Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2)

Before the Court are two proceedings arising from the collapse in April 2016 of Arrium Limited (now known as ACN 004 410 833 Limited (In Liq)) (Arrium), an Australian listed public company, and a number of its subsidiaries. Both proceedings are brought by banks who had either lent money to Arrium or to two of its wholly owned subsidiaries, Arrium Finance Pty Limited (now known as OS Finance Pty Limited) (In Liq)) (Finance) or Arrium Iron Ore Holdings Pty Ltd (now known as AIOH Pty Limited) (In Liq)) (AIOH) (together, the Arrium Entities), or who had taken assignments of debts either directly or indirectly from banks who had lent money to the Arrium Entities. In this judgment, a bank which lent money to one or more of the Arrium Entities will be referred to as a “Par Lender” or “Lender”. A bank which directly or indirectly took an assignment of a Par Lender’s debt will be referred to as an “Assignee”. A third proceeding brought by the liquidators of the Arrium Entities against the directors of those companies for insolvent trading settled in principle during the course of the hearing.

Both the remaining proceedings are brought in respect of Drawdown Notices and Rollover Notices issued pursuant to facility agreements to which the Par Lenders were parties.

The first proceeding in time (the Anchorage Proceeding) is brought by Anchorage Capital Master Offshore, Ltd (Anchorage), ACMO Finance (Ireland) Designated Activity Company (Anchorage Ireland), Midtown Acquisitions L.P. (Midtown), Deutsche Bank Aktiengesellschaft (DB) and the Commonwealth Bank of Australia (CBA). They sue Ms Delia Sparkes, who at all material times up until 29 January 2016 was the Group Treasurer of Arrium, Mr Robert Bakewell, who at all material times was the Chief Financial Officer (CFO) of the Arrium Group, and three employees of Arrium, Ms Vera Verawati, Ms Hazel Hall and Ms Jaimee Lieu, who each signed one or more of the Drawdown Notices or Rollover Notices in respect of which a claim is made.

Anchorage, Anchorage Ireland and Midtown bring their claims as Assignees. DB and CBA bring their claims both as Assignees of some debts and Par Lenders in respect of others. The claims are brought in respect of loans made under the following facility agreements:

The claims are complex and more will need to be said about them later in this judgment. However, in essence, what is alleged is that each Drawdown Notice and each Rollover Notice that was issued in accordance with the relevant facility agreement in order to drawdown or rollover funds to be advanced or advanced under the agreements contained, and by virtue of the terms of the relevant facility agreement made (1) a representation to the effect that there had been no change in the financial position of Arrium since 31 December 2012 (in the case of the 2013 SFA) and since the date up until when the last published accounts of Arrium were prepared (in the case of the other agreements) that had a material adverse effect on the borrowers’ ability to perform their obligations under the agreement (the MAE Representation); and (2) a representation to the effect that no event of default or potential event of default had occurred or continued unremedied (the No Event of Default Representation). Each of the Drawdown and Rollover Notices was signed by two of the defendants (other than Mr Bakewell). The plaintiffs claim that by signing the notices the signatories owed the relevant Par Lender or Par Lenders a duty of care which they breached causing the Par Lenders to suffer loss.

The breaches are said to arise from the fact that there had been a change in Arrium’s financial position that had the relevant effect. That meant that the MAE Representation was false. It also meant that the No Event of Default Representation was false because it was a potential event of default under the facility agreements if there was a change in the financial condition of the group (excluding certain subsidiaries) that had a Material Adverse Effect (“potential” because, in order for an event of default to occur, Arrium had to fail to remedy the situation within 15 Business Days of being required to do so by a Lender).

In the case of money advanced pursuant to Drawdown Notices, the loss is said to be in the amount of money advanced plus interest, less any amount recovered in respect of the relevant loan. In the case of loans that were rolled over, the loss is said to be the difference between the amount recovered in the administration of the Arrium Entities in respect of the relevant loan and the amount that would have been recovered if the Arrium Entities had gone into voluntary administration on or around 31 December 2015 (rather than 7 April 2016) following the relevant Par Lenders’ refusal to roll over the loan in question. The Assignees claim that these causes of action were validly assigned to them at the time they took an assignment of the debts acquired by them.

DB and CBA bring similar claims alleging that the relevant employees, by signing the notices, engaged in misleading and deceptive conduct in contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), s 1041H of the Corporations Act 2001 (Cth) (the Corporations Act) and s 18 of the Australian Consumer Law (ACL). They claim damages assessed in the same way under s 12GF of the ASIC Act, s 1041I of the Corporations Act or s 236 of the ACL. No such claims are brought by the plaintiffs to the extent that they are Assignees, since the plaintiffs accept that the statutory claims cannot be assigned.

Annexure 1 (59266, pdf) to this judgment is a table setting out:

As against Mr Bakewell, the plaintiffs advance three types of claim.

First, it is said that he owed the Par Lenders a duty of care which he breached either by (1) directing Ms Sparkes or alternatively one or more of Ms Verawati, Ms Hall and Ms Lieu in December 2015 to drawdown all available funds under each of the available facilities (the Bakewell Direction) and reaffirming that direction on 8 February 2016; or (2) failing to take steps to ensure that a number of representations including the MAE Representation and the No Event of Default Representation were true and accurate.

Second, it is alleged that the representations contained in or made by the Drawdown Notices were made by the Arrium Entities negligently or in breach of contract and that Mr Bakewell was liable for that conduct because he directed or procured it.

Third, to the extent that the representations contained in or made by the Drawdown Notices were made to the Par Lenders who bring claims in respect of that conduct, it is alleged that the relevant Arrium Entity engaged in misleading and deceptive conduct in contravention of s 12DA of the ASIC Act, s 1041H of the Corporations Act and s 18 of the ACL and that Mr Bakewell was a person involved in that contravention within the meaning of s 79 of the Corporations Act and s 236(1) of the ACL, with the result that he is liable for the same damages as the Arrium Entities.

Three additional claims were also advanced against Ms Sparkes. First, it is alleged that on 31 December 2015 she made a number of oral representations to Morgan Stanley concerning the accuracy of representations made in the Drawdown Notice dated 29 December 2015 and the progress of the sale of Arrium’s Mining Consumables business. Negligence claims are advanced against Ms Sparkes on the basis of those representations. Second, it is alleged that Ms Sparkes directed or procured breaches by the Arrium Entities of their breaches of duty or breach of contract. Third, it is alleged that Ms Sparkes, prior to 30 January 2016, was involved in contraventions by the Arrium Entities of s 12DA of the ASIC Act, s 1041H of the Corporations Act and s 18 of the ACL. These last two claims mirror similar claims made against Mr Bakewell.

The second proceeding (the BOC Proceeding) is brought by Bank of Communications Co., Ltd (BOC), Westpac Banking Corporation (WBC) and Banco Bilbao Vizcaya Argentaria SA t/as Banco Bilbao Vizcaya Argentaria SA (Hong Kong Branch) (BBVA). They sue Ms Sparkes and Mr Bakewell in respect of loans made by them (as Par Lenders) under the 2013 SFA, the 2014 SFA, the 2015 SFA and the following bilateral agreements:

It will be convenient in this judgment to refer to the facilities that are the subject of the two proceedings as the Facilities.

A claim against Ms Sarah Pearce, who replaced Ms Sparkes as Group Treasurer on 30 January 2016, by the BOC Plaintiffs was settled during the course of the proceedings. Nothing more needs to be said about it.

The claim brought in the BOC Proceeding is far simpler than that brought in the Anchorage Proceeding. The claim is limited to direct claims against Ms Sparkes and Mr Bakewell for misleading and deceptive conduct in contravention of s 18 of the ACL. Both are said to be liable for misleading statements said to be contained in or made by virtue of a number of Drawdown Notices issued by the Arrium Entities between 7 January 2016 and 10 February 2016. Details of the relevant notices are set out in Annexure 2 (61530, pdf) .

Both Ms Sparkes and Mr Bakewell are alleged to have engaged in misleading conduct in connection with the Drawdown Notices because both it is said were responsible for causing the Drawdown Notices to be executed and issued. Ms Sparkes’ responsibility is said to arise from the fact that she had authority to make and was responsible for making decisions as to which borrower would issue a Drawdown Notice, the relevant facility agreement in respect of which a Drawdown Notice would be issued, the amount of any such Drawdown Notice and that she was responsible for causing the execution and issuance of Drawdown Notices to give effect to her decisions. Mr Bakewell’s responsibility is said to arise from the fact that he gave the Bakewell Direction to Ms Sparkes in early January 2016 and to Ms Pearce on 8 February 2016.

Like the Anchorage Plaintiffs, the BOC Plaintiffs rely on the MAE Representation contained in and made by virtue of the Drawdown Notices, although, as will be explained, they say the representation was false for more limited reasons. Unlike the Anchorage Plaintiffs, the BOC Plaintiffs also contend that the representations made by the Drawdown Notices were false because the Arrium Entities were insolvent at the time they were made.

The BOC Plaintiffs contend that if Mr Bakewell and Ms Sparkes had not engaged in the misleading conduct, none of the Drawdown Notices would have been issued and none of the advances the subject of those notices would have been made, with the result that the Arrium Entities would have been placed into administration by no later than 7 January 2016. On that basis, the BOC Plaintiffs claim the difference between the amount they advanced and the amount they have recovered. In the alternative, they claim the difference between the amount they have recovered and the amount they would have recovered if the Arrium Entities had been placed into administration on 7 January 2016.

In each case, Mr Bakewell has brought a cross-claim against Herbert Smith Freehills (HSF) alleging that if he is liable to the plaintiffs then they are liable to him on the basis that, in December 2015, HSF gave advice which caused Mr Bakewell to give the Bakewell Direction and gave advice on the solvency of Arrium on which Mr Bakewell relied.

The defendants also rely on contributory negligence and proportionate liability defences. The proportionate liability defences name each of the other defendants as a concurrent wrongdoer together with the Arrium Entities. Mr Bakewell’s proportionate liability defence also names HSF as a concurrent wrongdoer.

Finally, each of the defendants deny that the causes of action on which the Assignees sue were assignable.

Arrium was listed on the Australian Securities Exchange (ASX) in October 2000. It operated three main businesses through a large number of subsidiaries (together, the Arrium Group), which together employed over 8,000 employees in a number of different countries. The three businesses were Mining, Mining Consumables and Steel. The Mining division operated mines in South Australia, 60 kilometres from Whyalla and 90 kilometres from Cooper Pedy which produced lower grade iron ore. The ore was exported through a port Arrium owned in Whyalla and was used by Arrium in its steel mill in Whyalla. For the year ended 30 June 2015, Mining reported revenue of $889 million and underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $90 million. The Mining Consumables business comprised the Moly-Cop grinding media businesses, the Waratah Steel Mill and AltaSteel. It supplied a range of mining consumables including grinding media, wire ropes and rail wheels. The Moly-Cop business was the largest supplier of grinding material in the world. It was (and remains) a successful business and was described as the jewel in Arrium’s crown. For the year ended 30 June 2015, Mining Consumables reported revenue of $1,591 million and underlying EBITDA of $211 million. The Steel business included manufacturing operations in Whyalla and two electric arc furnaces in New South Wales and Victoria which processed ferrous scrap metal. It also included downstream retail businesses which distributed the Arrium Group’s products and third-party products to the construction, manufacturing and resource markets. For the year ended 30 June 2015, the Steel business reported revenues of $2,870 million and underlying EBITDA of $62 million. During the same period, the recycling division of that business generated $1,073 million in revenue and underlying EBITDA of $8 million.

Each of the operating divisions of Arrium had its own finance department, which maintained the financial accounts for the Division, including the preparation of profit and loss statements and cash flows. Each division also operated its own bank accounts, which were generally held with the Australian and New Zealand Banking Group Limited (ANZ). In addition, Arrium also had a shared services function, known within Arrium as the “Finance Division”, which provided corporate services across the whole of the Arrium Group including finance, treasury, tax, internal audit, transactional services and business support. The four divisional heads, including the CFO (who headed the Finance Division) reported to the CEO, who at all relevant times was Mr Andrew Roberts.

The Arrium Group operated a centralised treasury operation within the Finance Division, which encompassed the management of transactional banking, debt facilities, guarantee facilities, trade finance facilities and the risk management functions. Ms Sparkes, who as Group Treasurer was in charge of those operations, reported to Mr Bakewell. Her responsibilities were set out in Arrium Group’s Treasury Policy, about which more will be said shortly.

Arrium’s cash and borrowings were managed centrally by the Finance Division through Finance, AIOH and another entity known as OneSteel US Group Holdings, Inc. Finance was the lender of inter-company funding and trading transactions within Australian domiciled entities. AIOH was the lender for US dollar denominated funding transactions between Australia and overseas domiciled entities. Mr Bakewell and Ms Sparkes were directors of each of Finance and AIOH.

The Group Financial Controller of Arrium was Mr Anthony Brooks, who also reported to Mr Bakewell. Mr Brooks’ responsibilities included ensuring and maintaining the integrity of the data in the Arrium Group’s accounting systems, preparation of the Arrium Group’s month-end accounts, cash flows and forecasts and the preparation of Compliance Certificates certifying the Arrium Group’s compliance with its obligations under covenants contained in the facility agreements.

The Arrium board typically met ten times a year in each month except April and October. However, during the period with which this judgment is primarily concerned, it met far more frequently than that – in all, on 21 occasions between December 2015 and April 2016. Board papers, which were often voluminous, were typically distributed to attendees (including external advisers) by email several days before the relevant meeting. Mr Mark Edler, the General Counsel and later Company Secretary of Arrium, prepared draft minutes of each board meeting.

The Arrium Group maintained a written treasury policy, on which the plaintiffs place some reliance. The one in force during the relevant period was dated July 2015 and was approved by the Arrium board on or around 18 August 2015. The policy sets out the respective responsibilities of the board, the Treasury Committee, the CFO, the Group Treasurer and the General Managers Commercial. Section 3.5 of the policy states that the responsibilities of the CFO included the following:

Section 3.6 of the Policy stated that the Group Treasurer “is responsible for the daily management of Arrium’s borrowing, investment and hedging activities”. It states that the Group Treasurer’s specific responsibilities included:

The Group Treasurer was also responsible for the preparation of a funding plan for the Arrium Group, which was submitted to the Arrium board for approval annually, usually in or around April or May.

Section 4 of the policy deals with liquidity management. Section 4.3, dealing with liquidity risk, relevantly states:

Section 4.4.2 dealing with cash management required the establishment of a liquidity reserve, which was set at $150 million. The Treasury policy gives the following explanation for that figure:

In addition to the Facilities, the Arrium Group had a series of uncommitted facilities which could be withdrawn by Lenders upon notice at any time. These took the form of overdraft facilities, bank guarantees, trade lines, prime receivable financing lines, foreign exchange, commodity and swap lines. As at 30 June 2015, the Arrium Group had access to $583.3 million by way of uncommitted facilities, which had reduced to $385.2 million by 30 September 2015 and to $232.7 million by 31 December 2015. Uncommitted lines were not taken into account in reports to the board on Arrium’s liquidity position.

Arrium Group’s transactional banking facilities were supplied by ANZ. Those facilities included bank accounts, point of sale and merchant facilities, electronic payment facilities including an intraday “pay away” facility that allowed for same day receipt and payment of funds. ANZ also provided certain guarantee facilities including Arrium’s WorkCover performance bonds that underpinned the company’s self‑insurance status, a facility under which the Arrium Group could elect to sell receivables to ANZ up to a maximum limit and its commercial credit card facilities. The various facilities were primarily provided under a facility offer letter dated 1 November 2013 (as amended). The facility offer letter provided for the facilities to be reviewed annually by ANZ. ANZ had a right to cancel one or more of its facilities after review, after giving notice and engaging in good faith negotiations for a period of at least 30 days.

Arrium (through OneSteel US Investments, a Delaware general partnership) had also issued notes in the US bond market with a face value of USD200 million in July 2008. The notes were issued in three series with varying interest rates. The 7% Series 2008 – Tranche 1 with a face value of USD50 million were payable on 9 July 2015, the 7.33% Series 2008 – Tranche 2 with a face value of USD97 million were payable on 9 July 2018 and the 7.43% Series 2008 – Tranche 3 with a face value of USD53 million were payable on 9 July 2020. OneSteel US Investments’ obligations under the notes were guaranteed by Arrium, Finance and later AIOH. Arrium made a further issue of notes with a face value of USD200 million in June 2011. Again, those notes were issued in three tranches with various interest rates. The first tranche of USD50 million was due to be paid on 28 June 2018, the second tranche of USD125 million was due to be paid on 28 June 2021. The third tranche of USD25 million was due to be paid on 28 June 2023. Both sets of notes were generally referred to as the USPP Notes.

With two exceptions to which I will come, the facility agreements relevantly contained substantially the same terms. Many of the submissions made during the course of the hearing were made by reference to the Morgan Stanley Facility Agreement and for that reason the terms of that agreement are set out in some detail in this judgment and most of the analysis contained in this judgment is made by reference to that agreement. The two exceptions aside, it was not suggested that the outcome of either case would be different depending on the agreement under which the relevant Drawdown Notices were issued.

Clause 6 of the Morgan Stanley Facility Agreement states:

“Drawing” is defined in cl 1.1 to mean “each loan provided or to be provided by the Lender to the Borrower under this Agreement and, to avoid doubt, includes a Rollover Drawing”. “Rollover Drawing” is defined to mean one or more Drawings “(a) made or to be made on the same day that a Drawing matures; and (b) the aggregate amount of which is equal to or less than the maturing Drawing”.

Clause 4.2 sets out a number of conditions precedent to a Drawing which include:

The representations and warranties are set out in cl 14.1. That clause relevantly provides:

“Accounts” is defined in cl 1.1 to mean “consolidated balance sheet, income statement, cash flow statements and statements, reports (including, without limitation, any directors’ reports and auditors’ reports) and notes, if any, attached to, or intended to read with any of them prepared in accordance with Australian Accounting Standards”.

Clause 14.3 relevantly states:

“Drawdown Date” is defined to mean “a date on which a Drawing is or is to be made pursuant to a Drawdown Notice”.

Clause 15 requires Arrium to give the Lender the audited consolidated annual accounts for the Group as soon as possible after the annual balance date (and at the latest 120 days after that date) and the unaudited consolidated semi‑annual accounts for the Group as soon as possible after the first half year of their financial year and at the latest 90 days after the end of that half year. Clause 15.2 states that the accounts must be prepared and, if applicable, audited by a suitably qualified accountant in accordance with the Australian Accounting Standards. Clause 15.1(d) requires Arrium to give to a Lender “within fourteen days after a request by the Lender, such other financial information as the Lender may reasonably require”.

Clause 16 sets out certain undertakings given by each Borrower Party, including an obligation under cl 16.1(g) that it “will ensure that guarantees in favour of the Lender are in place from the Parent and its Material Subsidiaries (other than a Borrower) at all times”. Under cl 16.1(j) each Borrower Party undertakes that “it will not create or allow to exist … a Security Interest over any of its … assets other than a Permitted Security Interest”. “Permitted Security Interest” is defined to include a Security Interest existing or created with the prior consent of the Lender or a Security Interest that does not secure monetary obligations with a total value of more than 5 percent of Arrium’s Total Assets from time to time.

Clause 16.2 provides:

Clause 17.1 relevantly states:

“Material Adverse Effect” is defined in cl 1.1 to mean “any thing which has a material adverse effect on a member of the Relevant Group's ability to perform the obligations under a Transaction Document”. “Business Operations” is defined to mean “the production, manufacture, recycling, distribution and sale of iron ore, mining consumables, steel and related products, building and construction materials and other materials being recycled, and such activities as may be related or ancillary thereto”. “Potential Event of Default” is defined to mean “any event, thing or circumstance which with the giving of notice, the passage of time, or both, would become an Event of Default”.

Clause 17.2 provides:

Clause 30.6(b) provides:

Clause 31.7 provides:

“Authorised Officer” is defined in cl 1.1 to mean:

Schedule 3 of the agreement is in the following terms:

As I have mentioned, there are two respects in which a facility agreement is said to be materially different from the Morgan Stanley Facility Agreement. First, as already referred to, cl 18.1(i) of the 2013 SFA, dealing with representations and warranties, states the no material change representation in these terms:

Second, in the case of the BBVA Facility Agreement, the pro forma Drawdown Notice set out in Schedule 3 refers to cl 13.2 (the equivalent of cl 14.2 of the Morgan Stanley Facility Agreement) rather than cl 13.3 of the agreement (the equivalent of cl 14.3 of the Morgan Stanley Facility Agreement). Clause 13.2 of the BBVA Facility Agreement and cl 14.2 of the Morgan Stanley Facility Agreement contain representations in a relation to a trust. The Drawdown Notice provided to BBVA on 10 February 2016 followed accurately the form of Schedule 3 and referred to cl 13.2. The reference to cl 13.2 is plainly the result of a typographical error. Clause 13.3 of the BBVA Facility Agreement is the clause that requires representations to be repeated. Clause 13.2 does not. Consequently, when Schedule 3 of the BBVA Facility Agreement refers to “the representations and warranties in the Facility Agreement which are required to be repeated under clause 13.2”, it must be read as referring to the representations and warranties required to be repeated under cl 13.3. The actual notice must be read in the same way.

It can be seen from the provisions referred to that relevantly the structure of the facility agreements is that the Borrowing Parties and the Parent make certain representations which are contained in cl 14.1 of the Morgan Stanley Facility Agreement. The MAE Representation is made by Arrium alone. The other relevant representations are made by each Borrower in respect of itself and by Arrium in respect of itself and each member of the Arrium Group. The No Event of Default Representation extends to cover Potential Events of Default when the representation is first made (on entry into the agreement), but not on other occasions. Under cl 14.3 and its equivalents, the representations are repeated at the time of each Drawdown Date – that is, the date at which money is advanced or rolled over pursuant to a Drawdown Notice or a Rollover Notice.

Under cl 4.2 and its equivalents, it is a condition precedent to each drawdown (but not rollover) that (1) no Event of Default or Potential Event of Default is subsisting; (2) the representations made by virtue of cl 14.3 are true and correct and not misleading nor deceptive. Under cl 17.1(c) and its equivalents, unless waived by the Lender, it is an Event of Default if (1) a representation is untrue, incorrect, misleading or deceptive in a material respect; (2) the Lender reasonably considers it to have a Material Adverse Effect and gives notice to that effect; and (3) the consequences are not remedied within 15 Business Days. If an Event of Default occurs, the Lender may terminate the facility and demand repayment of the total amount owing. It is also an Event of Default if there is a change in the financial condition of the Group, or a change in the whole or a major part of Business Operations of the Group, which constitutes a Material Adverse Effect and the situation is not remedied within 15 Business Days after being required to do so by the Lender.

The representations made by the agreements are repeated in the Drawdown Notices. However, the representations made by the Drawdown Notices are made both at the time of the notice and at the time of the Drawdown Date. More significantly, in the case of new drawings (but not rollovers) a representation is made by the notice that there is no Potential Event of Default subsisting. That representation mirrors the condition precedent included in cl 4.2(b) and its equivalents.

In about June 2015, as part of its strategy, budget and business planning process, Arrium commenced work on a strategic review to assess the options available to it to address its debt position (the Strategic Review). The Strategic Review occurred against a backdrop of a rapidly declining “spot” price for iron ore in early 2015 and the fact that approximately $1.125 billion of Arrium’s debt was due to mature in the period from July 2017 to December 2017 and the balance was due to mature between July 2018 and July 2023. In connection with the Strategic Review, Arrium engaged UBS and Lazard to advise it on available options and strategies.

The Arrium board met for two days on 18 and 19 May 2015. At that meeting, the board considered the FY16 Budget and Plan, which included a budget for the financial year and a five-year business plan. At the same meeting, Mr Roberts presented a paper setting out the strategic options available to the company. The paper (dated 13 May 2015) provided the following background in relation to the review:

The paper set out the following options to deal with Arrium’s future-maturing debt:

Also included in the board papers was a memorandum dated 12 May 2015 prepared by Mr Bakewell in relation to the funding plan and a paper prepared by Grant Samuel, who had been retained by Arrium to give advice on debt restructuring options (which became known as Project Archer). That paper stated:

In a further memorandum prepared by Mr Roberts in relation to Project Columbus, Mr Roberts set out an overview of the key considerations and planning for a potential divestment of the Mining Consumables business. That paper observed that “Based on advice received from UBS and Lazard, Arrium Management expects the sale of Mining Consumables to deliver gross proceeds of A$1.7 - $2.2bn…”.

The Arrium board approved the Strategic Review at a board meeting on 12 June 2015. In a memorandum to the board dated 8 June 2015, Mr Roberts explained the Strategic Review in these terms:

The memo contemplated that the three identified projects would occur in parallel and that the following preparatory steps would be taken in June and July 2015:

The memo also contemplated that UBS and Lazard would be appointed to advise on Project Columbus and to provide assistance with Project Marco, that Grant Samuel and Lazard would advise on Project Archer and that Herbert Smith Freehills (HSF) would be appointed as legal advisers on the Strategic Review.

