Monarch collapse prompts airline insolvency review

In the wake of the collapse of Monarch Airlines, transport secretary Chris Grayling has indicated the government is considering reforms to the rules governing insolvent airlines, a move which has been welcomed by insolvency and restructuring trade body R3

Grayling provided the House of Commons with an update on what has been described as the largest ever peacetime repatriation exercise, which has seen the government and other agencies work together to bring back some 110,000 passengers to the UK, with 700 flights over a two-week period.

Grayling said: ‘Of course, right now our efforts are rightly focused on getting employees into new jobs and getting passengers home. After that, our effort will turn to working through any reforms necessary to ensure that passengers do not find themselves in this position again.

‘We need to look at all the options—not just ATOL, but whether it is ​possible to enable airlines to wind down in an orderly manner and look after their customers themselves, without the need for the government to step in. We will be putting a lot of effort into that in the months ahead.’

The transport secretary said that normally, the CAA’s responsibility for bringing passengers back would extend only to customers whose trips are covered by the air travel organisers’ licence scheme (ATOL), but said this is the largest airline failure in UK history and there would have been insufficient capacity in the commercial aviation market to enable passengers to get home on other airlines, leaving tens of thousands of passengers stranded abroad.

The government is looking to recoup some of the costs of the operation and is in discussion with ATOL, travel providers and credit and debit card operators.

R3 president Adrian Hyde said: ‘The transport secretary’s interest in airline insolvency rules is welcome. The air industry is one of a number of parts of the economy where sector-specific rules on insolvency can make orderly wind-downs or business rescue tricky. Key licences can often be withheld from insolvent companies, for example. More structured wind downs could help improve outcomes for employees, creditors, and customers.

‘Although the thinking behind some of the rules in various sectors is understandable, the rules can sometimes make rescue all but impossible – leading to avoidable job losses or creditors being left out of pocket – or can significantly alter the way the insolvency is handled. R3 would welcome the opportunity to work with the government and regulators to introduce constructive and positive reforms, as they have in other specific sectors.’

Separately, the work and pensions select committee has raised concerns about a settlement agreed by the Pension Protection Fund (PPF) for the Monarch Airlines pension scheme when the airline first experienced financial difficulties, and which may now be at risk because of the airline’s insolvency.

Private equity firm Greybull Capital bought the ailing airline, minus the company pension scheme, for £1 from its billionaire founders the Mantegazza family October 2014. Before the takeover the pension scheme had reportedly been carrying a deficit of £158m.

To enable the takeover, the pension scheme was separated from the company as part of a Regulated Apportionment Arrangement (RAA) negotiated and approved by the Pensions Regulator (TPR) and the PPF in September 2014. TPR agreed to the deal as it was satisfied that Monarch would otherwise have inevitably gone insolvent within 12 months.

According to the terms of the RAA, the former owners made a £30m mitigation payment into the scheme and demonstrated to TPR’s satisfaction that all other creditors to the firm had made ‘significant compromises’ on their claims.

Greybull gave the PPF a 10% equity stake in the new restructured business and a £7.5m secured loan note, potentially enabling the PPF to gain from any recovery in the firm’s fortunes. The scheme entered PPF assessment in October 2014 and was fully transferred into the fund in November 2016.

However, Frank Field, chair of the work and pensions committee, has now written to the PPF’s chief executive, asking whether the PPF has to date received any payments from Monarch in respect of the secured loan note and where the note ranks in order of creditor preference. 

Field said: ‘How can it be that once again, mega rich individuals could walk away from a collapsed company with a bumper profit while ordinary people pick up the bill? This massively supports the case for the law to change, to robustly protect pension schemes against owners seeking to line their pockets while avoiding their responsibilities, in line with our recommendations.’

In a statement, Greybull said: ‘We have had a constructive relationship with the PPF since 2014 and aim to continue to do so. The administrators are working to maximise the proceeds from the sale of assets. If the recovery on assets is as speculated on in the press, we expect the PPF loan note to be paid in full.

‘There has been speculation about whether, and how much, Greybull may have lost as a result of Monarch’s failure. The outcome of the administration process, not least relating to the possible sale of Monarch’s airport slots, remains unclear, but will be fully reported on in due course by the administrators.

‘Of course, like any prudent investor, we seek to limit our losses when, despite the best efforts of everyone at Monarch and Greybull, the airline‘s position became untenable. If investors are not permitted to do that, then far fewer troubled businesses would have a chance to be rescued.

‘Our rescue of Monarch in 2014 provided over 2,700 people with employment over the last three years and generated over £250m of receipts for HMRC. Whilst we regret Monarch has not been successful for longer, we believe this outcome is far preferable to the business having failed in 2014.’

Chris Grayling’s statement to the House of Commons is here.

Frank Field’s letter to the CEO of the Pension Protection Fund is here.

Report by Pat Sweet

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