On Thursday Arrium, a major South Australian-based steelmaker and mining company, entered into voluntary administration.

Background

The decision for Arrium (formerly known as OneSteel) to go into voluntary administration comes after lenders rejected a USD927 million (AUD1.23 billion) lifeline from US private equity firm, GSO Capital Partners. The South Australian- based steelmaker and mining company is more than AUD2.5 billion in debt.

Arrium was part of BHP until 2000, when BHP decided to divest itself of its steelmaking operations in Australia. The company has three main divisions: its profitable Moly-Cop division that makes grinding materials and rail wheels; its steel-making division, which includes the loss-making Whyalla steelworks; and its loss-making Whyalla mining division.

Arrium's financial difficulties stem from a global glut of steel that has pushed down the price of iron ore.

What does voluntary administration mean?

On the appointment of a Voluntary Administrator (VA), the company's business, property and affairs come under the authority of the VA. The directors no longer have the power to control the affairs of the company.

One of the key features of the voluntary administration regime is the statutory moratorium which generally prevents parties (including creditors) from bringing any legal action against the company. This provides the VA with sufficient "breathing space" to investigate the affairs of the company and to formulate a plan for the future of the company.

Following an investigation into the affairs of the business, the VA will generally provide a report to creditors and provide a recommendation on the best course of action for the company.

Broadly, the outcomes of a voluntary administration are:

  1. the company enters into a deed of company arrangement with creditors. This is a process similar to a scheme of arrangement, indeed often implemented by a scheme of arrangement, to bind creditors to a proposal;
  2. the administration ends and control of the company is handed back to the directors; or
  3. the company is entered into liquidation.

What does it mean if you have a contract with the company?

On the appointment of a VA contracts with the company are not automatically terminated and, unlike a liquidator, a VA does not have the power to disclaim contracts. Whether a counterparty has the right to terminate a contract will depend on the specific terms of their contract.

Creditors will need to prioritise this to ensure they do all they can to protect their position. A key issue for counterparties is to determine whether they can, or indeed should, seek to terminate agreements or close out positions. These are matters which must be given urgent attention.