SUPERCARS’ major sponsor has endured a month of hell only to announce that they’re now in voluntary administration. But what exactly does that mean?

WORDS: Richard Craill

VIRGIN AUSTRALIA’S decision to enter volunteer administration has instantly become a major motorsport story given their title sponsorship of the Supercars Championship that runs through the end of the 2021 season.

Virgin have been a high-profile backer of the championship, with Supercars stars and cars appearing in Virgin’s in-flight safety videos and marketing over the last four years.

It is understood Supercars receive something in the vicinity of $1.5m in contra from Virgin as part of the deal – basically that value in flights and services supplied by Virgin at no cost to Supercars.

Travel is a major overhead in a national sporting competition, so this is a significant saving for both the championship and teams involved.

Virgin are also a major sponsor and the official airline of the AFL and clubs Greater Western Sydney, Gold Coast and Carlton.

It’s a big story and the potential loss of Virgin Australia’s backing will create stress at Supercars HQ – but it’s not as simple as that.

The process of Voluntary Administration means there is a way out the other side that could see things continue.

What does it mean? We’ve done the Googling for you – so read on.

WHAT IS VOLUNTARY ADMINISTRATION?

Voluntary Administration is a process that allows a company with cash flow issues or serious debt and solvency issues to gain some ‘breathing space’ from creditors to restructure the business and ideally come out the other side healthier.

With the suspension of almost all domestic and international travel, airlines cashflow has been all but erased during this period, while Virgin itself is also in debt to the tune of almost $5billion.

The administration process sees outside ‘administrators’ appointed to operate the business in a bid to restructure.

In this case, administrators have been appointed to operate Virgin and will work with the existing CEO and management team throughout the period.

Administration usually lasts approximately one month.

In that timeframe, the administrators can secure and protect key assets owned by the business from creditors looking to recoup some of their losses.

Basically, during the Administration period creditors are unable to forcibly attempt to recoup some of their debts from the business in question. In essence, it buys breathing room.

They will then assess the business from top to bottom before ultimately providing a recommendation to either liquidate, seek new investment, refinance debt or otherwise.

WHY VOLUNTARY ADMINISTRATION?

Companies in strife use voluntary administration because trading while insolvent is a crime and can result in jail time and hefty fines for company directors.

Putting a company into voluntary administration has been used as a defence by company directors accused of trading while insolvent – essentially it shows that they are attempting to minimise risk to creditors and those seeking money from the business in question.

It should be noted that there’s a difference between entering voluntary administration and a company being placed in receivership.

Voluntary Administration is exactly that – a board will take the decision to appoint administrators in a bid to save the company or, alternatively, wind things up.

Receivership is when a bank or creditors owed significant money (or a group of them) forcibly appoint someone to recoup some of their losses, generally by parting out the company and selling off assets and IP.

The former can result in businesses coming out the other side, while the latter does not.

WHAT DOES IT MEAN FOR SUPERCARS?

The championship will have a contract with Virgin Australia which specifies accurately and definitively the requirements from each side to meet the criteria laid out as part of the sponsorship deal.

Virgin’s situation is also different to the last time a major Australian airline, Ansett, collapsed.

Back then, they faced competition from both Qantas and the then-new Virgin in a market that probably couldn’t support three major domestic players.

Last financial year, Qantas had over 4.3 million domestic customers and Jetstar 4 million. Virgin had almost 3.8 million. Any other ‘rivals’ have only a tiny share of the market.

Basically, it means that should Virgin disappear, Qantas would have a monopoly on domestic air travel which governments tend to not like.

It means that an affordable Virgin Australia may be an attractive proposition to new investment to enter the company and help them through the current period, allowing them to come out of the other side in one piece.

Which will be good because according to research, only 26% of businesses that enter voluntary administration come out the other side.

While the sponsorship contract with Supercars will have escape clauses, Virgin will still need to sell tickets which means continuing to market their product – with sponsorship a key element in brands looking to raise awareness.

The administration process also allows for the implementation of a Deed of Company Arrangement (DOCA) to be put in place. A DOCA is a deal made between the company in question and creditors to either maximise the chances of a company continuing or provide a better return for creditors rather than immediately liquidating the company.

It’s questionable as to whether sponsorship agreements would likely be covered by a DOCA: assuming Supercars could prove that contractually they have met all the terms put in place for the sponsorship, they would in essence be a creditor to the company in Voluntary Administration.

However, the history of sporting sponsorship is rife with businesses terminating deals immediately with little recourse to appeal.

Supercars are a tiny component in the broader scope of a company with more than 10,000 employees and hundreds of millions of dollars in property forced into Voluntary Administration.

But big businesses entering periods like this affect the many hundreds of businesses tied to them via contracts, suppliers or otherwise, so the ramifications have a knock-on effect.

Interesting times ahead for both Virgin, and those affected by their current issues.