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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Major corporate collapses and the public interest – British Steel and more

The collapses in the UK of socially and economically important enterprises – British Steel, Carillion Constructions and Thomas Cook are current examples – raise many public interest issues that are managed by the joint conduct of the liquidations by the government Official Receiver and private insolvency firms.

The insolvency of a business raises broader issues than most general commercial law disputes.

“In contrast to general civil litigation, where cases affect only two or a few parties at most, [insolvency] cases may affect hundreds of scattered ill-represented creditors. [It] affects too many people to allow it to proceed untended by an impartial supervisor”.[1]

Nor, it might also be said, without government involvement and oversight.

That and more is evident in the collapse of British Steel Limited and its winding up by the High Court in England on 22 May 2019.[2]

The company and its decline

British Steel is, or was, one of Europe’s largest steelmakers with a base in England and about 20 subsidiaries in the UK, Europe and worldwide. It employed about 4,100 staff directly and about 1,300 agency and sub-contract staff, the majority at its registered office in Scunthorpe. Its annual turnover in the financial year to 31 March 2018 was nearly £1.2 billion. The nature of its operations necessitated major environmental and health and safety regulation.

British Steel had suffered a fall in sales and severe cash flow difficulties in the second half of 2018 into 2019, attributed to the uncertainties resulting from Brexit, competition from alternative suppliers in Europe, a fall in demand for steel from the automotive market, lower revenue from sales to the rail industry in France, and an increase in commodity prices.

The debts of the company as at 31 March 2019 totalled £880 million, which included £151 million due to the asset-based lenders and £206 million due to the company’s parent companies.

In April 2019, the UK Government was forced to step in to purchase sufficient carbon credits to enable the company to meet its obligations and avoid £500 million in fines under the EU Emissions Trading Scheme.

The company sought financial support from the UK Government, including support for an administration process, but these were refused.

Environmental and safety issues

Apart from the trading difficulties, there are significant environmental and health and safety issues connected with the Company’s business.

Its main site was regulated under major accident hazard laws as a ‘highest risk’ site – its furnaces and coke ovens contained pyrophoric iron sulphide and methane and needed to be maintained at pressure, which would be lost if the plant were shut down; the site was prone to flooding; and there were very significant amounts of hazardous materials, including effluent lagoons and asbestos. The hazards were such that if the company were to cease operations without careful supervision under a formal insolvency process, the risks would increase significantly.

Cash

At the time of the 22 May hearing, the company would have run out of cash by the end of the week with a shortage of £14.8 million, increasing thereafter to nearly £95 million by early August 2019.

Administration?

An administration order was not a viable option – the asset-based lenders would not fund it. Given the potential environmental and health and safety issues, no insolvency practitioners were prepared to accept appointments as administrators.

Special managers to assist

Ernst & Young were needed as special managers because the Official Receiver’s office did not itself have either the necessary expertise or manpower to cover the various tasks likely to be necessary.

Ernst & Young were said to be one of only a small number of firms in the UK which could deploy sufficient resources quickly and effectively. The firm had been providing contingency planning advice to the asset-based lenders for some months, and so had a very good understanding of the company’s operations, and had the knowledge, experience and expertise expeditiously to assume the special manager role.

Their independence

The special managers advised the Judge that they had satisfied themselves under their professional conduct obligations that they had no conflicts of interest by reason of having acted for the asset-based lenders, which had security over the assets of the Company.

The proposed special managers were ordered to provide security to the Official Receiver each in the sum of £5 million.

On-going issues

The on-going progress of the liquidation is recorded on the Insolvency Service website with links to further details on the Ernst & Young website.

The latest concerns a sale of the business and assets of British Steel to Chinese steelmaker Jingye, which the government says is ‘an important step towards securing steel making operations at British Steel’s sites in the UK’ and that it ‘continues to work with the Official Receiver and Jingye on the next stage of the sales process’.

Earlier, in August, the Official Receiver announced that a wholly owned subsidiary of British Steel had been sold ‘preserving over 400 jobs’.

Staff continue to be employed and paid and are kept informed about the progress of the liquidation. Advice is also being offered to external businesses which ‘face challenges arising from British Steel’s liquidation’.

The public interest

In the UK it has been asked whether British Steel, and other major collapses including Carillion Construction and Thomas Cook – are

‘forerunners of a new era where we see liquidation become more prevalent [rather than administration] particularly where public interest issues are involved? … perhaps because of the existence of concerns over some aspect of their business or because no IP will take on an appointment as administrator? …

 … public interest issues are involved in many insolvencies and particularly where large companies are concerned. For instance, the insolvency of a large company can devastate a local or even a regional area. Take MG Rover as an example where the administration of the company caused great upheaval in parts of Birmingham to employees, their families and facilities in the local community. The large amounts that are owed by large companies might mean that secured creditors will not be willing to fund administration and if that is the case compulsory liquidation is the only alternative’.

See British Steel: is it a wind up? Professor Andrew Keay and Professor Peter Walton, Corporate Rescue and Insolvency, August 2019.

Australia

How does this liquidation compare with the collapse of a similarly sized economically and socially important business in Australia and its administration by the private profession?

[1] US Congressional Statement 1978

[2] [2019] EWHC 1304 (Ch)

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