Air Australia Group of Companies

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1 14 March 2012 Pursuant to Section 439A of the Corporations Act

2 Table of Contents Executive Summary Appointment of Administrators Progress of Administrations Object of Administrations Prior involvement with the Companies First meetings of creditors Second meetings of creditors Receipts and payments of the Administrations Conduct of the Administrations Immediate financial review and cessation of trade Preserving and securing assets and reducing costs Collecting trade debtors Sale of business assets campaign Employee entitlements Dealing with Retention of Title and realisation of stock and spares Insurance public and product liability Investigations into the affairs of the Companies Other matters Companies background History of the Companies Directors and officers Related entities Events leading up to Administrations Reports as to affairs Historical financial performance Searches Investigations Administrators investigations Overview of Administrators investigations Approach to preliminary investigations Offences under the Act by the director Potential recovery actions available to a liquidator Offences Companies directors personal financial position Liability limited by a scheme approved under Professional Standards Legislation i

3 4.8 Limitation of investigations Offences in relation to the Companies Section 438D Sale process of the Companies Assets Summary of sale process Alternatives available to creditors Explanation of alternatives available to creditors Recommendation Reasons for recommendation Financial analysis of alternatives Estimated return to creditors Amount Timing Remuneration of Administrators Disbursements Further information Appendix 1 Declaration of Independence, Relevant Relationships and Indemnities Appendix 2 Summary of receipts and payments Appendix 3 Australian Securities and Investments Commission Company Searches Appendix 4 Directors and Secretaries Appendix 5 Summary of work completed Appendix 6 Calculation of Actual Fees Appendix 7 Disbursements Appendix 8 Historical financial performance Appendix 9 Analysis of alternatives available to creditors Liability limited by a scheme approved under Professional Standards Legislation ii

4 Executive Summary We, John Park and Mark Korda, were appointed as Administrators of seven companies collectively trading as Air Australia at 1:20am on 17 February On appointment we assumed control of the Companies operations and assets, communicated with all key stakeholders including passengers, employees and major creditors, and implemented new controls. The three point plan was: 1. Immediate suspension of flights and sales, and to quickly communicate and deal with passenger and staff travel prioritising those away from home ports 2. Sell the businesses as going concerns or find a white knight 3. Do our investigations. To date: 1. We have arranged for all staff to be returned home and alternate travel with a significant number of providers was arranged for passengers 2. We have begun the business sale process: Engineering there are approximately six interested parties with reasonable sale prospects Airlines (and the AOC) there was no interest in the business once the likely purchase cost was established and as such the business has been closed 3. Investigations we are yet to complete our investigations due to the short time period available and the workload to date. We have however ensured that we have retained all books and records of the company and access to systems to preserve the integrity of the data. This report sets out our recommendation to the creditors for the future of the Companies in the Group. It is our opinion that it would be in creditors interests for each Company in the Group to be placed in liquidation. It is estimated under the proposed winding up of each Company there could be a small surplus available to priority creditors (being employees) based on the assumptions made. It is estimated there will be no dividend to unsecured creditors. 14 March

5 1 Appointment of Administrators 1.1 Progress of Administrations We, John Park and Mark Korda, were appointed as Administrators of Strategic Airlines Pty Ltd ( SAL ) Strategic Aviation Pty Ltd ( SAV ) Strategic Engineering Australia Pty Ltd ( SEA ) Strategic Aviation Group Pty Ltd Air Australia Airways Pty Ltd Ozjet Airlines Pty Ltd Strategic Global Pty Ltd (collectively referred to as the Companies or the Group ) on 17 February 2012 pursuant to Section 436A of the Corporations Act 2001 (Commonwealth) ( the Act ). On appointment we assumed control of the Companies operations and assets, communicated with all key stakeholders including passengers, employees and major creditors, and implemented new controls for purchasing and banking. Following our appointment, we immediately formed the view that the Companies had insufficient funds to continue to operate in the short to medium term. Accordingly, we suspended all flight operations, terminated all employees and maintained a skeleton engineering operation to continue the CAR30 licence to allow for a potential sale. The entitlements of the SAL and SEA employees have been reviewed by us. We have communicated estimated entitlements to employees. The entitlements represent our best estimate of employee entitlements at this time and are subject to further review by Department of Education, Employment and Workplace Relations ( DEEWR ). We are liaising with DEEWR who administer the General Employee Entitlements and Redundancy Scheme ( GEERS ) to enable prompt processing of entitlements covered by GEERS to those employees in the event the Companies are placed in liquidation. At the date of this report we have not received a proposal for a Deed of Company Arrangement ( DOCA ) and we do not anticipate receiving one for any of the Companies. 1.2 Object of Administrations Section 435A of the Act states that the objectives of the Administration provisions of the Act are to provide for the business, property and affairs of an insolvent company to be administered in a way that: maximises the chance of the company, or as much as possible of its business, continuing in existence, or 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. This report has been prepared in accordance with Section 439A(4) of the Act. 14 March

