THE ROYAL Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is likely to give troubling insights into a directly related area that also needs urgent reform – administration, liquidation and bankruptcy.

Business Acumen has regularly highlighted concerns about how the existing business administration and liquidation regimes work in practice. Or, more specifically, how they clearly do not work – very well – for the good of the country and our economy.

A prime example we have mentioned is Cubby Station, the cotton property in Western Queensland that held the largest water storage rights in the country. Cubby Station’s directors placed the property into the ‘protection’ of voluntary administration during the prolonged Queensland drought, because of the risk of trading insolvent. 

Three weeks after doing so, it rained – the best rains Australia had seen in a decade and Cubby Station was back in business … Or so it should have been, except the administrators refused to return Cubby Station to its management and ownership as requested by the directors.

It was later sold to a combined China-Japan conglomerate. Cubby Station’s shareholders lost their investments.

ARRIUM TOO

A similar thing happened last year, after the giant steel and mining group, Arrium, was placed into voluntary administration by its directors. Arrium was suffering what was thought to be a temporary problem due to over-investment in the mining part of its business.

Arrium still had spectacular cash-flows – and that was why its administrators were able to book an alleged $1 million a week in fees to ‘guide’ the company.

Arrium, with a capitalised value of more than $16 billion, was eventually sold for an undisclosed sum (rumoured to be around the A$1 billion mark) to British steel entrepreneur Sanjeev Gupta’s group. Thankfully, he is making good on his promise to re-invest heavily in the company and drive innovation in Australian steel manufacturing.

The shareholders of Arrium? They are out about $16 billion, but there are rumours of a class action brewing about that particular situation.

BIG HIT ON SMALL FIRMS

The stories of small business owners going into administration and re-emerging are few and fanciful.

The more likely scenario is for SME owners to hang on for a long as they can, trying to trade out of trouble, before they are taken out by either their bank or the ATO.

A sobering example Acumen knows of is a diversified printing partnership in which one of two directors decided to leave the industry, selling his shares to the other, who drew on family home equity to fund the purchase.

The departing partner miraculously showed up in another competing business and managed to draw away his original business’s major client.

With 60-70 percent of cashflow going out the door and a large existing supplier debt to service, the remaining director was quickly in all sorts of trouble, starting with the ATO.

Instead of making two-thirds of staff redundant immediately, the business owner held on with the promise of new contracts that did not eventuate. PAYE debt grew.

Reward for doing the right thing by loyal staff set the ATO on a rampage that liquidated part of the group. This triggered a major print supplier to go for the director using the director’s guarantee supplied. The business owner tried hard and nearly made it, paying down $220,000 in debt to $37,000 over a year… but the supplier opted to force bankruptcy through the Federal Court.

The SME owner lost his home and assets. The petitioner got about $5000 of the $37,000 debt, likely a net-negative after paying legal fees. The bankruptcy trustee got $15,000 out of the sale of the family home, the mortgaging bank got an extra $19,000 in penalty interest, eight staff lost their jobs.

A family was out on the streets. Other creditors got nothing.

The trustee made $15,000 from the home sale and, through a later asset sale, bumped that up beyond $45,000. The original debt, remember, was just $37,000.

It is not unusual in Australia for an administrator to profit most from such actions. Business Acumen is preparing a special edition on the current Australian liquidation and administration regime.

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EDITORIAL >>

WE HAVE DEDICATED our special report in Business Acumen's edition #89 to companies we can call – confidently – game changers.

These are businesses and individuals who have come up with a way of doing things that are not only innovative and different, they will make the sectors they operate in different, from now on. 

Take the Regional Economic Development (RED) Toolbox. For too long Australia’s regions have been developing economically in an almost haphazard way. That is, regional economic development has not been a ‘joined up’ process in which regions can see what others are doing successfully and adapt these learnings to the local situation.

For too long economic development in the regions has been focused on “we need money from the government (State or Federal) ‘to develop X’ and then the proving process of business plans and fitting in to budget cycles and the threat of another election (which will derail these processes all over again) begins.

The RED Toolbox takes the polar opposite approach. It is a grassroots by design economic growth environment. It provides a joined-up national collaboration platform where good local ideas can come forward, take form, invite in expert assistance and even finance, while governments of all colours can look on and augment the process with judicious application of expertise, regulation and funding. 

