Nobody knows, the way it feels
Caught between Heaven and the Highway
Shipping steel, shipping steel . . .’ 1
On 7 April 2016, Administrators were appointed to South Australian-based steelmaker and iron ore miner Arrium, which reportedly owed approximately AUD4.3 billion to its lenders, suppliers and staff. The appointment covered 94 direct and indirect subsidiaries of Arrium Limited (the Arrium Companies), which at the time employed around 8,100 employees and contractors.
The broader Arrium Group also includes the Moly-Cop group, which is located mostly overseas, trading profitably and not subject to the insolvency proceedings. The Administrators announced on 4 November 2016 that US private equity firm American Industrial Partners had bought Moly-Cop for US1.23 billion (AUD1.6 billion). The proceeds of the sale will predominantly go to Moly-Cop’s lenders, reducing their debt by about 50%.
Complexities in the Administration
As is to be expected, the Arrium Companies have complex inter-company financing arrangements. They operate a complex integrated mining, iron ore export, steel manufacturing, steel recycling and steel distribution business under numerous business divisions. Of the 94 companies under administration, only 25 actually conduct businesses or hold property which the administrators may wish to sell.
The Administrators determined that the optimal sale structure (if a sale is to occur) is a share sale of at least 13 key trading companies in the group. However, the historical operation of the Arrium Companies complicated things as the various business divisions operated by Arrium have not been operated on an entity-by-entity basis. The Administrators’ investigations found that, for example:
- numerous legal entities held assets used in more than one division
- about 430 employees were employed by an entity which did not operate the division in which they worked
- numerous Enterprise Bargaining Agreements apply to employees based on geographical location, as opposed to an entity by entity basis
- of the 1,074 items of intellectual property, 154 spanned multiple business divisions, and
- of the 150 national contracts managed by a centralised procurement team, 70 operated across a number of divisions.
A novel deed of company arrangement (DOCA) structure
The Administrators needed a way of getting the right assets and employees into the right companies prior to a sale. Following the Administrators’ recommendation, creditors voted for 93 out of the 94 Arrium Companies to enter into Transaction Support DOCAs. These enable the Deed Administrators to align the various business units to separate legal entities by authorising the transfer of assets, employees and operations internally within the various Arrium Companies as they see fit. This will enable each business to be acquired in its entirety by way of share sale.
The final Arrium Company renamed ‘The Arrium Creditor Distribution Company Pty Limited’ (the Distribution Company), entered into the Arrium Distribution DOCA. The 93 Transaction Support DOCAs all authorise the Deed Administrators to transfer the sale proceeds from any sale occurring within the other 93 Arrium Companies to the Distribution Company, who will hold it as part of an Arrium Distribution Fund.
The Transaction Support DOCAs also authorise the transfer of liabilities of the Arrium Companies to the Distribution Company, so the businesses can be sold free of liabilities. Historically, the structure most commonly used to enable creditors of various group companies to share in the one pool of assets is a creditors’ trust, where assets are transferred to be held on trust for the creditors. This use of a ‘distribution company’ is a new variation of that practice.
How is this approach unusual?
The Transaction Support DOCAs are what are commonly known as ‘holding DOCAs’. A holding DOCA is one where the deed administrators continue to operate the company’s business as usual for a period of time before trying to either sell the business or find a recapitalisation proposal.
Holding DOCAs present some difficulties when administrators are preparing their report to creditors under section 439A of the Corporations Act 2001 (Cth) (Act). When preparing a section 439A report to creditors, the Act requires that administrators provide creditors with their estimated return should a company go into liquidation, compared to their estimated return pursuant to any DOCA that is proposed. In the case of a holding DOCA (as was the case with Arrium), the eventual return to each individual Arrium Company under the DOCAs is unknown.
In addition, Arrium’s Administrators want to keep their options open. It may be that Arrium ends up being recapitalised instead of its remaining operations sold. Although they have a preferred idea of how a sale should be structured, they don’t know what form an eventual sale will take. A report to creditors would usually set out what transaction would occur under the DOCAs, but that was not possible.
In order to overcome these difficulties, on 26 October 2016 the Administrators obtained orders and directions from the Court that dispensed with some of the requirements under the Act.
The Court authorised the Administrators to prepare a single report to all creditors of the Arrium Companies, prepared on an aggregate basis dealing with the Arrium Companies as a whole, but which did not provide any estimated return to creditors under the DOCAs versus in liquidation. Despite this, the report was still required to provide a statement setting out the Administrators’ opinion as to whether it was in the creditors’ interests for the Arrium Companies to execute the proposed DOCAs, end the administration, or wind the companies up.
Despite ASIC’s concern that, if endorsed by the court, this style of DOCA, which fails to identify a transaction or agreement resulting in an identifiable return to creditors and so operates as a sort of ‘extension’ of the administration process (with the administrators enjoying more extensive powers), could become a feature of voluntary administrations in the small to medium enterprise market, the Court approved the Administrators’ actions.
While ASIC’s concerns are not unfounded, the risk of this approach and type of DOCA becoming commonplace (particularly in smaller, less complex administrations), is minimal. The Arrium administration is anything but commonplace, and contains significant complexities warranting this novel approach by the Administrators.
In the last few weeks, it was reported that four bidders have entered the second and final round of an auction for the purchase of certain business divisions in the group, including the company’s steelworks and steel distribution network. It is expected that secured creditors will be paid in full from the sale, while unsecured creditors will receive between 60 cents and 65 cents in the dollar – a return only made possible due to the flexibility and operation of the DOCAs – but its anticipated to leave shareholders with nothing.
Full settlement of any deal is not expected to take place until late March 2017 or thereabouts.
1 Lyrics from ‘Shipping Steel’ from the Breakfast at Sweethearts album released by Cold Chisel in 1979.