Arrium investigated a number of other proposals during the course of the Strategic Review. Some are mentioned later in this judgment. Others included (1) Project Chess, which involved the partial investment in or full acquisition of the Arrium Group’s steel business by Brookfield and which had been on foot before the commencement of the Strategic Review; (2) Project Green, which involved discussions with Asia Pacific Resources Development (APRD) about a takeover of Arrium by that entity; and (3) Project Blue, a proposal by a group of Korean institutional investors initially to takeover Arrium and then to recapitalise it. Ultimately, those projects came to nothing; and it is not suggested that their existence or the work done on them are relevant to the outcome of these proceedings. For that reason, they are not discussed further in this judgment. Similarly, during the course of the Strategic Review, Arrium had discussions with the Commonwealth and South Australian governments about the future particularly of its steel business in Whyalla. But again, the nature and outcome of those discussions are not said to be relevant to the issues in these proceedings. They, too, are not dealt with further in this judgment.

On 15 June 2015, Arrium announced its Strategic Review publicly. The announcement stated that “The review includes an assessment of options for achieving an appropriate structure and level of debt. This will include the potential divestment of significant assets or businesses.”

After the announcement of the Strategic Review, one or more of Mr Bakewell, Ms Sparkes and Ms Pearce spoke to the Lenders about whether they would participate in a further refinance. According to evidence given by Ms Sparkes, she attended a meeting with representatives of one or another of the Lenders a couple of times a week. The meetings were usually with Mr Bakewell, sometimes Mr Bakewell and Ms Pearce and occasionally with Ms Pearce alone.

PowerPoint presentations were also given to the Lenders in July 2015. The presentation described Project Archer in these terms:

There was a board meeting on 18 August 2015. Included in the board papers was a memorandum prepared by Mr Roberts providing an update in relation to the Strategic Review. The update attached a presentation prepared by Lazard entitled “Evaluation Framework – Working Draft for discussion”. That presentation identified three possibilities in relation to Project Columbus. One was that Arrium received indicative bids for Mining Consumables on the high side (in excess of $2 billion), which it is said would create shareholder value. A second was that the indicative bids were unattractive (below $1.5 billion). A third was described as a “grey zone” where there was limited interest from strategic bidders (who were expected to be willing to pay more), where some bids may appear attractive but where Arrium could only be confident of receiving $1.6 billion to $1.8 billion based on the interest of “sponsors” – that is buyers who intended to buy Mining Consumables with a view to resale in the medium term (five to seven years) and who, most likely, would depend on borrowings to acquire the business. That led to three possibilities. One was that Marco (that is, the remaining business) remained viable and attractive. The second was a “Marco Grey Zone”, where the remaining business was viable on a base case but unattractive on a downside case. The third was where Marco was unviable or unattractive even on the base case.

At the meeting on 18 August 2015, the board also considered and approved Arrium’s accounts for the financial year ending 30 June 2015 (FY15). Those results were released to the market the following day. They indicated that total revenue for ordinary activities was $6,085,600,000 ($7,006,600,000 in FY14), that the statutory loss after tax for the year was $1,918,200,000 (compared to a profit of $205,500,000 in FY14 and a loss of $316,300,000 for the 12 months up to 31 December 2012) and that the underlying loss from ordinary activities after tax for the year was $6,700,000 (compared to a profit of $296,300,000 in FY14 and a profit for the 12 months up to 31 December 2012 of $169,200,000). The results also disclosed net assets of $2,554,900,000 (down from $3,730,900,000 as at 30 June 2014 and from $3,833,700,000 as at 31 December 2012). The statutory loss in the last twelve months (LTM) to 31 December 2012 included impairment charges of $469,900,000. The statutory loss of $1,918,200,000 included impairment charges of $1,410,500,000, which primarily related to the impact of low iron ore prices on the Mining business and the mothballing of Southern Iron, one of Arrium’s businesses.

There was a meeting of the board on 21 September 2015. A further meeting to discuss the Strategic Review was scheduled for 28 September 2015. However, much of the material in relation to the Strategic Review was contained in the board papers for the meeting on 21 September 2015. Included in those papers was a memorandum from Mr Bakewell reporting on discussions with the banks. Mr Bakewell said:

Arrium ultimately terminated Grant Samuel’s engagement in relation to Project Archer effective 31 October 2015. The letter terminating the engagement stated:

By 25 September 2015, Arrium had received 11 indicative bids for Mining Consumables as part of the Project Columbus process. Those indicative bids ranged from approximately $1.47 billion to $1.972 billion (USD1.043 billion to USD1.4 billion). The indicative bids were discussed at the board meeting on 28 September 2015. The minutes of that meeting record:

In a paper prepared by Lazard and UBS for that meeting, they also advised that “On the above basis and assuming the current economic environment does not further deteriorate, Marco would be a viable standalone entity”.

On 9 November 2015, ANZ informed Arrium that it would be sending Arrium a notice under the review provisions of the facility offer letter. That notice was sent the following day. It stated that ANZ intended to exercise its review rights by reducing a number of the facilities it provided to Arrium. That led to negotiations between Arrium and ANZ which culminated in Arrium providing cash collateral of $61.7 million in order to maintain its transaction facilities with ANZ while it developed a plan for replacing ANZ as its transactional banker.

On 13 November 2015, Arrium representatives met with Ernst & Young (EY) to discuss having EY undertake a “limited scope” review in relation to Arrium Group’s cash flow forecasting processes and liquidity management (which became known as Project Polo). The final engagement letter for that work was signed on 30 November 2015. In late December 2015, the scope of EY’s work was expanded to include working with Arrium’s Group Treasury on the production of a 13 week forecast, which became known as Project Polo II.

There was a board meeting on 17 November 2015. Included in the board papers for that meeting was a revised forecast for FY16. The revised forecast included adjustments to a number of key external assumptions, including the AUD:USD exchange rate and the prices for iron ore, scrap metal and steel. In accordance with Arrium’s usual practice, the assumptions were generally taken from CRU, a well-known business intelligence company headquartered in London that focuses on global mining, metals and fertilizer markets and that produces short, medium and long-term analysis for major commodities. At the time, the iron ore price was taken from the S&P Platts index, which is a well-recognised source of pricing information in metals commodity markets. Arrium continued to use assumptions based on forecasts made by CRU up until the beginning of 2016, when Arrium adopted a forecasting methodology based on a basket of forecasts following a change in methodology used by CRU.

The forecast for FY16 included anticipated savings of approximately $60 million from Project Marco together with associated restructuring costs of approximately $17 million and a provision for asset sales (other than Mining Consumables).

The forecast indicated that full year underlying EBITDA was $33 million unfavourable to budget. It included the following explanation:

The full year operating cash flow before tax of $74 million was $78 million unfavourable to budget. The difference was explained in the following terms:

The summary also stated:

The forecast also included a number of tables comparing the projected position with the budget, including the following table summarising the position in relation to cash flows:

The forecast was approved by the board at the meeting.

Also included in the board papers was a paper dated 12 November 2015 prepared by UBS and Lazard. Among other things, the paper said:

UBS and Lazard also reported that:

Under the heading “Next Steps” UBS and Lazard state:

Commenting on the update, Mr Roberts said in a memorandum also dated 12 November 2015 that:

Despite these difficulties, it is Mr Bakewell’s unchallenged evidence that at the board meeting on 17 November 2015 Mr Lachlan Edwards of Lazard said:

There was a board meeting on 2 December 2015. One of the papers included in the board papers for that meeting was a paper prepared by Lazard which set out “for discussion purposes” three potential or alternative capital structures that “may be available” in the event that the sale of Mining Consumables did not proceed. The three options were:

The third option contemplated existing Lenders agreeing to write-off approximately 30 percent of the face value of their debt. The “pros” of that alternative were said to be:

Mr Robert’s copy of the paper contained some handwritten notes which appear to record what Mr Edwards, who presented the Lazard paper, said during the course of the presentation. Against option 3 are the following notes:

On 3 December 2015, Ms Sparkes resigned as Group Treasurer, with effect from 29 January 2016.

Shortly before the board meeting on 2 December 2015, Lazard had discussions with organisations that might have been interested in providing Arrium with a recapitalisation proposal. One of those was Kohlberg Kravis Roberts & Co Inc (KKR). Another was GSO Capital Partners (a Blackstone subsidiary specialising in project and alternative financing). The project under which a new lender would takeout Arrium’s existing debt at a discount became known as Project Miwok.

On 8 December 2015, KKR submitted an indicative proposal for a whole of company refinancing, which envisaged that existing Lenders would be paid $0.65 in the dollar. On 10 December 2015, GSO entered into a confidentiality agreement with Arrium in connection with proposed discussions between Arrium and GSO for a refinancing deal.

On 8 December 2015, Mr Roberts and Mr Bakewell met with representatives of NAB and separately with representatives of Westpac. The results of the meeting with NAB were recorded in its internal “strategy management system”. It is apparent from the notes that Arrium had provided NAB with an “update paper” on 1 December 2015. NAB’s note records the following information in relation to Arrium’s financial position:

The note included the following comments on the meeting:

It is not entirely clear what was discussed at the meeting with Westpac. It appears that Mr Roberts and Mr Bakewell gave Westpac an update on Arrium’s financial position.

Coincidentally, on the same day there was a meeting of BOC’s credit committee. The minutes of that meeting record Mr Patrick Lynam, Chief Risk Officer, as saying “Noted the very significant fall in iron ore prices and the stress that this would be causing Arrium. And that if the Molycorp sale does not proceed, Arrium may have material difficulties. …”.

On 14 December 2015, EY provided its final report in relation to Project Polo. The report concluded that the existing cash flow forecast “is sufficient for its original intended purpose”. However, the report recommended that Arrium should determine “the optimal forecast period to cover an entire working capital cycle (eg. minimum 13 weeks projections at any point in time)”. The report also identified a number of “improvement opportunities”, including an adjustment to the graph reporting funding and liquidity headroom to draw a clearer distinction between funding headroom and liquidity headroom.

In her affidavit evidence, Ms Sparkes was critical of the proposal (that was ultimately adopted) to produce cash flow forecasts for a 13 week period. She explains that different Arrium businesses had different working capital cycles. Moreover, although most of the costs of production (which were incurred early in the cycle) were known or could reasonably be anticipated, the revenue was often difficult to predict because it depended on the prospects of a sale, the price that would be obtained and the payment terms that would be negotiated. Accordingly, the last three weeks particularly of the 8 week cash flows involved a “best guess”, and historically were often conservative. In her view, the position was unlikely to be improved by a 13 week forecast.

On the day EY delivered its Project Polo report (14 December 2015), Mr Bakewell sent an email to EY expanding the scope of work to be undertaken by them to include “Advice in respect of any contingency planning in relation to liquidity events appropriate to the situation as it evolves”. That work expanded into what became known as Project Jacaranda. The agreed scope of works was set out in these terms by EY:

There was a board meeting on 18 December 2015. In his Monthly Operating Report prepared for the purpose of the meeting, Mr Roberts noted that “The Platts 62% Fe fines index fell dramatically during November from a starting point of US$49, finishing at US$44”. That was substantially below the assumption included in the November forecast of USD53 for FY16. Commenting on those figures, another board briefing stated:

Also included with the board papers was a memorandum dated 15 December 2015 prepared by Mr Roberts providing an update in relation to the Strategic Review. In that memo, Mr Roberts said:

Mr Roberts also observed:

In relation to debt structure and options, the memo said:

The memo listed the following “key areas of work to be completed over the next period”:

The memo explained that Arrium had “developed financial scenarios against which potential divestment, business and debt restructuring options can be assessed, as well as assessment of the balance sheet, cash flow, liquidity and debt covenants of the Arrium Group, taking into account the current external environment”. Those scenarios comprised:

The analysis of the various scenarios itself was attached as an updated business plan to a memorandum dated 16 December 2015 prepared by Mr Bakewell. The analysis explained that the “Whyalla mothball” scenario involved the majority of billets currently produced at Whyalla being replaced by imported billets and the structural mill and rail plant at Whyalla continuing to operate using imported steel. It records that the “Spot” component of each modelled scenario assumed:

A summary of the updated business plan was included in the following table:

Mr Bakewell also included in his memorandum two tables summarising the results of the analysis. One table summarised whether Arrium would remain in compliance with the covenants in the facility agreements and a covenant in the agreements governing the terms of the USPP Notes relating to shareholder equity on the different scenarios. The other indicated whether Arrium was predicted to have positive cash flows in future years. Those tables are set out below:

Commenting on the tables, Mr Bakewell said:

The Lazard paper referred to by Mr Roberts makes the following points among others:

Also among the board papers was an update on Project Columbus prepared by Lazard and UBS. The update observed that a number of bidders had dropped out for various reasons, and that the two most promising bidders were Platinum Equity and Argand/Cerberus and that Rhone Capital had yet to provide feedback. In relation to Platinum Equity, the update observed:

In relation to Argand/Cerberus the update observed:

At one point, UBS Leveraged Capital Markets was considering providing financing to the successful bidder. In relation to that proposal, the update stated:

Despite these events, Mr Bakewell says in his affidavit evidence that he can recall a representative of Lazard or UBS (he cannot remember which) saying words to the effect that “there are still good prospects of a deal in at least the mid-range [that is, around USD1.35 billion]”. Elsewhere in his affidavit evidence, Mr Bakewell says that Mr Daniel Kleijn from Lazard said in response to a question from an Arrium director that “we think it is still likely” that Arrium would get at least “AUD$1.35 [scil USD1.35] billion with these interested bidders”.

Also considered at the board meeting was a memorandum prepared by HSF entitled “Project Jacaranda Phase 1 Memo”. Mr Andrew Pike and Mr John Nestel, both partners of HSF, attended the relevant part of the board meeting (Mr Nestel by telephone) and spoke to the memo.

The memo explained the context of their advice in the following terms:

The memo provides an overview of relevant legal principles relating to the assessment of solvency and the duty to avoid insolvent trading. On that topic, the memo said:

The minutes for the 18 December 2015 board meeting record the following:

Mr Bakewell says in his affidavit evidence that after Mr Pike had taken the board through HSF’s memorandum, Mr Jerry Maycock, Arrium’s Chairman, said words to the effect:

Mr Bakewell says in his affidavit evidence that having had his recollection refreshed by an email from Mr Nestel on 23 December 2015 (referred to below), he can recall a conversation with Mr Nestel sometime after receiving a letter from ANZ on 10 December 2015 and no later than 17 December 2015 in which he (Mr Bakewell) said that it appeared that ANZ was intent on cancelling its credit facilities, requiring Arrium to hold a lot of cash. According to Mr Bakewell, Mr Nestel replied:

Mr Bakewell replied that he would need to check with Ms Sparkes because he did not know whether Arrium had already given notice of its intention to repay an amount in December 2015. According to Mr Bakewell, he and Mr Nestel then had a conversation to the following effect:

Mr Bakewell says that he then spoke to Ms Sparkes and asked her whether Arrium could stop repaying debt and drawdown all remaining debt. Ms Sparkes replied that it could to which Mr Bakewell replied “Okay, make sure we can do it, and if we can, let’s drawdown on the facilities”. According to Mr Bakewell, the good sense of that advice was confirmed by Mr Edwards in a telephone conversation Mr Bakewell had with him.

On 21 December 2015, Ms Verawati sent Mr Bakewell and Ms Sparkes, among others, a revised daily cash flow forecast for the 8 weeks starting 21 December 2015 which corrected an error in an earlier draft.

Mr Bakewell responded to that email on 22 December 2015 saying:

Ms Pearce responded to that email later on 22 December 2015. She included a graph showing the previous week’s cash flow forecast and one for the week commencing on 23 December 2015 (Week 52). A copy of the latter graph appears below:

The dip at the end of December reflected a practice Arrium had adopted of implementing a number of initiatives to reduce its debt at the end of reporting periods. Those initiatives included a short deferral of creditor payments, giving customers who paid early a discount and selling receivables using its discounting facility with ANZ.

Commenting on the graph, Ms Pearce said:

On receiving that email, Mr Bakewell sent Ms Pearce and Ms Sparkes an email (which was copied to Mr Roberts) saying:

Mr Edwards replied to that email on the same day (22 December 2015) saying:

Mr Bakewell responded on the morning of 23 December 2015 saying:

Mr Nestel, who was in London at the time, also sent a response to Mr Bakewell’s email forwarding Ms Pearce’s email to him. In that response he said:

On 23 December 2015, Mr Bakewell forwarded Mr Nestel’s email on to Ms Sparkes and Ms Pearce saying:

Ms Pearce then spoke to Mr Nestel. Following that conversation, Mr Nestel sent a further email to Mr Bakewell saying:

The Anchorage Plaintiffs plead in their Commercial List Statement that “In around December 2015, Bakewell instructed or directed Sparkes and/or Treasury to draw down all available amounts under each of the Arrium Group’s available facilities …” (para 73), which is defined as “the Bakewell Direction”. They give as particulars of that allegation evidence given by Ms Sparkes in public examinations conducted by the liquidators. In those examinations, Ms Sparkes gave this evidence:

However, this passage does not support the proposition that Mr Bakewell gave the alleged instruction in December 2015; and it is difficult to reconcile the allegation he did with the emails on 22 and 23 December 2015. Despite what Mr Bakewell says in his affidavit evidence about the conversations between 10 and 17 December 2015, it seems plain from the emails of 22 and 23 December 2015 that the advice that Mr Nestel gave was that, instead of repaying debt and then redrawing it, Arrium should hold any spare cash on deposit to avoid incurring new debts. That was prudent advice in the circumstances. In any event, it is plain that neither Mr Nestel’s advice nor Mr Bakewell’s alleged instruction was acted on, at least in December 2015.

On 24 December 2015, Ms Pearce sent Mr Bakewell and others an email setting out a revised cash flow forecast. The following graph was included in her email:

Ms Pearce explained that “The following initiatives and updates have been made to the forecast”:

On 28 December 2015, Mr Roberts sent the week 52 liquidity forecast to the Arrium directors stating that “the current position outlines the importance of the StandBy Facility as well as the whole of company refinancing with KKR and GSO which is progressing and we will provide an update next week”. In the meantime, on 22 December 2015, Mr Colin Galbraith resigned as director of Arrium.

On 30 December 2015, Mr Pedro Panizo of Morgan Stanley sent Ms Pearce and Ms Verawati, among others, an email asking for a call with Ms Sparkes as soon as possible to discuss a Drawdown Notice for USD37.5 million that Arrium had served on 29 December 2015 under the Morgan Stanley Facility Agreement. The email explained that:

That call occurred on 31 December 2015 between Ms Sparkes and a number of representatives of Morgan Stanley, including Mr Panizo, Mr Rick Ball, Morgan Stanley’s Vice-President of Investment Banking in Australia, Ms Janie Park and Ms Peggy Wong. Reporting on the call, Ms Park said in an email to Mr Ed Diaz-Perez that:

On 31 December 2015, Ms Wong sent Ms Park a note of the meeting, which Ms Park returned with her marked-up changes. The note (including Ms Park’s changes) relevantly states:

No-one from Morgan Stanley gave evidence of what occurred during the telephone call. The Anchorage Plaintiffs did serve an outline of evidence from Mr Ball and a subpoena to give evidence was served on him. However, the Anchorage Plaintiffs elected not to call on the subpoena. It was not suggested that Mr Ball was unavailable to give evidence.

Ms Sparkes accepts that the call occurred but says that she cannot now recall what was said. She accepts that she could have said many of the things recorded in the file note. So, for example, she gave the following evidence:

However, Ms Sparkes did deny that she said some of the things set out in the file note on the basis that she did not know them to be true. That included the statement in item 1 to the effect that one of the reasons that liquidity was weaker was because of restructuring costs. Ms Sparkes also stated that she did not tell Morgan Stanley that there was a realistic prospect that the banks may be asked to take a haircut on a whole of company refinance, since that was something she did not know at the time. She also stated that she did not tell Morgan Stanley that ANZ was threatening to cancel its facility unless it got cash collateral.

According to Mr Bakewell, on 3 or 4 January 2016 he participated in a telephone conference call with Mr Edwards, Mr Nestel, Mr Roberts and possibly others regarding the position taken by ANZ. During the call, they discussed an email that Mr Edwards had sent setting out two Scenarios in relation to the ANZ. The email described the two scenarios in these terms:

According to Mr Bakewell during a discussion of the email Mr Nestel said words to the following effect:

There was a board meeting on 7 January 2016. HSF and Lazard prepared a joint written advice to the Arrium board for that meeting. The advice recommended provision of the cash collateral sought by ANZ. It also recommended that Arrium seek to put in place an additional AUD200 - AUD250 million secured standby facility. In relation to the standby facility, the advice stated:

At that meeting, the board resolved to approve the provision of approximately $61.7 million cash collateral to ANZ.

Included in the board papers was an 8 week liquidity forecast as at 4 January 2016, which included the following graph:

It is apparent from this graph that it was expected at that time that some debt would be repaid in March 2016.

There was a further board meeting on 15 January 2016. As was the case with the previous board meeting, included in the board papers was a liquidity update prepared by Mr Bakewell. The update included a graph in the form set out earlier in this judgment. The forecast indicated that net debt remained within the treasury policy liquidity buffer after allowing for the cash collateralisation of the ANZ facilities.

The minutes of the meeting record the following:

The board papers also included an update dated 15 January 2016 prepared by UBS and Lazard on Project Columbus. The update noted:

The board papers also included a presentation dealing with progress made on “Project Lightning”, which was a project to revise the mine plan in response to the fact that the “Iron ore price [had] fallen 30% since the start of October with some analysts expecting this environment to continue for some period of time”. The introduction to that presentation observed that “As noted in the Project Lightning December Board update, the remaining mine plan opportunities are relatively small”.

On 19 January 2016, Ms Sparkes sent to Mr Edler an email in which she said “As I am leaving next week, can you please proceed with the resignation of director from the subsidiary entities as at today”. Mr Edler replied to that email on the same day saying “Ok, will get you a document soon for signing (probably Friday or Monday)”. Mr Edler then forwarded Ms Sparkes’ email to Ms Sara Goldstein and Ms Barbara Piccioli asking them to draft a notice of resignation for Ms Sparkes from all the companies of which she was a director effective 29 January 2016.

Although Ms Sparkes originally submitted that her resignation as a director took effect earlier than 29 January 2016, it seems plain from this material that her resignation as a director did not take effect until that date.

EY delivered its draft Project Jacaranda report on 20 January 2016. That report considered liquidation of asset values and possible returns to Lenders and other creditors on a hypothetical forced liquidation scenario, forecasting total Lender recoveries on, stated assumptions, of between 26.1 percent and 43.2 percent, and much lower recoveries for non-lender creditors. The difference was explained by guarantees given to the Lenders which, in effect, gave the Lenders priority access to the proceeds of sale of the Mining Consumables businesses.

There was a board meeting on 21 January 2016. Included in the board papers was a monthly liquidity outlook model which, following recommendations from EY, included a cash flow forecast that covered a 13 week period. The model included the following liquidity headroom chart:

Commenting on the model, Mr Bakewell said in a covering memorandum:

The minutes of the meeting record the following in relation to Mr Bakewell’s liquidity update:

Included with the board papers was a memorandum prepared by Mr Roberts which provided an update in relation to the Strategic Review. In relation to Project Marco, Mr Roberts summarised the expected results in these terms:

In relation to Project Lightning, Mr Roberts said:

Also included in the board papers was a paper prepared by UBS and Lazard providing an update in relation to Project Columbus and a paper prepared by Lazard providing a recapitalisation update.

The paper in relation to Project Columbus stated that two bidders (Argand/Cerberus and Platinum Equity) “remain very active in the process” and that three other bidders remained interested. According to Mr Bakewell, Mr Kleijn spoke to the report and said words to the effect of “We continue to be confident that the transaction is likely proceed [sic] at a price in the mid-range at a level acceptable to the Board”.

The paper in relation to recapitalisation identified four options, which were described in the following terms:

The paper focussed on Option B in order “to stimulate a discussion on the strawman terms the Board would need to agree on the “ongoing facilities” for the company to have a sustainable capital structure in each scenario”. It assumed that Arrium’s net debt would be $2.58 billion “based on total drawn debt of A$2.63 billion as at 17 January 2016, less unrestricted cash of A$53 million” and “Columbus proceeds of US$1.1 billion (A$1.6 billion)”. The paper defines a “sustainable capital structure” as:

Also included in the board papers was EY’s report in relation to Project Jacaranda. That report indicated that Lenders could expect to recover:

Also included in the board papers was an update on the business plan. The executive summary noted that “Project Marco cost savings initiatives are progressing, with A$20m of cost savings achieved in December 2015 YTD, with A$87m expected to be achieved through FY16”.