The RED Toolbox is Australian digital ingenuity at its best. It is where great regional projects will be born. Exceptional companies will be born and they will  ‘export’ interstate and abroad. Exceptional entrepreneurs and business people will put great things together using the RED Toolbox.

It is where business success stories will be showcased and learned from. It is a gathering point for people with a business challenge and others who have the products and services to help them. Business Acumen is proud to have been involved in the creation of the RED Toolbox – a world first in joined-up nationwide economic development. We are proud to be able to tell its story and, in coming years, the success stories of the businesses and entrepreneurs who will thrive as a result of its creation by Queensland company Digital Business insights and the many partners who shape the platform.

A related game changer is David Wallader’s organisation, IFO, which has brought to Australia a new way of funding major infrastructure – at no cost to taxpayers. That is, for billion-dollar projects like railways, highways, airports, ports, tunnels, even major energy projects, it is possible for a private company to establish a bank guarantee of more than A$160milllion, based on its capital assets, and use it on this secure trading platform to generate billions of dollars  for a specific government-agreed  infrastructure project.

At the end of that contact period, the guarantee is released back to the guarantor company and the project is completed debt free and able to be returned to the respective government after an operating period. For example, a government could plan a major hydro generation project, the construction company could raise a guarantee and complete the project then operate it as a going concern for 30 years, and after that it is returned to public ownership. Because the hydro power station is debt free, it is not servicing a loan, so profitability is high – or the price of that generated power could be reasonably lowered.

Another game changer in the area of infrastructure is the PileJax piling repair system of innovative Australian company Joinlox. Because PileJax can refurbish aged or degraded marine piles – taking in road and rail bridges, ports and wharves – at a tiny fraction of the cost of replacement, it is able to solve an enormous problem for end-of-life infrastructure in Australia and, now, in the US.

The method is ingeniously simple, but only made so by the bio-mimickry genius of the patented Joinlox system – which the company’s CEO John Pettigrew describes as being “like a huge industrial-size zipper”. A custom-made jacket is manufactured from fibreglass reinforced plastic, it is manouevred into position and literally ‘tapped’ together with a rubber mallet by divers below the waterline. It is then filled and bonded to the pile with a special epoxy mix and PileJax is happy to guarantee the life of that pile for another 25 years … but its research shows it could actually last far longer.

And the last but certainly not least of our game changers in this edition is Novius – a cloud-based 3D imaging platform that allows architectural, engineering and construction professionals to work on the same drawings simultaneously. It has been called the ‘holy grail’ for the interrelated industries Novius calls the ‘AEC’ sector.

Apart from the remarkably faster processing times Novius offers, its platform is also expected to significantly reduce errors on construction projects because everyone is able to view the very latest plans and drawings all the time – even on tablets on site. How much time and money is Novius going to save on construction projects in years to come?

What game changers.

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EDITORIAL UPDATE >>

BUSINESS ACUMEN magazine has long lamented the fact that too many iconic Australian companies have fallen, and national wealth has been lost, because of this country’s inadequate approach to voluntary administration.

Up until now, the Cubby Station voluntary administration – now owned by a joint China-Japan-Australia venture – and, perhaps, the Ansett Australia collapse – with that operating space now dominated by majority Air New Zealand, Etihad, Singapore Airlines, and Virgin Group owned Virgin Australia – have been stand-outs. 

Now it looks like one of the most severe examples in Australia’s voluntary administration history is about to play out: Arrium. 

We fear that one of Australia’s manufacturing and mining giants, the 94 companies of Arrium (in the distant past known as BHP Steel and today its best-known brand is OneSteel) could wither away in aimless administration until its most prized companies are exhaustingly sold off to foreign interests. One of the jewels in the Arrium crown, Moly-Corp, was recently sold by KordaMentha with the assistance of Morgan Stanley to American Industrial Partners for more than $1.6 billion.

Arrium's smaller interdependent companies could either be stripped away in a series of desperate ‘trade sales’ or fall into liquidation of their own accord. 

Given such a prospect and the thousands of jobs at stake – which apparently alarms no-one in the (Jobs and Growth!) Government – you would think someone in the Federal or South Australian Governments might be interested to hear from someone with a plan to save the entire company … at no cost to any government or the tax payer.

The Australian representative company of this international infrastructure financial trading platform, who has put forward this proposal to the administrators, the major creditor banks, the creditor Australian Workers Union, the Australian Government and the South Australian Government, only wants a meeting to explain the system and gather more information.

