British Steel Case Study : What is Compulsory Liquidation in the UK?

British Steel Case Study

British Steel was created in 1967 as a nationalised company and was established as part of the Iron and Steel Act 1967, largely in response to the huge demand for steel following the Industrial Revolution.

The company was later privatised in the 1980s and has since undergone major changes over the years, particularly in the 1990s when the demand for steel dropped. By 1999, the company merged with Koninklijke Hoogovens, forming Corus and in 2007, it was bought out by Tata Steel. By 2016, Greybull Capital purchased Tata Steel’s European business, including British Steel, and went on to buy FN Steel.

However, just three years later in May 2019, it was announced that British Steel had been placed into compulsory liquidation following failed talks for emergency funding from the UK government.

Why did British Steel fall into liquidation?

Although a year after Greybull purchased British Steel from Tata Steel in June 2016 the company appeared to have recovered and was making a profit, just a short time later the company was struggling. The main reason given for the turnaround of events into insolvency was put down to uncertainty surrounding Brexit which caused their customers to seek supplies elsewhere.

The UK government stepped in with a £120m loan in May 2019 to pay for their EU carbon emissions credits. More funds were requested from the UK government to support further investment from Greybull but it was sufficient to turn the company around.

Although Greybull had purchased the company in 2016, and collected their management fees, they made a high interest loan to the company that hasn’t been paid back and is therefore a creditor as well as being the owner.

The UK government gave British Steel a £75m bridging loan while the company assessed its options, enabling it to continue trading for a short period while discussions were ongoing.

Why the company was allowed to continue trading

Following a petition from the company’s directors, the court appointed an official receiver to act as liquidator and take over the management of British Steel, along with insolvency practitioners from EY to assist in the management of the business. Technically, as an insolvent company, British Steel should have ceased trading and employee contracts terminated.

However, the UK government issued an indemnity to British Steel along with further financial support, the unusual decision was taken that the company was allowed to continue operating, which ensured the majority of the workers from British Steel were able to continue in their roles. Technically, this means that British Steel was placed into administration.

The decision by the official receiver (OR) to continue operations despite the company being entered into a compulsory liquidation process is unusual. The reason given was that the OR wanted to consider all options for the business, including aiming to find a buyer for the company.

In most compulsory liquidations, where creditors have applied to the court for a winding up order to be issued, the company stops trading and employee contracts are terminated with immediate effect. However, in the case of British Steel and despite directors applying to the court for the compulsory liquidation of the business, the process will be treated as an administration procedure, i.e. the company will continue trading while a buyer is sought.

Sale of British Steel and its assets

However, as with any administration process, the company’s assets and liabilities are also assessed and may be sold off to pay back creditors. With this in mind, the OR and liquidators agreed to sell some of British Steel’s assets to Jingye Steel (UK) Ltd and Jingye Steel (UK) Holding Ltd.

The sale agreement, which was completed in March 2020, included the purchase by Jingye Steel of the Scunthorpe steelworks, the mills at Skinningrove and Teesdale in the UK, TSP Engineering in Cumbria as well as the entire subsidiary of FN Steel, acquired by Greybull not long after they bought British Steel.

In August 2019, the OR also announced that TSP Projects Ltd, which was a wholly-owned subsidiary of British Steel, which is still in compulsory liquidation although with a licence to continue trading, was sold to SYSTRA Ltd.

At this point, the sale agreement was announced and creditors were asked to register as a creditor of British Steel by sending a Proof of Debt form to the liquidator/OR. The sale of these assets also secured a large majority of the jobs at British Steel and its associated businesses, raised funds to pay back priority creditors and allowed the business to continue trading.

The future of British Steel

Jingye (a Chinese company) had a big struggle on their hands when they took over British Steel, sinking a further £220m into the business for running costs. Due to the coronavirus pandemic, the demand for steel dropped, particularly in the automotive industry as factories were closed temporarily.

As industries and manufacturing re-opened, the price of steel rose considerably, only to be later hampered by rising energy costs. This meant that they had to re-adjust schedules for making steel to periods of the day when energy demand was at its lowest. According to UK Steel, around a fifth of the manufacturing cost of steel is accountable to energy costs, which affected its competitiveness worldwide. Other international events have alleviated the competition pressure as more global businesses are being affected by rising energy costs.

The new owner of British Steel, Jingje, has stated they will be making large investments into their new steel manufacturing subsidiary, securing the company and jobs for the foreseeable future.

Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering.  If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance.  For more information on how our professional insolvency practitioners may be able to help your business, contact us today.