The update also included modelling of a number of scenarios “in order to stress test the current balance sheet, forecast liquidity and existing debt covenants of the Group in its current configuration and in combination with a number of strategic options”. Two scenarios were based on the updated business plan (one involving a sale of Mining Consumables) and a further seven were based on the December 2015 “spot price inputs for steel and raw material and January 2016 iron ore spot pricing and FX inputs”. Unsurprisingly, the modelling showed that “the impact of on [sic] December 2015 spot price inputs for steel and raw material and January 2016 iron ore spot pricing and FX inputs January 2016 spot prices is demonstrably negative primarily driven by Mining”. The scenario based on the updated business plan summarised the position in the following table:

On 29 January 2016, representatives of Westpac (Mr Rodney Owen, Head of Corporate, Vic, & SA Credit Restructuring, and Mr Robert Casey, a Director in the same group) met with Mr Bakewell and Ms Pearce. That followed an earlier meeting on 12 January 2016 that Mr Owen and Mr Casey had had with Ms Sparkes. Mr Owen made some handwritten notes during the course of the meeting. According to the notes, the representatives from Westpac were told that there was a potential write down in the mining business “but not so large as to threaten covenant compliance”. They were also told that “Covenant compliance 30/6/16 ok but tight”, that in all there were six bidders for Mining Consumables, two of whom were active, one was “semi-active” and the remaining three were not active, and that Arrium expected letters of offer by 5 February 2016.

On 3 February 2016, members of Arrium’s Audit and Compliance Committee (ACC), other Arrium board members, Arrium’s auditors (Mr Tony Young from KPMG and others) and, for some items, representatives of HSF, met to consider a range of issues relevant to Arrium’s 31 December 2015 half year financial statements (the HY16 Accounts), including impairment testing, whether the draft financial statements gave a true and fair view of Arrium’s financial position as at 31 December 2015, and solvency and going concern status.

In the second half of January 2016, KPMG had raised the question whether some qualification should be included in the accounts concerning whether Arrium was a going concern. In its draft review report on HY16 Accounts dated 21 January 2016, which was included in the papers for the ACC meeting on 3 February 2016, KPMG stated:

Arrium originally resisted the inclusion of any going concern qualification in the accounts. KPMG ultimately accepted that the accounts should be prepared on a going concern basis. However, they took the view that an emphasis of matter note on going concern should be included in the notes to the accounts. Arrium accepted that position. The minutes of the ACC record:

There was a board meeting on 4 February 2016. A joint paper prepared by UBS and Lazard was tabled at that meeting setting out details of the final bids from the two remaining bidders for Mining Consumables – Argand/Cerberus and Platinum Equity. The bids from Argand/Cerberus were in the range of USD825 million to USD1.1 billion. The higher bids were made on the assumption (suggested by UBS and Lazard) that “a higher level of leverage that could potentially be achieved via “rolling” a portion of the debt of Arrium’s existing Lenders to support the acquisition”.

In addition, included in the board papers was a memorandum dated 2 February 2016 setting out four “funding scenarios” that had been prepared in connection with Project Miwok. One scenario was based on the current business plan, which differed in only minor respects from the plan presented at the board meeting on 21 January 2016. It included the following summary of the cash flow position:

Scenario 2 was the Spot Plan. Scenario 3 was Spot + Whyalla Steelworks and Magnetite Mothballing and Hematite Mothballing from 1 July 2016. Scenario 4 was the same as Scenario 3, except it contemplated the “mothballing” of the Hematite business from 1 July 2018. The paper stated that:

Also at the board meeting, the board considered a paper prepared by Mr Bakewell recommending the adoption of a consensus iron ore price estimate for the purpose of the assumptions used in Arrium’s financial forecasts and impairment testing. The conclusion of the paper was as follows:

Included with the board papers was a paper prepared by Mr Bakewell dated 2 February 2016 setting out a liquidity forecast for the next 8 weeks. It is not necessary to set out the graph. Commenting on the graph, Mr Bakewell observed:

The memo also included a 13 week forecast prepared as at 15 January 2016. Commenting on that forecast, Mr Bakewell said:

On 8 February 2016, KPMG sent Mr Bakewell a draft letter in relation to going concern. The letter states:

The letter then sets out details supporting KPMG’s position. They include the following matters in relation to cash flow:

According to Ms Pearce, on or about 8 February 2016 she had a discussion with one of Mr Nestel, Mr Edler or Ms Naomi James, Head of Strategy, in which words to the following effect were said to her:

Following the conversation, Ms Pearce sent an email to Mr Bakewell saying:

It appears that contact was made with Mr Nestel and a telephone conference call was organised for that evening between Ms Pearce, Mr Bakewell and Mr Nestel. Ms Pearce says that during that call Mr Bakewell said words to the following effect:

Ms Pearce kept a handwritten file note of that discussion. The note is somewhat obscure. However, it does record the following:

Mr Bakewell says that he has no recollection of the conversation on 8 February 2016 or of instructing Ms Pearce to drawdown the remaining facilities. However, he says that he has no reason to doubt that he had a telephone call with Ms Pearce and Mr Nestel on 8 February 2016, although he says that he is certain that he never said that Arrium should drawdown all remaining funds “regardless of whether the Arrium borrowers were entitled to do so”. Mr Bakewell also accepts that a decision was made to drawdown the remaining facilities and that it was unlikely that that decision was made by Ms Pearce.

The Arrium board met again on 11 February 2016.

The board papers included a liquidity update from Mr Bakewell dated 10 February 2016. The update only includes an 8 week forecast. The memorandum states that a draft updated 13 week forecast would be tabled at the board meeting. In the memorandum, Mr Bakewell states that the forecast assumes that “committed debt facilities are fully drawn from 15 February, with those drawings being held as cash on deposit and used to fund the on-going operations of the group”. Commenting on the 8 week forecast, Mr Bakewell said:

The papers also include a UBS/Lazard paper entitled “Project Columbus Status Update” which contained details of a revised bid for Mining Consumables submitted by Platinum Equity, which included a reduction in the total offer to USD1.05 billion but an increase in equity contribution.

Lazard also presented a recapitalisation update and Strategic Review option analysis. The paper identified three strategic options:

Three cases were considered for each option which were described in the following terms:

The analysis is detailed and somewhat complicated. Not all options were presented in detail. However, it is worth observing that, in the case of the amend and extend (no haircut) option on the basis of the debt funding scenario, there would be a shortfall in available liquidity in FY17 and a breach of existing covenants in FY17 and FY18. According to the analysis, in 2020 Arrium’s gross debt to EBITDA would be 4.5x and its gearing would be 49 percent, which would make it difficult to refinance the debt at that time. However, that was not the case on the equity upside scenario.

In relation to the proposed note to be included in the half yearly accounts in relation to solvency, the minutes of the meeting record the following:

The Arrium board met on 16 February 2016 and at 6.30 am on 17 February 2016, including to consider and sign off on the HY16 accounts ahead of the planned release of the accounts to the market on 17 February 2016.

Included in the board papers was a revised forecast for FY16 and a management estimate for FY17. The revised forecast was summarised in the following table:

The forecast included the following explanation of the differences:

The management estimate for FY17 was summarised in the following comparative table:

The board papers included a liquidity update dated 15 February 2016 from Mr Bakewell which included 8 and 13 week forecasts prepared as at 8 February 2016.

The commentary to the 8 week forecast stated:

At the meeting, there was also an update provided on Project Polo. On that subject, the minutes of the meeting record:

At the meeting on 17 February 2016, the board also approved the HY16 Accounts. The Accounts included the following balance sheet:

The results were summarised in these terms in the results presentation:

Note 1 to the accounts included the following under the heading “Going Concern”:

KPMG included the following emphasis of matter note in its review report on the accounts:

Also included in the board papers was a presentation dated 16 February 2016 prepared by Lazard and UBS entitled “Review of Recapitalisation Strategic Options”. The presentation observes that “Gamma” (GSO) had been in Sydney since Saturday to advance due diligence and negotiate term sheets and that discussions were ongoing. It pointed out that two options were currently being considered. “Plan A” involved an agreement with Gamma in relation to a framework for recapitalisation of the company which would be subject to a number of conditions precedent including obtaining lender approval and Gamma completing satisfactory due diligence. As part of the arrangement, Gamma would provide an interim liquidity facility. “Plan B” involved continuing to work with Gamma (and others) to secure an agreement in relation to recapitalisation. The presentation observed that negotiations with KKR “have not resulted in a viable commercial proposal”.

The paper considered five options. Those options and Lazard and UBS’s comments on them are summarised in the following table, which formed part of the presentation:

Of the two options considered further the advisers preferred, on balance, entry into a recapitalisation agreement with GSO.

In a memorandum dated 15 February 2016 to the board, Mr Roberts states:

On or about 16 February 2016, HSBC refused to fund a Drawdown Notice issued by Arrium on 11 February 2016 and signed by Ms Hall and Ms Verawati. Following that refusal, Mr Bakewell and Mr Anthony Brooks, the Group Financial Controller, signed a document stating:

That document was sent to HSBC. However, the funds were not advanced, and no claim is made in respect of the document signed by Mr Bakewell and Mr Brooks. The Drawdown Notice was not pursued following entry into an agreement with GSO.

Arrium released its half year financial results to the ASX on 17 February 2016.

Following the announcement Mr Owen prepared an update on Arrium. The update relevantly said under the heading “The way forward” the following:

There was a board meeting on 20 February 2016. Included in the board papers for that meeting was a memorandum dated 20 February 2016 prepared by Mr Bakewell in relation to solvency. The memorandum relevantly said:

Also included in the board papers was a presentation prepared by Lazard and UBS providing an update in relation to negotiations with GSO. The paper “on balance” supported the proposal to enter into a recapitalisation deed with GSO and provided a detailed analysis of the financial implications of the proposed deed. Also included in the board papers was a summary of the proposed deed prepared by HSF.

In a memorandum to the board dated 20 February 2016, Mr Roberts summarised the effect of the recapitalisation deed in the following terms:

In a memorandum to the board dated 20 February 2016, Mr Bakewell gave the following explanation for the interim secured debt facility:

At the meeting, it was resolved that authority be delegated to a subcommittee to finalise negotiations with GSO and to finalise and approve the final terms of a recapitalisation deed.

On 22 February 2016, Arrium entered into the recapitalisation deed and interim facility agreement under which, independently of the recapitalisation deed, GSO agreed to provide Arrium with a senior secured interim facility of USD140 million (approximately $200 million). On the same day, the GSO recapitalisation proposal was announced to the market and Lenders.

At some stage in February 2016, McGrathNicol were appointed (at Arrium’s expense) to advise the Lenders regarding exploration of options available, including the GSO recapitalisation proposal.

On 24 February 2016, King & Wood Mallesons (KWM) sent a letter to HSF on behalf of the syndicated and bilateral Lenders:

On 29 February 2016, Arrium gave a confidential presentation to various representatives of the Lenders. The presentation was given by Mr Roberts and Mr Bakewell with Mr Edwards (Lazard), Mr Nestel (HSF) and Mr Barry (UBS) also present to answer questions from Lenders. The presentation gave an overview of the history of the Strategic Review, including a detailed account of the Mining Consumables sales process and its outcome and the GSO recapitalisation proposal. It also included forecasts for the balance of FY16 and the following four financial years.

On 4 March 2016, HSBC sent a letter to OneSteel Recycling Hong Kong Limited withdrawing certain facilities provided by the bank to that company and demanding repayment in full of all outstanding debts.

On 8 March 2016, Lenders were presented with a final version of EY’s Project Jacaranda model.

On 15 March 2016, Mr Roberts, together with representatives of HSF, Lazard and UBS attended a meeting with representatives of McGrathNicol, KWM and advisers to the noteholders. The meeting was requested by the advisers to the Lenders and noteholders to provide informal feedback on the GSO proposal. The agenda for the meeting states:

On 18 March 2016, Mr Bakewell resigned as CFO of Arrium.

There was a meeting of the Arrium board on 18 March 2016 by telephone. Included in the papers for the board meeting was a memorandum dated 17 March 2016 from Mr Bakewell which provided an update on the forecast liquidity position of the group. Included in the memorandum is a graph setting out the 8 week forecast. Commenting on that graph, Mr Roberts said:

Also included in the board papers was a report from HSF on the meeting on 15 March 2016. The reported stated, among other things, that the advisers to the banks had indicated that:

The minutes of the board meeting record Mr Edwards as reporting:

Shortly after the board meeting, McGrathNicol provided Arrium with draft documents setting out the Lenders’ proposal.

On 23 March 2016, Mr Roberts wrote to Mr Peter Anderson, the Executive Chairman of McGrathNicol in relation to the GSO proposal. The purpose of the letter was stated to be to set out the possible consequences of rejecting the proposal. In that context, Mr Roberts said:

The letter set out a number of objections to the proposal contained in the documents provided by McGrathNicol. Those objections included the following:

On 29 March 2016, KWM wrote to HSF. The letter indicated that the Lenders were likely to reject the GSO proposal and set out their reasons for doing so, not least of which the fact that the Lenders regarded the proposed debt compromise as “completely unacceptable”. The letter proposed that Arrium terminate the GSO recapitalisation deal and that the terms of a standstill agreement be finalised. During the standstill period it was envisaged that:

On 1 April 2016, a meeting was held between representatives of Arrium and representatives of Westpac and CBA. Following that meeting, NAB, acting on behalf of syndicated and bilateral Lenders (excluding Morgan Stanley), advised Arrium that those Lenders had rejected the GSO recapitalisation proposal and had “lost confidence” in Arrium’s management.

There were further discussions between representatives of Arrium and representatives of the Lenders. However, those discussions were unfruitful. On 7 April 2016, Arrium’s available directors resolved that:

The Board also resolved to appoint partners of Grant Thornton as the administrators. Those administrators were replaced by partners from Korda Mentha. Subsequently, 94 Arrium Group entities entered into inter-related deeds of company arrangement to facilitate the distribution of the group’s assets. The Arrium Entities went into liquidation on 20 June 2019. At the time the voluntary administrators were appointed, Arrium held a total of $295 million in cash. The administrators sold Mining Consumables on 4 November 2016 for USD1.23 billion.

It is convenient to address first the question whether there was a breach of the representations and warranties contained in the facility agreements and repeated in the Drawdown Notices, and to deal first with the representation concerning solvency.

The representation concerning solvency was to the effect that Arrium and each of its subsidiaries was solvent at the date of the agreement and that at each Drawdown Date it would continue to be able to pay all its debts as and when they became due and payable. The representation was repeated on each Drawdown Date by the terms of the facility agreement. It was also repeated by virtue of the representation in each Drawdown Notice, which stated that the representations “which are required to be repeated under [the facility agreement] are true as though they had been made at the date of this Drawdown Notice and the Drawdown Date specified above in respect of the facts and circumstances then subsisting”. In substance, that raises the question whether any of the relevant Arrium Entities was insolvent between 7 January 2016 (when the first impugned Drawdown Notice was issued) and 16 February 2016 (when the last drawdown was advanced).

The BOC Plaintiffs also rely on the representation contained in the facility agreements to the effect that no Event of Default was subsisting at the date of the relevant Drawdown Notice or at the relevant Drawdown Date and that one of the Events of Default was an “Insolvency Event” within the meaning of the facility agreements. However, this claim adds nothing to the representation concerning solvency. For that reason, nothing more needs to be said about it.

It is common ground that the BOC Plaintiffs bear the onus of proof on the issue of solvency, that the question of solvency should be determined at a group level (because of cross-guarantees between companies in the Arrium group and inter-company loans between companies in the group) and that the test of insolvency for the purposes of the relevant facility agreements is the test adopted by the Corporations Act, which provides in s 95A that:

Before dealing with the relevant legal principles governing the test stated in s 95A, it is necessary to say something about how the BOC Plaintiffs’ put their case on solvency.

As their claim stood before 3 March 2021, the BOC Plaintiffs alleged that the Arrium Group was insolvent by no later than 7 February 2016 because by that date it had no means of repaying the debt totalling approximately $871 million which would mature on or about 10 July 2017. In substance, that was said to be so because of the group’s deteriorating financial position and because of the following matters:

Although particularised somewhat differently, that claim mirrored the insolvent trading case brought by the liquidators. Indeed, the BOC Plaintiffs filed no expert evidence in relation to the question of solvency and, like the liquidators, chose to rely on lengthy affidavit evidence given by Mr Martin Madden, one of the liquidators, who expressed opinions on the question of solvency.

On 19 February 2021, the liquidators filed a notice of motion seeking to amend their claim in a number of respects including by amending their particulars of insolvency. The motion was heard on the third day of the hearing. Relevantly, the liquidators sought to amend their particulars by alleging that the Arrium group had a limited time in which to find a solution to its debt problems. The BOC Plaintiffs filed a parallel motion seeking to make similar amendments. The principal amendment sought to be made to the list statement filed in the BOC Proceeding was to include the following paragraph in the particulars of insolvency:

That amendment was initially opposed by the defendants on the basis that it arguably raised a new and important factual allegation – namely, that Arrium would run out of cash before July 2016. Although the amendment does not make that allegation specifically, an earlier version of the amendment did. That version was abandoned in the face of correspondence from the defendants’ solicitors objecting to it. Mr Williams SC, who appeared for Ms Sparkes and who took the primary running of the defendants’ opposition to the amendment application, submitted that the reformulated amendment suffered from the same flaw as the original proposed amendment – that is, it introduced an important new factual allegation at a very late stage in the proceedings. Mr Borsky QC, who appeared for the liquidators at the time and who was principally responsible for advancing the amendment application, rejected that interpretation of the amendment. During the course of argument, I summarised what I understood to be the plaintiffs’ case in these terms:

A little later, Mr Borsky said:

Mr Collinson QC, who appeared for the BOC Plaintiffs, had previously said that his clients adopted Mr Borsky’s submissions. Mr Collison did not seek to advance a different case on insolvency from the one advanced by Mr Borsky. It was on that basis that I permitted the amendment.

Understood in that way, the BOC Plaintiffs’ case on insolvency is narrow and atypical. The case is that Arrium was insolvent from 7 January 2016 because from at least that date it could not pay its banking facilities maturing in July 2017. It is not part of the BOC Plaintiffs’ pleaded case that Arrium was insolvent because it could not pay other debts that became due before July 2017, although the BOC Plaintiffs do allege that Arrium’s diminishing liquidity position somehow or another affected its ability to deal with the facilities falling due at that time. It will be necessary to return to how that allegation is put later in this judgment.

The question whether a company can pay its debts as and when they become due is a question of fact that involves a realistic commercial assessment of the company’s financial position as a whole. As Barwick CJ explained in Sandell v Porter (1966) 115 CLR 666 at 670-1:

The BOC Plaintiffs identify four principles which are said to emerge from the cases and to have particular relevance in this context.

First, the fact of insolvency must be proved on the ordinary civil standard – that is, on the balance of probabilities: Evidence Act 1995 (NSW) s 140; Bell at [1097]; Octaviar Public Trustee (Qld) v Octaviar Ltd (2009) 73 ACSR 139; [2009] QSC 202 at [134] per McMurdo J.

Second, a debt is taken to be owing at the time stipulated for payment in the contract unless there is evidence proving to the Court’s satisfaction that there has been an express or implied agreement between the company and the creditor for an extension of time, or that some estoppel applies or there is evidence of an imminent compromise between the creditor and the debtor. As McMurdo J explained in Octaviar (at [134]):

Third, the test of insolvency is future looking. Consequently, the question is not simply whether the company can pay debts falling due at or around the date the question arises but whether, as at that date, it can pay debts falling due in the future. As McMurdo J explained in Octaviar at [134]:

How far into the future the Court should look is a question to be answered having regard to the particular facts of the case. Normally, a court will not look too far into the future because there are so many unknowns and contingencies, but sometimes it may be appropriate to do so. As Jackson J explained in Re Cube Footware Pty Ltd [2013] 2 Qd R 501; [2012] QSC 398:

One case where the court was prepared to look years into the future is Insurance Commissioner v Associated Dominions Assurance Society Proprietary Limited (1953) 89 CLR 78. That case involved an application filed in May 1953 by the Insurance Commissioner to wind-up a life insurance company on the ground of insolvency, which was brought in the original jurisdiction of the High Court and heard by Fullagar J sitting alone. After examining the financial position and prospects of the company, his Honour concluded that it was apparent that, although the company would be able to pay policyholders who made claims for the next several years it was apparent that at some stage it would not be able to continue to do so. In reaching that conclusion, Fullagar J said (at 110-1), in a passage that took on some significance in this case:

Fourth, although the question of solvency is to be determined by reference to the circumstances as they were known or ought to be known at the date at which the question of solvency is assessed and not in hindsight, the Court can have regard to what actually happened to the extent that what actually happened sheds light on what was likely at the time when the question of solvency is to be assessed. So, for example, in Lewis v Doran (2004) 208 ALR 385; [2004] NSWSC 608 Palmer J had regard to the fact that the debtor in that case had, for slightly more than three years after the time it was said to be insolvent, continued to pay its debts as they fell due. In that case, the fact that it did so was evidence “that the funds of the other companies in the group were a resource available to [the company] as a matter of commercial reality” (at [118]). That reasoning was referred to with approval on appeal: see Lewis v Doran (2009) 219 ALR 555; [2005] NSWCA 243 at [95] per Giles JA (with whom Hodgson and McColl JJA agreed). After referring to these decisions, Owen J in Bell summarised the position in the following terms (at [1117]):

None of the principles on which the BOC Plaintiffs rely is controversial, particularly in the context in which they were stated. However, the BOC Plaintiffs seek to derive two principles from them which are controversial.

First, according to the BOC Plaintiffs, the requirement that they prove that Arrium was insolvent on the balance of probabilities means that “a company will also be insolvent if it can be said, on the balance of probabilities, that the company is not able to repay a debt falling due on some future date”. In stating the test in those terms, the BOC Plaintiffs take issue with the written advice given by HSF to the Arrium board on 18 December 2015 in which HSF, adopting some of the language used by Fullagar J in Insurance Commissioner v Associated Dominions Assurance Society Proprietary Limited (1953) 89 CLR 78, said:

In my opinion, that criticism of the HSF advice is misplaced and confuses two things. One is the standard of proof to be applied to the question whether from a particular date (that is, from 7 January 2016) Arrium was unable to pay its debts as they became due. That question is one of fact, not likelihood. The civil standard requires the Court to be “satisfied that the case has been proved on the balance of probabilities” (to quote from s 140 of the Evidence Act). That is, the civil standard is concerned with the degree of satisfaction the Court must have that the facts essential to the finding of liability have been made out – in this case, that as and from 7 January 2016 Arrium was unable to pay its debts (including future debts) as they became due. To put the point another way, the civil standard is concerned with the weighing of available evidence to reach a conclusion about the existence of a fact or set of facts as at a particular date and the degree to which the Court must be satisfied that those facts existed at that date. The standard of proof is not concerned with identifying what those facts are.

The other thing the Court is concerned with is what facts are relevant to the question of solvency and, in particular, how the Court should deal with future events in assessing the question of solvency. In the present case, the assessment the Court must make is whether it can be said that as from 7 January 2016 Arrium was unable to pay a debt falling due in July 2017. That is not a question of fact in the normal sense. It involves a prediction based on what was known and knowable as at 7 January 2016. In order to make that prediction – that is, in order to be able to say as at 7 January 2016 Arrium could not pay a debt falling due in July 2017 – there needs to be a high degree of certainty that that state of affairs would come about on the basis of the facts known or knowable at the earlier date. Otherwise, it is not possible to say that as at 7 January 2016, Arrium was unable to pay debts falling due in July 2017. At most all that could be said is that it was unlikely that Arrium would be able to pay debts falling due in July 2017. But that is equivalent to saying that Arrium was likely to become insolvent, not that it was insolvent, from 7 January 2016 on.

The fact that both the standard of proof and the prediction of future events can be framed in terms of the balance of probabilities does not mean that they are the same thing or that they involve the same assessment. The difficulty involved in predicting the future with sufficient certainty so as to be able to say that what is predicted is true at the time of prediction explains the general reluctance of courts, except in special cases, such as long tail insurance claims, to determine the question of solvency by reference to debts that are not payable immediately or in the near future. It also explains why Fullagar J expressed himself in the terms he did in reaching the conclusion that the insurer in that case was insolvent even though it was in a position to pay its liabilities as they became due for a number of years.

Second, the BOC Plaintiffs contend that “A ‘mere theoretical possibility’ that a creditor may, at some time prior to the debt falling due, agree to alter the amount of the debt or the date upon which it is due and payable, is insufficient to preclude a finding of insolvency, in circumstances where the company is, but for the creditor agreeing to such alteration, otherwise unable to pay the debt as and when it falls due” and that “The party wishing to contend that the assessment of solvency should be conducted on the basis that a contractual debt becomes due and payable on some date, or in some amount, different to that which is stipulated in the contract bears the onus of proving that matter”. Although these statements reflect statements of principle that can be found in the cases, they must be treated with some caution in the present context. The statements of principle are normally made in relation to trade creditors who might well expect to be paid when their debts are due. After all, trade creditors are not in the business of providing credit. They are in the business of being paid for the goods or services they provide.

