NEWS & INSIGHTS
RISK VS REWARD - THE RISK OF ADMINISTRATOR LIABILITY
What characteristics should a potential appointee consider, where a company is insolvent and needs to appoint an Administrator, but appointees are having difficulties determining the risk.
Wexted were recently required to give active thought to the environmental liability associated with a difficult Voluntary Administration appointment, where two significant firms had declined to take the appointment on the back of the potential risk a VA might assume for clean up costs.
Pacific Metals Group
Pacific Metals Group was a private equity backed roll-up of scrap metal operators in Melbourne. The business was significant, acquiring, sorting and repackaging for sale c. 50,000 tonnes of scrap metal per annum across four sites. The most significant of those sites was in Laverton North in Melbourne’s western suburbs.
Wexted as an advisor
When the group was unable to secure further debt funding in late 2023, Wexted was approached to act as Safe Harbour Advisor, while the Company considered restructuring options including a funded, managed wind down. The Safe Harbour appointment did not proceed, as the Company failed the literal interpretation of the Safe Harbour eligibility tests [Editor’s Note: these tests are now being scrapped, as part of the Panel Reforms of Safe Harbour – see our article here]. Wexted continued as Advisors, including assisting with pre-planning work to introduce a third party Voluntary Administrator.
During the process, a large accidental fire broke out at the Laverton North site. Efforts to bring the blaze under control drew nationwide attention.
Fire incident and EPA Notices
During the process (2 January 2024) a large accidental fire broke out at the Laverton North site. Efforts to bring the blaze under control drew nationwide attention (see 7 News' story - huge fire breaks out at factory in Laverton North, Melbourne) and the Environmental Protection Agency (EPA) issued various breach notices and imposed conditions that effectively resulted in cessation of operations.
The EPA issued two legal notices:
- A prohibition notice, stopping the company from bringing further material onto the site and requiring a stockpile management plan.
- An Environmental Action Notice (EAN) requiring the company to prevent surface water from leaving the site and produce a stormwater risk assessment.
As a result of this action, and the risk that the EPA would extend those notices and obligations to the proposed Administrators, the proposed Administrators (and a further national firm we invited to consent to an appointment) declined to accept the role.
Understanding the assessment
Wexted was placed in a position where the client asked whether we could consent to Act. Whilst the circumstances were not ideal, the view we took was that the Company and Directors were exposed, it was appropriate to appoint an Administrator, and an appointment needed to occur. We were fortunate to have assisted the Group with pre-planning work and briefing the proposed Administrators. We applied a positive mindset to the problem: while the risk was there, was it likely that action would be taken exposing the Administrators?
We considered the following issues in deciding to accept the appointment:
- Management: The management team was capable and diligent, and the proposed plan to address the EPA Notices was actionable and robust
- Counterparty: Our meetings with the EPA led us to believe they would be a reasonable and balanced counterparty on the basis we would engage actively and positively
- Funding: The majority shareholder provided significant funding for the wind-down, supported by a super senior intercreditor
While there was a level of risk associated with potential cost overruns and EPA action, our assessment was that this risk could be managed and that a better outcome would be achieved via the funded winddown proposed, addressing the EPA requirements as Administrator.
“We started from the premise that the problem needed a solution, and it was important to be realistic and objective about the risk. We assessed the scale of the impact of the risk – was it significant, what was the probability. We also assessed the actions we could take if the risk eventuated — could it be addressed and controlled or transferred. That assessment, and our conclusions on the counterparties, told us the risk of liability was low.”
Chris Johnson
| Wexted
| Partner
The outcome
The process implemented ultimately enabled the companies to:
- Effect a cleanup of the sites as efficiently as possible, reducing overall environmental risk and complying with EPA requirements; and
- Maximise the value on sale, including selling one operating business as a going concern.
Communication with key stakeholders, particularly the EPA, was critical throughout the matter. The funding provided allowed for continued limited trade, the sale of residual scrap, the collection of debtors, the payment of employees in full, and the making good of the yards.
The appointment culminated in the Administrators achieving a going concern sale of the Packenham site, completing an on-site auction at the Melbourne site, and returning the Melbourne site to its landlord in good order. The EPA removed all notices previously issued to the companies and the secured creditor received a return materially above the nil return.
The Administrators were assisted by Corrs Chambers Westgarth Partners Craig Ensor - Corrs Chambers Westgarth and Cameron Cheetham https://www.corrs.com.au/people/cameron-cheetham
Published 4th November 2024