If someone is seriously interested in raising more than A$4 billion to save Arrium – and not as a loan – but reasonably needs more information to frame the deal and work out the schedule for recovery of the entire Arrium Group, you would think he would at least receive the courtesy of being seen and heard.

He cannot get a meeting.

Not with KordaMentha, to whom he first proposed this rescue package in June 2016 and who only answered his request for a meeting in December (with a ‘no’) after various government Ministers referred the now more widespread request back to the administrator.

Not with the South Australian Government – the government with surely the most to lose from a broken up Arrium and foreign-owned Whyalla plant … whose initial response from the Treasurer Tom Koutsantonis (on behalf of the Premier and other Ministers written to) fobbed him off by saying KordaMentha was well advanced in the sale process and “it is at the administrator’s discretion how they assess and act on proposals they receive”.

(To his credit, though, Mr Koutsantonis has since responded to the platform's Australian representative with an assurance that the South Australian Government was insisting on Arrium not being broken up and a $50 million loan to support the group maintained that condition. He encouraged the continuance of the move to rescue Arrium in its entirety.)

Not with the Federal Government, either. However, former Industry Innovation and Science Minister Greg Hunt did reply fairly promptly and did suggest the platform should take its concerns about not getting a hearing from the administrator to the Australian Securities and Investment Commission (ASIC), which has since happened.

(And ASIC, it is understood, were not prepared to investigate the matter further nor play a role in having the administrators respond to the request for a meeting on the recovery plan).

And neither could he get a meeting with the four major creditor banks, who would apparently need to participate in the infrastructure trading platform for just two years to get all their money back.

Or, at least, the banks have not agreed to meet so far – yet they are showing belated interest as the quantum of their potential losses on Arrium going the way it is going hits home. Banks, after all, have a duty of care to their shareholders too.

Apparently it has recently been pointed out that by not alerting Arrium’s Committee of Creditors, which includes the banks and the Australian Workers Union, to the financial recovery proposal, it may not meet the provision in the Corporations Act 2001 Section 439A Paragraph 4 (v) to provide “such other information known to the administrator would enable the creditors to make an informed decision about each matter”.

It is, perhaps, ironic that paragraphs 3 and 4 of that section of the Act have actually been removed by the Parliament, as of March 1, 2017. Something to do with, we surmize, red tape reduction.

It is a frustrating situation for the man making the offer on behalf of his Europe-based infrastructure financial trading platform colleagues … who are more used to being welcomed. Welcomed by Japan, for instance, to help develop its national fast rail system. Or successfully helping medical researchers to develop a vaccine for ebola. Yes, this platform helped provide funding in both cases.

Apparently the reason the European infrastructure financial group is interested in recovering Arrium is that they see a bright future for the mining and steel production giant in developing much-needed infrastructure – rail, tunnels, bridges, airports, energy systems – well into the future.

And Australia is a safe place to develop infrastructure, which is their main game. 

Once they have successfully funded a major project in Australia – and Arrium would certainly prove their system to Australia, should they be successful – they believe a huge demand for their infrastructure funding system would follow here.

As we now know, a report by Korda Mentha on December 20, 2016, that a sale of the Arrium’s prized Moly-Corp operation was likely to go ahead in early 2017 to American Industrial Partners came to pass. Despite international offers for various other prized parts of the Arrium empire, the desire to see the rest of the group sold as a single entity still seems a long way off.

While not specific about the sale of Arrium’s other entities, apart from saying it would prefer the business to be sold “as one line” and as a going concern, Korda Mentha said it expected to have the sale completed by March 31, 2017. That clearly has not happened. Most media reports have tipped strongest interest from South Korean private equity firm Newlake Investments joined by it Australian steelmaker Posco, competing with UK-based Liberty House, and tipped a result in April.

Without hearing out this new infrastructure finance offer, the Australian Government has shown it is not serious about its calls for more financial innovation in this country.

A trading platform that can develop new infrastructure without taxpayer funding, in most cases is operated for 30-35 years by the developer and then is handed back to the government that ‘owns’ it?

Listen, surely it’s not too innovative for Australia?

THE MAGIC word of the prevailing business age seems to be innovation – but are we desperately guilty in Australia of chasing innovation rainbows, believing in ever-more elusive pots of gold?

