A deal that would effectively stop Morgan Stanley's US court action against Arrium has been brokered between the American banking giant and administrators from KordaMentha.
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The deal came as administrators warned staff about the need to reduce the cost base of Arrium's politically sensitive Whyalla steel mill.
Fairfax Media understands the deal will see Morgan Stanley join the queue of the other lenders of Arrium including the steelmaker's 19 noteholders.
The agreement came after Morgan Stanley Bank filed action in the Delaware Chancery Court on Friday seeking orders that Arrium and its subsidiary companies must repay a $US75.4 million ($98 million) credit facility the US bank provided in 2013.
Morgan Stanley was seeking immediate repayment of the loan that is provided to Arrium and its subsidiaries including Arrium's hugely successful ore grinding business Moly-Cop. A spokesman for the bank declined to comment.
It's not clear whether the deal increases the chances administrators will look to sell Moly-Cop, which is Arrium's most profitable business. Arrium tried to sell the business earlier this year for an amount believed to be $1.5 billion but failed to lure a buyer.
KordaMentha's breakthrough with Morgan Stanley was trashed out between court hearings in the Federal Court in Melbourne on Monday by lawyers for the US bank, the insolvency firm and Arrium's lenders.
The matter has been adjourned for eight days, according to sources, leaving open the possibility that if either party is not happy with the agreement the legal battle can resume.
"The agreement means that court action initiated in the Federal Court in Melbourne this morning are stayed," a spokesman for KordaMentha said.
"The parties are now working constructively towards an outcome that will align all interests of the lender group in supporting the best possible outcome for the Arrium Group, including the employees of the businesses in Australia and overseas," the KordaMentha spokesman said.
Morgan Stanley's legal manoeuvre was the latest instalment in the dramatic collapse of Arrium that saw tensions between Arrium's directors and managers and its lenders boil over, leading to the controversial removal of Arrium's voluntary administrators at Grant Thornton in favour of rival insolvency group KordaMentha.
The change in administrator was supported by Arrium's lenders, including its 19 noteholders, as well as the Australian Workers Union, which represents thousands of Arrium's workers.
The steel maker's workers are owed hundreds of millions in entitlements while the company has loans totalling $2.3 billion ,of which $1 billion is from ANZ, CBA, Westpac and NAB.
Separately on Monday, KordaMentha founder and Arrium administrator Mark Mentha warned that the cost base of the Whyalla steelworks would need to be lowered as part of an overall fix-it plan for the Arrium business.
A letter to Arrium staff on Monday outlined that while many of the Arrium businesses were in "good shape", a number of them were connected to the Whyalla operations "which are challenged by low iron ore and steel prices and their current cost base".
"There can be no solution for Arrium as a whole without addressing the challenges in those businesses," Mr Mentha says.
The first meeting of creditors is scheduled to be held in Sydney on Tuesday.
Mr Mentha told staff in the letter that usually a second meeting is held about a month after the first meeting but the timeline is "often extended for large and complex administrations" to allow more time to "assemble a full picture and identify priorities for a restructure".
