Whyalla wipeout: State-sponsored upending of creditor waterfall?

Synopsis

A fundamental purpose of Australia’s formal corporate insolvency laws is the provision of fair and orderly processes (administered by an independent external administrator typically appointed either by the insolvent company’s directors or its most significant secured creditor) for dealing with the company’s financial affairs. Such processes contemplate ‘pari passu’ distribution between unsecured creditors subject to the priority rights of secured creditors and certain special ‘priority rules’ conferring priority entitlements to proceeds from realisation of the insolvent company’s assets upon particular creditor categories, including employees.

A cardinal feature of this largely creditor-centric regime is a stable and universally accepted set of legal rules that binds all creditors and stakeholders (including government agencies and bodies) to the outcomes of the external administration regime (being either a voluntary administration or a liquidation). However, the durability and predictability of this regime has recently been sharply brought into question by the dramatic intervention of the government of the state of South Australia in the operations of the Whyalla steelworks, an intervention that directly triggered the appointment of external administrators to the steelworks’ operator, OneSteel Manufacturing Pty Ltd (the ‘Company’). As will be explained below, the steps taken by the South Australian government in orchestrating the appointment of administrators to the Company potentially represents an unprecedented liability management approach. The question which emerges is whether that approach could be deployed by other Australian governments to either seize effective control of significant economic infrastructure or otherwise elevate their status as creditors to a preferred or pre-eminent position that would not otherwise be achievable under orthodox pari passu distribution principles. Any such result will potentially represent a material sovereign risk consideration for current and future investors.

Background

On 19 February 2025, the South Australian government forced the Company, the operator of the Whyalla steelworks, into external administration in response to protracted failures to pay unsecured royalties and water charges owed to the State, and other trade debts, of at least $300 million.

The Whyalla steelworks’ operations were fully integrated, involving the mining and processing of raw materials required for steel products and the manufacture and distribution of finished steel products. The Company produced over 75% of Australian structural steel used in rail and major infrastructure projects and was the only domestic Australian producer of steel long products, directly employing approximately 1,500 employees and an additional 1,500 workers engaged by numerous independent contractors. Consequently, the South Australian government’s justification for its appointment of administrators to the Company cited the criticality of the Whyalla steelworks to ‘sovereign Australian steel’ and Australia’s capacity to build and maintain significant economic infrastructure such as railways, high-rise towers, housing, windfarms, electrical transmission, bridges, defence assets and hospitals.

The administrators’ appointment was procured by urgent amendments to the Whyalla Steel Works Act 1958 (SA) (the ‘Whyalla Act’). By the introduction of new sections 3A and 3B into the Whyalla Act, any amounts owing by the Company to the State were declared to be a first ranking charge which was deemed to be a security interest for the purposes of the Personal Property Securities Act 2009 (Cth). A critical aspect of the amendments was the deeming of the State’s newly created charge as a ‘statutory interest’ to which section 73(2) of the PPSA applied, thereby empowering the State to determine the priorities afforded to that statutory interest and all other security interests in the Company’s property. The cumulative effect of these amendments was to deem the State as a first ranking secured creditor with the right to appoint administrators pursuant to section 436C of the Corporations Act 2001 (Cth).

On the same day as the administrators’ appointment, the State and the administrators entered into a funding and indemnity deed under which the State agreed to provide funding for the administrators’ costs and the costs of funding the Company’s general working capital requirements.

Current status of the Whyalla steelworks

At time of writing, the State and Federal governments have committed a co-investment of approximately AUD$384 million to fund the conduct of the exter­nal administration and AUD$100 million in creditor assistance payments, infrastructure upgrades, job matching and skills hubs. Funding of approximately AUD$100 million has already been paid by the State to the administrators to cover initial trading expenses and remuneration, with the remaining AUD$300 mil­lion to be drawn upon to the extent required. In addi­tion, current information arising from a recent court application made by the administrators indicates that total creditor claims appear to exceed AUD$1.3 billion, comprising:

• approximately AUD$570 million of those debts allegedly owed to the Company’s related entities within the GFG Alliance group of companies;
• approximately AUD$437 million owed to unrelat­ed third-party trade creditors and suppliers (both secured and unsecured);
• approximately AUD$189 million in entitlements owed to the Company’s employees;
• over AUD$110 million in prepaid sales to third parties; and
• approximately AUD$40 million owed to the State in respect of water charges and royalties.6
• Given the relatively diminutive size of the quantum of debt owed to the State compared with the other known creditors, the effects of the Whyalla Act amendments in elevating the State (which would otherwise have been an ordinary unsecured creditor) to the position of a first-ranking secured creditor with power to appoint an administrator are even more remarkable in their scale and significance. In this regard, the relatively muted community and business reaction so far to the State’s effective unilateral vaulting to the top of the creditor totem pole may be at least partially attributable to the following factors:
• the creditor body does not appear to comprise any senior secured debt or unsecured bondholders or holders of convertible note-type instruments;
• the Commonwealth government’s simultaneous pledging of funding of about AUD$2.4 billion to continue trading operations and promote ‘green steel’ manufacturing, of which AUD$100 million has been allocated to ‘immediate on the ground support’, including AUD$50 million in creditor as­sistance payments;
• the widespread public opprobrium and antipathy directed at the GFG Alliance and its managing director, Sanjeev Gupta, in response to both the Company’s treatment of cash-starved creditors and employees and the GFG Alliance’s well-documented financial distress and regulatory exposure following the collapse of the Greensill Bank. The resulting regulatory scrutiny includes Companies House prosecutions for failing to file accounts and ongoing criminal investigations by the UK Serious Fraud Office of suspected fraudulent trading and money laundering associated with the GFG Alliance’s financing arrangements with Greensill Capital UK Ltd.