The present case is very different. It concerns a publicly listed company which, like many if not most large publicly listed companies, relied on borrowings for part of its working capital. In the normal course of events, it would be expected that the company would rollover or replace on an ongoing basis the relevant borrowings as they became due for repayment. The BOC Plaintiffs bore the onus of proving that Arrium was insolvent. In the present case, it seems to me that as part of that onus, it bore the onus of proving that as from 7 January 2016, it was unlikely that the relevant banks would be prepared to extend their loans on some basis. To hold otherwise would wrongly shift the burden of proof on the question of solvency to the defendants.

The principal steps in the BOC Plaintiffs’ case in relation to solvency are these:

The first of these steps is essential to the BOC Plaintiffs’ case on insolvency. Arrium had at least 16 months to deal with the facilities falling due in July 2017. According to the HY16 accounts, it had total assets of $6,196.9 million and net assets of $2,328.4 million. There is no suggestion that those accounts were defective in some respect. Nor is there any suggestion that Arrium’s total assets or net assets decreased substantially in January or February 2016. Consequently, given the time available, it is to be expected that in the normal course of events Arrium would, if necessary, either be able to sell assets or raise finance on security of those assets in order to repay the facilities falling due in July 2017.

It is no answer to this point to say that it was apparent by January 2016 that Arrium would not receive an acceptable price for Mining Consumables (assuming that that was the case). Even accepting that a sale of Mining Consumables was necessary, the question is whether Arrium was able to obtain an acceptable price for those assets before the facilities became due. Absent the claim that Arrium had a narrow window in which to sell those assets, there is no reason, for example, why Arrium could not have resumed the sale process later. That, of course, is what the administrators did; and successfully. The businesses in which Arrium operated were cyclical. It is apparent that Arrium was seeking to sell Mining Consumables at a time when there had been a serious downturn in the prices of some commodities on which Arrium’s business depended – iron ore, in particular. Those prices were forecast to increase. Similarly, Arrium had embarked on Project Marco which was likely to lead to costs savings which themselves would affect the price that Arrium needed to obtain from a sale of Mining Consumables. Having regard to those matters alone, it could not be said that, looking at the position in the period from 7 January 2016 to 16 February 2016, it was more likely than not Arrium would be unable to raise sufficient cash to repay the July 2017 facilities, even if that is the correct test, if it had the following 16 months to do so. The position was too uncertain to be able to say that.

The BOC Plaintiffs’ answer to the point made in the previous paragraph is to say that Arrium would not get another opportunity to sell Mining Consumables (or take other steps to address the facilities falling due in July 2017) because it would run out of cash in the few months following its initial unsuccessful attempt. They accept that, up until that time, Arrium was able to pay its trade creditors as their debts fell due and that consequently it could not be said that Arrium was insolvent before that time for that reason. But, according to them, it does mean that Arrium was insolvent because it would not be able to repay the Lenders in 2017.

For the proposition that Arrium would run out of cash in the next few months, the BOC Plaintiffs rely principally on what actually happened; and, in particular, the fact that Arrium went into voluntary administration on 7 April 2016. In advancing that case, the BOC Plaintiffs do not clearly explain why the expected future inability to repay the Lenders meant that Arrium was insolvent from 7 January 2016, but the expected future inability to pay trade creditors did not. One explanation could be that the debts to the Lenders had largely been incurred at the time the question of solvency arose whereas the debts to future trade creditors whose debts would not be able to be repaid (if incurred) had not. Looked at in that way, the question of solvency as at a particular date is to be examined by identifying all the liabilities of a company that existed at that date and asking whether each of those liabilities could be paid when it fell due. That may be a practical approach in a simple case. But it does not seem to be practical in the case of a large company that incurs and pays many debts each day. Nor does it seem to be consistent with the principle that the question of solvency should be determined by making a realistic commercial assessment of the company’s financial position as a whole. However, for reasons that will become apparent, it is not necessary to pursue this issue further.

In my opinion, the case that the BOC Plaintiffs’ now seek to advance is the very case that Mr Borsky disavowed during the hearing of the amendment application. They should not be permitted to advance it now. Although there was evidence before the Court that was relevant to the question whether Arrium would run out of cash by about July 2016, it was not an issue specifically addressed by Mr Quentin Olde, the expert on solvency called by the defendants, and Mr David Lombe, the expert on solvency called by HSF. It is an issue they could have addressed specifically. I accept that for that reason the defendants would suffer irremediable prejudice if the BOC Plaintiffs were permitted to advance the argument now.

In any event, on the available evidence, I am not satisfied that Arrium would run out of cash at any time before July 2017.

Mr Madden (and Mr Olde and Mr Lombe) accepted in their joint report on solvency that:

None of those sources of information indicate that Arrium would run out of cash prior to the July 2017 facilities falling due. The draft forecast for the 8 weeks commencing 21 December 2015 did suggest that would happen. However, that forecast was found to contain errors and was revised. Some of the cash flow forecasts did indicate that Arrium would breach its liquidity buffer. But that was usually towards the end of the forecast period, where the figures were historically conservative. Moreover, breach of the liquidity buffer did not itself demonstrate that Arrium would run out of cash. Mr William Hardie, the expert retained by the Anchorage Plaintiffs in relation to the question whether there had been a change in financial position of Arrium that had a material adverse effect on its ability to comply with its obligations under the facility agreements included in his expert report dated 9 December 2019 the following table summarising Arrium’s liquidity position from June 2015 to February 2016:

No-one suggests that the figures included in that table are inaccurate. The table shows that even in February 2016, Arrium had total liquidity of $368 million. The large decrease from December 2015 is explained by the reporting initiatives taken by Arrium and the end of year and half year to reduce temporarily its borrowings.

In his affidavit evidence, Mr Madden places considerable emphasis on the Project Polo II Status Report which was included in the board papers for the meeting on 21 January 2016, which forecast $535 million in operating cash outflows for the third quarter of FY16. He gives this evidence:

Arrium’s budget and business plans are also not consistent with Arrium running out of cash before July 2017. It is not necessary to set out detailed information from each business plan. The following table sets out the forecast cash flows taken from the budget and business plans relied on by Mr Madden, Mr Olde and Mr Lombe for FY16, FY17 and FY18, where that information is available:

As I have explained, the later versions of the business plans (including the one considered at the board meeting on 4 February 2016) included a number of alternative scenarios, many of which were based on the spot price for iron ore. Those versions indicated a substantially worse picture. However, even the “Spot” scenario included in the papers for the 4 February 2016 board meeting indicated that, after negative cash flows of $192 million in FY16 and $19 million in FY17, Arrium would experience positive cash flows in subsequent years (for example, $72 million in FY18). More significantly, the alternative scenarios were included for the purpose of stress testing Arrium’s financial position. They modelled possible but not expected outcomes. In fact, as Mr Olde points out, the actual iron ore price generally turned out to be significantly above both the spot price and the price assumed in the relevant business plans. Set out below is a table prepared by Mr Olde comparing the actual iron ore price with the spot price at certain dates and the price assumed in the business plans:

The table indicates that, except for the price assumed in the Updated Business Plan of December 2015, the actual iron ore price was above the assumed and spot prices. Of course, the actual prices cannot be used for the purpose of determining whether Arrium was insolvent in the period from 7 January to 16 February 2016. However, they provide some evidence that the business plans were prepared on a reasonable basis and they support the view that the business plans were an appropriate basis by reference to which Arrium’s solvency should be judged.

It is apparent from the table comparing cash flow forecasts set out above that Arrium was forecasting that it would be cash flow positive in each of FY16, FY17 and FY18, except for the forecast presented to the board on 16 February 2016, when the forecast changed dramatically to forecast negative cash flows of $233 million in FY16. It is not clear from the evidence how that change came about. In the May 2015 budget, Arrium was forecasting positive cash flows of $101 million in FY16. That forecast changed substantially in November 2015. The change is explained largely by the continuing deterioration of the price for iron ore. It appears that no significant changes were made to the forecast then until the results for HY16 were finalised. The actual results involved negative cash flows of $291 million, which were expected to be partially offset by positive cash flows in the second half of the year. The main explanations given for the negative cash flows was the poor price for iron ore, a decrease in “cash initiatives” of $81 million, which presumably is a reference to tightening credit terms, greater than budgeted restructure and project costs of $21 million and a reduction in assets sales against budget of $63 million. Despite that, as I have said, Arrium was still forecasting positive cash flows in the second half of the year. There is no reason not to accept that forecast. It is true that the forecast in May 2015 and November 2015 had proven to be optimistic. However, much of that optimism was based on a forecast stabilisation or increase in the iron ore price, which did not materialise. Although an improvement in the price of iron ore took longer than expected to happen, it was still reasonable to expect that it would happen soon, since that is what independent reputable third-party forecasters were predicting.

Although Mr Madden did not himself embrace the submission now advanced by the BOC Plaintiffs that Arrium would run out of money, he did suggest in his first affidavit sworn on 15 May 2020 that the deferral of the sale of Mining Consumables would give rise to certain difficulties. They included the fact that a delay would give rise to significant concerns with Arrium’s suppliers, Lenders and customers. Mr Madden also expressed the opinion that a deferral “would not have realistically achieved a different outcome unless there was a significant turnaround in [existing] business conditions and future expectations, and that depended (in part) on matters that were beyond Arrium’s control and were uncertain”. However, at most these points illustrate that there was considerable uncertainty concerning Arrium’s future. They do not demonstrate that there was no realistic prospect that Arrium would be able to sell Mining Consumables for an acceptable sum before July 2017.

Mr Madden, in his second affidavit sworn on 11 December 2020, says in reply to evidence given by Mr Olde that “without the provision of borrowings beyond the Existing Finance Agreements, the Arrium Group may not have been able to pay its debts falling due in the period leading to 30 June 2016”. He also expressed the opinion that the Arrium Group “was otherwise in a distressed financial state, which increased the urgency required to address the July 2017 Maturities”. Even accepting those propositions, neither of them establishes that Arrium was not in a position to resume the sale of Mining Consumables later in the year. All the first proposition establishes is that there was a risk that it might not have been able to do so. All the second proposition establishes is that it was preferable to deal with the debts maturing in July 2017 earlier rather than later because of the risks associated with a delay – something recognised by the board when it embarked on the Strategic Review.

As I have said, in their final submissions, the BOC Plaintiffs rely heavily on the fact that Arrium did go into voluntary administration on 7 April 2016, which was said to be evidence that Arrium was insolvent at that time and insolvent at the time the drawdowns were made. Neither of those propositions is correct.

The administrators were appointed under s 436A(1) of the Corporations Act. That section provides that a company may appoint an administrator if the board passes a resolution to the effect that:

Consequently, all the appointment proves is that the directors were of the opinion that Arrium was or was likely to become insolvent. The opinion of the directors does not establish the position objectively. And the resolution is consistent with the directors holding the opinion that Arrium was likely to become insolvent, not that it was insolvent on 7 April 2016.

More significantly, the BOC Plaintiffs’ contention involves an impermissible use of hindsight. Hindsight cannot be used to establish a fact at some earlier point of time. Rather, at most it provides evidence of what was likely or possible at that time. The fact that Arrium was insolvent on 7 April 2016 (if it was a fact) may be evidence that, as at January or February 2016, Arrium was likely to become insolvent. But it is not evidence that Arrium was insolvent in January or February 2016.

In the present case, circumstances changed very substantially between 16 February and 7 April 2016. As at 16 February 2016, it was apparent that Arrium was not going to get an acceptable price for Mining Consumables as a result of the then current sales process. There were, therefore, three main possibilities available to Arrium at that time. The first involved refinancing the whole of its debt with most likely GSO. The second involved reaching an agreement at that stage with its current Lenders in relation to its banking facilities. A third involved doing nothing immediately and addressing the issue later in the year, when market conditions were expected to improve.

Each of these options was a realistic possibility as at 16 February 2016 (and before). Plainly, the first was Arrium’s preferred option, since it involved Lenders agreeing to be paid substantially less than 100 cents in the dollar, which would benefit shareholders to the detriment of Lenders. The risk (which Arrium recognised) was that the option would not be acceptable to Lenders. That risk came to fruition, which might be thought to have been a likely outcome. However, it was an option that was pursued and analysed in detail on the advice of Lazard and UBS, both of whom are experienced and well-regarded investment banks.

The plaintiffs suggest in their submissions that the second option was abandoned by Arrium no later than when it terminated Grant Samuel’s retainer in relation to Project Archer. That is not correct. Project Archer was put on hold while Arrium pursued the sale of Mining Consumables. The retainer with Grant Samuel was terminated because there was nothing for them to do in the meantime. Moreover, Lazard, who had continued to be retained generally, had also been retained on Project Archer. In fact, the second option was considered in Lazard’s paper which was included in the board papers for the meeting on 11 February 2016. It was rejected by Lazard at that time, partly because, on certain assumptions (which included spot prices for specific commodities), it led to a shortfall in available liquidity in FY17 and a breach of existing covenants in FY17 and FY18. However, that was not the case on the assumption that the price for iron ore was the average of independent commodity forecasters and the prices for other commodities were those forecast by CRU. The second option was unattractive because of the risk that those prices might not be achieved and the fact that it was an option that gave preference to the Lenders over shareholders when compared to the first option.

The third option was not seriously considered by Arrium or its advisers. But that does not mean that it was not an available option as at 16 February 2016 (and before), if the other two failed. As I have explained, neither the BOC Plaintiffs nor for that matter Mr Madden in his affidavit evidence sought to demonstrate that Arrium had insufficient liquidity to continue to trade for the foreseeable future. The third option was unattractive because it left Arrium in a state of uncertainty for a substantial period of time and it was unclear if and when Arrium would require additional borrowings before it became cash flow positive.

All three options required, or were likely to require, co-operation from the Lenders. The first two plainly did. The third was likely to do so because it would presumably have required the Lenders to rollover drawdowns and possibly to provide some additional liquidity. As at 16 February 2016 (and before), it was reasonable to expect that the Lenders would continue to cooperate with Arrium. Project Archer, which involved reaching an agreement with the Lenders, had been put on hold pending the outcome of the sale of Mining Consumables at the request of the Lenders or at least some of them. Once it became clear that the sale would not proceed and discussions with the Lenders resumed, the Lenders (other than Morgan Stanley) indicated that they did not want Arrium to go into administration, that they were willing to negotiate with Arrium and as part of those negotiations to provide additional liquidity if that was necessary. That, of course, happened after 16 February 2016. But reference to those facts is a permissible use of hindsight, since all that is being said is that what happened provides some evidence of what was possible or likely at an earlier time.

Consequently, when the Lenders said that they had lost confidence in the Arrium board, it became clear that an agreement with them and cooperation from them were no longer possible. That was a dramatic change in circumstances. It ruled out any possibility of acceptance of a recapitalisation proposal, or an amend and extend proposal or any accommodation or agreement with the Lenders if Arrium was to continue under the control of the board. That explains why the board appointed administrators. It says nothing about what was possible or likely between 7 January and 16 February 2016.

The BOC Plaintiffs take issue with some of the analysis of the previous paragraphs on the basis of cases which state that the onus was on the defendants to establish that a creditor was willing to compromise or extend the time for payment of its debt and that the defendants had not discharged that onus in this case: see, particularly, Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, [2001] NSWSC 621 at [54] per Palmer J; Emanuel Management Pty Ltd v Foster's Brewing Group Ltd (2003) 178 FLR 1, [2003] QSC 205 at [72]ff per Chesterman J. However, as I have explained, the facts of the cases relied on by the BOC Plaintiffs were very different from the facts of the present case. The cases relied on by the BOC Plaintiffs generally concerned trade creditors who, most often, without agreeing to an extension of time, had not taken active steps to insist on payment of debts that had fallen due in the past. The fact they had not done so was not evidence that the debtor was solvent. Just the opposite. Unless the debtor was able to prove that as a result of some actual or imminent agreement or compromise the debts that had or that were about to fall due were not payable in the amount or at the time originally agreed, the fact that it could not pay those debts on time was evidence of insolvency.

In the present case, the relevant debts were not due for approximately 18 months or longer. In the normal course of events, it would not have been expected that the debts would be repaid in full. Rather, it is to be expected that they would have been refinanced with the same or different Lenders, quite possibly on different terms and in different amounts. As is apparent from the advice that Arrium was receiving from UBS and Lazard, in some cases, banks may be prepared to accept less than 100 cents in the dollar because they accept that is the best way of maximising their returns on the debt that they are owed. No doubt, in accordance with the principles stated in the cases relied on by the BOC Plaintiffs, if the debts were repayable in the near future and no compromise was likely, the possibility of a compromise was insufficient to establish solvency. However, looking at the position 18 months before the debt was payable, the possibility of compromise together with the other possibilities available to Arrium at that time are relevant to the question whether it can be said at that time that Arrium would be unable to pay debts falling due 18 months later. For the reasons I have given, there were still a sufficient number of possibilities open to Arrium to deal with its bank debt that it could not be said that it was insolvent in January or February 2016.

The MAE Representation was made by cl 14.1(i) of the Morgan Stanley Facility Agreement and its equivalents and was repeated by cl 14.3 at the time of each drawdown. Under the terms of the facility agreements, the representation was made by Arrium alone. The representation was also repeated by the representation made by the relevant Arrium Entity in each Drawdown and Rollover Notice to the effect that each representation required to be repeated was true as though it had been made at the date of the Drawdown Notice and the Drawdown Date in respect of the facts and circumstances then subsisting.

The first issue that arises in relation to the MAE Representation is precisely what the representation conveys. The representation is true if either (1) there was no change in the financial position of Arrium between the relevant Drawdown Dates and either 31 December 2012 (in the case of the 2013 SFA) or the date up until when the last published accounts of Arrium were prepared (in the case of the other agreements) or (2) if there was such a change, that change did not have a material adverse effect on the borrowers’ ability to perform their obligations under the relevant agreement. The first limb requires the “financial position” of Arrium to be compared at two points in time. The second requires an objective assessment to be made of the question whether any change had the relevant effect.

There is a question concerning what is meant by the expression “financial position”. The defendants (and HSF) contend that it is a reference to the assets and liabilities of Arrium. The plaintiffs, particularly the Anchorage Plaintiffs, contend for a much broader interpretation that would encompass any change relating to Arrium’s business that has an impact on its ability to comply with its financial obligations. A third, intermediate interpretation is to interpret it as a reference to the information disclosed in Arrium’s “Accounts” (as defined in the facility agreements).

The defendants (and HSF) submit that the meaning of “financial position” for which they contend is consistent with its technical accounting meaning and that is the meaning that the parties intended to adopt. That is said to be so for two main reasons. First, it is a requirement of the facility agreements that the relevant Accounts (which provide one of the comparators for the comparison required by the first limb of the MAE Representation) must be prepared in accordance with Australian Accounting Standards and those standards use the expression in its technical sense. Second, they contend that the comparative exercise required by the representation can only sensibly be undertaken by reference to Arrium’s assets and liabilities and that consequently that is the meaning that the parties must have intended the expression to have. A third reason is that the facility agreements appear to draw a distinction between the “financial position” of Arrium and its “financial condition”. The latter expression is used in cl 17.1(i), which states that it is an Event of Default if “a change occurs in the financial condition of the Relevant Group … which constitutes a Material Adverse Effect (and the situation is not remedied within 15 Business Days of being required to do so by notice from the Lender)”. Accordingly, when the parties wanted to refer to the financial circumstances of Arrium more broadly, they used the phrase “financial condition”, leaving “financial position” to be interpreted in accordance with its technical meaning.

The defendants and HSF are correct to say that “financial position” is often used in a technical accounting sense to refer to the balance sheet of the company. AASB 101 entitled “Presentation of Financial Statements” is a good example. Paragraph 10 of that Accounting Standard (as it existed at the time the facility agreements were entered into) provided:

It is apparent from these provisions that the expression “statement of financial position” is used in AASB 101 to refer to the balance sheet of the company. But equally, as the Anchorage Plaintiffs point out, “financial position” is used in a broader sense to refer to the financial circumstances of the company. So, for example, s 588GA(2) of the Corporations Act states that, for the purpose of determining whether a person is entitled to the safe harbour defence to a claim of insolvent trading that is provided by that section, regard may be had to, among other things, whether the person “is properly informing himself or herself of the company’s financial position”. The reference to “financial position” in this context is plainly broader than the company’s balance sheet. Similarly, a condition precedent to Arrium’s rights under the facility agreements is the provision of a certificate by the directors certifying that the then most recent Accounts “are a true and fair statement of the Group’s financial position as at the date to which they are prepared and disclose or reflect the Group’s actual and contingent liabilities as at that date”. In this context it is said that the reference to the Group’s “financial position” must be a reference to all of the financial information contained in the Accounts.

There is no rule or principle of law which requires the Court to choose the technical meaning over the broader, ordinary one. It is sometimes said that the words of a contract should be given their ordinary or natural meaning unless it is apparent that the parties intended them to have some other meaning: see, for example, Manufacturers’ Mutual Insurance Ltd v Queensland Government railways (1968) 118 CLR 314 at 321 per Windeyer J. However, that principle must be understood as one that applies where the alternative meaning involves a departure from a recognised meaning of the words. Where a word or phrase has both an ordinary meaning and a recognised technical meaning, which meaning the parties intended the word or phrase to have is to be resolved in accordance with ordinary principles of contractual interpretation. Those principles require the Court to determine what a reasonable business person would have understood the phrase to mean, which requires consideration of “the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract”: see Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35] per French CJ, Hayne, Crennan and Kiefel JJ.

In my opinion, little turns on the fact that the facility agreements require the relevant accounts to be prepared in accordance with Australian Accounting Standards. The purpose of that provision is to ensure that the accounts that are provided to the Lenders fairly describe the financial circumstances of the company. The information to be provided to the Lenders obviously extends to all of the information that is required to be included in financial statements in accordance with para 10 of AASB 101, and all of that information must be prepared in accordance with the Accounting Standards. That is what the definition of “Accounts” states. The fact that the parties chose to identify the financial information to be supplied to the Lenders, and the standards that that information had to satisfy, by reference to the Australian Accounting Standards does not mean that they intended (objectively) to adopt the meaning given to each expression used in those standards.

Indeed, the opposite appears to be the case. The structure of the representations contained in the facility agreement is that Arrium was required to provide the half yearly and end of year accounts to the Lenders. Plainly, those accounts included more than a balance sheet. By cl 14.1(h), Arrium warranted that those accounts were “a true, fair and accurate statement of [Arrium’s] consolidated financial position.” In that context, the reference to “financial position” must mean more than the information contained in the balance sheet. Otherwise, there would be no point in requiring Arrium to supply the Accounts (as defined), and there would be no point in requiring the warranty in cl 14.1(h) to be given in relation to the Accounts (rather than the balance sheet). Clauses 14.1(h) and 14.1(i) must be read together. The change in position with which cl 14.1(i) is concerned is the position referred to in cl 14.1(h) – that is, the position disclosed in the Accounts.

As the defendants point out, it is a straightforward task to identify changes in the balance sheet between two dates. That simply involves comparing the same line items in two balance sheets – one contained in the relevant Accounts and the other presumably derived from management accounts for the purposes of the comparison. It is more difficult to compare other items in the financial statements, since those items do not generally reflect the company’s financial position at a point in time. For example, the profit and loss statement identifies the income earned and the amounts expended over a period of time; and the periods of time between which the comparison is to be made will not be comparable. The Accounts will identify the income and expenditure over a year or six months, whereas the comparator for the purpose of the application of the MAE Representation will be income earned and expenditure incurred in some other period of time determined in some way by reference to the date at which the warranty is given. Moreover, changes in the financial position of the company, broadly defined, are likely to be reflected in the balance sheet, since those changes are likely to have an impact on the value of the assets and liabilities as disclosed in the balance sheet. If, for example, an asset is sold for a loss, that loss will need to be brought to account. If the company makes a trading loss, that loss will be reflected in a reduction in the net assets of the company. According to the defendants, the first of these points demonstrates that it is not practical to give “financial position” the broad meaning for which the plaintiffs contend and second demonstrates that no commercial purpose is served by doing so, since the object of the representation will be served by the narrow interpretation.

I do not accept either of those propositions. No doubt it is more difficult to compare financial metrics that are not determined at a point in time, as balance sheet items are; and the comparison is likely to involve the exercise of some judgment. But that does not mean that the comparison cannot be made. So, for example, it is possible to say that a company has become less profitable over a period of time and to describe that change as a change in the financial position of the company. However, in order to reach that conclusion, it is obviously not possible simply to compare two figures. Rather, it is necessary to undertake some analysis and apply some judgment. Just what that requires will depend on the circumstances. For example, suppose the assessment is to be made on 1 January. As at that date, the most recent Accounts delivered in accordance with the relevant facility agreement will be the annual accounts for the previous financial year, which will disclose the income, expenditure and profit for that year. In order to compare those figures with the position as at 1 January of the subsequent year, it will be necessary to determine the profit made during the six-month period from 30 June to 1 January. It will then be necessary to compare that figure with a comparable figure for the previous financial year. That will involve determining the profit earned during a similar period in the previous financial year. It may also involve making adjustments for one-off items that are incurred in either period. It will then be necessary to make a judgment on whether the results indicate that there has been a change in profitability over the relevant period.