6 This report has been prepared from information obtained from the Companies records, the Director and management of the Companies and from our own enquiries. Our investigations into the Companies affairs have been limited due to the short time period provided under the Act within which we must issue a report about the Companies business, property, affairs and financial circumstances for the Second Meetings of Creditors. We have no reason to doubt the information contained in this report. The statements and opinions given in this report are given in good faith and in the belief that such statements and opinions are not false or misleading. Except where otherwise stated, we reserve the right to alter any conclusions reached on the basis of any changed or additional information which may become available to us between the date of this report and the date of the Second Meetings of Creditors. Neither KordaMentha nor any member or employee thereof undertakes responsibility in any way whatsoever to any person in respect of any errors in this report arising from incorrect information provided to us. 1.3 Prior involvement with the Companies There has been no change to the position as stated in the Declaration of Independence, Relevant Relationships and Indemnities included with our Initial Circular to Creditors. A copy of which is attached as Appendix First meetings of creditors Section 436E of the Act required us to conduct a meeting of the creditors of each company in administration within eight business days of being appointed ( the First Meetings of Creditors ). The First Meetings of Creditors for the Companies were held on 29 February At the First Meetings of Creditors, we advised that it would be in the interests of the creditors if a Committee of Creditors was formed for Strategic Airlines Pty Ltd. We also recommended that the Committee of Creditors should comprise one or more individuals representing each of the main creditor interest groups. A resolution was passed by the creditors present at the meetings to appoint a Committee of Creditors for this company. The Committee of Creditors was elected as follows: Swiss International Lee Schofield (employee) ANZ DER Travel National Air Cargo No resolution was passed to form a Committee of Creditors for any other company. 1.5 Second meetings of creditors We are required to convene a second meeting of creditors of each Company in administration pursuant to Section 439A of the Act ( the Second Meetings of Creditors ) to consider the future of each Company. 14 March

7 Before the Second Meetings of Creditors, we must prepare a report on the relevant Company s business, property, affairs and financial circumstances and provide opinions on certain matters, which is the purpose of this report. This allows creditors to be in a position to vote at the Second Meetings of Creditors on the options available to them, as to whether it would be in the creditors interests for each Company for: the Company to execute a deed of company arrangement ( DOCA ) the administration to end, or the Company to be wound up We advise that the Second Meetings of Creditors will be held at The Greek Club, 29 Edmondstone Street, South Brisbane, Queensland on 23 March 2012 at 10:00am. Formal notice of the meetings accompanies this Report. Registration for the meetings will commence at 9:30am. A Form 532 Appointment of Proxy also accompanies this report. If you intend to appoint another person to act on your behalf at the meetings, or you are a corporate creditor, you are required to complete the Proxy Form appointing your representative. Proxy forms may be sent to KordaMentha GPO Box 2985, Melbourne, Victoria 3000 or by facsimile (03) no later than 12:00pm, Thursday, 22 March If you are representing a company, please ensure that your proxy is executed pursuant to Section 127 of the Act or your representative is appointed pursuant to Section 250A of the Act, otherwise you will not be entitled to vote at the meeting. Creditors are required to have lodged proofs of debt no later than 12:00pm on Thursday, 22 March 2012, failing which they may be excluded from voting at the meetings. A Form 535, Formal Proof of Debt or Claim, accompanies this Report. Proofs of Debt may be sent to KordaMentha GPO Box 2985, Melbourne, Victoria 3000 or by facsimile to (03) Those creditors who have already lodged a Proof of Debt are not required to lodge a further proof (unless they wish to amend their claim). A copy of this report, together with other information relating to the Companies, can be found on the KordaMentha web site at in the Creditor Information section. 1.6 Receipts and payments of the Administrations Attached as Appendix 2 is a summary of the receipts and payments for the period from 17 February 2012 to 11 March Further details in relation to the receipts and payments are available on request, provided sufficient notice is given to comply with the request. 2 Conduct of the Administrations On appointment, we assumed control of the Companies operations and assets and communicated with all key stakeholders including employees, the major creditors, trade creditors and passengers. During the course of the Administrations to date, we: immediately suspended sales and shut down the operations including all flights arranged for all crew to be flown home to Australia within 72 hours of appointment at no cost to creditors 14 March

