Gwalia insolvency in the mix for de Kerloy

If winning the big jobs is a measure of success, then Freehills gets top billing in the insolvency market this year after being appointed as legal adviser to the administrators of failed mining company Sons of Gwalia.

The lead partner on the Gwalia job is Konrad de Kerloy, who has also been ranked among WA’s top insolvency lawyers in a WA Business News survey of business people in Perth.

Other lawyers who featured in the survey include his Freehills colleague David John, Christensen Vaughan partner John Vaughan, Clayton Utz partner Rob McKenzie and Mallesons Stephen Jaques partner Beau Deleuil, whose recent jobs include acting for the receiver of Epic Energy and for Sons of Gwalia’s financiers.

Ironically, Mr de Kerloy says the Perth market is not big enough to keep him fully occupied on insolvency work, nor does he want to work full-time on insolvencies.

“I regard myself as a general commercial litigation partner with an insolvency speciality,” Mr de Kerloy said.

“When insolvency isn’t busy, I do other general commercial litigation work in banking and so on.”

He believes Freehills won the Gwalia job partly because of its availability at the time and the lack of conflicts of interest, but also because it is one of the few law firms able to provide the range of specialised services needed by the administrators.

Up to five Freehills partners have been working on Gwalia since last August, when the company went into administration with debts of more than $800 million.

In view of the scale and complexity of the administration, most will be involved for many more months yet. Freehills mining partner Peter Smith is one person whose task is complete, after advising on the recent sale of Gwalia’s gold assets to St Barbara Mines.

Mr de Kerloy and corporate partner Justin Mannolini are advising on the restructuring of Gwalia’s tantalum business.

A third area of activity is general advice covering day-to-day insolvency issues such as retention of title clauses and works contracts, which is being handled by Mr John.

“It’s been unusual because usually an administrator gets in, sells things and gets out,” Mr John said.

“However, in order to maximise value of particular tantalum assets, they are entering into significant contracts for works, including mine upgrades, which the administrators are personally liable for.”

The contracts include a $10 million investment in the Greenbushes tantalum mine and an $8 million upgrade of the Wodgina processing plant.

Mr de Kerloy said the administrators were also renegotiating contracts with service providers at a time of buoyant activity and escalating contractor rates in the mining industry.

“At last count, just on the day-to-day legal issues, there are probably 20  files with advice and paper. It’s just a very big administration,” Mr de Kerloy said.

One of Freehills’ Melbourne partners, Dan Brierley, has played a key role in negotiations over financing issues.

A further aspect is what Mr de Kerloy calls the investigations issues.

“The investigation, which is required by the Corporations Act, is important given this was a high-profile company with a lot of investors who have lost their money and creditors who are going also to lose a lot of money.

“The question is what happened, what went wrong, is anyone responsible and so on?”

The administrators have already launched legal action in the Supreme Court against the company’s auditors, Ernst & Young.

“That is going to be a very large claim and there are ongoing investigations,” said Mr de Kerloy, adding that “some other parties might be looked at as well”.

Another aspect, handled mainly by partner Katrina Banks-Smith, is a variety of applications to the courts, including modifying the way in which the administrator’s indemnity works. Mr de Kerloy said the separation of Gwalia’s assets and liabilities in different legal entities complicated the indemnity process.

“Rather than try to invent a whole new accounting system, we went to the court and modified the law so that they could aggregate all of the assets and treat them in a single pool.”

A final aspect is the so-called shareholders’ test case (see page 5), which will determine the rights of Gwalia shareholders.

Mr de Kerloy said the lawyers worked very closely with the administrators and their financial advisers, investment bank UBS.

“There is a huge amount of interaction because, to some extent, value is driven by structure,” he said.

“We’ve understood their commercial objective and they’ve understood the legal limitations, and between those two points we’re trying to find solutions.

“In all of that mix, we’ve also got creditors who want to be involved in the process and have to be brought along, and they’ve got their own ideas.”

Mr de Kerloy characterised his role as being “proactively engaged in trying to find solutions”.

“I don’t see it as being conservative, I see it as what is achievable based on what the law will permit.”

An issue that arises in many corporate collapses is whether trading has continued after the company has become insolvent.

In the case of Gwalia, the company continued trading after receiving bad news on its gold reserves, as it was in advanced negotiations with its banks for a ‘standstill’ agreement.

Most of the banks agreed to the standstill but not all of them, which immediately prompted the directors to call in the administrators.

Mr de Kerloy said it was generally accepted that company directors should be able to keep trading, even during a period of financial stress, if there was a realistic prospect their company could survive.

He declined to comment on the specifics of the Gwalia matter.

While Freehills is normally associated with big jobs for large companies, it has also carved out a niche in the reconstruction of shell companies.

Mr John said Freehills’ Perth office played a pioneering role in this area, having handled the very first reconstruction through a creditors trust involving Mt Lyall in 1997.

He said Freehills had worked on about a dozen reconstructions over the past few years.