As to the second proposition, not all changes in the financial circumstances of a company will find their way into the balance sheet. For example, an increased risk of insolvency would be regarded as a change in financial position on the broader definition, but that increased risk may not necessarily be reflected in a change in the balance sheet.

There is more force in the argument that the parties must have intended the expressions “financial position” and “financial condition” to have different meanings and in those circumstances it is appropriate to give “financial position” its technical meaning and “financial condition” a broader meaning that encompasses the ordinary meaning of both expressions, applying the presumption that different words in a document were intended (objectively) to have different meanings: see Eureka Funds Management Ltd v Freehills Services Pty Ltd (2008) 19 VR 676; [2008] VSCA 156 at [52] per Cavanough AJA. However, the two expressions are used in different clauses and there is a lack of precision in the drafting of the clauses, particularly cl 17.1, which suggests that the drafter has not paid close attention to the way the clauses fit together. Clause 14.1 sets out certain representations and warranties which are repeated at the time of each drawdown by force of cl 14.3. Clause 14.1(i) contains the MAE Representation. Clause 17.1 sets out what amounts to an Event of Default. It operates to create an Event of Default based on a Material Adverse Effect in two ways. First, if the MAE Representation is untrue, incorrect or misleading in a material respect and the other conditions set out in cl 17.1(c) are satisfied that is an Event of Default. One of those conditions is that the relevant lender forms the opinion reasonably that “the consequences of which” (which, presumably is a reference to the consequences of a breach of the warranty) constitutes a Material Adverse Effect. What that means is not clear. In order for the MAE Representation to be untrue or misleading, there has to be a material change in financial position that has a material adverse effect on Arrium’s ability to comply with its obligations under the relevant facility agreement. Accordingly, taken literally, the condition seems to require a Lender to be reasonably satisfied that a material change in financial position that has a material adverse effect on Arrium’s ability to comply with its obligations constitutes a material adverse effect on Arrium’s ability to comply with its obligations. Stated in that way, there is a degree of circularity or redundancy in the language used.

The second way in which cl 17.1 operates to create an Event of Default by reference to a Material Adverse Effect is to provide in cl 17.1(i) that it is an Event of Default if there has been a change in financial condition, or a change in the whole or a major part of Business Operations, which constitutes a Material Adverse Effect and that change is not remedied within 15 Business Days of being required to do so by notice from a lender. The difficulty with that provision is that it is unclear over what period the change is to be measured. Presumably, in the absence of some period being specified, the relevant period is the period from the date the relevant facility agreement was entered into. But why the parties should choose that date as the date by reference to which cl 17.1(i) should operate but (except in the case of the 2013 SFA facility) a different date by reference to which cl 14.1(i) should operate is unclear.

It is, of course, unnecessary to resolve the constructional issues raised by cl 17.1, since there is no allegation that Arrium committed an Event of Default, not least because no notice requiring a potential Event of Default to be remedied was given. The point, however, is that the drafting of cl 17.1 is far from perfect, which undermines the force of the argument that the parties deliberately chose “financial position” to express a concept which was different and narrower than the one encapsulated by the expression “financial condition”. It is just as likely that they did not pay careful attention to the different expressions they used in different clauses of the agreement. And the fact that the parties used what on any view is a concept that has a non-technical meaning as a comparator in cl 17.1(i) undermines any suggestion that they thought it was impossible for the comparison to be made except where it was between the financial positions narrowly understood at different dates.

In my opinion, the wider interpretation is also more consistent with the object of the clause. Arrium was required to give the Lenders copies of its annual and half yearly accounts. On receiving those accounts, the Lenders were able to make an assessment of whether Arrium’s financial circumstances had changed either from the time the facility was entered into (in the case of the 2013 SFA facility) or from the last set of accounts. If they thought that that circumstance had changed, they could have refused to provide any further advances under the agreement on the basis that the condition precedent had not been complied with. There is no commercial reason for drawing a distinction between information revealed by the balance sheet and other information contained in the Accounts. The purpose of the representation and warranty in cl 14.1(i) was to give the Lenders a level of comfort that was similar to the one they could get by reviewing the Accounts themselves in respect of the period for which they did not yet have Arrium’s Accounts.

Conversely, I do not think the term “financial position” has the broad and amorphous meaning for which the plaintiffs contend. That meaning makes the first limb of the representation otiose, since it appears to encompass any change that constitutes a Material Adverse Effect. Moreover, it is not clear why the parties would have intended the representation and warranty to go beyond the type of information available from the Accounts. As I have explained, the structure of the MAE Representation is that Arrium represents and warrants that the Accounts are a true and fair statement of the consolidated financial position as at the date to which they are prepared. Arrium is not required to give the Lenders any other information at the time it is required to give them the Accounts. The Lenders are expected to make their own assessment of the financial position of Arrium on the basis of those accounts, and to ask for additional information if they want it. The warranty given in relation to changes in financial position is only given in respect of changes since the relevant Accounts were provided. It is natural in those circumstances to interpret the warranty as covering only changes in the information contained in the Accounts, and not other changes.

The parties, particularly the Anchorage Plaintiffs, made extensive submissions on the meaning of “material” in the context of a material adverse change clause by reference to decided cases. Ultimately, however, “material” is an ordinary English word that must be construed in the context in which it appears. Other cases which construe the word in different if similar contexts are of limited assistance.

In the present case, what must be “material” is the effect of a change in financial position on Arrium’s ability to perform its obligations under relevantly the facility agreements. It appears to be common ground that “material” in this context means “significant” or “substantial”, although how helpful it is to substitute for the word one of its synonyms is open to some doubt. Importantly, though, the effect in this case must be judged objectively. It does not depend, as is often the case, on an opinion formed or reasonably formed by a Lender. And the effect must be on the ability of Arrium to comply with its obligations under the facility agreements – relevantly, in this case on its ability to repay the facilities when they became due. Accordingly, the question is whether any of the changes in financial position identified by the plaintiffs materially affected Arrium’s ability to repay the facilities and, most immediately, those due in July 2017. Necessarily, that involves a question of judgment concerning the effect of a change on future events. It would include a change in financial position which materially increased the risk that Arrium would not be able to repay the facilities when due. But in order to be able to say that such a change had occurred, it would be necessary to identify the risk that existed before the change and be able to say that there had been a material increase in that risk as a consequence of the change.

The first limb of the MAE Representation raises the question whether there was a change in Arrium’s financial position from the end of the accounting period for which the most recent accounts were available (or from 31 December 2012 in the case of the 2013 SFA facility) and the dates on which a relevant Drawdown Notice was given or the drawdown the subject of the notice was advanced. That requires a comparison to be made between the position as at 30 June 2015 (or 31 December 2012) and, in the case of the Anchorage Plaintiffs, dates ranging from 22 December 2015 (when the first impugned Drawdown Notice was issued) to 12 February 2016 (when the last rollover occurred). As I have already explained, in the case of the BOC Plaintiffs, the comparator is the financial position of Arrium at dates ranging from 7 January 2016 to 16 February 2016. The second limb requires consideration of whether those changes had a Material Adverse Effect.

Consistently with the broad meaning they give to the phrase “financial position”, the Anchorage Plaintiffs identify a large number of matters that they say were changes in financial position that resulted in a Material Adverse Effect. They group them into the following categories:

The BOC Plaintiffs, on the other hand, content themselves with three matters. They are:

Despite the list of changes provided by the Anchorage Plaintiffs, it is apparent that in substance their primary case is that Arrium’s financial circumstances (broadly understood) deteriorated during the period from 30 June 2015 to 31 December 2015 to the point where there was a material increase in the risk that it would not be able to repay the amounts it owed under the facility agreements. According to them, that increase in risk was a Material Adverse Effect. In making that submission, the Anchorage Plaintiffs point to many of the same matters as the BOC Plaintiffs point to in their case that Arrium was insolvent. Essentially, the case is that because of the decrease in the price of and demand for key commodities, particularly iron ore and steel, Arrium was making unsustainable losses that meant that it faced an increased risk that it would run out of cash before it could sell assets for a sufficient price to enable it to repay the facilities, particularly those falling due in 2017.

The defendants (and HSF) take issue with the claim put in that way on two bases. First, they submit that it rests on a mistaken interpretation of financial position. Second, they submit that in any event, there was not a material change in effect because it was apparent that Arrium would be able to repay the facilities.

It is apparent from what I have already said that I accept the first of these points. I do not accept the second. It is convenient to explain why I do not accept the second point before turning to the consequences of my acceptance of the first.

The defendants provided an extensive report from Mr Olde on the question whether the MAE Representation was true, which contained a detailed analysis of Arrium’s financial position (broadly understood). It is not necessary to deal with the report in any detail. The factual basis which underpins Mr Olde’s conclusions are set out earlier in this judgment. Mr Olde accepts that there was a change in financial position. However, he concludes that the changes in financial position did not have a Material Adverse Effect. He summarised his reasons in the following paragraph:

In my opinion, there are two difficulties with Mr Olde’s reasoning. First, he addresses the wrong question. The question is not whether there remained a reasonable prospect that Arrium would be able to deal with the maturities under the facilities. The question was whether the changes in financial position materially changed the chances of it being able to do so. To a large extent, that depended on whether the forecast improvement in Arrium’s financial position would materialise or not, which depended heavily on whether the price of iron ore would increase in accordance with forecasts or whether it would remain at historic lows for an extended period of time. The emphasis of matter note included in the HY16 accounts strongly suggests that the risks associated with Arrium’s business had increased since June 2015, with a resulting increase in the risk that the Lenders would not be repaid in full. The defendants led no evidence to suggest otherwise. There appears to be no issue that the risk had increased substantially since December 2012. At that time, Arrium was making substantial profits and its net assets were approximately $3,833,700,000, approximately $1.5 billion more than they were as at 31 December 2015.

Second, although the ability of Arrium to deal with its debts through extension or compromise may be relevant to the question whether it was solvent, it is not relevant to the question whether there was a Material Adverse Effect. Whether there was a Material Adverse Effect turns on whether there was something which had a material adverse effect on Arrium’s ability to comply with its obligations under the facility agreements. Those obligations included an obligation to repay the loans on specific dates. Consequently, if something happened which made it less likely that it would be able to do so, that was a Material Adverse Effect, even if it was highly likely, for example, that the Lenders would agree to an amend and extend proposal. It is the change in risk that is important, not its absolute value.

The question still remains whether there were changes in Arrium’s financial position properly understood that had a Material Adverse Effect. The plaintiffs do not directly address that issue in their written submissions. However, they maintained in oral submissions that even on the narrower interpretation of “financial position” that I prefer there was a Material Adverse Effect.

It is apparent from what I have already said that many of the “changes” relied on by the Anchorage Plaintiffs are not changes in Arrium’s financial position properly understood, since they are not changes in the financial position of Arrium as set out in its Accounts. Moreover, a number of matters are not so much changes as circumstances existing at a particular point in time which might either be said to be a consequence of a change in financial position or likely to cause a change in financial position.

The principal changes in market conditions referred to by the Anchorage Plaintiffs were the decline in the prices for iron ore, copper, gold and steel, a decrease in the global demand for steel products and a decline in the Australian dollar compared to the US dollar. The decline in the prices for copper and gold are said to have had a negative impact on Mining Consumables. The decline in the Australian dollar is said to have increased Arrium’s net debt and debt servicing costs, since most of Arrium’s debt was in US dollars. On the conclusions I have reached, none of these changes are changes in Arrium’s financial position, although they may have had an effect on Arrium’s financial position.

The Anchorage Plaintiffs list a large number of “key financial metrics” that are said to have changed. One group of changes is identified by reference to Arrium’s forecasts and budgets and the fact that Arrium fell substantially short of those forecasts and budgets. Those changes are not changes in Arrium’s financial position between 30 June 2015 (or 31 December 2012) and the relevant dates. The fact that Arrium fell short of its FY16 budget or forecast does not itself mean that its financial position changed from 30 June 2015. To take an obvious example, the budget or forecast could have predicted that Arrium would do substantially better than the previous financial year whereas in fact it may have done no better. That could not be regarded as a change in financial position for the purpose of the relevant facility agreements.

The Anchorage Plaintiffs also point to the following changes in the position as at 31 December 2015 compared to the position as at 30 June 2015:

The Anchorage Plaintiffs also point to the fact that the deterioration was worse when comparing the position to the position as at 31 December 2012. It is not necessary to set out each measure that they point to. A number relate to a deterioration in the performance of individual businesses. Some relate to changes in external factors such as the price of iron ore, a decline in the steel industry generally and movements in the Australian dollar. The critical changes are the fact that Arrium’s NPAT for FY14 was $296 million compared to a loss of $223.6 million in HY16 and the fact that its net asset position was $3.73 billion as at 30 June 2014 compared to $2.328 billion as at 31 December 2015.

In my opinion, changes in the financial performance of individual business units are generally not relevant to a change in Arrium’s financial position except to the extent that those changes are reflected in Arrium’s financial position taken as a whole. The MAE Representation is concerned with the group’s financial position, not the performance of individual businesses. Similarly, it is the financial performance of the group, not the financial performance of individual businesses, that affected Arrium’s ability to comply with its obligations under the facility agreements. Accordingly, it is unnecessary to consider the financial performance of individual businesses.

I accept that there were a number of changes in Arrium’s “financial metrics” which amounted to a change in Arrium’s financial position between 31 December 2015 and 30 June 2015 and 31 December 2012 and that those changes continued at least until 16 February 2016. Those changes were a change in net assets and a change in net profit which had consequences for the interest cover ratio and the gearing. It will be necessary to say more about the extent of those changes later in this judgment. The other changes referred to by the Anchorage Plaintiffs are either reflected in those changes or themselves are not relevant to changes in the financial position of the group.

The Anchorage Plaintiffs also make extensive submissions concerning the deterioration in the liquidity of Arrium. Like the BOC Plaintiffs, they submit that by December 2015 “Arrium was running out of cash” and that “it was not going to be able to sustain those cash losses indefinitely” and that it faced an “acute liquidity crisis”. In support of those allegations, they refer to Mr Hardie’s evidence, which was largely in the nature of submissions based on contemporaneous records, concerning losses that Arrium made in HY16 and early in calendar 2016. They point to the fact that there is evidence that Arrium’s electricity supplier wanted to end its contract and that it may have been difficult to secure a new contract or continued gas supplies without providing “credit support” or paying in advance. No attempt, however, is made to analyse the position carefully as at particular dates or to compare the information disclosed in the Accounts for FY15 or for the half year ended 31 December 2012 with the position between 22 December 2015 and 12 February 2016. I accept, however, that Arrium made losses in HY16 and early calendar 2016 and that those losses were reflected both in an increase in debt and a decrease in net assets and that to that extent there were changes in the financial position of Arrium.

The Anchorage Plaintiffs also rely on the 8 and 13 week cash flow forecasts as indicating a further deterioration in Arrium’s liquidity position. But again, for the reasons I have given, those forecasts do not themselves constitute a change in financial position.

I do not accept that ANZ’s demand for cash collateral was a change in Arrium’s financial position. That demand, and Arrium’s agreement to it, had no consequences for Arrium’s financial position as disclosed in the Accounts. The same is true of what is said to have been Arrium’s need for what is described as “an emergency standby facility”. That facility was put in place after 12 February 2016 and had no effect on Arrium’s financial position as would have been disclosed in Accounts prepared as at any of the dates on which a Drawdown Notice was given or a drawdown occurred.

The going concern disclosure was made in accordance with AASB 101 paras 25 and 125. The bold text of para 25 (which states the main principles) provides:

The bold text of para 125 states:

It is apparent from these provisions that the requirement to include a note concerning going concern arose when management became aware of “material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern” over the next financial year. I accept that the inclusion of that note represented a change in financial position, since as at the date the accounts were signed management had formed the view (no doubt, under pressure from KPMG) that there was a material uncertainty concerning whether Arrium could continue as a going concern whereas that uncertainty did not exist as at 30 June 2015 or 31 December 2012.

The question is when that uncertainty first arose. That does not depend simply on an objective assessment of the risk that Arrium would become insolvent as at particular dates. Rather, it turns on when management formed the relevant view, since it is the formation of that view that triggers the requirement to include the note and it is the inclusion of the note that is said to represent the change in financial position. That question is never properly addressed by the Anchorage Plaintiffs. It appears that the question whether Arrium was a going concern or whether some note should be included in the HY16 Accounts was the subject of discussion between KPMG and Mr Bakewell in the second half of January 2016. However, it was not until the ACC meeting on 3 February 2016 that KPMG proposed that a note should be included in the Accounts. The members of the ACC accepted that proposal in principle at that time. The issue was not formally raised by KPMG until its draft letter sent to Mr Bakewell on 8 February 2016 and it was only after that letter was sent that the terms of the note were agreed. The inclusion of the note was first raised with the board at the meeting on 11 February 2016. Although each of Arrium’s directors was cross-examined, none was asked about when he or she first formed the view that it was appropriate to include a note in the HY16 Accounts concerning going concern. In my opinion, absent any other evidence, it was on 11 February 2016, when the issue was considered by the board for the first time and the board apparently accepted that it was appropriate to include the note in the Accounts.

A similar problem exists with the BOC Plaintiffs’ contention that there was a material change in financial position because the likely sale value of Mining Consumables decreased over time. That itself was not a change in financial position; and there is no suggestion that the value of Mining Consumables should have been written down at any time prior to its sale.

The question, then, is whether the changes in financial position properly understood materially increased the risk that Arrium would not be able to repay the facilities at the time they became due. The relevant changes fall into four categories:

In considering these questions, it seems appropriate to focus on the position as at 31 December 2015, 31 January 2016 and 28 February 2016. Drawdown Notices were served and drawdowns were made on a number of dates between 22 December 2015 and 16 February 2016. It is not possible to determine accurately Arrium’s net assets, profitability, Gearing Ratio and ICR on each of those dates and it is doubtful that the amounts were substantially different depending on the precise date in issue. A reasonable and practical approach is to focus on the three dates referred to and assume that the financial position of Arrium on the dates in question was materially the same as the financial position on which of those two dates the date in question was closer. It is not suggested that Arrium’s net assets, the Gearing Ratio or ICR changed materially between 31 December 2015 and 16 February 2016. Consequently, it seems appropriate to focus on the position as at 31 December 2015 and only consider Arrium’s profitability at the later dates.

Set out below are two tables taken from Mr Olde’s report which summarise the position:

Set out below is a table summarising information contained in Arrium’s management accounts in relation to the profit it earned in January and February 2016:

It seems plain on these figures that the most significant change occurred between 30 June 2014 and 30 June 2015, when Arrium made a small underlying loss compared to a substantial profit in the previous year and made a large statutory loss as a result of restructuring costs and, more significantly, the recognition of large impairments on assets, no doubt resulting from the deteriorating market conditions. Those losses were reflected in a substantial decline in net assets. The changes between 30 June 2015 and 31 December 2015 do not appear to be that significant. Mr Olde used as the appropriate comparator in relation to profits the results for the twelve months to the end of December 2015. The Anchorage Plaintiffs do not suggest that that comparator was inappropriate. It indicates that Arrium was continuing to suffer small underlying losses of the same magnitude. The statutory figures suggest that the position was worse in HY16 than it was in reality, since most of the reported losses included in the 12 month period occurred in the first six months. The management accounts for December 2015 indicate that for the six months to the end of December 2015, statutory EBITDA was $95.9 million, depreciation and amortisation had a negative impact of $106.2 million and that the statutory loss was $36.5 million. The profit results for January and February 2016 suggest that the position was continuing to improve.

A further difficulty for the Anchorage Plaintiffs’ case is that they do not explain how the changes in net assets and in profits increased the likelihood that Arrium would not be able to repay the facilities when they fell due. In particular, the Anchorage Plaintiffs made no attempt to assess the likelihood that Arrium would not be able to repay the facilities based on the 30 June 2015 Accounts (or for that matter, the 31 December 2012 Accounts) compared to the likelihood of that happening based on the 31 December 2015 Accounts. It might be easier to infer that there was a material change in risk between 31 December 2012 and 31 December 2015. After all, over that period, Arrium went from making substantial profits to making losses and its net assets decreased by approximately $1.5 billion. However, the difficulty with drawing that inference is that it is not supported by any evidence or submissions and it appears that the Lenders themselves did not reach that conclusion. The relevant changes became apparent following the release of the FY15 Accounts. But none of the Lenders suggested that following the release of those accounts there had been a change that had a Material Adverse Effect, and each was apparently content to continue to advance money in accordance with Drawdown Notices served after that time.

The same problem exists with the BOC Plaintiffs’ case. The only changes they point to that could properly be regarded as changes in Arrium’s financial position are the changes in the Gearing Ratio and the ICR. But nowhere do they explain how those changes had a Material Adverse Effect on Arrium’s ability to comply with its obligations under the relevant facility agreements. Moreover, the facility agreements contained covenants in relation to those ratios. Arrium was required to ensure that the Gearing Ratio (that is, the ratio of Consolidated Net Financial Indebtedness to Consolidated Net Financial Indebtedness plus Consolidated Net Worth) would not exceed 0.55 to 1.00 and that the ICR (that is the ratio of EBITDA to Debt Service for any rolling 12 month period ending on a Reporting Date (that is 30 June or 31 December)) exceeded 3.35 to 1.00. It is not said that either of those covenants was breached. It is to be expected that the ratios set out in the agreements were chosen because breach of them might materially affect Arrium’s ability to comply with other obligations under the facility agreements – in particular, the critical obligations to pay interest and repay the loan when due. Conversely, if the covenants relating to the ratios were not breached, it is reasonable to infer that a change in the ratios alone would not materially affect Arrium’s ability to comply with its other obligations under the agreements.

The other Material Adverse Effect identified by the BOC Plaintiffs is the claim that by 7 January 2016 there was no reasonable basis to expect that Arrium could obtain a price of at least USD1.35 billion for Mining Consumables. Even assuming that a material change in the likely sale price for Mining Consumables could be described as a change in financial position (which seems doubtful), nowhere do the BOC Plaintiffs explain why the figure of USD1.35 billion was critical to the question whether the change had a Material Adverse Effect. Even on the BOC Plaintiffs’ case, what seems to be critical is whether there was a reasonable prospect of Arrium obtaining a sufficient price for Mining Consumables to enable to repay the Lenders and the Lenders who were due to be repaid in 2017, in particular. The BOC Plaintiffs do not point to any evidence which would demonstrate that there was no reasonable basis for thinking that such a price was unachievable as part of the then current sales process. Indeed, if that had been the case, it is to be expected that UBS and Lazard would have said so. They did not. The true position was that the prospects of obtaining an acceptable price for Mining Consumables deteriorated over time, but until final bids were lodged it was impossible to say whether an acceptable price would be achieved or not. The deterioration in the prospects of obtaining an acceptable price for Mining Consumables was not itself a change in financial position.

In my opinion, the going concern disclosure falls into a different category. I have already concluded that the decision of the directors to include that disclosure in the accounts was a change in financial position. As I have said, that decision appears to have been taken on 11 February 2016, although no formal resolution was passed at that time. The formal decision to include the note was not taken until the board meeting on the morning of 17 February 2016. The decision to include that disclosure was a Material Adverse Effect. It indicated that there was an uncertainty (which may be material) “as to whether the Group will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report”. If Arrium’s financial position had reached the point that warranted the inclusion of that note, it seems reasonable to infer that there was a material increase in the risk that the Lenders would not be repaid in full compared to the position as at 30 June 2015 (and 31 December 2012).

It follows from what I have said that I am not satisfied that there was a change in Arrium’s financial position which had a Material Adverse Effect before 11 February 2015 but that I am satisfied that there was such a change on and from that date.

As I have explained, the claims in the Anchorage Proceeding rely on two main representations – the MAE Representation and the No Event of Default Representation. The MAE Representation has two forms. In the case of all facilities except the 2013 SFA, it is a representation to the effect that there had been no change in the financial position of Arrium since the date up until when the last published accounts of Arrium were prepared which had a Material Adverse Effect. In the case of the 2013 SFA, the relevant comparator is the financial position of Arrium as at 31 December 2012. Both the MAE Representation and the No Event of Default Representation are said to have been made both by the terms of the facility agreements and by the terms of the Drawdown and Rollover Notices.