8 addressed all staff in Melbourne, Perth and Brisbane (Head Office and Engineering) communicated key messages within one day to approximately 4,000 overseas and short term booking passengers and subsequently to the balance of approximately 100,000 booked passengers communicated with all employees, unsecured creditors, lessors etc. prepared and distributed pre-populated GEERS claim forms for all employees are arranging return of five aircraft to international lessors being three A320 s and two A330 s including performing line maintenance, records collation and CASA clearance on commercial terms exited approximately ten rental premises arranged and held first creditors meetings arranged for the second creditors meetings began sale process for the engineering business negotiated process for potential return of IATA held trust funds initiated negotiations to potentially realise some value from the European subsidiary. 2.1 Immediate financial review and cessation of trade Following our appointment, we formed the view that due to there being no funds available and the historical financial performance of the businesses, we were unable to trade the businesses of the Companies and had no choice but to immediately suspend sales and shut down flight operations on 17 February Further, the Companies had insufficient funds to continue to operate in the short term to enable a restructure of the cost base. We immediately addressed all staff where possible and all staff were immediately made redundant. We also communicated to all passengers due to fly in the next five days by text message and to ensure that they made alternate travel arrangements given the grounding of the fleet. The balance of approximately 100,000 passengers with bookings over the next twelve months also received communications shortly thereafter. We arranged for all crew to be flown home to Australia within 72 hours of appointment. We considered it to be in the best interests of all creditors to retain the services of a casual skeleton staff at each state premises post 17 February 2012 to supervise and manage any movements of stock, aircraft records and plant and equipment. We also retained the services of project staff, engineers and technical records staff on a casual basis to assist in dealing with the Companies assets and leased aircraft, as well as several members of the accounts and finance team to assist us and our staff with our review of the Companies financial position, and two members of the call centre team. We would like to thank those employees who have assisted us since the commencement of the Administrations with such professionalism and enthusiasm in sometimes trying circumstances. 2.2 Preserving and securing assets and reducing costs Immediately upon appointment, our KordaMentha Forensics Team reviewed the Companies IT platforms and networks and secured the system backups. These actions were taken to ensure the integrity of the Companies electronic data was maintained. 14 March

9 We aimed to quickly determine any assets of the Companies that may have been at risk and took appropriate steps to ensure such assets were preserved. All assets were automatically insured on our appointment pursuant to an OpenCover facility with our insurance brokers, Willis Australia ( Willis ). Willis undertook an assessment of the adequacy of the policies in place at the time of appointment, amended them where necessary and placed appropriate cover for the purposes of the Administrations. The Companies head office is located at 34 Navigator Place, Hendra, Queensland 4011 ( Head Office ). We attended these premises along with all other business locations Australia wide immediately following our appointment. Given the need to limit any liability incurred by us we undertook a review of all leased and hired equipment and arranged for the return of equipment surplus to our requirements. We only retained sufficient warehouse and IT equipment necessary for the conduct of the Administrations and immediately disclaimed all other leased assets including the five aircraft. 2.3 Collecting trade debtors Immediately on appointment, we initiated discussions with the debtors of the Companies. We note there were minimal debtors and to date we have collected $420,979 in respect of pre appointment debtors owing to the Companies. We have also negotiated a process with IATA to potentially recover funds held within the pool for flights availed prior to the date of the Administrations. 2.4 Sale of business assets campaign The business assets were immediately put to market upon our appointment as Administrators. Given the nature of the key assets, it was critical that we acted quickly before value dissipated. We identified the engineering operations and the airline itself as the two distinct business assets. It quickly became apparent that there was minimal interest in purchasing the airline, due in part to the loss making nature of the operations and that the Air Operators Certificate ( AOC ) must be held within the existing corporate structure if it were to be sold. The engineering operations did however attract interest. The initial deadline for expressions of interest in the business assets was Wednesday, 29 February Detailed below is a timeline of the key stages in the sale process: Event Date Contact with strategic industry participants 20 February 2012 Preparation and Distribution of Information Memorandum 23 February 2012 Initial Expressions of Interest Due 29 February 2012 Provision of Detailed Information 5 and 6 March 2012 Negotiations with key parties commenced 8 March 2012 Finalisation of Sale Agreements Continuing Several expressions of interest were received and negotiations commenced immediately with parties who had provided suitable indicative bids. Completion of a sale, if any, is expected to occur in late- March. 14 March

10 2.5 Employee entitlements All employees were informed of their termination on our appointment at meetings held on 17 February All employees were employed by either SAL or SEA. Further meetings were held with employees during the following week to provide updates and address employee queries. We made immediate contact with unions representing a number of SAL and SEA employees and held phone conferences with them. We invited several government and public assistance agencies to meet with employees after the 17 February 2012 meetings to provide support for the employees. In addition to these meetings, employees have received regular communication via and SMS. Formal confirmation of termination letters and initial employee information packs were mailed to all employees on 20 February On 5 March 2012, we issued letters to employees outlining an estimate of their outstanding entitlements as well as outlining the GEERS process. Employees were engaged generally under common law contracts with no reference to Awards. Payroll was completed in house and it appears from an initial review of the outstanding entitlement information provided on appointment that further review of areas such as time in lieu and various allowances might be necessary. An approximate summary of employee entitlements outstanding at 17 February 2012 is detailed below: SAL $000 SEA $000 Gross Amount $000 Estimated GEERS Funding $000 Superannuation 1, ,306 Nil Wages Annual Leave 1, ,893 1,537 Long Service Leave Nil Nil Nil Nil Notice 3, ,368 1,730 Redundancy 1, ,420 1,144 Total 8, ,653 5,008 We note that the figures shown in this summary are approximate values only and are subject to change. GEERS does not cover all outstanding employee entitlements. GEERS does not cover outstanding superannuation, notice in excess of 5 weeks, redundancy in excess of 4 weeks for each year of employment or any sick leave entitlements payable on redundancy. In addition, there is an income cap on calculating the amount GEERS will pay for an employee. The majority of employees will have a portion of their outstanding entitlements covered by GEERS. Payment of employee entitlements and superannuation in excess of GEERS funding will be dependent on the final outcome of the Administration and liquidation processes. We will work closely with DEEWR and employees to enable prompt processing of claims, answering of queries and payment of any funding advanced to Air Australia to pay outstanding employee entitlements received via GEERS. 14 March

