After almost 17 months of voluntary administration, the two administrators of the company Air Mauritius finally held a Watershed Meeting with creditors on September 28, 2021, to know their feedback on the options submitted to them in the administrators’ report tabled under the Insolvency Act 2009.
There were three options offered to the creditors, namely corporate restructuring, the end of voluntary administration or company liquidation. Actually, there were two mutually exclusive options: company restructuring (labelled as Deed of Company Arrangement) with a haircut on liabilities owed to creditors or company liquidation. The end of voluntary administration would occur under either option.
What would be the outcome of the creditor’s vote is a foregone conclusion. Creditors (lessors and suppliers) would prefer to take a haircut (reduction) to the amounts owed to them rather than facing a company liquidation where the proceeds from the sale of assets might produce a worse deal in terms of money distributable to them.
The administrators’ report raises more questions than answers to the issues that have plagued the company even before the pandemic started. Three of them have hit a nerve with observers.
First, page 5 of the report contains a disclaimer that the administrators have not conducted an audit of the books and records, financial accounts and other
documentation pertaining to the Company’s affairs. So, the administrators relied on financial and other quantitative data provided to them by company management. This begs the question: what has been done in almost 17 months to do a proper assessment of the financial situation of the company, considering the amount of money spent on professional services contracted for during the voluntary administration. This leads us to the second issue.
Secondly, page 23 of the report provides a summary of the receipts and payments of the Company during the period from 23 April 2020 to 31 August 2021. Two line items stand out under “Payments”:
- Legal and other professional fees for 2,218,765 euros (or Rs 112.7 million at the exchange rate of Rs 50.80 per euro mentioned in the report).
- Administrators’ remuneration for 954,867 euros (or Rs 48.5 million at the same exchange rate).
The period stated covers a little more than 16 months. Using 16 months as a basis, the two administrators’ compensation amounts to Rs 3.03 million per month or Rs 101,057 per day (in a month of 30 days). That is a daily compensation of Rs 50,528 per administrator.
Without making a value judgment, this important level of daily compensation raises two questions:
- What is the billing rate per hour of work provided?
- How many hours of work were provided per day?
It should be noted that, in addition to administrators’ compensation, the administrators relied on legal and other professional services which cost Rs 112.7 million. Those services were provided by consultants in aviation strategy, finance, HR policy and legal matters. Which raises another question: did the administrators use all the in-house expertise available to them in those areas? For a 53-year-old company, it is hard to say that such expertise was lacking in house.
In matters of insolvency administration, it is necessary to consider the nature, extent, and value of professional services purchased and obtained. Relevant factors to consider are:
- Time spent on services provided.
- The rates charged for such services.
- Whether the services were necessary to the administration of the company.
- Whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed; and
- Whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners in similar cases of voluntary administration in the industry or in other industries.
Were these factors rigorously evaluated when setting the professional fees? The majority shareholder (the State) may not ask this question, but it is up to minority shareholders to seek answers.
Thirdly, page 17 of the report mentions the sale of four surplus aircraft: two A319 for US $ 6 million (Rs 258 million at the exchange rate of Rs 43 per dollar) and two A340 for $ 350,000 (Rs 15 millions at the same exchange rate). The net book value (historical cost less accumulated depreciation) of the four aircraft in April 2020 was:
- two A319 aircraft at 26.6 million euros (Rs 1.356 billion at the exchange rate of Rs 51 per euro), and
- two A340 aircrfat at 44.9 million euros (Rs 2.392 billion).
The loss upon the disposal of four aircraft is a staggering amount: Rs 3.377 billion (net book value of Rs 3.650 billion less proceeds of sale of Rs 273 million).
Selling assets at a loss is not abnormal in business, but selling aircraft at a sale value equal to 7.48% of their net book value is quite abnormal. All companies try to sell assets at a price that reaps a gain upon disposal. The gain is the excess of the sum of accumulated depreciation and sale price over the historical cost (original purchase price). A loss upon disposal occurs when the sum of accumulated depreciation and sale price is less than historical cost.
In all probability, the aircraft sold should have fetched a higher price than the price at which they were sold. The sale price is 7.48% of the net book value, which means that the loss on disposal represents 92.52% of the net book value. Some assets are sold at a loss in case of company liquidation in order to recover a minimum dollar (rupee) value for distribution to shareholders. But in case of company insolvency under administration where the intent is to keep the company as a going concern, selling assets at bargain basement prices looks like an ill-advised or desperate move. Unless there is some non-business rationale that we are missing in the overall picture.