Virgin Atlantic has filed for bankruptcy protection and could run out of money next month if creditors fail to approve a £1.2bn rescue deal, a London court has heard.

Lawyers for the airline have said that while Virgin is “fundamentally sound”, a restructuring and injection of cash is critical to securing its future.

As part of the process, Virgin is seeking protection from creditors in the US under chapter 15 of the US bankruptcy code, which allows a foreign debtor to shield assets in the country.

Why has the airline filed for bankruptcy protection?

The file for bankruptcy protection comes after the travel industry was hard hit by the coronavirus pandemic, with the airline forced to ground thousands of its flights for several months.

As well as filing for US bankruptcy protection, in July the company agreed a rescue deal worth £1.2bn to secure its future for another 18 months.

The court in London heard that the airline’s finances would drop to “critical levels” by the middle of next month and would “run out of money altogether” by the week commencing 28 September.

Due to the plummet in passenger demand, the group is now “undergoing a liquidity crisis”, and without an injection of new money the company would have “no choice” but to enter into administration in mid-September.

David Allison QC, for Virgin Atlantic, told Mr Justice Trower in written submissions that the group had a “fundamentally sound business model which was not in any problems at all before the Covid-19 pandemic", but it has fallen into difficulties due to a drop in customer demand.

Mr Justice Trower gave the go-ahead for a meeting of creditors on 25 August.

Under the airline's restructuring plan, the Virgin Group will inject £200m with additional funds provided by investors and creditors.

A Virgin Atlantic spokesperson said: “Virgin Atlantic attended court yesterday (4 August) as part of a solvent recapitalisation process under 26(A) of the UK Companies Act 2006. That process is proceeding with the support of the majority of our creditors.

“Following the UK hearing held yesterday, ancillary proceedings in support of the solvent recapitalisation were also filed in the US under their Chapter 15 process. These ancillary US proceedings have been commenced under provisions that allow US courts to recognise foreign restructuring processes.

“In the case of Virgin Atlantic, the process we have asked to be recognised is a solvent restructuring of an English company under Part 26A of the English Companies Act 2006.”

What happens if I have flights booked?

The airline is continuing to operate flights, although this is still on a limited schedule, and the application for bankruptcy protection has no direct implication on claiming money if a flight has been cancelled.

In the event flights are cancelled, travellers will be entitled to a full cash refund, including for any component of the same journey that has not been cancelled.

Customers who have booked the flight as part of a package, or with a credit card, will have their money protected.

While customers are entitled to full refund in the event of cancellation, some have been forced to wait up to four months before receiving their money. However, the airline vowed last week to improve the speed of its refund process.

Further information on claiming a refund can be found on the Virgin Atlantic website.

Virgin Atlantic: why the UK-based airline has filed for bankruptcy protection - and if you’re entitled to a refund if you have flights booked