11 As at the date of this report we have received 108 signed GEERS claim forms. In the event of Liquidation these forms and any other signed GEERS claim forms received will immediately be forwarded to the DEEWR for consolidation and processing. It is important to note that employees can only make formal claims through the GEERS process if the Companies are placed in liquidation. 2.6 Dealing with Retention of Title and realisation of stock and spares Stock was located in multiple business locations in three States of Australia and internationally. In those locations, the Companies electronic stock system disclosed approximately $4.77 million worth of stock at cost including sundry food and drink stocks and aircraft spares (rotables and consumables). A stocktake was completed in the first week of our appointment. The Companies also held various pools of spares belonging to Lufthansa, John Holland Aviation Services and various other suppliers. These pools were not owned by the Companies and have been collected. We are managing all Retention of Title ( ROT ) issues and the realisation of stock from the Brisbane premises to ensure efficient resolution of ROT claims and the avoidance of additional costs to the Administrations. Administrators representatives at each interstate location, together with the retained staff, manage stock movements interstate. Each of the business locations were leased from third parties. We have negotiated continuing occupation in order to facilitate the Administrations and sale processes. In order to resolve the ROT claims as quickly as possible claimants were invited to view stock by appointment. We immediately responded to all ROT claimants and requested they complete a ROT questionnaire. This enabled claimants to understand the process and prompted them to provide specific supporting documentary evidence of their claim. Using these responses, we were able to perform an initial review of the validity of each claim. The majority of claimants have completed and returned ROT questionnaires and the adjudication process has commenced with the aim of finalising all claims as quickly as possible. 2.7 Insurance public and product liability The Administrators have an OpenCover Insurance facility arranged through our brokers, Willis. This OpenCover facility provides for an automatic hold cover period for a large range of policies for the first 30 days of an administration. During this 30 day period, Willis review the insurance requirements of the particular administration. Willis also advise us on any cover that is required due to the risk being outside the scope of the automatic OpenCover facility. 2.8 Investigations into the affairs of the Companies Our investigations into the affairs of the Companies are at a preliminary data gathering stage. 2.9 Other matters Further actions undertaken by the Administrators and our staff during the course of the Administrations include the following: 14 March

12 attending to media enquiries arranging site security inspecting the various sites operated by the Companies reviewing and securing stock held by the Companies arranging stocktakes by location confirming insurance requirements arranging financial close as at 17 February 2012 overseeing day to day operations cash management attending to BAS/GST lodgement requirements with the ATO reviewing and authorising payments to creditors of the Administrations negotiations with creditors and structuring of payment terms for the Administrations creditors review and approval of casual payroll convening and holding the First Meetings of Creditors assessing creditor claims, where necessary reviewing asset valuations discussions with industry participants overseeing the daily trade debtor collection process reviewing asset realisation alternatives reviewing and arranging information and documentation for the sale process preparing Business Asset Overviews for interested parties negotiating and documenting the proposed sale of asset agreements convening the Second Meetings of Creditors preparation of this report initial review of the historical financial affairs and records of the Companies securing, reviewing and storing the Companies books and records in accordance with applicable legislation initial stage of the investigations required under the Act to complete this report negotiating with key customers with respect to outstanding debtors reporting to the major creditors. 14 March

13 3 Companies background 3.1 History of the Companies The Companies in the Group were progressively incorporated over the period 23 March 1993 to 24 May 2011 and the business of the Companies was initially a charter airline operation. On the loss of the main contract in October 2010, the Companies began regular public transport operations and in turn, created the aviation engineering business supporting the airline. Strategic Airlines rebranded to Air Australia on 15 November The Companies were operating from the Head Office, a hanger located at Brisbane Airport, Queensland and had various sub-branches in Melbourne and Perth. The Group was structurally split with shareholders being James Family Pty Ltd and Michael James personally, as follows: 14 March