A relevant Event of Default only arises under the terms of the facility agreements if a Lender gives notice of the matters that unless remedied within the time specified in the agreement (15 Business Days) would amount to an Event of Default. That is, notice and a failure to cure are essential prerequisites for there to be an Event of Default. In particular, it is only an Event of Default if a representation made in the facility agreements is untrue, incorrect or misleading if (1) it is untrue, incorrect or misleading in a material manner; (2) the Lender acting reasonably forms the view that the consequences constitute a Material Adverse Effect; and (3) such consequences are not remedied within 15 Business Days (as defined in the facility agreements) of receipt of a notice from the lender requiring “such remedy”. Similarly, it is only an Event of Default if there is a change in financial position that has a Material Adverse Effect if the situation is not remedied within 15 Business Days of being required to do so by notice from the Lender. It is common ground that no notice was given and therefore that no relevant Event of Default occurred.

The Anchorage Plaintiffs contend, however, that the representation to the effect that there was no Event of Default extends to a representation that there was no Potential Event of Default. A “Potential Event of Default” is defined to mean “any event, thing or circumstance which will [sic] the giving of notice, the passage of time, or both, would become an Event of Default”. The result, according to the Anchorage Plaintiffs, is that the No Event of Default Representation was breached by changes that had a Material Adverse Effect.

Two points may be made about that submission. First, even if it is correct, it is not clear what the No Event of Default Representation adds to the MAE Representation. Secondly, and more significantly, in my opinion the submission rests on a misunderstanding.

The No Event of Default Representation is to be found in cl 14.1(k) of the Morgan Stanley Facility Agreement and its equivalents. Clause 14.1(k) contains a representation to the effect that “no Event of Default or (except when this representation is repeated) Potential Event of Default, has occurred or continues unremedied”. In other words, when the No Event of Default Representation is repeated by the terms of the facility agreements it is made only in respect of actual and not potential Events of Default. A similar analysis applies to representations made in the Drawdown and Rollover Notices. The representation contained in those notices is only made in relation to representations required to be repeated by cl 14.3 and its equivalents. Clause 14.3 picks up the representation in cl 14.1(k), but when repeated that representation is limited to actual Events of Default. The result is that the Drawdown and Rollover Notices only contain a representation in relation to actual Events of Default. Accordingly, any representations made in the Drawdown Notices in relation to Events of Default that might have arisen from a Material Adverse Effect were true. There was no Event of Default in relation to a Material Adverse Effect because no notice was given.

For these reasons, nothing further needs to be said about the No Event of Default Representation.

The signatories to the Drawdown and Rollover Notices were Ms Verawati, Ms Hall, Ms Lieu and Ms Sparkes. Ms Verawati was Operations Manager in the Treasury group. Her responsibilities included assembling regularly updated financial reports and forecasts from each of the general managers of Arrium’s individual businesses for review by Ms Sparkes, monitoring compliance with financial covenants and preparing Drawdown and Rollover Notices. She reported to Ms Sparkes and obtained instructions from Ms Sparkes each week about which facilities should be drawn down, rolled over or repaid. Ms Lieu reported to Mr Brooks, and Ms Hall reported to Ms Lieu. Ms Lieu’s responsibilities included the preparation and consolidation of monthly management accounts and half year and full year statutory financial statements and assisting with figures to be included in the monthly CFO’s report to the board. Ms Hall was one of a number of employees who assisted Ms Lieu. Ms Hall and Ms Lieu’s role relevantly was to sign Drawdown and Rollover Notices when Ms Sparkes was not available. None of Ms Verawati, Ms Hall or Ms Lieu gave evidence, although each swore affidavits for the purposes of the proceedings. As I have said, Ms Sparkes was the Group Treasurer until her resignation took effect on 29 January 2016. She had been in that position since November 2011. She did give evidence in the proceedings.

The Anchorage Plaintiffs put their claims against the signatories to the Drawdown Notices in two ways. First, they claim that the signatories owed the Par Lenders a duty of care in completing and signing the Drawdown and Rollover Notices. Second, they say that the signatories personally made the representations contained in the Drawdown Notices and owed the Par Lenders a duty of care in making those representations. According to the Anchorage Plaintiffs, the signatories breached both duties because they did not take reasonable care in completing the Drawdown Notices and, in particular, in checking that the representations that they contained were accurate.

A preliminary question raised by Ms Verawati, Ms Hall and Ms Lieu is whether the MAE Representation was made by the Drawdown and Rollover Notices. The argument is not easy to follow. They point out that under the terms of the facility agreements the MAE Representation is only made by the “Parent” (that is, Arrium itself). Consequently, the MAE Representation, when repeated by the terms of the facility agreements, is only made by the Parent. On the other hand, the Drawdown Notices are given by the actual borrower (usually, Finance or AIOH) and the representations in those notices are made by “We”. The representations and warranties made in the Drawdown Notices are the representations and warranties in the facility agreements which are required to be repeated. There is a question whether “We” is a reference to the borrower or the signatories to which it will be necessary to return. It is not, however, a reference to the Parent – the only entity that gives and repeats the MAE Representation under the facility agreements. Accordingly, so it is said, the MAE Representation is not made in the Drawdown Notices.

In my opinion, that conclusion does not follow. There appears to be a disconnect between the terms of the facility agreements and the terms of the pro forma Drawdown Notice (contained, for example, in Schedule 3 of the Morgan Stanley Facility Agreement). But I do not think that it follows that the MAE Representation is not made in the Drawdown Notices at all. Rather, the position is that the “We” who make the representations in the Drawdown Notices represent that the representation made and repeated by the Parent by force of the facility agreements in relation to material adverse changes also, by the Drawdown Notices, make that representation. The result is that the representations in the Drawdown Notices are not a simple repetition of the representations in the agreements. In the case of the MAE Representation, the representation is made by Parent in the agreements and by the “We” in the notice. The result is not that the MAE Representation is not made at all in the notices.

In their written submissions, Ms Verawati, Ms Hall and Ms Lieu seek to make much of the fact that they were not Authorised Officers at the time they signed the Drawdown and Rollover Notices. However, accepting that they were not, it is difficult to see how that assists their case. They still signed the notices and made whatever representations they made by doing so whether they were Authorised Officers or not. The only consequence if they were not Authorised Officers is that it may have been open to the relevant Arrium Entity to argue that it was not bound by the notices that only they signed. That, in turn, might have given rise to a question whether the signatories were liable for breach of a personal warranty of authority. They, however, are not issues in the case.

There is a degree of unreality in the contention that the conduct of the signatories can be separated into its component parts for the purpose of identifying the conduct in respect of which a duty of care is said to be owed and in the suggestion that seems to be implicit in the Anchorage Plaintiffs’ submissions that somewhat different principles apply depending on the precise conduct in respect of which it is said the duty is owed. In substance, the complaint of the Anchorage Plaintiffs is that the Par Lenders suffered harm because they relied on the representations contained in the Drawdown and Rollover Notices in advancing money to, and rolling over loans owed by, the Arrium Entities and that the signatories owed the relevant Par Lenders a duty to take reasonable care to avoid that harm because of their involvement in the making of those representations. Understood in that way, the making of the representations is a critical component of the conduct, and the question must be whether the signatories owed a personal duty of care in connection with the making of those representations.

The circumstances in which a party owes a duty to take reasonable care in making a representation were described in these terms by Brennan J in San Sebastian Pty Ltd v The Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 at 372, referring to the judgment of Barwick CJ in Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 571 (which itself was approved by Mason J (with whom Aitkin J agreed) in Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 at 251 and by Gleeson CJ, Gummow and Hayne JJ in Tepko Pty Ltd v Water Board (2001) 206 CLR 1; [2001] HCA 19 at [47]):

Of course, it is not necessary that the representor be personally responsible for the communication of the information or advice to the representee. It is sufficient if the representation is contained in a document prepared by the representor and that the representor knew or ought reasonably to have known that the document would be distributed to and relied on by the representee. As Brennan CJ explained in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 252:

There is a question of how the principles of negligent misstatement fit with recent developments in the law of negligence generally and, in particular, the importance that vulnerability now plays in determining whether it is appropriate to impose a duty of care to avoid pure economic loss. In Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; [2004] HCA 16, Gleeson CJ, Gummow, Hayne and Heydon JJ said at [23]-[24]:

Commenting on those passages, Crennan, Bell and Keane JJ said in Brookfield Multiplex Ltd v Owners Strata Plan No 61288 (2014) 254 CLR 185; [2014] HCA 36 at [128]ff:

After quoting passages from Woolcock to the effect that a builder did not owe a duty of care to subsequent purchasers because those purchasers could have protected themselves from defects in the building through contractual warranties from the vendor who, in turn, could have obtained protection through warranties from the builder, their Honours continued (at [132]):

It is apparent from the decisions in Woolcock and Brookfield that the test summarised by Brennan J in San Sebastian remains important, if not critical, in determining whether a duty of care exists in respect of representations. But vulnerability is also an important factor which provides the basis for a reasonable expectation on the part of the representor that the representee places trust and reliance on the information conveyed by the representor and for a belief on the part of the representee that it would be reasonable to rely on that information.

In the present case a further question arises in relation to whether the signatories owed the Par Lenders a duty of care and that is whether they are to be understood as making the representations contained in the Drawdown and Rollover Notices personally or merely on behalf of the entity seeking the drawdown or rollover.

In general, the fact that an individual’s conduct is conduct engaged in in the course of the individual’s employment does not mean that the individual is not personally liable for that conduct. As the High Court explained in Houghton v Arms (2006) 225 CLR 553, [2006] HCA 59 at [40]:

One exception to this general principle is where the conduct of the employee can be regarded as purely ministerial. As Jacobson and Gordon JJ explained in Australian Securities and Investments Commission v Narain (2008) 169 FCR 211, [2008] FCAFC 120 at [96], in the context of a claim in respect of misleading and deceptive conduct in contravention of s 1041H of the Corporations Act, in answering the question whether a representor is personally responsible for a representation it is necessary to consider whether “all of the elements of the contravention are made out against the individual or whether he or she merely acted as a corporate organ, binding the company but not the person individually”.

In the context of the law of negligent misstatement the question whether the representor owed a duty of care and the question whether the statement was made personally by the representor raise similar questions. In the present case, in substance the question is whether in all the circumstances of the case, the signatories are to be understood as taking personal responsibility for the statements made in the Drawdown Notices or whether they were merely the conduits by which those statements were made by the relevant company.

The context in which the representations were made is important. They were contained in Drawdown and Rollover Notices that formed part of a contractual mechanism by which Arrium could drawdown and rollover amounts borrowed by it under revolving credit facilities provided by the Par Lenders. The form of the notices, and the representations they contained, were specified by the relevant facility agreements; and the representations largely mirrored representations contained in the facility agreements themselves. They were one of a number of contractual obligations on Arrium negotiated by the Lenders to protect themselves against changes in the credit risk during the term of the relevant agreements. Others included an obligation on Arrium to provide its annual and half yearly accounts to the Lenders, a right on the part of the Lenders to serve a notice identifying a Material Adverse Effect and a right to terminate the facility on the basis that an Event of Default had occurred if the circumstances giving rise to the Material Adverse Effect were not rectified within the time specified in the facility agreements. They also included a right on the part of the Lenders to obtain additional financial information.

Two things follow from these points. The first is that the notices were given and the representations made as part of a contractual mechanism permitting drawdowns and rollovers to occur. The second is that Lenders could and did through the terms of the agreements protect themselves against errors in the Drawdown and Rollover Notices and in that sense they were not vulnerable to the consequences of a lack of reasonable care on the part of the signatories.

It is true, of course, that the Lenders may be worse off if the signatories are not liable in negligence to them, since they cannot recover any loss they may have suffered from the signatories and their insurers. But as I have explained, that is not the relevant test of vulnerability. The Lenders seek, through a claim in negligence, to hold the signatories liable in effect as guarantors of Arrium’s obligations. In theory, it was open to the Lenders to negotiate to obtain those guarantees at the time they negotiated the terms of the facility agreements. In practice, it is unlikely that they would have been successful in doing so. Why, it might be asked, should the Lenders through a claim in negligence be entitled to obtain what was open to them to obtain, but which they were unlikely to have obtained, through contractual negotiations?

Arrium was a large public company. The requirement that Drawdown Notices be signed by an “Authorised Officer” who was appointed and identified in accordance with the facility agreements was an important mechanism by which the Lenders could be confident that notices given in accordance with the agreements were given by, and therefore binding on, Arrium. The requirement that the notices be signed by two representatives was a requirement of Arrium, not the Lenders or the agreements, and was, no doubt, a requirement put in place as an internal control mechanism.

The Anchorage Plaintiffs only relevantly sue on the MAE Representation. However, that does not alter the fact that if they are right, the signatories must personally have made all of the representations contained in the Drawdown and Rollover Notices. The signatories had no particular knowledge or expertise that enabled them to form a view on matters such as the solvency of the Arrium group or whether there had been a Material Adverse Effect. They had various levels of seniority within Arrium. Each of them could be expected to have knowledge of some aspects of Arrium’s business but not the broad knowledge necessary to form a view on those questions. The most senior signatory was Ms Sparkes. As Group Treasurer, she had a detailed knowledge of some aspect of Arrium’s business including its current need for funding and its expected cash flows. It is also apparent that Ms Sparkes had some knowledge of other aspects of the Strategic Review. It is unclear what knowledge she had of the progress of projects such as Project Jacaranda and Project Miwok. But it could not be suggested that the question whether a duty of care was owed and the question whether the signatories took on personal responsibility for the representations contained in the notices depended on who exactly signed the notices. The point is that the notices could be and were signed by persons who could not have been expected to have any particular knowledge or expertise to make what in effect were broad representations concerning Arrium’s overall financial circumstances.

The Anchorage Plaintiffs submit that the notices were given, and the representations therefore made, by the signatories personally because the signed notices referred to “We”, which must be taken to be a reference to the two signatories. I do not accept that submission. The actual notices differed in minor respects from the notice set out in the Schedules to the facility agreements to accommodate the fact that they were signed by two Arrium employees rather than one, as the agreements and Schedules contemplate. In addition, the actual notices have been amended so that the first numbered paragraph reads “We give you irrevocable notice that [the name of the company rather than “we”] wish to draw down under the Facility Agreement …”. That amendment appears to have been made by someone who misunderstood the drafting of the pro forma notice set out in the Schedules. However, none of the parties could have thought that the notices that were signed would have some different legal effect from the effect of notices given in accordance with the agreements. It is apparent that the notices required to be given in accordance with the agreements were notices given by Arrium and not the individual signatories. The reference to “We” is obviously intended to be a reference to the entity seeking to draw down (or roll over a loan made) under the facility and not to the individuals signing the notice. It is the Arrium Entity seeking to draw down on the facility that is giving the irrevocable notice. That is made clear by the fact that the notices are signed “for and on behalf of” that entity. Similarly, when the pro forma notice states that “we” have taken or propose to take the remedial action specified in the notice, the reference to “we” must be a reference to the entity on whose behalf the notice is given. It cannot be a reference to the signatories.

Moreover, under the terms of the notice, the “We” referred to in the notice “represent and warrant” the matters that follow. That formulation follows the one contained in the facility agreements. It is plain from those words and the balance of the paragraph by which the representations and warranties are given that the warranties are intended to be absolute ones. The representations and warranties are breached, and the Lenders are entitled to their contractual rights arising from a breach, if objectively any of the representations made by the notice were false. Those facts strongly suggest that the representations and warranties were given by the corporate entities, not the signatories. The parties could not have intended that the signatories themselves were giving personal warranties concerning the absolute truth of the representations contained in the notices, but that is the effect of the interpretation contended for by the Anchorage Plaintiffs.

If a personal duty of care were owed by the signatories that would place them in a difficult position. Their signatures were required as part of a contractual mechanism which permitted Arrium to drawdown and rollover loans. As part of that mechanism, Arrium was required to make certain representations, but the individuals were not. If the Anchorage Plaintiffs are correct, the signatories were either forced to incur potential personal liability by signing the notices or risk breaching their duties as employees by refusing to sign notices that they had been requested to sign in accordance with the terms on which they were employed.

Having regard to those matters, I am not satisfied that the signatories owed a duty of care in relation to the representations contained in the Drawdown and Rollover Notices. That is so for two broad and related reasons. First, I do not accept that the representations and warranties were made and given by the signatories. They were made and given by the borrowing entity. Second, to use the traditional language of negligent misstatement, I do not think it could be said that the signatories realised or ought to have realised that the Lenders would be relying on their personal knowledge or expertise in making the representations. For the reasons I have given, they would have expected the Lenders to treat the representations as having been made by the relevant Arrium Entity. Nor do I think that it was reasonable for the Lenders to accept and rely on the representations as representations made by the signatories. They understood that the representations were being made as part of the contractual process by which Arrium could drawdown or rollover loans. There was nothing about the signatories which would have caused the Lenders to rely on what they said other than the fact that they were authorised to bind Arrium. As I have explained, the Lenders were not relevantly vulnerable to a failure by the signatories to take reasonable care. For similar reasons, the Lenders could not have understood that the representations were being made by the signatories personally.

It follows that the claim that the signatories owed the Lenders a duty of care must fail.

The case in relation to breach is essentially that none of the signatories turned her mind to the question whether the MAE Representation was true and, if she did, undertook reasonable enquiries to find out whether it was true.

There are a number of difficulties with that case. The Anchorage Plaintiffs give no indication of what enquiries the signatories ought to have undertaken. It does not appear to be suggested that the signatories ought to have undertaken their own factual enquiries and formed their own views, based on those enquiries, on whether there had been a change in Arrium’s financial position that constituted a Material Adverse Effect. Nor could there be. That would require the signatories to become familiar with aspects of Arrium’s financial position that were outside their areas of responsibility and to form opinions on the effect of any changes that had occurred since the date up until when the last set of published accounts were prepared (or 31 December 2012, in the case of the 2013 SFA) on Arrium’s ability to comply with its obligations under the facility agreements. It would be unreasonable to place those obligations on the signatories.

There is a suggestion in some of the Anchorage Plaintiffs’ submissions that the signatories, particularly Ms Sparkes, had knowledge of matters relevant to the question whether there had been a Material Adverse Effect. The Anchorage Plaintiffs point to the following evidence given by Ms Sparkes:

The Anchorage Plaintiffs also submit that Ms Sparkes was aware that the change in financial position adversely affected Arrium’s ability to perform its obligations. That awareness was to be inferred from the following:

Also relevant to this issue is the following evidence given by Ms Sparkes:

Relying on less evidence, the Anchorage Plaintiffs make similar submissions in relation to Ms Verawati, Ms Hall and Ms Lieu.

A fatal problem with these submissions is that they go well beyond the pleaded case. The pleaded case is that the signatories were negligent because they did not make adequate enquiries. On the other hand, these submissions are directed at establishing that the signatories, or at least Ms Sparkes, knew that there had been a change in financial position that had a Material Adverse Effect. As the defendants point out that allegation is an allegation of fraud. If it was to be made it should have been properly pleaded and particularised.

In any event, the evidence does not establish that Ms Sparkes (or the other signatories for that matter) knew enough to make a proper assessment of whether the changes in financial position that she accepts occurred had a Material Adverse Effect. At most the evidence establishes that Ms Sparkes, unsurprisingly, knew that there had been a deterioration in Arrium’s financial position and that Arrium was investigating various strategies to deal with its debt, particularly its debt maturing in July 2017. She certainly could not know in December 2015 that Arrium would not achieve an acceptable price for Mining Consumables. The most that could be said was that she appreciated that the risk that Arrium would not obtain an acceptable price in the near future had increased. In order to make good the case that Ms Sparkes knew that the MAE Representation was not true, it would be necessary for the Anchorage Plaintiffs to identify the change they rely on by comparing the relevant accounts, to prove that Mr Sparkes was aware of that change and to explain how that change or those changes in combination had a Material Adverse Effect and why Ms Sparkes was aware of that effect. They have not done that. The only concession that Ms Sparkes made was that she was in a position to make an assessment in relation to changes in the financial covenants contained in the facility agreements.

The Anchorage Plaintiffs’ case appears to be that the signatories ought to have made enquiries of someone in authority and in a position to know whether changes in Arrium’s financial position had had Material Adverse Effect before signing the Drawdown and Rollover Notices. Their negligence was in failing to turn their minds to that question and make those enquiries. But it is not apparent why the onus was on the signatories to make those enquiries and why they were not entitled to rely on those in authority (presumably, Mr Bakewell, Mr Roberts or the board) to tell them if and when the representations could no longer be made or required qualification. The drawing down and rolling over of amounts under the facilities was part of Arrium’s normal business. It is to be expected that those in senior management, such as Mr Bakewell and Mr Roberts, would be aware that Arrium’s Treasury would manage that activity in accordance with Arrium’s Treasury Policy unless they were told otherwise. It is also to be expected that senior management would have been aware of the fact that Arrium was not in a position to drawdown on its loans if there was a change in financial position that had a Material Adverse Effect. It was at least apparent to the signatories that Arrium had embarked on a Strategic Review and that as part of that review the board was considering a number of options to deal with Arrium’s obligations under the banking facilities. Although the signatories may have had a general idea of what those options were and what progress had been made in relation to them, there is no evidence that all of the details of them were known outside of those who attended board meetings. Accordingly, it was the board and Mr Roberts and Mr Bakewell who were in the best position to assess whether any changes in Arrium’s financial position had a Material Adverse Effect. Consequently, it would have been reasonable for the signatories to be expected to be told that Arrium was no longer in a position to make the MAE Representation if that was the view the board, or Mr Roberts or Mr Bakewell’s view. It follows that they were not negligent in not making those enquiries.

Section 5D of the Civil Liability Act 2002 (NSW) provides:

In this case, factual causation cannot be made out for at least three reasons.

First, if any of the signatories had made enquiries of Mr Bakewell (who seems the obvious candidate of whom enquiries would be made), they would have been told on each occasion that the representation could be made. That is clear from the fact that when HSBC refused to fund a Drawdown Notice issued by Arrium on 11 February 2016 and signed by Ms Hall and Ms Verawati, Mr Bakewell and Mr Brooks signed a Drawdown Notice confirming that the representations and warranties made in the Drawdown Notice were true.

Second, for the reasons I have given, at least until 11 February 2016 the representation was true on each occasion on which it was made.

Third, there is the question of reliance. The issue of reliance is important both to the question whether a duty of care existed and to the question of causation. It is the Anchorage Plaintiffs’ case that the Par Lenders were caused harm by the MAE Representation because they relied on it in advancing or rolling over the relevant loans.

The Anchorage Plaintiffs led no evidence of reliance. Absent any evidence of reliance, I am not satisfied that the Par Lenders relied on the representations made by the signatories. The Anchorage Plaintiffs submit that reliance can be inferred because the giving of the notices was an essential step in the process by which loans were made or rolled over. However, that submission focuses on the wrong issue. I accept that the Lenders relied on the Drawdown and Rollover Notices in making or rolling over the loans. The question, however, is whether they relied on the representations said to be made by the signatories in those notices or whether, for example, they relied solely on the fact that the notices were given in accordance with the relevant facility agreement and the warranties were given by the entity seeking to make the drawdown. That raises the question whether the Lenders paid any attention to the representations contained in the Drawdown Notices. It also raises the question of what it was about representations made in a personal capacity by the individuals who signed the Drawdown Notices that caused the Lenders to advance or rollover funds – in the sense that but for those personal representations they would not have done so.

There is substantial evidence that the Lenders were aware of Arrium’s deteriorating financial position and that the sale of Mining Consumables for an acceptable price was essential if the Lenders were to be repaid in accordance with the terms of their respective facility agreements. The Lenders knew that if that did not occur, it would be necessary to reach some agreement with Arrium to vary the terms of the facilities. A number wanted to know the outcome of the sales process before negotiating such an agreement. It was for that reason that Project Archer was put on hold.

The Lenders were aware of the change in Arrium’s financial position between FY14 and FY15. By about October 2015, a number of Lenders had placed Arrium on a watchlist or equivalent and transferred the file to the asset management or similar group within the Lender to monitor Arrium’s financial position and closely manage the loans owed by it. The evidence is that one or more of Mr Roberts, Mr Bakewell, Ms Sparkes and Ms Pearce met with representatives of most if not all the Lenders during the period from October 2015 (and before) and January 2016 (in the case of HSBC, 17 February 2016). It is to be expected that at those meetings, the Lenders would have had an opportunity to ask questions about Arrium’s financial position.

