Sanjeev Gupta’s directors seek safe harbour

The move to seek safe-harbour protection follows the South Australian government’s intervention to grab control of Sanjeev Gupta’s Whyalla steelworks.

South Australian Premier Peter Malinauskas and Prime Minister Anthony Albanese at Whyalla’s steelworks. Picture: Tim Joy

Directors of companies connected to Sanjeev Gupta have sought protection under safe-harbour laws ahead of the first creditors’ meeting of the failed Whyalla steelworks in South Australia – as the tycoon fights to save his industrial empire.

Sources said the move was triggered after the extraordinary intervention by the state government to take control of the steelworks and follows months of broader concern over the financial health of Mr Gupta’s businesses.

Olvera Advisors principal Damien Hodgkinson, who specialises in assisting companies dealing in crisis management and distressed investments, has been retained by entities related to Mr Gupta’s GFG Alliance and InfraBuild as it considers options for its business.

Safe-harbour protections typically involve drafting external consultants to help directors engineer a turnaround of the business without the risk they could be pursued for insolvent trading.

Directors of GFG Alliance itself, or related entities including InfraBuild, have sought the protections for their board, sources said. GFG and Mr Hodgkinson declined to comment.

Mr Gupta rose to fame after hoovering up a string of struggling or closed plants and fashioning them into a $US15bn empire.

This included the former Arrium steelworks at Whyalla in South Australia’s upper north, kept within GFG, along with its steel manufacturing and distribution businesses housed under the InfraBuild banner.

The actions of the state government to push the Whyalla steelworks into administration are reverberating around legal and investment circles nationally, and experts say it has the potential to worsen Australia’s sovereign risk profile.

Administrator KordaMentha, government officials including SA Premier Peter Malinauskas, and creditors owed well north of at least $600m, are preparing for the first creditors’ meeting of OneSteel Manufacturing, to be held in Whyalla on Monday.

At the afternoon meeting it is expected that a ballpark figure for the total debt owed by OneSteel – a subsidiary of Sanjeev Gupta’s GFG Alliance – will be revealed. Publicly-announced debts already have surpassed $640m and the total sum potentially tops $1bn.

This includes a $500m claim from other companies in the embattled Gupta empire, such as long-steel products company InfraBuild. Mining services contractor NRW Holdings has claimed a $113m debt, but says this is secured against the Whyalla port which is still owned by Mr Gupta’s GFG.

While Mr Gupta has claimed, in a memo to staff late last week, that his companies are the biggest creditor of the failed steelworks, a state and federal government bailout package, which includes emergency payments for creditors, expressly rules out handing any money to entities related to Mr Gupta.

First creditors’ meetings are usually a somewhat staid affair, with the main order of business to agree to keep the nominated administrator on in the role.

The last time the steelworks went into administration, when former owner Arrium failed in 2016, this did not happen. The original administrator, Grant Thornton, was turfed out in favour of the financiers’ pick in KordaMentha, which is now about to have its second tilt at selling the operations.

With the governments stumping up a maximum $384m to its preferred administrator KordaMentha to run the steelworks while in administration this time around, and with the SA government being the first ranking creditor, a move to unseat KordaMentha seems unlikely.

Meanwhile, Minter Ellison partner Nick Anson, who specialises in restructuring, said the move by the SA government to tip the steelworks into administration appeared to be unprecedented, and presented a new strategy which would be closely monitored by other governments and the investment community. “I can’t think of a recent example that’s analogous to this,’’ he said.

Mr Anson said the federal government had appointed receivers to Eddy Groves’ ABC Learning back in the 2000s, so there was precedent at that level for governments using insolvency processes to manage issues in a strategic industry.

But the move by a state government was seemingly unique.

He said that there could be other examples like the steelworks where a similar strategy to that employed in SA might be seen as attractive to a government.

“Particularly where you have got a business that’s crying out for reinvestment, that equity promises year after year to do it and it doesn’t happen, then this is a wonderful thing to be able to threaten or have in the background as a way to get a better outcome,’’ he said.

“I’m not sure how many other situations there will be which are so one sided in terms of community attitude’.’

But Mr Anson said sophisticated investors would now be aware that this strategy existed, which potentially had sovereign risk implications.

It was also true, he said, that state governments had a lot of unsecured liabilities to corporate entities, with resources project remediation liabilities a prime example. Mr Anson said where a project might have residual value – be it in property or the tailings – “the ability to do what they have done, and say we’re getting in front of equity and secured creditors ... it’s quite a powerful thing’’.

Mr Anson said that in an environment whereby state governments were strapped for cash, the ability to avoid some of these off-balance sheet liabilities could be attractive.

Australian Securities and Investments Commission dep­uty chair Sarah Court said the regulator was closely following the situation at Whyalla.

She said ASIC was looking at the financial reporting and disclosures from the business, and would “continue to consider the governance issues going forward”.

Ms Court said ASIC was considering the broad spread of companies in Mr Gupta’s empire, here and overseas.

Originally published as Sanjeev Gupta’s directors seek safe harbour