The COVID-19 Pandemic hit the travel industry hard. Borders were closed, airline fleets were grounded, travel bookings were cancelled, and travel agents were overwhelmed with customers wanting refunds.
Many travel agents closed their doors because travel bookings dried up.
STA Travel was one. Across 27 stores in Australia, STA Travel operated as a travel agent, booking travel for customers as agent for travel providers, mainly airlines and tour operators.
Following an insolvency filing in Switzerland of its parent company (STA Travel Holding AG) on 20 August 2020, STA Travel went into administration the next day. On 25 September 2020, STA Travel went into liquidation because it was insolvent. After being in business since 1971, STA Travel closed its doors because there was no-one to take over.
What did this mean for the customers expecting fare refunds, for the bank to be reimbursed the credit card chargebacks and bank guarantees it had paid, and the creditors whose claims for payment were being diminished by the liquidator’s remuneration?
After doing what they could to collect the assets and identify the entitlements, the liquidators applied to the Court for judicial advice on the relative rights of the customers, the bank, the creditors and the liquidators to be paid out of the assets.
In the matter of STA Travel Pty Ltd (in liquidation) [2022] NSWSC 1544 (Peden J) (11 November 2022), a decision of the NSW Supreme Court, the Court shed light upon out these rights to payment. This is what the Court said:
Customer refunds
As travel agent, STA Travel collected airfares and tour prices from customers and forwarded the funds to the travel provider (the “supplier”). The fare/price remained with STA Travel for only a short time because the supplier required payment before issuing the air ticket or booking confirmation.
If the customer had requested a refund through STA Travel before it went into administration, then the supplier paid the refund to the liquidators. If the customer had requested a refund after that time, then the customer needed to contact the supplier directly.
The suppliers refunded $1,245,085.97 (net of fees) to the liquidators for 587 customers who had requested refunds through STA Travel before it went into administration. The customer refunds were allocated into one of three accounts:
- IATA Refunds: $1,057,346.55 for flights booked with airlines via the International Air Transport Association (IATA) clearinghouse for processing of payments. Because IATA did not provide details of which bookings the fees of $102,812.84 were deducted from before making the refunds, the Court decided that the fees would be allocated proportionally to the refund amounts. The fees were commissions, credit card fees, taxes and cancellation fees.
- Direct Airline Refunds: $173,314.99 for flights booked with airlines directly. The fees were allocated proportionally for the same reason.
- Other Travel Suppliers Refunds: $14,424.43 for accommodation or tour services. No fees were deducted.
The Court was satisfied that the customer refunds were held in trust for, and were to be distributed to, the customers, as opposed to being general recoveries in the winding up available to creditors. There was one exception – the 33 customers who had received refunds from their credit card provider could not receive a double-recovery – the liquidators could keep those refunds for the creditors in the winding up.
Not all refunds were claimed. The Court ordered that any refunds unclaimed or undistributed to the relevant customers within six (6) months be paid to the NSW Trustee and Guardian (under s 47 Trustee Act 1925 (NSW)).
The Bank
STA Travel had several bank accounts with the Commonwealth Bank of Australia (“CBA”):
- Operating Account: An everyday purposes account used for money received from customers and paying liabilities such as wages and rent. Balance: $774,204.06.
- Additional Accounts: no specific purpose. Balance: $75,000.
- Bank Guarantee Account: An account with funds used to secure bank guarantees given by the CBA such as to landlords for its stores. Balance: $5,500,000.
- Client Travel Account: the STA Travel Trust Account - into which money paid by customers for IATA airline bookings was transferred from the Operating Account, and into which fare refunds were paid.
This trust account was an IATA requirement. IATA would automatically debit fares from that account when STA Travel provided details of flight bookings, and pass on the fares to the airline. The Court found that this account was trust account. As such, those funds were not available to the creditors in the winding up, because even if the customers could not be found, the funds retained their status as trust funds, and were payable to the NSW Trustee and Guardian.
The Court had to decide whether the CBA could reimburse itself from the various bank accounts (other than the trust account) for credit card chargebacks paid to customers and claims on Bank Guarantees, which totalled $4,779,706.43 (i.e. the CBA’s entitlement to a banker’s set off).
A credit card chargeback works like this: If the service, in this case the flight or the tour, is not provided, then a customer can ask that the credit card debit reversed. If so, the credit card provider (such as VISA or Mastercard) posts a credit to the card, which is a refund, and is entitled to charge back that amount to the merchant’s banker, in this case CBA, under the Scheme Rules. The CBA then debits the amount to the merchant’s account, in this case the STA Travel Operating Account, under its Merchant Agreement.
Similarly, landlords called upon bank guarantees given by STA Travel, which CBA honoured by debiting the Bank Guarantee Account.
The Court considered that the chargebacks and the Bank Guarantees were contingent debts that crystallised after STA Travel went into administration, but which were in existence prior to that time. As such, “under s 553C(1) of the Corporations Act, and consistent with its exercise of rights under the CBA Terms and Conditions, the CBA was entitled to set off those liabilities against the monies in the various accounts” (but not the trust account).
The liquidator and the creditors
The creditors had already approved the liquidator’s remuneration for work carried out in the course of the administration and liquidation of STA Travel.
But the liquidators needed the Court’s approval of their remuneration for their work in connection with customer refunds, including obtaining the refunds, reconciling the refunds from lump sum “batch payments” received against particular customer ticket numbers and customers, preserving the fund and dealing with customer enquiries.
The Court approved the sum of $301,735.50 (exclusive of GST), as a lump sum, as being fair and reasonable, after reviewing the overall work and finding the work was of value as a benefit to the community, and was proportionate to the amount collected, representing approximately 24% of the total collected. That sum could be debited from the trust account.
In addition, the Court approved payment of $15,000 (plus GST) to the liquidator’s firm for utilising a proprietary platform for IT hosting, for costs and customer identity checks and for making the distributions to the customers. That sum could be debited from the trust account.
Comments – Travel Refunds for cancellations
Travel refunds are available to customers if the travel provider cancels a booking because it cannot provide the flight or the tour. On the other hand, if the customer cancels, the refund may be subject to cancellation fees, or not be available at all.
The STA Travel decision confirms that the customer’s right to a refund of fares and tour prices survives the liquidation of the travel agent, so long as the funds used to pay for the travel came from the travel agent’s trust account. Being trust moneys, the funds belong to the customer and are not available for distribution to the creditors of the company in the winding up.
It is worth noting the Court approved liquidators’ fees of over $300,000 to collect and administer the refunds. These fees are a reflection of the complexity of obtaining fare refunds, especially from airlines. This complexity comes as no surprise to the many people who book airfares directly and have found it very difficult to obtain a refund from the airline.
It is also worth noting that during the COVID-19 Pandemic, many airlines and tour operators offered fare credits and vouchers, as an alternative to cash refunds. Price credits and vouchers can be offered provided that they comply with the Australian Competition and Consumer Commission policy on travel refunds and cancellations – see my article COVID-19 travel and event cancellation is an ACCC priority in 2021.
An STA Travel Advertisement –
If a cheap airfare is refunded, will it be peanuts?