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The collapse of Monarch – Should the law be changed to soften the blow?

David Tann

04 December 2017

The collapse of Monarch Airlines caused a shock across the airline and tourist industry. The reasons for the collapse have been well covered in the media. A fatal combination of a fall in passenger numbers to destinations such as Turkey, Egypt and Tunisia, the fall in the pound against the dollar following the Brexit vote and the model not being quite right in what is a fiercely competitive industry all contributed to the failure.

It is clear that Monarch had been teetering on the edge for some while which allowed the CAA time to plan the repatriation of passengers stranded overseas. By all accounts they did a remarkable job, making contact at short notice with all customers due to fly and chartering aircraft and crew from numerous different airlines, albeit at a significant cost.

One of the main questions being asked is why it was not possible to achieve an orderly wind down of the Monarch operation rather than to bring it to a juddering and dramatic halt. Air Berlin filed for insolvency, but was allowed to continue to operate for three months and Alitalia is still operating whilst a sale is pursued. The current insolvency laws certainly make it difficult to achieve a similar, more orderly, closure and the Government has announced a review into airline insolvency arrangements. In the Autumn budget statement the treasury said that it plans to appoint an independent chair to review consumer protection and look at ways of allowing airlines to wind down in an orderly fashion.

Whilst low the low cost airline business is fiercely competitive and the failure has had a huge impact on consumers, why limit this review to airlines? The view of the insolvency profession is that it should be tied in to the Government’s existing corporate insolvency reform proposals which were announced in May 2016. They have made almost no progress, presumably because the Government has bigger things to worry about at the moment, but a debtor in possession procedure similar to the US Chapter 11 process may assist many businesses to survive or achieve a more orderly wind down. Funding would still be the main issue though; the Air Berlin wind down was only achieved with a loan of €150 million from the German government­ and Alitalia also had received substantial funding from the Italian government.

Until there is a significant change in the legislation Administration will still be the vehicle of choice for this type of insolvency. It does have its limitations with risk being one of the biggest issues for the Administrators.  In Monarch the appointment of the Administrators was made at four in the morning. This was because the proposed Administrators needed to make sure no aircraft were in the air at the time of their appointment as they did not want to be responsible for the costs and risks of aircraft in mid-flight. By all accounts there was a judge lined up in the offices of the Administrators’ lawyers at 2am to sign off the appointment, but there was one flight delayed and he had to sit there until 4am while they waited for confirmation that it was safely on the ground. Apparently he was not terribly happy at being called out at such an early hour and, perhaps understandably, his mood did not improve when he was forced to sit there for two hours before putting pen to paper.

Some have questioned why it was not possible to use Monarch’s aircraft for the repatriation which were sitting idle. There are a number of reasons for this, not least because the aircraft were owned by or pledged to finance companies which would be keen to secure their assets to mitigate their loss. It is likely as well that the airports may have wished to claim a lien over the aircraft against any money owed to them by Monarch. Then there may well have been fuel suppliers wishing to recover fuel in the aircraft under retention of title clauses, plus other equipment on board which may have been leased or rented.

There is also the issue of legal action by staff over the Administrators’ failure to consult prior to making the redundancies. This is caused by a conflict between employment law and the practicalities of insolvency which it is difficult to see will ever be satisfactorily resolved. The employer, via its Administrators, is required to apply the consultation process, but the Administrators have no choice but to make staff redundant without adequate consultation because they have no money to pay them.

In the meantime the Administrators are getting on with trying to dispose of the assets, the most valuable of which seems to be the runway slots. The ability of the Administrators to sell the slots is being contested in the courts, with the Administrators losing in the first instance, but being granted an order in respect of the Luton and Gatwick slots on appeal. It is likely though that there will be plenty more work for the lawyers on this front and it could take many months, and probably years, before the final outcome of the unfortunate saga is known.

About David Tann

David Tann

David has over thirty years’ experience in the insolvency profession. David’s broad portfolio includes many owner managed businesses looking for relief from financial difficulties. Working with a wide range of companies and their advisers in the Thames Valley region, David offers advice to the directors of underperforming businesses, acting as liquidator or administrator and supporting them through the challenges and complexities of insolvency. He is also experienced in assisting large corporate groups to dispose of dormant subsidiaries as part of restructuring processes. David has a flexible and pragmatic approach in addition to a wealth of experience that spans a number of sectors, including retail, engineering, hospitality and leisure and mining.

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