14 Company name (all Administrators Appointed) Shareholder name Number of shares held Shares Fully Paid % Air Australia Airways Pty Ltd Strategic Aviation Pty Ltd 1 Yes 100 Ozjet Airlines Pty Ltd Strategic Global Pty Ltd 100,000 Yes 100 Strategic Airlines Pty Ltd James Family Pty Ltd 100 Yes 100 Strategic Aviation Group Pty Ltd James Family Pty Ltd 100 Yes 100 Strategic Aviation Pty Ltd Michael David James 1 Yes 100 Strategic Engineering Australia Pty Ltd Michael David James 2 Yes 100 Strategic Global Pty Ltd Michael David James 2 Yes 100 Attached as Appendix 3 is information regarding the Companies obtained from searches obtained from the Australian Securities and Investments Commission ( ASIC ) as at the date of our appointment. A fixed and floating charge over the Companies was granted on 7 November 2011 in favour of the secured creditor. Our initial view is that such a charge is only valid to the extent of new monies advanced under such a facility however we will take advice on this issue. The charge secures the overdraft to an amount of $3.5m and the merchant facility. The chargeholder has reserved their rights at this stage. We are not aware of any winding up petitions having been made against any of the Companies. 3.2 Directors and officers Attached as Appendix 4 is information regarding the Director and Secretary of the Companies obtained from ASIC as at the date of appointment. 3.3 Related entities Detailed below is a summary of related entities of the Companies, which could be debtors of the various Companies: Related entity Company in which the related entity is a debtor (all Administrators Appointed) Nature of claim Amount James Family Trust Strategic Aviation Pty Ltd Unknown (note: this entity is a creditor of other group entities) Strategic Property Group Strategic Aviation Pty Ltd Unknown (note: this entity is a creditor of other group entities) Property Unit Trust Strategic Aviation Pty Ltd Unknown (note: this entity is a creditor of other group entities) $5.4m $1.2m $6.0m 14 March

15 Related entity Company in which the related entity is a debtor (all Administrators Appointed) Nature of claim Amount Air Charter Strategic Airlines Pty Ltd Unknown (note: this entity is a creditor of other group entities) Air Charter (Aust) Strategic Aviation Pty Ltd Unknown (note: this entity is a creditor of other group entities) Strategic Aviation UK Strategic Aviation Pty Ltd Unknown (note: this entity is a creditor of other group entities) $0.1m $0.8m $0.8m SAS Airlines France Strategic Aviation Pty Ltd and Strategic Airlines Pty Ltd Unknown $3.0m and $4.7m Air Charter (US) Strategic Aviation Pty Ltd Unknown $0.1m Strategic Luxembourg Strategic Aviation Pty Ltd and Strategic Airlines Pty Ltd Unknown $0.2m and $2.6m The above debtor claims have yet to be assessed fully. Our preliminary understanding is that the only potential realisation might come from the Luxembourg operations. It should also be noted that Strategic Aviation Pty Ltd (Administrators Appointed) also owns 49% of the issued share capital of Strategic Luxembourg. Where noted, the above entities are also creditors of Companies within the Group. The claims have not yet been adjudicated. However, if the Companies are placed in liquidation and there are sufficient funds realised for the Liquidators to make a distribution to creditors, the related entities will each be required to provide a proof a debt, which will then be adjudicated. 3.4 Events leading up to Administrations Our investigations indicate that the Companies financial difficulties can be attributed to: heavy losses from at least July 2009 in the order of: $27m in the 2010 financial year $37m in the 2011 financial year $25m in the 2012 financial year to date (from the management accounts) inadequate utilisation of aircraft i.e. the fixed cost of significant assets was not spread widely enough across the revenue base economies of scale the significant infrastructure investment and running costs was not supported by a sufficient revenue base lack of working capital fare discounting to support cash flow. 3.5 Reports as to affairs At the date of finalising this report, we have not received meaningful or compliant RATAs from the Companies Director. 14 March

16 3.6 Historical financial performance The Companies financial statements were last prepared as at 30 June Please note that these accounts were not audited. Monthly management accounts were prepared by the Companies and the latest such accounts were prepared as at January Detailed in Appendix 8 is a summary of the comparative balance sheets and profit and loss statements of the Companies, extracted and reconstructed from the Companies books and records. The Companies financial statements disclose the following: 3.7 Searches the Companies working capital decreased considerably over the period from 30 June 2010 to 31 December 2011, from $3 million to a deficiency of $58 million the net asset position of the Companies deteriorated significantly over the same period, from a net asset position of $8 million in 2010 to a net asset deficiency of $36 million at 31 December 2011 the decline in revenue between 30 June 2010 and 31 December 2011 was due to the loss of a major contract in October Motor vehicle and property searches have been requested with a view to determine if any of the Companies is the registered owner of any motor vehicles or property. These searches were undertaken in the state of Queensland and to date, results of the searches are yet to be received. 14 March