Most, if not all, of the Lenders must have appreciated throughout the period during which the relevant drawdowns and rollovers were made, that there was a risk that they would not be repaid in full, particularly if the sale of Mining Consumables did not proceed for an acceptable price. That conclusion is supported by the internal records of a number of the Lenders. The file note made by NAB following the meeting with Mr Roberts and Mr Bakewell on 8 December 2015 (quoted in para [101] above) is an example, as are the minutes of a meeting of BOC’s credit committee held on the same day (referred to in para [103] above). It is apparent that many, if not all, the Lenders took the view that their best chance of being repaid in full was to continue to support Arrium until the outcome of the sale process was known and Arrium’s financial prospects became clearer. Ms Verawati, Ms Hall and Ms Lieu’s submissions refer to a number of internal Lender documents which support that conclusion. So for example, an internal HSBC credit memorandum dated 18 December 2015 states:

Similarly, BBVA in a loan review dated 28 January 2016 stated:

But the clearest evidence of the attitude of the Lenders was the position they took after the sale of Mining Consumables fell through. On 16 February 2016, HSBC refused to advance funds which were the subject of a Drawdown Notice, notwithstanding the representations contained in the notice. On the other hand, all but one of the Lenders indicated a willingness in principle to advance further funds if necessary if Arrium terminated its agreement with GSO. It seems clear that the Lenders were making their own assessment of Arrium’s financial position and what was in their best interests in the circumstances. They were not relying on the truth of the MAE Representation in making that assessment.

Moreover, there is no evidence that the Lenders relied on any representation made by the signatories personally. No argument is advanced which explains what it was about the signatories personally and what they did and said that caused the Lenders to advance or to rollover funds because the representations were made by them, rather than the corporate entity alone. There is no evidence that anyone from any of the Lenders attached any significance to who actually signed the notices. Indeed, the evidence seems to be that none of the Lenders even checked to see whether the signatories were Authorised Officers. The true position is that the signatories were simply fulfilling a ministerial function the effect of which was (assuming they occupied the position they claimed to have) that the relevant Arrium Entity was conclusively bound by the relevant notice and the consequences that followed from what it contained.

It follows that the case on causation must also fail.

The claims against the signatories for misleading and deceptive conduct are only brought by CBA and DB insofar as they bring their claims as Par Lenders. It raises similar questions to the claim in negligence.

To adapt the words of Jacobson and Gordon JJ in Australian Securities and Investments Commission v Narain (2008) 169 FCR 211, [2008] FCAFC 120 at [96], the question is whether all the elements of a contravention are made out against the signatories or whether they merely acted as a corporate organ. In order to make out a contravention of the relevant provisions, it was necessary for the Anchorage Plaintiffs to prove, among other things, that the signatories personally engaged in misleading or deceptive conduct – that is, that they personally engaged in conduct that had a tendency to lead CBA and DB into error: see Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640, [2013] HCA 54 at [39].

In my opinion, this is a case where the signatories merely acted as a corporate organ, and their own conduct could not be said to have a tendency to lead the Lenders into error. I have already explained my reasons for reaching that conclusion. The signatories signed the Drawdown and Rollover Notices in accordance with a requirement contained in the relevant facility agreements as a mechanism by which drawdowns and rollovers were made and as a means by which the relevant Arrium Entity became bound by the notices. There was nothing about the relationship of the signatories to the Lenders or their knowledge of the affairs of Arrium that suggested that they were making some representation to the Lenders personally. On the proper construction of the notices, the representations and warranties by their terms were expressed to be made by the relevant Arrium Entity. The representations and warranties were expressed in absolute terms. That may have been appropriate for representations made by the Arrium Entities in the context of the facility agreements. However, CBA and DB could not have understood that the signatories by signing the notices were giving what were in effect personal promises that the representations were true – and were true not just at the time the representations were made, but were also true at the time the drawdowns or rollovers occurred.

If the representations were made by the individuals, a further issue that arises is whether they should still be treated as absolute representations of fact. It may be appropriate to do so where the representations are treated as contractual representations made by the relevant companies. As I have indicated, it seems less appropriate to do so if the representations are treated as personal representations by the signatories. The representations involved difficult questions of judgment concerning Arrium’s financial position. Were the signatories really to be understood as making absolute representations concerning those matters rather than expressing an opinion on the basis of what they knew? The Anchorage Plaintiffs do not explain why that question should be answered in the affirmative. And if it is answered in the negative, the case based on the statutory prohibitions raises similar questions to the negligence claim. In particular, it raises the question of why it was not reasonable for the signatories to assume that they would be told by those responsible for making the relevant assessments, such as the board, if the representations could no longer be made.

Moreover, even if it is accepted that the representations were absolute ones for the purposes of the statutory prohibitions at the time they were made, they could not be treated as absolute ones at the time the drawdown or rollovers occurred. The representations were made at the time the relevant notices were issued. To the extent that they were representations concerning what the position would be at the time of actual drawdown or rollover, they were representations concerning the future. Representations of that type are misleading or deceptive if the representor did not have a reasonable basis for making them: see ACL, s 4; ASIC Act s 12BB; Corporations Act, s 769C.

In most cases, the distinction is not important in this case on any view because corresponding representations of fact were made a few days earlier. However, on the findings I have made, it could be important in relation to rollovers that occurred on 12 February 2016 and possibly 11 February 2016 (the position on that day may be affected by the precise time the board considered the issue). I have concluded that there was a change in financial position constituting a Material Adverse Effect on 11 February 2016 because on that date the board appears to have accepted that a note should be included in the HY16 Accounts concerning Arrium’s solvency. However, that is not sufficient to establish that the representations made in the relevant Rollover Notices were misleading or deceptive. Rather, it would have been necessary for the Anchorage Plaintiffs to prove that, on the date the Rollover Notices were issued, the signatories did not have reasonable grounds for making the representations concerning the position as at the date the relevant rollover was to occur. That turns on whether the signatories could reasonably have anticipated that the board would accept inclusion of the note concerning solvency on or prior to 11 February 2016. Those issues were not addressed in submissions and having regard to the other conclusions I have reached do not arise. Consequently, it is undesirable and unnecessary to express a final view on them.

As to reliance and causation, the claims for misleading and deceptive conduct raise similar issues to those raised by the claim in negligence. For the same reasons, CBA and DB have failed to prove that any contravention caused them loss.

Two additional claims are made against Ms Sparkes. First, it is said that she was negligent in making a number of representations on 31 December 2015 to Morgan Stanley. Second, it is alleged that Ms Sparkes had accessorial liability for (1) breach of contract by the Arrium Entities; (2) negligence on the part of Arrium Entities in making the representations in the Drawdown Notices, the representations made by reason of the terms of the relevant facility agreements and the representations made by Ms Sparkes on 31 December 2015; (3) misleading and deceptive conduct by the Arrium Entities in making the representations referred to in (2) to the extent that those representations were made to CBA and DB as Par Lenders.

For reasons which are not apparent, the Anchorage Plaintiffs frame the claim they make against Mrs Sparkes in connection with the representations she is alleged to have made during the telephone conversation on 31 December 2015 in negligent misstatement and negligence, as if they were separate causes of action. That is not the case. There is one cause of action in negligence arising from statements made by Ms Sparkes during the course of the telephone conversation. The principles that apply to that cause of action are discussed earlier in this judgment.

The representations said to have been made by Ms Sparkes on 31 December 2015 to Morgan Stanley were:

Before dealing with the individual representations, it is necessary to say something about the claim generally.

First, the onus is on the Anchorage Plaintiffs to prove that the representations were made. Courts have repeatedly stressed that, in the case of oral representations, the conversation “must be proved to the reasonable satisfaction of the court which means that the court must feel an actual persuasion of its occurrence or existence” (to quote from the judgment of Hammerschlag J in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [94]). Underlying that requirement are two considerations. The first is the fallibility of human memory, affected as it is by the passage of time and the distortions that arise from personal involvement in the relevant events. The second is that the words used and the context in which they were spoken are important because subtle differences in language and context can have a substantial effect on the meaning the words convey.

Second, in the present case, the Anchorage Plaintiffs rely entirely on a file note recording, and an email reporting on, the conversation. Those documents would provide important corroborating evidence of a witness who gave evidence of the conversation. However, they are a poor substitute for testimony of a person who participated in the conversation because they are hearsay and there is no possibility of testing with a witness to the conversation whether the written words accurately convey the meaning of what was said. That point is particularly relevant to internal emails and file notes, which are often prepared without a great deal of thought.

Third, although Ms Sparkes said that she could not deny that she made a number of the statements attributed to her, her inability to deny those statements is not equivalent to an admission that they were made. The onus remains on the Anchorage Plaintiffs to prove that Ms Sparkes made the statements. In some cases, Ms Sparkes makes what appear to be admissions that she said things attributed to her, particularly in the email. The most significant example, which is relied on by the Anchorage Plaintiffs, is quoted in para [150] above. But that admission must be treated with caution. It is plain from Ms Sparkes’ evidence that she could not recall the conversation. Nor was she in a position to deny that the email represents an accurate record of the effect of what she said. But it does not follow from that that she admits she said those things. She was not in a position to make that admission.

I accept that Ms Sparkes owed Morgan Stanley a duty of care in making any representations she did during the telephone conversation. The telephone conversation had been requested by Morgan Stanley so that it could better understand Arrium’s financial position and the reasons behind the drawdown request. Ms Sparkes accepted in cross-examination that she regarded the conversation “as a matter of importance”. She must have understood that Morgan Stanley wanted some additional information concerning the drawdown request before agreeing to it. It was reasonable for Morgan Stanley to rely on what it was told by Ms Sparkes. She occupied a position of some seniority and was the person immediately responsible for issuing the Drawdown Notice. It was reasonable of Morgan Stanley to expect that Ms Sparkes would either know or be in a position to find out the additional information it wanted to know. It had no other means of finding out the information itself, and in that sense it was vulnerable to a lack of reasonable care on Ms Sparkes’ part.

I am not satisfied that the representation referred to in para (a) was made. There is no reference in the file note to Ms Sparkes saying anything about the representations contained in the Drawdown Notice. If that had formed an important part of the conversation, it is to be expected that there would have been some reference to the representations in the file note. The email records Ms Sparkes as saying that “they are comfortable with all the reps made”. It says nothing about Ms Sparkes. Absent any other evidence, the reference to “they” must be a reference to the Arrium Entities. Consequently, at most Ms Sparkes said words to the effect that the Arrium Entities were comfortable with making the representations contained in the Drawdown Notice. It is not entirely clear what “comfortable” means in this context, and it is unlikely that a statement to that effect was simply volunteered by Ms Sparkes. The email appears to summarise the author’s recollection of the effect of what Ms Sparkes said, and whether “comfortable” was Ms Sparkes’ word or the author’s is unclear. At most, the email is evidence that Ms Sparkes said words to the effect that Arrium believed that the relevant Arrium Entity could make the representations contained in the Drawdown Notice and had reasonable grounds for that belief. The Anchorage Plaintiffs have not sought to demonstrate that a representation to that effect was false. Their submissions are directed at establishing the objective falsity of the MAE Representation, not to Ms Sparkes beliefs about the representation and her reasons for thinking that the Arrium Entities were comfortable making it.

As to the representation referred to in para (b), I accept that it is likely that Ms Sparkes did say something to the effect that Finance and AIOH would be in compliance with the Gearing Ratio and the ICR and under the Morgan Stanley Facility Agreement as at December 2015. She concedes that she did. They are two metrics specifically referred to in the facility agreement. It was the responsibility of Arrium’s Treasury group to calculate the relevant ratios and they were obvious matters to mention in the context of a discussion about the Drawdown Notice. There is, however, no suggestion that the representation was false.

The representation referred to in para (c) is similar to the representation in para (a), except that it is a representation that “they” were comfortable. I am not satisfied that a representation was made in those terms. It was not referred to in the file note. The email may record a representation made by Ms Sparkes. It may, however, be a summary of the author’s understanding of the effect of what Ms Sparkes said. Without more, it is not possible to be satisfied the email accurately records something that Ms Sparkes said. I have already explained why little weight can be placed on Ms Sparkes’ apparent admission that it does. In any event, as I have said, the most that could be concluded from the email is that Ms Sparkes said words to the effect that the Arrium Entities believed that they could make the representations contained in the Drawdown Notice and had reasonable grounds for that belief. The Anchorage Plaintiffs have not explained why a representation to that effect was false.

As to the representation referred to in para (d), I am not satisfied that the representation was made by Ms Sparkes. The email simply records “Sales process is ongoing but not much else disclosed there”. Morgan Stanley, and Mr Ball in particular, had considerable knowledge of Project Columbus because it (and he) were advising APRD, one of the bidders for Mining Consumables. It is unclear in that context whether the email was simply recording a fact already known to Morgan Stanley and stating that Ms Sparkes had nothing to add or whether it is recording a statement made by Ms Sparkes. In any event, the representation was plainly true.

The same is true of the representation referred to in para (e). The Lenders including Morgan Stanley knew that discussions with them had been put on hold pending completion of the sales process of Mining Consumables. The email may be recording that Ms Sparkes said that restructuring with the banks was “Plan B”. But it could equally be recording something already known to Morgan Stanley and a statement by Ms Sparkes that Arrium had not yet started discussions with the main banks on Plan B. In any event, the representation was also plainly true.

The representation referred to in para (f) appears to be a statement of the obvious. In any event, it can be no more than a representation concerning what Ms Sparkes believed at the time. There is no suggestion that it was false.

The pleaded representation in para (g) does not correspond to what is set out in the email. The email states “further cost reduction talks with suppliers and potential mine plan change but she's 'confident' of getting to cash positive at current levels”. It is not clear why the author of the email put “confident” in single quotes. It may be that the author was intending to signify that she was using the precise word used by Ms Sparkes, but it may be that the author was intending to convey some qualification to the use of the word. Nor is it clear what the reference to “current levels” is. It could be a reference to the current levels of cost reduction and the then existing mine plan. But it could also include the price for which Arrium was able to sell its products. The pleaded representation is concerned with the Arrium Group as a whole. However, the email is consistent with Ms Sparkes making a statement about the Mining Division alone. For those reasons, I am not satisfied that the pleaded representation was made. If the representation was made, it was plainly a statement of opinion by Ms Sparkes. It could only be false if Ms Sparkes did not hold the opinion or possibly did not have reasonable grounds for holding it. But again, the Anchorage Plaintiffs advance no reasons for why the Court should find either that Ms Sparkes did not hold that particular opinion or did not have reasonable grounds for doing so.

The Anchorage Plaintiffs’ case in relation to the No Omissions Representations appears to be that Ms Sparkes did not qualify any of the representations she made or that were made in the Drawdown Notices and therefore she impliedly represented that no qualification was necessary and impliedly represented that the Drawdown Notice did not contain any omissions. I do not accept that the No Omissions Representations was made. Ms Sparkes participated in the conversation at Morgan Stanley’s request to answer questions it had about the Drawdown Notice. It is difficult to see how any duty Ms Sparkes had extended beyond taking reasonable care in providing the information she gave in response to the questions that she was asked. There is no evidence that Ms Sparkes was asked a question that required her to disclose more than the evidence indicates she did. Nothing about the occasion could have led Ms Sparkes reasonably to believe that she was being relied on to volunteer more information than was responsive to those questions or that the Morgan Stanley representatives reasonably relied on Ms Sparkes to do more than answer them.

Moreover, the significance of the representation is unclear. The Anchorage Plaintiffs assert that it was false. The reasons are not clear, but presumably their case is that the representation amounts to a representation that the MAE Representation contained in the Drawdown Notice did not need to be qualified and that representation was false because the MAE Representation did need qualification because it was false. Put like that, the significance of the No Omissions Representations is that it is an absolute representation that the MAE Representation was true, in contrast to the express representation said to have been made by Ms Sparkes to the effect that the Arrium Entities “are comfortable” with the representations contained in the Drawdown Notice (including the MAE Representation). But if that is the Anchorage Plaintiffs’ case, there are two problems with it. First, I have already concluded that the MAE Representation was not false at the time of the conversation. Second, I do not think that the inference on which the representation depends can be drawn. If the email recording what was said during the conversation is correct, Ms Sparkes said words to the effect that the Arrium Entities were comfortable making the representations in the Drawdown Notice, including the MAE Representation. How can it be inferred that Ms Sparkes impliedly made an unqualified representation during the conversation by her silence when she expressly made a qualified representation on the same subject-matter – namely that the Arrium Entities “are comfortable” making the representations? The Anchorage Plaintiffs say nothing that would provide a satisfactory answer to that question.

Having regard to the conclusions I have reached, it is unnecessary to address the question whether Morgan Stanley relied on what Ms Sparkes said during the course of the telephone conversation for advancing funds sought in the relevant Drawdown Notice, and there is a degree of unreality in attempting to do so. The most important representation was the representation to the effect that Arrium or the Arrium Entities were comfortable making the representations in the Drawdown Notice. It is not possible to consider the position solely on the basis that that representation was not made, since the MAE Representation was obviously made in the Drawdown Notice and it is doubtful that the drawdown would have occurred if the true position was that Arrium was not comfortable in making it. The real question in relation to reliance and causation is whether Morgan Stanley was inclined not to honour the Drawdown Notice before the conversation and whether Ms Sparkes said something during the conversation which either alone or together with other matters caused Morgan Stanley to change its mind. In my opinion, the Anchorage Plaintiffs have not proved that to be the case. The evidence suggests that Morgan Stanley had and thought that it had learned very little as a result of the conversation. As I have explained, Mr Ball in particular must have had considerable knowledge of Arrium’s financial circumstances. It is apparent that its research arm prepared regular updates on Arrium’s business. Ms Park said in her email that the conversation was “Not extremely helpful”, which is likely to be something of an understatement. In the absence of any other evidence, I am not prepared to conclude that Morgan Stanley relied on anything Ms Sparkes said. The likelihood is that Morgan Stanley made its own assessment of Arrium’s financial circumstances and the risks of honouring and not honouring the Drawdown Notice and, having received nothing of much assistance from Ms Sparkes, decided to honour it.

Each of the claims based on accessorial liability depends on an allegation that the Arrium Entities (or some of them) breached one or more duties they owed to the Par Lenders. Four types of breach and accessorial liability are identified. First, it is said that the Arrium Entities breached their obligations under the facility agreements and Ms Sparkes induced those breaches. Second, it is said that Finance and AIOH owed a duty to take reasonable care in relation to the MAE Representation made by the terms of the facility agreements and in the Drawdown and Rollover Notices, that they breached that duty of care and that Ms Sparkes procured those breaches. Third, it is said that the Arrium Entities engaged in misleading and deceptive conduct by making the MAE Representations made by the terms of the Morgan Stanley Facility Agreement and in the Drawdown Notices given to CBA and DB (insofar as they bring claims as Par Lenders) and Ms Sparkes was knowingly concerned in that conduct. Fourth, it is alleged that the representations made by Ms Sparkes on 31 December 2015 were made by the Arrium Entities, that they owed Morgan Stanley a duty to take reasonable care in relation to those representations, that they breached that duty of care and that Ms Sparkes procured those breaches.

The last of these allegations can be put to one side immediately. I have already found that Ms Sparkes owed Morgan Stanley a duty of care in relation to representations made by her during the course of the telephone conversation on 31 December 2015. Consequently, Ms Sparkes had primary liability for any breaches of duty arising from the representations made during that conversation. It may be that Arrium was also liable for the representations made by Ms Sparkes during the course of the conversation because those representations were made by Ms Sparkes as one of its employees. But in that case, the claim that Ms Sparkes had accessorial liability in respect of Arrium’s conduct can add nothing to the claim that she was liable as principal, since Arrium’s conduct was her conduct. And if, as I have found, Ms Sparkes either did not make or was not negligent in making any of the representations she is alleged to have made during the course of the conversation, then any claim against Arrium must also fail, as must any accessorial claim against Ms Sparkes.

The claim that Ms Sparkes induced the Arrium Entities to breach the terms of the facility agreements can also be put to one side. No submissions were advanced in support of the claim. As I have explained, a breach of the facility agreements could only arise because a representation and warranty was untrue, incorrect or misleading if the relevant Lender acting reasonably considered the consequences of those circumstances constituted a Material Adverse Effect and those consequences were not remedied within 15 Business Days of receipt of a notice from the Lender requiring that to be done. No such notice was given. Consequently, there was no breach arising from the fact (assuming it was a fact) that one or other of the representations and warranties was untrue. No other breach is identified.

In order to be liable, Ms Sparkes would knowingly and intentionally have to have induced the breach of the facility agreements, which would require Ms Sparkes to “know of the contract and sufficient of its terms to know that what [she] induced or procured [the Arrium Entities] to do would be in breach of the contract”, to adapt the language of the New South Wales Court of Appeal in Fightvision Pty Ltd v Onisforou; Tszyu v Fightvision Pty Ltd (1999) 47 NSWLR 473; [1999] NSWCA 323 at [160]. See also LED Technologies Pty Ltd v Roadvision Pty Ltd (2012) 199 FCR 204; [2012] FCAFC 3 at [41]ff per Besanko J (with whom Mansfield and Flick JJ agreed). Accepting for present purposes that Ms Sparkes induced or procured the representations made in the Drawdown Notices, there is no evidence that she knew that the making of those representations involved a breach of contract. Moreover, a director of a company cannot be liable for inducing a breach of contract by the company where the director is merely the individual through whom the company acts: see Pittmore Pty Ltd v Chan [2020] NSWCA 344 at [163]ff per Leeming JA (with whom Bell P and Brereton JA agreed), and cases cited there. There is no reason why the same principle should not apply to employees. On that basis, Ms Sparkes could not be liable for inducing any of the Arrium Entities to breach the terms of the facility agreements. Any acts performed by Ms Sparkes that might otherwise amount to inducement were performed by her either as a director of Finance or AIOH or an employee of Arrium.

The case that Ms Sparkes procured a breach of duty on the part of the Arrium Entities must fail for at least four reasons.

First, I do not accept that the Arrium Entities owed the Lenders a duty of care in making the representations made by the terms of the facility agreements or that Finance or AIOH (the two Arrium Entities on whose behalf Drawdown Notices were signed) owed the Lenders a duty of care in making the representations contained in the Drawdown and Rollover Notices.

It is difficult to see how the Arrium Entities could have owed the Lenders a duty of care in connection with representations and warranties contained in the facility agreements themselves. As the New Zealand Court of Appeal said in Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324, [2004] NZCA 97 at [66]:

So far as the representations contained in the Drawdown and Rollover Notices are concerned, it is common ground that in a case such as this, where the Court is considering whether to recognise a duty of care in respect of a relationship which is not within an established category, it is necessary “to undertake a close analysis of the facts bearing on the relationship between the plaintiff and the putative tortfeasor by references to the “salient features” or factors affecting the appropriateness of imputing a legal duty to take reasonable care to avoid harm or injury” (per Allsop P (with whom Simpson J agreed) in Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258). Those features include (at [103]):

This list, however, is not a checklist to be applied mechanically and the results tallied to arrive at a conclusion. Rather, it is a list of factors that may be relevant to consider in undertaking the required analysis: Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258 at [172] per Basten JA.

In the present case, there is no reason to recognise a duty of care owed by Finance or AIOH anymore than there is a reason to recognise a duty of care owed by the individuals who signed the Drawdown Notices. As I have already explained, the Drawdown Notices and their contents were prescribed by the relevant facility agreements, as were the consequences if the representations and warranties made by the Drawdown Notices were false or misleading in a material respect. The terms of the representations and the consequences if the representations and warranties were false or misleading were negotiated between sophisticated parties who were quite capable of protecting their own interests. Consequently, it could not be said that the Lenders were vulnerable to any negligence on the part of Finance or AIOH in making the representations they contained. There is no reason to overlay a quite different set of obligations and consequences on those already set out in the agreements. On the contrary, to do so would be to depart from the principle stated by Crennan, Bell and Keane JJ said in Brookfield Multiplex Ltd v Owners Strata Plan No 61288 (2014) 254 CLR 185; [2014] HCA 36 at [132] that “primacy of the law of contract in the protection afforded by the common law against unintended harm to economic interests where the particular harm consists of disappointed expectations under a contract”. The same analysis applies to the representations made by reason of the terms of the facility agreements themselves.

The Anchorage Plaintiffs seek to distinguish Brookfield on the facts. In that case, the Owners Corporation of a strata unit development brought claims in negligence against the builder of the development for faulty workmanship. The contract between the builder and developer contained detailed provisions setting out the builder’s obligations and limitations on its liability. The contracts between the developer and purchasers of the units also contained provisions concerning the quality of work and the repair of defects. The High Court held that the builder did not, in the circumstances, owe the Owners Corporation a duty of care; and it was in that context that Crennan, Bell and Keane JJ made the remarks that they did. The facts of the present case are very different. Moreover, in the present case, the facility agreements contained an express provision stating that “The rights, Powers and remedies provided to the Lender in the Transaction Documents are in addition to, and do not exclude or limit, any right, power or remedy provided by law”.

However, neither of these points alters the position. The fact remains that the parties through their agreements set out the rights and obligations arising from the representations contained in the Drawdown Notices. There is no reason to graft a different set of rights on to those agreed by the parties. The term of the facility agreements that preserves other rights cannot be interpreted as creating rights where none would otherwise exist.

Second, apart from representations made in respect of the period on and from 11 February 2016, I do not accept that the Arrium Entities breached any duty of care they owed the Lenders, since, on the findings I have made, the MAE Representation was true on each occasion on which it was made at least up until that date.