A very successful media sales manager who once worked for Business Acumen was fond of saying “a bird in the hand is worth much more than two in the bush”. It was his way of saying that an existing client is more valuable than an apparently attractive and apparently more lucrative potential client on the horizon. 

In other words, look after the clients and assets you have – do what you can to secure them with you – before you expend energy chasing rainbows.

In his practical manner, Business Acumen’s long lost sales manager – he left the industry, with regret, for he wanted to pursue his lifestyle dreams – put solid numbers to his ‘bird in the hand’ ethos.

If the cost of sales is about 20 percent of income, which it so often works out to be, then an existing client is already a 20 percent better bet than acquiring the next client. By our sales manager’s reckoning, practically, you could afford to discount up to 20 percent to keep an existing client.

The reality is, rarely do you have to discount – if you are treating your clients well and keeping their best interests at heart.

BEST INTERESTS AT HEART: The Cases of Arrium and Cubby Station

The same business philosophy should apply to Australia’s major business assets – but there is a problem.
Perhaps Australia’s liquidation and administration provisions under the Corporations Act have the right intentions. Perhaps, though, they have also been watered down by precedents and more recent business practices.

Cubby Station is a case in point. Moved into voluntary administration owing about $300 million when it ran into cashflow difficulties – any wonder as Cubby, with Australia’s largest private water holdings, was constructed during the longest drought in Queensland history. The vast potential cotton fields were parched.

Three months after Cubby moved into administration, it rained. And rained. The largest water holding in the country was a wet dream come true.

The directors of the Australian founding company asked to take Cubby Station back, seeing that it was now clear there would be many years of profitable growth and harvests ahead. The administrators, McGrathNicol (and banks) respectfully refused …

The administrators decided the best course of action – and the directors would question, for whom? – was to sell to a combined China-Japan-Australian group, at a knock-down price of $240 million, far less than its establishment costs, funded from offshore.

There can never be another Cubby Station created in Australia, because its location and the deals for water and land that created it were unique.

Of course, Cubby Station is still here and it’s great for Australia that it is now thriving. But where are those thriving profits going today? Largely offshore.

One thing is for certain, the liquidators – who can charge upwards of $500 an hour per executive for certain types of work – had a very profitable time.

ARRIUM, UM?

We can only hope that a similar fate does not befall the multi-faceted steel manufacturing conglomerate, Arrium.

The 94 companies that make up Arrium – whose best known brand is probably OneSteel – are currently in the voluntary administration hands of KordaMentha.

Arrium’s board was obliged to take this move early this year when cashflow was badly hit by a set of unfortunate circumstances – the most highlighted of which was the fall in resources prices, affecting mines the company had acquired in an earlier era of high prices.

But the rest of the group was trading reasonably well and there seemed to be good prospects for recovery.

However, one of the factors that can play havoc with a company in administration in Australia is the sheer costs of being in administration.

Business Acumen has reported on one case of a Queensland mining equipment company which came out of administration to find that in less than a month the administrators’ fees had run to almost $400,000, extracted from the company’s bank accounts. The loss of this cash soon forced the directors to liquidate the company.

KordaMentha’s early information for shareholders on Arrium is heartening, however. In its initial information release, KordaMentha stated:

“The role of the voluntary administrator is to maximise the chances of a company, or as much as possible of its business, continuing in existence. In addition, the voluntary administrator will investigate the company’s affairs, prepare and issue a report to creditors and provide a recommendation to creditors as to whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.”

As promising as that sounds, the longer it goes on, the final option of returning the company to directors seems more unlikely. The Cubby Station case is an example, where it took four years of administration before a loss-making sale was made.

With the South Australian Government having thrown Arrium a lifeline in terms of a lucrative long-term rail production contract, and with the Federal Government having ‘donated’ $40 million to assist Arrium already, it would seem there is an increasingly likely option of a break-up of the company into profitable saleable components – with losses to shareholders on the rest.

Again, a major Australian asset would go and jobs would undoubtedly vanish.

There may not be a pot of gold at the end of this rainbow, but surely there should at least be a pot of Australian steel?

Until Australia gets something like the self-administration benefits that the US has in its Chapter 11 bankruptcy provisions – which have been used to great national benefit by General Motors and most American airlines – our major business assets will continue to hang by a precious and precarious thread. 

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