17 4 Investigations 4.1 Administrators investigations Under the Act, we are required to investigate the Companies business, property, affairs and financial circumstances. Pursuant to Regulation 5.3A.02 of the Act, we are also required to investigate and report to creditors on any possible recovery actions that would be available to a Liquidator, if creditors resolve to place any of the Companies into liquidation. Our investigations are at a preliminary stage and we are not in a position to provide any final comments about potential offences that may have been committed or amounts of money that may be recoverable in the event of any of the Companies being placed into liquidation. It should be noted that further detailed investigations will need to be undertaken by a Liquidator (if appointed), and independent legal advice sought in order to determine the likely success of any actions contemplated in respect to the matters detailed below. 4.2 Overview of Administrators investigations Our limited investigations to date have focused on the following matters: collation of information that will enable investigation into breaches of duty and other offences under the Act by the Director collation of information that will enable investigation into potential actions by a Liquidator (if appointed). 4.3 Approach to preliminary investigations In conducting our preliminary investigation, we: arranged for a backup of the financial and payroll records to be made and retained by us reviewed documentation provided to us by the employees of the Companies held discussions with key employees, including the Chief Financial Officer and Legal Counsel identified, reviewed and undertook preliminary analysis of financial information in both hard copy and electronic form undertook searches of various publicly available databases, including ASIC spoke with various external parties, including suppliers of goods and services and customers of the Companies. 4.4 Offences under the Act by the director Section 438D of the Act requires an Administrator to lodge a report with ASIC if it appears that: a past or present officer, or member, of a company may have been guilty of an offence in relation to the company, or 14 March

18 a person who has taken part in the formation promotion, administration, management or winding up of a company may have misapplied money or property of the company or may have been guilty of negligence, default, breach of duty or trust in relation to the company. We set out below our comments as to whether investigations are warranted in relation to particular offences Books and records Failure to maintain adequate books and records may be relied upon by a Liquidator in an application for compensation for insolvent trading and other actions for recoveries pursuant to Division 2 of Part 5.7B of the Act. From our limited investigations to date, we consider that the Companies have maintained books and records in accordance with the requirements of the Act, although investigations need to be finalised Care and diligence and duty to act in good faith The duty to act in good faith includes the following: to act honestly to exercise powers in the interests of the company to avoid conflicts of interest to use their position properly to use information only for its proper purpose. We have not completed adequate investigations to form a view on the above at this stage. We do note that if there is evidence to indicate that the Companies or specific Companies traded whilst insolvent for a period and entered into certain transactions these may be voidable against a Liquidator. If this is the case, then it may be that the provisions of Sections 180, 181, 182, 183 and/or 184 of the Act may have also been breached, that is the Director may not have acted in the interests of the Companies or specific Companies. Ultimately, the determination of whether the director has breached these provisions of the Act will be made by a Court. 4.5 Potential recovery actions available to a liquidator Voidable transactions Unfair preferences If a company is placed into liquidation, various provisions of the Act enable the Liquidator to recover certain payments that were made by the company to a creditor prior to the company being placed into Voluntary Administration, referred to as unfair preferences. These are transactions where the payment results in a creditor receiving more than it would have received in the winding up of the company. A Liquidator is able to look back at the preceding six months to determine whether or not any such transactions occurred i.e. a Liquidator is able to review transactions between the periods 18 August 2011 to 17 February 2012 In order to prove a creditor received an unfair preference payment, the Liquidator must first show that the company was insolvent at the time of the payment. 14 March

19 The creditor has a defence to an unfair preference claim by a Liquidator if it proves that it entered into the transaction in good faith and, at the time the benefit was received, the creditor had no reasonable grounds for suspecting that the company was insolvent or would become insolvent through entering into the transaction and valuable consideration was given, nor would a reasonable person in the creditor s position have suspected that the company was insolvent or would become insolvent. A preliminary review of the Companies records indicate that a significant number of payment arrangements had been entered into with creditors prior to our appointment. This can be an indication of preferential payments being made to creditors under the provisions of Section 588FA of the Act. These payments would be reviewed further in a liquidation. Uncommercial transactions A transaction of a company is an uncommercial transaction if the following elements are established by a Liquidator: the transaction was entered into or given effect to within two (2) years of the date of appointment of the Administrator at the time the transaction was entered into, or when given effect to, the company was insolvent or became insolvent as a result of the transaction a reasonable person in the company s circumstances would not have entered into the transaction having regard to the benefits and detriments to the company in entering into the transaction and the respective benefits to other parties. The defences available to a party involved in an uncommercial transaction claim are, in effect, the same as those for an unfair preference. Our investigations are at a preliminary stage and we are not in a position to provide any final comments about potential uncommercial transactions that may have been entered into. Unfair loans Essentially an unfair loan is a loan agreement where the interest or charges are considered to be extortionate. Unfair loans made to the company any time prior to the appointment of the Administrators may potentially be overturned by a subsequently appointed Liquidator, whether or not the company was insolvent at any time after the loan was entered into. From our limited investigations, we are not aware of any unfair loans entered into by the Companies. Our investigations are at a preliminary stage and we are not in a position to provide any final comments about potential unfair loans that may have been entered into Insolvent trading Under the Act, a director is personally liable to the company if the director fails to prevent a company from incurring a debt when, at the time of incurring that debt, the company is insolvent, or becomes insolvent by incurring the debt, and there existed reasonable grounds to suspect that the company was or would become insolvent. Creditors should be aware that a successful claim for insolvent trading requires extensive analysis and would generally require legal action. Further, we would point out to creditors that such proceedings may often be drawn out and involve significant cost. Creditors should also be aware that any successful claim may be set-off by a Director against amounts due to that individual by way of unsecured advances or a loan account. In this regard, we note that as yet, the Companies Director has not lodged proofs of debt in the administration. 14 March