Consequently, the prospects of the commencement of litigation (led either by aggrieved bondholders or credi­tors) seeking to challenge the validity of the Whyalla Act amendments presently appear to be remote. Indeed, a telling initial indicator of broader creditor acquiescence with the State’s flexing of its sovereign muscles was the absence of creditor opposition to the administrators’ recent court application for an exten­sion of the period for completion of their investigations of the Company’s possible options for its restructure and/or recapitalisation.

In this regard, the apparent permanence of the Whyalla Act amendments’ state-imposed impacts on all other creditors is exemplified by the administrators’ recent references to the following matters that indicate not only the likely protracted duration of the Com­pany’s external administration, but the extent of the challenges ahead in delivering a greater than minimal return to the Company’s creditors other than the State:

• the administrators’ investigations and conduct of the administration being hampered by a lack of ac­cess to corporate records;
• the administrators’ recent discovery that the Company has sustained a long period of underinvest­ment, inadequate or no maintenance, poor health and safety practices (including the administrators currently being unable to verify that the Company is compliant with all occupational, health and safety obligations), insufficient spare parts and op­erational and financial inefficiencies;
• the administrators’ view that stabilisation of the Company’s business and operations in order to permit a successful restructure, recapitalisation or sale of the Company and/or its business as a go­ing concern via a deed of company arrangement (‘DOCA’) may take 12 months to complete; and
• the administrators’ confirmation that notwith­standing the funding support received from the State and Federal governments, the administrators do not presently have sufficient funding to con­tinue the Company’s operations for the proposed 12 month extension of the administration, in particular, their expectation that the funding will be exhausted within approximately 6 months.

Immediate implications

Even in the absence of more granular detail regarding the identity and extent of the Company’s creditors, the State’s resort to special legislation to not only seize con­trol of the Whyalla steelworks’ operations but confer upon itself first-ranking secured creditor status, repre­sents an extraordinary intervention.

First, there appears to be no direct Australian precedent for the Whyalla Act amendments, insofar that the legislation represents direct action by a state to specifically elevate its creditor position to first-ranking secured status. The closest analogous example is the Western Australian state government’s 2015 Bell Group legislation (the ‘WA Bell Group Act’) which had purported to establish a Western Australia-based government authority, the WA Bell Companies Administrator Authority (the ‘Authority’) to finalise the Bell Group liquidation, which at that time had been running for approximately 20 years. That legislation purported to vest in the Authority all property vested in or held on behalf of or on trust for the various Bell Group companies. In addition, the WA Bell Group Act empowered the Authority to determine in its absolute discretion the property and liabilities of each WA Bell Group company, including the existence and amount of certain Commonwealth tax debts of relevant Bell Group companies and override the Commonwealth of Australia’s rights as a creditor regarding those tax debts that arose under Commonwealth tax legislation. In essence, the WA Bell Group Act purported to create a statutory scheme under which Commonwealth tax debts were stripped of the characteristics ascribed to them by the Commonwealth tax legislation as to their existence, quantification, enforceability and recovery and thereby alter or impair the rights of the Common­wealth as a creditor of the WA Bell Group companies. Accordingly, the High Court of Australia found that the WA Bell Group Act was entirely invalid by virtue of operation of section 109 of the Commonwealth Consti­tution, as it was inconsistent with the Commonwealth tax legislation.

Second, whatever rationales may be cited from a national security perspective (including the protection of critical economic infrastructure), the Whyalla Act amendments represent a dramatic sovereign interven­tion in conventional practice regarding the operation of creditor priority waterfalls. The stark reality of the Whyalla Act’s implementation of a liability manage­ment process that perpetuates an apparent cramdown on non-State creditors is highlighted by the current uncertainty regarding:

• the extent to which current and future State and Federal government funding will be applied to­wards payment of pre-administration creditors, despite the allocation out of that funding of at least AUD$50 million in creditor-assistance payments;
• the viability of a potential DOCA; and
• any proposed post-DOCA treatment of creditors (including differential and/or preferential treat­ment for the State and certain other selected creditors deemed to be integral to any successful restructure or recapitalisation of the Company’s operations).

At the very least, if the Whyalla Act amendments lead to forced creditor adjustments, the ensuing results may raise the prospect of further State-sanctioned restructuring of ‘significant economic assets’ which, if replicated by other Australian governments hold­ing substantial debt positions, may become a material sovereign risk consideration for current and future investors.

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Authored by: 
Pravin Aathreya, Partner