Could Arrium be the next Bell Group?

News broke yesterday of the banks rejecting Arrium’s rescue package proposed by GSO Capital Partners that would have involved the banks taking a big haircut on their reportedly unsecured loans. Fairfax newspaper reported that the banks have offered further funding if Arrium appoints particular voluntary administrators as well as providing security for further funding. There are echoes of the Bell Group litigation here.

In the Bell Group litigation (one of Australia’s longest running and most expensive cases) a restructuring proposal was negotiated with a large group of unsecured bank lenders which involved providing the lenders with security in exchange for delayed payment terms and a stay from enforcement for 12 months. The banks took all of the free cash generated by the group of companies and the security they received included assets from companies that did not owe money to them who offered a guarantee. A little over a year later the banks had enforced their security and appointed receivers to seize and sell the companies’ assets. The companies also entered liquidation and the liquidators sued the banks under a variety of arguments, including relief under Barnes v Addy for knowingly assisting directors to breach their fiduciary duties and knowingly receiving assets resulting from those breaches of duty. The courts (both at trial and on appeal) held that the directors in implementing the restructuring failed to consider the interests of the companies in the group and its creditors and thereby breached their fiduciary duties. Essentially the directors acted to prefer one group of creditors (the banks) over considering all of their companies’ creditors. The compensation payable for this conduct was well over a billion dollars (including interest).

I co-authored a paper on the Bell Group case for the Sydney Law Review in 2013:

For whom the Bell Tolls: Directors’ Duties to Creditors after Bell

You can also read the excellent series of articles written by Rosemary Langford in the C&SLJ and other journals during the past 5 years:

Rosemary’s SSRN page

How is the Bell Group case relevant for the Arrium restructure?

Like in Bell, the banks here are unsecured and are trying to get security as part of any restructuring deal. It has not been reported whether the banks are asking for all of their existing debt to be secured, or only for the new debt to receive security. Securing old debt (particularly with a circulating security interest, previously known as a floating charge) can raise risks of void transactions under s 588FJ of the Corporations Act 2001 (Cth). There can also be risks of simple breach of directors duties and uncommercial transactions under s 588FB. What makes Arrium different from Bell (at least based on what is publicly reported) is that it appears that the banks are offering new money for the restructure, whereas in Bell the trial judge was highly critical of the fact that the restructure involve no realistic plan to save the business as no new money was being provided. Taking security over new money lent is not as problematic under s 588FJ given the exceptions in s 588FJ(2). New money also gives the directors a better argument that the restructure is in the best interests of all creditors, not just the banks-but it may depend on the terms of the restructure and what will happen to the company’s cash flow during the implementation of the restructure.

Although the Bell case has been heavily crticised (including by me in various publications), it does provide a lot of points for restructuring teams to consider. To be clear, I have no inside knowledge of what’s going in Arrium, and I’m just going on what’s reported in the press. I’m not suggesting that the Arrium directors or the company’s banks are breaching any duties. I just think this current restructure has some parallels with the Bell Group restructure and clearly some lessons can be learned from that case.

Who should be the administrator?

Another issue with the Arrium restructure discussed in yesterday’s press is the supposed tension between the banks and Arrium’s board over who should be appointed as administrators with Arrium preferring a global insolvency firm (given it’s global operations) while the banks preferring a particular Australian firm. The Fairfax press alleged that the Australian firm was advising the banks on their response to the GSO restructure proposal, which if correct, could give rise to independence issues if they were appointed, although depending on the advice given this could be managed through appropriate disclosure. Insolvency practitioners are required to complete a DIRRI which sets out relevant relationships. However, disclosure would not be sufficient if there was an actual conflict of interest that prevented the practitioners from being independent. An administrator is obliged to act in the best interests of all creditors, not just major creditors. Insolvency practitioners are also subject to a double independence requirement, they must:

  • in fact be independent; and
  • be seen to be independent by a fair minded and reasonable observer.

As I’m not involved in the case I can only go on what’s reported in the press so I’m not suggesting the firms named by Fairfax wouldn’t be independent if they accepted the appointment, or that they would be perceived to be too close to the banks. All insolvency firms work closely with the banks because they are major lenders to most Australian businesses and are key stakeholders in virtually all restructurings. Insolvency practitioners are bound by legal duties and the ARITA Code of Professional Practice (if ARITA members) as well as codes of ethics by professional accounting bodies. I have great confidence that large professional insolvency firms can and will remain independent and compliant with their legal duties.

Ultimately this is up to the board of Arrium (if they want to appoint an administrator) to determine who they believe is appropriate. If major creditors such as the banks don’t like the appointee they can seek to replace them at the first creditors’ meeting or they could withhold further funding to pressure the company to agree to their terms. Of course, if the banks do get security for their loans then they may be able to bypass the administration altogether and appoint a receiver and the receiver must work to protect the secured assets-not necessarily in the best interests of all creditors. If the banks remain unsecured they are vulnerable to a DOCA being approved that compromises their debts anyway. A DOCA could be proposed by anyone (including GSO) and could involve a debt for equity swap to address the company’s balance sheet issues. A split between the banks and the other creditors (including employees) could result in a split meeting (difference in number and value) determined by the administrator’s casting vote as chair of the meeting. There are a lot of potential options. It will be fascinating to see how this plays out.

Conclusion

This Arrium situation presents a great case study in restructuring-a viable business hit by too much debt and a falling commodity price. If they can fix the balance sheet and lower costs this could be a good business. If they can’t, we (as taxpayers) will all be paying for if several thousand employees lose their jobs and seek taxpayer funding through the Fair Entitlements Guarantee. This would come at a particularly bad time for the FEG fund, given the Queensland Nickel workers will be seeking payouts of tens of millions of dollars.

Let’s hope the company, the banks and their advisors can come with a creative solution to save this important business.

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