is satisfactory either to Jet Midwest itself or to the Court in this regard, as the Administrators will doubtless wish to conclude the Sale Process in a way that maximises the return to creditors of the Rex Companies.
It will be open to Jet Midwest in the course of that process to apply under s 442C(5) for an order under s 442C(4) that the Administrators not carry out the Sale Process; a powerful incentive for the Administrators to come to an arrangement satisfactory either to Jet Midwest or to the Court.
The Administrators accept that application of s 442C will not result in a delivery up to Jet Midwest of all the SAAB components. In that regard, it will be recalled that, when these proceedings were commenced, Jet Midwest did not seek delivery up, but rather sought damages.
The Administrators submit that "it is plain that Jet Midwest has no particular reason for wishing to have its property returned to it in specie" and that "[t]hat is unsurprising where what were once four aircrafts have now been split into parts which appear to be dispersed across the Rex Companies' fleet and elsewhere". [14]
However that may be, the fact is that now that the Rex Companies are in administration, Jet Midwest is subject to the restrictions that the Act imposes concerning the recovery of its property.
It is true that the process under s 442C will be contingent upon the Administrators comprehensively and accurately identifying what property of Jet Midwest is in the possession of the Rex Companies.
But I do not see this as placing Jet Midwest "at the mercy of the searches which the Administrators choose to perform and thereafter the Administrators' determination of whether property identified is owned by [Jet Midwest]". [15]
The Administrators are officers of the Court and can be expected to act consistently with their duties considering the prohibitions contained in s 442C. There is no reason to think that the Administrators will do otherwise than their professional best.
The Administrators have every incentive to ensure that the process they conduct is thorough, so as to ensure that the proposal concerning Jet Midwest's putative property is acceptable to the Court, and thus avoid incurring any personal liability for selling assets that the Rex Companies do not own.
In one sense, Jet Midwest may well be in a better position now that Administrators have been appointed as the investigation concerning the SAAB components is now in the hands of professionals, rather than officers of the companies.

Leave to bring the proposed claim for delivery up

As I have said, this is not a claim that was originally made by Jet Midwest and only arises from the proposed amendment.
As the Administrators propose to make, and for all practical purposes are bound to make, an application under s 442C, it would not be appropriate to impose on the Administrators the distraction of, at the same time, having to incur the cost of and be involved in the time necessarily required to, at the same time, respond to Jet Midwest's claim in these proceedings.
In this regard I see force in these submissions made on behalf of the Administrators: [16] "The alternative course advanced by [Jet Midwest] is lengthy and costly litigation to achieve effectively the same outcome (given that it will be necessary as part of the conduct of the administration for the Administrators to undertake the task of identifying the relevant property in question). On any view, this proceeding will be substantial and complex if allowed to proceed; and the requirement for the Administrators to be involved in such litigation will be an unnecessary and costly distraction from their important task of completing the Sale Process and effectuating any deed of company arrangement or other mechanism necessary to implement any sale transaction. Every dollar of legal costs incurred by the Administrators in conducting the proceeding will be a dollar that is not available for the benefit of the creditors of the Rex Companies."
Further, it would be highly undesirable to have two proceedings, these proceedings and the foreshadowed s 442C proceedings, pending at the same time, with each proceeding aiming to achieve the same result, namely determining compensation to Jet Midwest for such loss as it has suffered by reason of the events which I have described.
It may well be that at the conclusion of the process under s 442C, there will be aspects of Jet Midwest's claim which will remain to be resolved: for example, its claim for damages. That is a factor to be weighed in the balance but not one which I would consider warrants the granting of leave.

Leave to bring the claim for funds in escrow

The Administrators accept that this claim is separate in nature from Jet Midwest's claim in respect of the SAAB aircraft components and that this is a claim of the kind which would ordinarily be the subject of leave under s 444E in relation to a company the subject of a Deed of Company Arrangement, or under s 471B of the Act in the case of a company in liquidation. That is because, the Administrators accept, this claim is not one amenable to a proof of debt process.
However, I accept the Administrators' submissions that leave should not be granted to Jet Midwest in relation to this claim for two reasons.
One is that the claim is one of some complexity.
As the Administrators submitted: [17] "Those events are likely to give considerable room for argument as to who is entitled to the deposit. There may be further, as yet undiscovered, communications which are relevant to the matter. The entitlement to the deposit will be governed by the law of the purchase agreement, which is the law of New York. It is unclear whether additional questions will arise under the Escrow Agreement, which is governed by the law of Oklahoma. These questions will require advice on foreign law and may be of some complexity. The Administrators should not be distracted from their tasks by being required to search for documents, obtain advice and form a position on these matters now when they can be addressed in any deed administration or liquidation."
Further, as Jet Midwest accepted in argument, there is no particular urgency to the resolution of that claim. Although the funds are not bearing interest, the alleged failure to complete occurred between 2019 and 2020, and Jet Midwest has thus waited some four years before taking any steps concerning the deposit.

Conclusion

I decline to grant Jet Midwest leave to proceed under s 440D.
I invite the parties to bring in short minutes to give effect to these reasons.
If there is any dispute as to costs, the parties should agree a timetable for short submissions so that I can deal with that question on the papers.

Endnotes

Section 435A of the Act.
Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited (No 2) [2023] NSWCA 246 at [17] (Gleeson JA).
Ibid at [18].
Ibid at [22].
Section 444E(3) of the Act.
Section 471B of the Act: see Hill v Esplanade Wollongong Pty Ltd ACN 141 133 708 (subject to a deed of company arrangement) [2018] NSWSC 478 at [19] (Gleeson JA).
To adopt the language of Hammerschlag J (as the Chief Judge in Equity then was) in Larkden Pty Limited v Lloyd Energy Systems Pty Limited [2011] NSWSC 1305 at [37].
Section 440B(1) of the Act: see Item 4 in the Table to that section.
See particularly ss (1), (2)(b)-(c).
Submissions of Mr Izzo SC, who appeared with Mr Krochmalik for the Administrators at [13].
Ibid at [29].
Ibid.
Section 442C(3) of the Act.
Submissions of Mr Izzo and Mr Krochmalik at [41].
As apprehended in the submissions of Mr Knowles SC and Mr Cooper, who appeared for Jet Midwest, at [44].
Submissions of Mr Izzo and Mr Krochmalik at [36].
Submissions of Mr Izzo and Mr Krochmalik at [55]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 October 2024

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