Following a boom-time strategy to boost iron ore exports including debt field acquisitions, the recent slump in iron ore prices and global steel markets has led to the demise of one of Australia’s largest steel works manufacturers, Arrium, who resolved on 7 April 2016 to place the company and approximately 93 other related entities into Voluntary Administration.
Although the major operations of Arrium are the Whyalla-based steel works, Arrium also owns and operates a range of steel assets in and around Newcastle, which between them employ more than 1,200 people. These include the OneSteel steel mills at Mayfield and the Comsteel and Moly-Cop businesses at Waratah. (Although Moly-Cop is not in administration it is apparent that it may be a key business and source of funding to enable a successful restructure of the Arrium group.)
In addition to the administration of Arrium, we have also seen financial pressure at the top end of town from several large Australian entities within the last six months, including Dick Smith Electronics, SubZero and Queensland Nickel. However, we have not seen a company of Arrium’s size collapse since Ansett Airlines in 2001, who at that time employed approximately 16,000 employees, $900 million dollars in assets and debts of approximately $2 billion dollars. In comparison, it has been reported that Arrium employs 9,000 employees and has debts in the vicinity of $4 billion dollars. We note that the ultimate restructure of Ansett Airlines has taken approximately ten years and can only speculate that the restructure of Arrium will be conducted over a similar time period.
It is far too early to consider the future of Arrium and whether a successful restructure is viable and what that would entail, however, the impact of the appointment of the Voluntary Administrators can be far reaching and cause serious disruptions and financial concerns, including disruption to business, their financial positions and cash flows, and this could affect all parties in the supply chain from employees to lenders, trade creditors, contractors, landlords and the community as a whole.
Even Governments including a number of State Governments, as well as the Federal Government, now have decisions to make surrounding the restructure of Arrium that may significantly affect the economic and infrastructure policy development.
Set out below are some common impacts or effects that local suppliers, customers and employees could expect to face as a result of the Voluntary Administration.
Personal Property Security Interests
As a result of the appointment of the Voluntary Administrators, any suppliers who have registered security interests over property supplied to the Arrium companies, are restricted from taking possession of that property to the extent that it is unpaid, or otherwise recover it without the Voluntary Administrators’ written consent or with leave of the Court. In saying this, in the event that the Voluntary Administrators realise the property subject to any security interest, then they are required to account to the secured party for the sale proceeds.
Any parties who have failed to perfect a security interest in accordance with the Personal Property Securities Act 2009 will unfortunately lose their priority to the goods supplied and will rank as an unsecured creditor in the Voluntary Administration. For further details on the Personal Property Securities Act 2009 please refer to our May 2015 newsletter.
Termination of Contracts through “Ipso Facto” Clauses
In Australia the appointment of a Voluntary Administrator does not result in the automatic termination of contracts between the company in administration and the third party (customer). Often, however, contracts contain “ipso facto” clauses which allow parties to either terminate or renegotiate in the occurrence of an insolvency event.
During an administration however, the Voluntary Administrator may choose not to perform the contract and must advise the relevant parties of their decision within the period of five business days. Any damages following from the termination of the contract will rank unsecured against the company.
As such, as a result of the appointment of the Voluntary Administrator, it may be that contracts entered into with the company’s customers and suppliers which appear to be on favourable terms may be terminated and renegotiated at lower margins and other terms which may impact on customers and suppliers sustainability.
The Effect of the Voluntary Administration on Employees
As a result of these large restructures, many employees have found/will find themselves redundant and looking for alternative employment opportunities. With an already high unemployment rate, finding alternative employment opportunities may prove difficult for many employees effected and faced with their own financial problems, may be forced to relocate and/or apply for bankruptcy.
Of the 9,000 employees employed by Arrium nationally, approximately 1,200 of those employees are located in the two businesses operating in the Hunter.
As the Voluntary Administration process is designed to allow Arrium to restructure, there is the possibility that such a restructure may result in job losses. We note that to the extent that employees are owed any entitlements as at the date of the appointment of the Voluntary Administrators, then they will rank as priority creditors.
Although there is a Government scheme operating known as the FEG Scheme to assist employees who have lost their jobs as a result of the insolvency of a company, the Scheme does not respond to claims during the course of the Voluntary Administration period. In the event that Arrium ultimately goes into liquidation then the Scheme will respond to any claims made by employees for the payment of their outstanding entitlements. If Arrium proposes a Deed of Company Arrangement which is accepted by creditors, then the Deed cannot be discriminatory against the priority of the employees.
If the employees are engaged by the Voluntary Administrators to continue to be employed post the date of their appointment, then the Voluntary Administrators are personally liable to pay any entitlements accrued by the employees during the course of the Voluntary Administration.
Stay on Proceedings
As a result of the Voluntary Administration any proceedings commenced against Arrium or any of the 93 subsidiaries that have also been placed into Voluntary Administration, are stayed pursuant to the provisions of the Corporations Act 2001. Should any creditor wish to proceed with any current Court proceedings they are required to obtain the written consent of the Voluntary Administrators or alternatively seek leave of the Court to do so.
Cash Flow Implications
Businesses that trade with Arrium, be it customers who have purchased goods, may feel pressure finding alternative supply sources or be simply forced out of the market due to no alternatives being available. Similarly, suppliers to these large businesses that have fallen over can expect to be faced with varying degrees of cash flow shortages as a result of payments owing to them being tied up in the administration process for many years and may also experience significant declines in turnover as a result of a lost customer forcing them to consider their own potential restructures.
As a result of the appointment of the Voluntary Administrators, all creditor claims against Arrium are frozen meaning payments will not be paid to those parties who are owed monies. This may have serious and detrimental consequences for individual creditor cash flows and may in turn result in those creditors experiencing their own financial distress.
In terms of when creditors could expect to receive a return of monies that they are owed, if any, this will be subject to the timing of the second meeting of creditors and ultimately the realisations made by the Voluntary Administrators under either a Deed of Company Arrangement or a liquidation scenario.
The second meeting of creditors is typically to be convened within 20 business days after the appointment of the Voluntary Administrators, however this period can be extended by the Court. Having regard to the nature and size of the Voluntary Administration, it is likely that the Voluntary Administrators will seek an extension to the convening period from the Court. This could result in the second meeting of creditors being delayed for up to 18 months.
How We Can Assist
Shaw Gidley is New South Wales’ largest regional specialised insolvency firm with over 70 years combined specialised insolvency experience. We may be able to assist you and/or your clients in one or more of the following ways.
- Completion of statutory documentation – In order to formally submit claims and monies owed or to exercise a vote at any meetings during the course of the administration period, creditors would be required to complete numerous forms for submission with the Voluntary Administrators. We are able to assist creditors with the completion of these statutory forms to ensure that claims are admitted and voting rights are maintained.
- Consulting services – Shaw Gidley is able to provide a range of consulting services to creditors and employees including litigation support, commercial dispute resolution and mediation, preference claim reviews, security reviews, payment arrangement negotiations, and cash flow analyses. Should you or your clients be interested in engaging Shaw Gidley for any of these services please do not hesitate to contact us.
- Financial distress – As a result of the Voluntary Administration of Arrium and the freeze on all creditor claims, there may be significant financial distress for many suppliers. We may be able to assist in these times to elevate the financial impacts including a restructure of the business, negotiating payment terms with their own suppliers and/or assisting seeking alternative funding arrangements.
Should you be interested in discussing the above, please do not hesitate to contact us.