Qenos, funding solutions in voluntary administrations

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By Taline Chater, Partner

Key takeaways

  • The Victorian Federal Court’s decision in Preston, in the matter of Qenos Pty Ltd (Administrators Appointed) [2024] FCA 461 is another example of a commercially sensible decision by the Courts, enabling administrators to accept a funding solution and therefore preserve value and optionality in restructurings in a voluntary administration.
  • The Court granted orders limiting the Administrators’ personal liability to their indemnity out of the companies’ properties, in respect of a $200 million funding facility provided by the group´s owner, LAOP LenCo Pty Ltd (Lendco) and likely restructuring proponent.
  • Equally sensibly, the Court found no issue with the Administrators engaging with the companies some 4-6 weeks prior to their appointment, for purposes of contingency planning including the group’s funding needs, in so far as it related to their independence. This is in line with the decision in Re Ten Network Holdings (2017) 252 FCR 519.

Background facts

  • The Qenos group conducts the largest plastics and chemical manufacturing business in Australia. It has sizeable plants in Botany, Sydney, (the Botany facility) and in Altona, Victoria, (the Altona facility). The Botany facility is not presently operating after being shut down due to a cooling tower failure.
  • The group’s facility in Altona, Victoria has a significant role in the production of liquified natural gas in South Eastern Australia, taking ethane from Esso’s Long Island Point site. If the Altona facility were suddenly shut down, and so could no longer take ethane from Esso’s operations, the Court noted that this would have a high likelihood of interfering with LNG supplies in South Eastern Australia.
  • However, it was noted that the Altona facility’s arrangements to take ethane from Esso terminate at the end of 2024 by which time Esso’s new power generating plant at Hastings will be operational and able to receive the ethane from LNG production. Therefore the future of the business is, as separate matter to its present financial position, finite.
  • The Altona facility and the facility in Botany, Sydney are large industrial complexes handling highly hazardous substances. They are subject to extensive environmental licensing regimes and have legacy contamination issues that would be extremely costly to remediate.
  • In April 2024, the group and certain of its debt were sold to Lendco.

Key findings

  • The Court granted orders pursuant to section 90-15(3)(a) of the Insolvency Practice Schedule (Corporations) (IPS) and s447A of the Corporations Act 2001(Cth) (the Act), limiting the voluntary administrators’ personal liability under section 443A(1) of the Act, to their indemnity out of the company’s property, pursuant to 443D of the Act, in respect of a $200 million funding facility provided by Lendco, the group’s likely restructuring proponent.
  • Key to the Court´s decision were the following factors:
    • The funding would benefit creditors in three ways:
      • First it allowed for the Administrators to continue to trade the business in the short to medium term and the foreshadowed deed of company arrangement to be proposed.
      • The Court noted that there was a “strong” prospect that Lendco would propose a deed of company arrangement (DOCA) which would provide funding to pay accrued employee entitlements (approx $190m) provide an orderly shutdown, address safety and remediation issues at the Botany and Altona facilities, a capped fund for distribution and the acquisition by Lendco or its nominees of the land owned by the Quenos companies including the Botany and Altona facilities with a view to remediating those sits and re-developing them for industrial use. Lendco was the natural DOCA proponent because it had in April 2024 bought the Qenos companies and certain of its debts.
      • Second, the companies had no other immediate funding options and without the Lendco funding, the business would need to be immediately shut down and the companies placed into liquidation. By avoiding a liquidation of the companies and the liquidators disclaiming onerous property of the companies, the realisable value of the companies’ assets was able to be maximised for the benefit of creditors. It was acknowledged that a sale of the entire business ‘in tact’ was unlikely given amongst other things, the lack of long term supply of ethane.
      • Third, it avoided an escalation in the companies’ liabilities if the operations were abruptly shut down because the companies would be exposed to claims from amongst others, Esso, following a breach of the offtake agreement with the companies as well as environmental and safety risks.
  • The Court also noted that it was “self evident” that avoidance of the material safety and environmental risks and flow on effects to the LNG supply were in the public interest in South Eastern Australia, particularly as winter approaches. However, the Court did not find it necessary to rely on this factor and rather, elected to focus on the best interests of creditors, consistent with the object of Part 5.3A of the Act.
  • Separately,  the Court considered the Administrators’ pre appointment engagements in March 2024 for the Qenos group for reviewing and considering financial forecasts and the companies’ ability remain solvent, undertaking  contingency planning and the funding needs of the companies for a potential voluntary administration.  The Court again sensibly, found no issue with the Administrators’ conduct in so far as it related to their independence, making reference to the decision in Re Ten Network Holdings (2017) 252 FCR 519. The Court noted the evident benefits of seeking advice from qualified insolvency professionals prior to entering voluntary administration to permit the Administrators to “hit the ground running” should an appointment eventuate.
For further information, please do not hesitate to contact us.

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