20 The Act provides a number of possible defences to Directors to a claim for insolvent trading. These defences are: at the time the debt was incurred the Directors had reasonable grounds to expect and did expect that the company was solvent and would remain solvent if it incurred that debt and any other debts that it had incurred at that time at the time the debt was incurred the Directors had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing information about the company's solvency and that person was fulfilling that responsibility the Directors through illness or some other good reason were not taking part in the management of the company at the time the debt was incurred the Directors took all reasonable steps to prevent the company from incurring the debt. It is crucial to note that, with the exception of unfair loans, in order for a Liquidator to be able to set aside a transaction or obtain compensation from a director for insolvent trading, the Liquidator must first be able to show that at a relevant point in time the company was insolvent. The Act states a company is considered to be solvent if, and only if, the company is able to pay its debts as and when they become due and payable. A company that is not solvent is insolvent. Accordingly, the test for insolvency is not a balance sheet test but rather a cash flow test. Results of investigations To date, an exact date of insolvency has not been determined. As set out previously, due to the limited time available to date, our focus has been on collation of the required information to ensure the investigations are able to be completed. Any claim for insolvent trading against the Director of the Companies, however, would need to be assessed on commercial grounds, including the: Costs likelihood that pursuing a claim of insolvent trading would be successful, taking into account the defences available to Director cost of litigation likelihood of recovery against the Director of the Companies. As stated earlier, the Act provides Directors with a number of defences to a claim for insolvent trading. We are unable to comment, at this stage, as to whether the Director of the Companies would have any defences. The costs of pursuing voidable transactions and insolvent trading would come from the assets of the Companies or funding from creditors of the Companies. Alternatively, the Liquidators could seek litigation insurance funding. 4.6 Offences Our investigations to date have not revealed that the Director has committed any offences prior to our appointment. Further investigation however is required. 14 March

21 4.7 Companies directors personal financial position In determining the likely recoveries from a Director, we must establish the Director s capacity to pay any judgement claim ASIC searches A search of ASIC s database for the Director indicates that he holds the following current positions: Company Strategic Air Charter Pty Ltd J.L.I Queenscliff Pty Ltd Mining Construction Safety Services Pty Ltd Strategic Engineering Group Avi8ion Pty Ltd Strategic Air Charter (Australia) Pty Ltd Air Australia Catering Pty Ltd Air Australia Engineering Pty Ltd Air Australia Freight Pty Ltd Air Australia Frequent Flyer Pty Ltd Air Australia Ground Handling Pty Ltd Air Australia Group Pty Ltd Air Australia Holidays Pty Ltd Air Australia Link Pty Ltd Air Australia Regional Pty Ltd Direct Mortgage Reduction Pty Ltd James Family Pty Ltd Strategic Property Group Pty Ltd Position Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Motor vehicle and real property searches Motor vehicle and property searches have been requested with a view to determine if the Director is the registered owner of any motor vehicles or property. These searches were undertaken in the state of Queensland and to date, results of the searches are yet to be received Personal guarantee claims Our investigations to date have revealed the existence of one personal guarantee claim being that provided by the Director in favour of the secured creditor for the aforementioned facilities. The Director has advised that he is unaware of any other personal guarantee claims. 14 March

22 4.8 Limitation of investigations The opinion outlined above is based on limited investigations undertaken by our office into the Companies affairs, business and financial position. Our investigations have been based on the following information: representations of the Director and the management team of the Companies the details of the Companies assets and liabilities as established by our office the books and records of the Companies, which have been written up to record transactions of the Companies to 17 February 2012, as have been made available to us. 4.9 Offences in relation to the Companies Section 438D At this stage, we are not aware of any serious offences in relation to the Companies that may have been committed by the Director of the Companies. At this stage, we are not aware of any persons, who have taken part in the formation or management of the Companies, misapplying or retaining money or property of the Companies. At this stage, we are not aware of any persons who have been guilty of negligence, breach of duty or trust of the Companies. Accordingly, at this stage we have not reported to the ASIC under Section 438D of the Act. 14 March

23 5 Sale process of the Companies Assets 5.1 Summary of sale process The business assets were immediately put to market upon our appointment as Administrators. Given the nature of the key assets, it was critical that we acted quickly before value dissipated. We identified the engineering operations and the airline itself as the two distinct business assets. It quickly became apparent that there was minimal interest in purchasing the airline, due in part to the loss making nature of the operations and that the Air Operators Certificate ( AOC ) must be held within the existing corporate structure if it were to be sold. The following processes were adopted by us in order to conduct a sale of the engineering business Marketing The marketing was commenced with a targeted campaign calling for expressions of interest in the engineering business. The campaign was directed at a number of industry participants and other parties that we considered may be interested based on our discussions with the staff, customers and suppliers of the Company Interested parties database All parties who contacted us expressing interest in the business were placed in an Interested Parties Database. All registered parties were given updates in relation to the sales process and data was provided during the process. To date, we have received over 20 registrations of Expressions of Interest and entered into formal discussions with approximately half of these parties with varying degrees of progress. 14 March

24 5.1.3 Process For the engineering operations, the initial deadline for expressions of interest in the business assets was Wednesday, 29 February Detailed below is a timeline of the key stages in the sale process: Event Date Made contact with strategic industry participants 20 February 2012 Preparation and distribution of Information Memorandum 23 February 2012 Initial expressions of interest due 29 February 2012 Provision of detailed information 5 and 6 March 2012 Negotiations with key parties commenced 8 March 2012 Finalisation of sale agreements Continuing Several expressions of interest were received and negotiations commenced immediately with parties who had provided suitable indicative bids. Completion of a sale, if successful, is expected to occur in late-march. 6 Alternatives available to creditors 6.1 Explanation of alternatives available to creditors It is our obligation to make a recommendation to creditors on which alternative is in the best interests of creditors. Our recommendation is based on what is in the best interests of creditors with regard to repaying their existing debts and must also ensure that those creditors who have an ongoing relationship with the Companies are comfortable in their dealings with the Companies. We make the following general comments in respect to each option: Deed of company arrangement We have not received a proposal for a DOCA Bringing the Administrations to an end It is possible that creditors may consider ending the Administrations and returning the Companies to the existing Director. This is not feasible at this stage given the financial position of the Companies and the professional assistance and funding it would requires to trade out of the Companies difficulties. The Companies Director would resume control of the assets and be able to deal with them as he deems appropriate. This will not prevent creditors from initiating legal proceedings for the recovery of their debts or petitioning to the Court to have the Companies wound up at their own expense. Should creditors resolve that the Administrations be terminated, the Companies will be placed in a similar position to that existing prior to our appointment as Administrators. 14 March

25 6.1.3 Winding up the Companies At the Second Meetings of Creditors, creditors may resolve that any of the Companies be wound up. Should they do so, that Company will be placed into liquidation and the Company is taken to have nominated us as the Administrators to be the Liquidators, if the creditors do not nominate a person to be the Liquidator. The Liquidators are required to realise and distribute the assets in accordance with Section 556 of the Act (subject to Section 545 of the Act) and will also be required to complete a thorough investigation into the Companies past dealings and affairs, and the past actions of the Director. The effects of the liquidation of the Companies include: 1. the moratorium available under the Voluntary Administration process will cease 2. the Liquidators will be empowered to recover potential voidable transactions, as outlined in Section 4 of this report 3. the Liquidators will be required to conduct an investigation into the affairs of the Companies pursuant to Section 533 of the Act and lodge a report with the ASIC in respect of the same. It is clear at this stage that the Companies have a deficiency of assets to liabilities and further that they are insolvent and that they cannot meet their debts as and when they fall due. In our view, the winding up of the Companies is the only realistic option for creditors in that the Liquidators will be in a position to wind up the affairs of the Companies and realise the Companies remaining assets for the benefit of creditors. We acknowledge that the sale of the engineering business is in progress and placing the Companies and specifically SEA into liquidation has, in our view, the potential to affect the ongoing trading of the engineering business which may in turn jeopardise the sale of the business as a going concern. It is however our opinion that this risk to the business sale process is not material and that this liquidation option allows the following areas to be investigated more thoroughly, which on an holistic view, will be beneficial to the creditors of specifically SAL and SEA, and the Companies generally. Investigation of voidable transactions and insolvent trading If any of the Companies are placed into liquidation, further investigation of the matters referred to earlier in this report would be undertaken to determine the potential of any recoveries. Directors guarantees If any of the Companies are wound up, creditors with guarantees from that Company s Director could pursue the Director for those debts immediately Adjournment of second meetings There is no requirement to adjourn the second meetings. An adjournment of the meetings for up to 45 days is possible under the Act. 6.2 Recommendation It is our opinion that it would be in creditors interests for each Company to be placed in liquidation. 14 March