Third, I have already explained why, absent evidence of reliance, I am not satisfied that the Lenders relied on the MAE Representation.

Fourth, even if the Arrium Entities did owe the Lenders a duty of care in relation to the MAE Representation and that representation was false, the claim against Ms Sparkes must fail.

The general principle is that a director of a company who directs and procures the commission of a tort by the company will be liable for that tort along with the company. As Lord Buckmaster explained in Rainham Chemical Works Ltd (In Liq) v Belvedere Fish Guano Co Ltd [1921] 2 AC 465 at 476, in connection with a Rylands v Fletcher claim against the directors of a company in respect of an explosion on premises that it occupied and that caused damage to a neighbouring property:

This principle has most often been applied in intellectual property cases. In that context, there has been a question whether liability should attach on the basis that the director “ordered or procured the [infringing] acts to be done” (to quote from the decision of Performing Rights Society Limited v Ciryl Theatrical Syndicate Limited [1924] 1 KB 1 at 14 per Atkin LJ) or on the basis of “deliberate, wilful and knowing pursuit of a course of conduct that was likely to constitute [patent] infringement or reflected an indifference to the risk of it” (to quote from the decision of Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195 at 204 per Le Dain J). Commenting on the two tests, the Full Federal Court in JR Consulting & Drafting Pty Ltd v Cummings (2016) 329 ALR 625; [2016] FCAFC 20 at [350] said this:

Although these principles have been applied outside the area of intellectual property, as Rainham Chemical Works itself demonstrates, the Anchorage Plaintiffs were not able to point to any case where the principles had been applied to the tort of negligence. They did refer to the decision of Barker J in Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd [2011] FCA 522, a case brought against a company that provided a valuation of real property and the individual director who prepared the valuation report. The report was prepared in connection with a loan advanced by the plaintiff on security of the property. When the mortgagor defaulted, the plaintiff sued the valuer and director on the basis that the valuation was misleading and deceptive. An alternative claim was brought for negligent misstatement. Commenting on the vexed question of when a director of a company will be held liable for the company’s conduct, Barker J referred to the principles established in cases such as Rainham Chemical Works (at [180]). However, his Honour did not purport to apply them. Rather, relevantly he found that the director personally owed the plaintiff a duty of care (at [189]).

Relying on the decision of Slade LJ (with whom O’Connor and Cumming-Bruce LJJ agreed) in C Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317, the Anchorage Plaintiffs submit that it is not necessary to prove, or at least it remains an open question whether it is necessary to prove, that the director knew that the conduct was tortious. That case involved an application to strike out a pleading alleging that a director directed or procured a copyright infringement by the company of which he was a director on the basis of a failure to plead knowledge that the conduct was tortious or reckless indifference to that matter. In refusing to strike out the pleading, Slade LJ said (at 329):

Three points may be made about this decision. First, it was a strikeout application. The Court of Appeal did not decide that knowledge or reckless indifference was not a necessary element of the claim in all cases – a point specifically made by Slade LJ in the paragraph following the quoted one. The court simply decided that “different considerations may well apply” in certain cases. Second, it is far from clear why different principles should apply in this area of the law from those that apply to the tort of inducing a breach of contract, which requires knowledge on the part of the tortfeasor of the breach. In any event, the decision in C Evans & Sons appears to be inconsistent with the test most recently stated by the Full Federal Court in JR Consulting & Drafting. I should follow that test stated by the Full Court. Third, the point made by Slade LJ that, if the tort has a mental element then it is necessary to prove that the director also had that mental element, illustrates the difficulty of applying the principle to the law of negligence. Negligence is an essential element of the claim against the company, but how does that translate to a claim against the director? It makes little sense to say that the director is liable if the director was sufficiently closely involved in the relevant conduct and negligently failed to appreciate that that conduct was negligent.

A similar problem arises if at a minimum what is required is reckless indifference to the company’s unlawful civil wrong. In the present context, what does it mean to say that Ms Sparkes was recklessly indifferent to the alleged negligent misstatements made by Finance and AIOH in the Drawdown Notices? The Anchorage Plaintiffs do not and cannot give a satisfactory answer to that question.

The final basis on which it is said Ms Sparkes has accessorial liability is that she was knowingly concerned in the Arrium Entities’ breaches of statutory provisions which prohibit a person from engaging in misleading and deceptive conduct.

Section 79 of the Corporations Act relevantly states that “A person is involved in a contravention if … the person … has been in any way, by act or omission, directly, or indirectly, knowingly concerned in, or party to, the contravention”. Section 1041I states that a person “who suffers loss or damage by conduct of another person that was engaged in a contravention of section … 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention …”. Sections 2 and 236 of the ACL contain analogous provisions. Section 5(3) of the ASIC Act incorporates Parts 1.2 of the Corporations Act, which includes s 79. Section 12GF of the ASIC Act mirrors s 1041I of the Corporations Act, with the result that it too permits a person to recover damages from a person knowingly concerned in a contravention of s 12DA.

In order for a person to be “knowingly concerned” in a contravention the person must have knowledge of the essential facts constituting the contravention. “Knowledge” in this context means actual knowledge, not imputed or constructive knowledge, although wilful blindness to the falsity of a representation is sufficient: Australian Competition and Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17 at [135]; Australian Securities and Investments Commission v Rent 2 Own Cars Australia Pty Ltd [2020] FCA 1312 at [372]ff. It is not necessary for the person to know that those facts constitute a contravention: Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65 at 670 per Mason ACJ, Wilson, Deane and Dawson JJ; Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53; [2003] HCA 75 at [48].

For the reasons I have given, with the possible exception of representations made in respect of rollovers that occurred on 11 or 12 February 2016, the MAE Representation was not misleading at any time at which it was made. For that reason, the knowingly concerned claim against Ms Sparkes must fail except possibly in relation to the rollovers that occurred on those dates. However, in my opinion it must fail in any event because CBA and DB have not established that Ms Sparkes knew each of the essential elements of the contravention. In particular, they have not established that Ms Sparkes knew that the MAE Representation was false.

The Anchorage Plaintiffs submit that it can be inferred that Ms Sparkes knew that the representation was false because she was aware that Arrium’s financial position had changed and that that change reduced its ability to perform its obligations. I accept that Ms Sparkes knew that there had been a change in Arrium’s financial position. However, I do not accept that she appreciated that that change had had a Material Adverse Effect, assuming that there was one. The Anchorage Plaintiffs do not identify the changes they rely on in this context. Nor do they identify the evidence which establishes that Ms Sparkes was aware that those changes had the relevant effect. A broad and unsubstantiated assertion that those matters are made out is not a substitute for an identification of the material that supports the assertion.

Moreover, the question whether the MAE Representation was true or not involved the formation of an opinion based on an analysis of a substantial amount of financial information. It is unclear which of that financial information was known to Ms Sparkes. It certainly cannot be inferred from the information that was available that Ms Sparkes must have formed the requisite opinion, particularly when, as I have explained, there was a reasonable basis for reaching the opposite conclusion.

A further difficulty with the Anchorage Plaintiffs’ accessorial claims against Ms Sparkes is that, for the reasons I have already explained, I am not satisfied that the Anchorage Plaintiffs have established that the Par Lenders relied on the representations contained in the Drawdown and Rollover Notices. Consequently, to the extent that the claims against the Arrium Entities depend on proof of loss flowing from the relevant breach (as the negligence and statutory claims do), those claims must fail for that reason as well, with the result that the accessorial claims must also fail.

For those reasons, the accessorial claims against Ms Sparkes must fail.

In all, three types of claim are made against Mr Bakewell.

First, it is alleged that Mr Bakewell owed the Par Lenders a duty of care (1) in giving and reaffirming the “Bakewell Direction” – that is, the direction allegedly given to Ms Sparkes in December 2015 to drawdown all available funds under the facility agreements; (2) to ensure that the MAE Representation was true and accurate. It is alleged that he breached both duties.

Second, it is alleged that Mr Bakewell directed and procured negligent misstatements and breaches of the facility agreements by the Arrium Entities. Like the analogous claim made against Ms Sparkes, these claims essentially concern the MAE Representation said to have been made both by the terms of the relevant facility agreements and the terms of the Drawdown and Rollover Notices.

Third, it is alleged that Mr Bakewell was involved in a contravention by the Arrium Entities of the statutory provisions relating to misleading and deceptive conduct. Again, this claim mirrors the claims against Ms Sparkes. Like the claim against Ms Sparkes, the claim is limited to claims pursued by CBA and DB as Par Lenders.

Mr Bakewell accepts that he gave the Bakewell Direction to Ms Sparkes no later than 17 December 2015, following a conversation he had with Mr Nestel, although according to Mr Bakewell the instruction was qualified. It was left to Ms Sparkes to decide whether the instruction could be followed consistently with Arrium’s obligations under the facility agreements. There is some evidence (in the form of Mr Robert’s handwritten note made at the board meeting on 2 December 2015) that the idea to draw down all remaining facilities was first raised by Mr Edwards at that meeting. There is no evidence to suggest that the board resolved to accept Mr Edwards’ advice. It is unclear whether Ms Sparkes acted on the instruction. As I have explained, it is not easy to reconcile Mr Bakewell’s evidence that he gave the Bakewell Direction with the evidence that he says prompted it – which was his conversation with Mr Nestel. The objective evidence suggests that Mr Nestel’s advice was confined to advice that Arrium should not repay debt and did not extend to advice that Arrium should draw down all remaining debt immediately. Having said that, the effect of Mr Bakewell’s evidence is clear. Mr Nestel did not give evidence. It appears that the idea of drawing down all remaining debt was raised, albeit by Mr Edwards. Taking these matters into account, I accept that Mr Bakewell first gave the Bakewell Direction no later than 17 December 2015.

However, it seems clear that the instruction was not acted on immediately; and the likelihood is that it was expressed as an idea worthy of serious consideration rather than a direction that Mr Bakewell expected to be implemented immediately. As is apparent from the attached annexures, Arrium drew down on the facilities over the period from late December 2015 to about mid-February 2016. The Anchorage Plaintiffs submit that the drawdowns that occurred in late December 2015 and January 2016 were, in effect, part of a carefully orchestrated plan to put Mr Bakewell’s direction into effect without alerting the Lenders to what was happening. That submission does not sit easily with the plaintiffs’ submission that Arrium was facing a liquidity crisis, and it is not supported by the objective evidence. Debt did reduce at the end of December 2015, which was consistent with Arrium’s usual end of accounting period practice. That reduction occurred in accordance with irrevocable repayment notices, all of which were given on or before 18 December 2015. The liquidity forecast prepared on 11 December 2015 and tabled at the 18 December 2015 board meeting shows a spike in drawn debt after 31 December 2015, as might be expected, but it does not show all debt being drawn at any time covered by the period of the forecast, but again it is likely that that forecast was prepared before the direction was given. However, the same is true of the forecast prepared for the board meeting on 7 January 2016. In fact, that forecast indicates that some debt would be repaid in March 2016. It is not until the board meeting on 19 January 2016 that the forecast suggests that drawn debt would approach the facility limits, and then only in March 2016.

The likelihood is that Mr Bakewell repeated the Bakewell Direction to Ms Pearce on or about 8 February 2016. That is Ms Pearce’s recollection, which is consistent with her handwritten file note. Mr Bakewell does not deny that he gave the instruction; and it is consistent with what Arrium subsequently did. Mr Bakewell accepts that that is not a decision Ms Pearce would have made. The likelihood is that it was something that she was instructed to do, and the likelihood is that those instructions came from Mr Bakewell following the board meeting on 4 February 2016 at which it appears the topic was discussed. Following the instruction on 8 February 2016, Arrium served notices to drawdown USD16 million under the CBA Facility Agreement on 9 February 2016, CAD9.9 million under the Westpac Facility Agreement on the same day and USD20 million under the BBVA Facility Agreement on 10 February 2016. As I have explained, HSBC refused to honour the Drawdown Notice served on it on 11 February 2016.

Absent a more detailed analysis of Arrium’s liquidity needs in January 2016, I am not satisfied that the drawdowns made prior to 8 February 2016 were made as a consequence of the Bakewell Direction. However, particularly given their timing, the likelihood is that the drawdowns made after 8 February 2016 were made in accordance with the Bakewell Direction.

In my opinion, the case based on the Bakewell Direction is misconceived. Again, for reasons which are unclear, the Anchorage Plaintiffs formulate their case both in terms of negligence and negligent misstatement, as if they were distinct torts. The real question is whether Mr Bakewell owed the Lenders a duty of care in giving the instruction he did. In my opinion, he did not. The instructions were internal instructions given as part of the internal operations of Arrium. It appears that they were given by Mr Bakewell following a board meeting during which a suggestion was made that Arrium drawdown on its remaining facilities and that suggestion was accepted, at least tacitly, by the board or perhaps Mr Roberts.

It cannot possibly be the case that every time a director or employee of a company makes and communicates a decision to another employee which affects a third party, the employee making and communicating the decision owes the third party a duty to take reasonable care to avoid causing that third party economic loss arising from that instruction, even if that loss is reasonably foreseeable. That, however, is the logical consequence of a finding of a duty of care in this case. Such a conclusion would involve a radical change in the law and is inconsistent with established and binding authority: see, for example, Spies v The Queen (2000) 201 CLR 603; [2000] HCA 43 at [95] per Gaudron, McHugh, Gummow and Hayne JJ. The directors of a company do owe a duty to consider the interests of creditors where the company is approaching insolvency. But that duty is still one owed to the company and not to the creditors: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. It would be perverse if the directors did not owe a direct duty to creditors where the company was at risk of becoming insolvent, but employees owed a duty to creditors to take reasonable care to avoid economic loss arising from actions they took that were internal to the operations of the company.

For reasons already given, there is nothing about the facts of this case which would justify the imposition of a duty of care in accordance with established principle. The parties had agreed a process by which drawdowns and rollovers were to occur. As part of that process, both Arrium in the facility agreements and the borrowing entity in the relevant notice gave representations and warranties relevant to the Arrium Entities’ financial position. It was open to the Lenders to negotiate for other representations and warranties or for different consequences if those they had negotiated were breached. They were, therefore, not vulnerable to a want of care on Mr Bakewell’s part. Moreover, the imposition of a duty of care on Mr Bakewell would place him in an impossible position. In the present case, it appears that by giving the direction he was acting in accordance with the wishes of the board or Mr Roberts and on advice apparently given by Mr Edwards of Lazard. It might reasonably be thought that his duties to Arrium required him to give the instruction in those circumstances.

The Anchorage Plaintiffs do not give any convincing explanation of why it would be appropriate to hold Mr Bakewell liable for the consequences of the directions he gave. Accepting that the directions were a necessary condition for the harm allegedly suffered by the Lenders, it is not clear why the scope of Mr Bakewell’s liability should extend to the harm arising from the fact that the Lenders advanced the funds that they did. Those funds were advanced in response to Drawdown Notices served on the Lenders in accordance with the facility agreements. In accordance with those agreements, the Arrium Entities made certain representations. It was in reliance on those notices that the Lenders advanced the funds. I have already explained why, in my opinion, the Anchorage Plaintiffs have failed to prove that the Lenders relied on the representations made in or as a result of the Drawdown Notices. In those circumstances, it is difficult to see why the scope of Mr Bakewell’s liability should extend to the consequences flowing from the fact that the Lenders advanced funds in accordance with the notices.

It is not necessary to discuss these claims in any detail. Generally, they must fail for the same reasons as similar claims against Ms Sparkes.

For the reasons I have explained, the Arrium Entities did not breach the terms of the facility agreements by making the representations they did. I am not satisfied that the representations – most importantly, the MAE Representation – were false or misleading (with the possible exception of the representations that were made in respect of rollovers that occurred on 11 and 12 February 2016). Even if they were, that would not amount to a breach of the facility agreements absent notice, which was not given.

Apart from the Bakewell Direction, there is no evidence that Mr Bakewell induced or procured the Drawdown and Rollover Notices by which, or as a consequence of which, the representations were made. The Drawdown and Rollover Notices were issued as part of the normal functions of Arrium’s Treasury group. In any event, there is no evidence that Mr Bakewell knew that the representations amounted to a breach of the facility agreements, assuming that they did.

I have already explained why I do not think the Arrium Entities owed the Lenders a duty of care in making the representations they did, why the representations were not made negligently and why I have concluded that the Lenders did not rely on the representations. Similarly, I have explained why accessorial liability based on directing and procuring a tort is not available in respect of a negligence claim. The same analysis applies equally to the claim against Mr Bakewell.

That leaves the knowingly concerned claim brought by CBA and DB to the extent that they are Par Lenders. I have already explained why the claim against the Arrium Entities for misleading and deceptive conduct must fail at least in respect of drawdowns and rollovers that occurred before 11 February 2016. The question remains whether, if that conclusion is wrong, Mr Bakewell was knowingly concerned in that misleading conduct – that is, whether Mr Bakewell was sufficiently involved in the issuing of the notices that it could be said that he was concerned in the representations made in or by reason of them and whether he knew that they were false, assuming that they were.

It is, of course, difficult to answer this question definitively in a context in which I have concluded that, with the possible exception of the Rollover Notices in respect of debts rollover on 11 and 12 February 2016, the Drawdown and Rollover Notices were not misleading and deceptive because the MAE Representation was not false at the time the notices were issued. However, two general points can be made.

First, in order for a person to be “concerned” in a contravention there must be a practical connection between the person and the contravention: see Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 432 at [407]ff and cases cited there. Just what practical connection is sufficient will depend on all the circumstances of the case.

In the present case, it is not suggested that Mr Bakewell had any particular involvement in the decision to serve the relevant Drawdown and Rollover Notices. It is not suggested, for example, that he was in some way involved in the selection of which facilities should be drawn on at which times. In their written submissions, the Anchorage Plaintiffs identify five matters that are said to demonstrate that Mr Bakewell was an intentional participant in the Arrium Entities’ misleading conduct. They are:

The matters referred to in (b) and (e) can be put to one side for the moment, since they go to Mr Bakewell’s knowledge, not his conduct. Paragraph (d) states a generalised conclusion. It does not identify facts which justify a conclusion that Mr Bakewell was sufficiently involved in the conduct. Accordingly, the Anchorage Plaintiffs’ case boils down to the claim that Mr Bakewell was involved in the contravention because as CFO (and a director of Finance and AIOH) he bore ultimate responsibility for the drawing down of funds and the contents of the notices. It is not clear what “ultimate responsibility” means in this context. To say that he bore ultimate responsibility to the Lenders states the conclusion, not a reason for it. And it is not correct to say that he bore ultimate responsibility for the drawing down of funds or for ensuring that the relevant representations were accurate. That responsibility was borne by the board. The case seems to be that Mr Bakewell was involved in the contravention because he was the executive with overall responsibility for managing the financial aspects of Arrium’s business under the supervision of the CEO and the board. In my opinion, that is not enough. Rather, Mr Bakewell must personally have taken some action or failed to take some action expected of him in relation to the particular Drawdown Notices and the statements they contained so that it could be said that he had a practical involvement in the making of the statements in the particular notices in question. The Anchorage Plaintiffs have not established that he did. It may be that the Bakewell Direction would have been sufficient to establish Mr Bakewell’s personal involvement. However, on the findings I have made, that direction was not acted on before 8 February 2016, by which time all the Drawdown Notices relevant to the Anchorage Plaintiffs, apart from the one dated 9 February 2016 given under CBA Facility Agreement, had been issued.

As to the question of knowledge, it was necessary for Mr Bakewell to know that the representations contained in the Drawdown Notices were false. If the representations were false, then plainly Mr Bakewell knew the facts from which the conclusion of falsity could be drawn. But that would not be sufficient. It would be necessary for the Anchorage Plaintiffs to establish that Mr Bakewell actually drew that conclusion or was wilfully blind to the fact that the conclusion followed from what he knew. As I have explained, the question whether there was a change in financial position that had a Material Adverse Effect involved the formation of an opinion based on a large number of facts. Even if the correct position is that there was a breach of MAE Representation, it is not so obvious that that is an opinion that Mr Bakewell ought to have formed, so that it could be said that he was wilfully blind to the fact.

It is not necessary in this judgment to set out in any detail the mechanism by which the relevant Par Lenders, and a number of intermediary Assignees, sought to assign the rights of action the Anchorage Plaintiffs assert in the Anchorage Proceeding against the defendants. As I have said, it is common ground that the assignments were not effective to assign any of the statutory causes of action, since it is accepted that the relevant statutes do not permit an assignee to recover damages for a contravention of those provisions. It is also common ground that the assignments by their terms are sufficiently broad to assign the common law causes of action on which the Anchorage Plaintiffs sue. The only question is whether those assignments are ineffective because they infringe the principle that bare causes of action are not assignable since they “savoured of or was likely to lead to maintenance”: Glegg v Bromley [1912] 3 KB 474 at 489 per Parker J.

The question whether the assignments were ineffective to assign the relevant causes of action was addressed by me in an interlocutory judgment dealing with a contested application by the Anchorage Plaintiffs to amend to bring the assigned claims (see Anchorage Capital Master Offshore Pty Ltd v Sparkes [2019] NSWSC 384) and by the Court of Appeal in an application for leave to appeal from that judgment (see Bakewell v Anchorage Capital Master Offshore Ltd (2019) 372 ALR 349; [2019] NSWCA 199). It is not necessary to repeat what was said in my earlier judgment. It is sufficient to observe that I allowed the amendments by which the present claims are brought because (1) a recognised exception to the general principle prohibiting the assignment of a bare cause of action is where the assigned claims are ancillary to a proprietary right or interest which itself is assigned; (2) on the state of the current authorities, it was at least arguable that the causes of action on which the Anchorage Plaintiffs sue were ancillary to the debts assigned to them because “ancillary” in this context included cases where there was a legitimate commercial purpose in taking an assignment of the causes of action together with the debt.

Bell P (with whom Macfarlan and White JJA agreed) gave three reasons for refusing leave to appeal. One was that “it is at the very least arguable within the scope of existing authority that the assignments were valid” (at [49]). Another (at [50]) was the following:

I have already concluded that the relevant causes of action do not exist, with the result that the question of assignment does not arise. If I am wrong in that, then it may be relevant to know on which causes of action the Par Lenders are entitled to succeed before determining the validity of an assignment of those claims. It is arguable, for example, that there is a difference between causes of action which depend on accessorial liability for breaches of obligation arising from the facility agreements and direct claims in negligence against the defendants themselves. Consequently, it seems better that the question of the validity of the assignments be dealt with on the basis of actual findings concerning the causes of action that exist rather than on the basis of one or more of a number of hypotheses. Having said that, had it been necessary to do so, I would have concluded that the assignments of the causes of action based on representations made in, or by reason of, the Drawdown Notices were valid.

As I explained in my earlier judgment, prior to the decision of the House of Lords in Trendtex Trading Corporation v Credit Suisse [1982] AC 679, the law recognised two exceptions to the general principle that bare causes of action were not assignable, although there is not necessarily a clear dividing line between the two. One was where the assignment was of a property right or interest and the cause of action was ancillary to that right. The other was where the assignee had a genuine commercial interest in taking the assignment. In Trendtex, the House of Lords held, in what was generally seen at the time to be an extension of the existing law, that the second exception was wide enough to cover a case where the assignee had a financial interest in the outcome of the assigned claim because its ability to recover a debt owed to it by the assignor depended on the success of that claim. The correctness of Trendtex was accepted by the High Court in Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7. In that case, the Court determined that a restitutionary claim had been validly assigned in conjunction with the assignment of a contractual debt. French CJ, Crennan and Kiefel JJ explained their decision in these terms at [53]:

Two comments may be made about this passage. First, in my opinion, their Honours are to be understood as saying that a proprietary right and other rights assigned with it will be sufficiently connected to support the assignment of the latter if it can be said that the assignee has a genuine commercial interest in taking an assignment of the latter with the former. Second, the decision is a recognition that there has been a change in public policy away from the view that “trafficking” in litigation was a social evil towards a recognition that the assignment of legal rights performs a useful social function in ensuring that losses are properly borne by those legally responsible for them.

In the present case, consistently with the decision in Equuscorp, it seems clear that the claims in negligence against the Arrium Entities in relation to the Drawdown Notices (if they existed) were assignable with the assigned debts, since they would have been available as an alternative to a claim based on the facility agreements themselves. It seems a small step to say that the Assignees had a legitimate commercial interest in also taking an assignment of accessorial claims in relation to breaches of the facility agreements and the representations made in the Drawdown Notices, since those claims were intimately connected to the claims against the Arrium Entities themselves and were a means of protecting the Assignees in the event that the claims against the Arrium Entities were not recoverable. It also seems a small step to say that the Assignees had a legitimate commercial interest in taking an assignment of direct claims against the defendants arising out of the same facts for the same reasons. If the defendants were liable to the Par Lenders as a result of their conduct in connection with the facility agreements, there appears to be no policy reason why they should not also be liable to the Assignees.

The defendants submit that the assignments are against public policy because properly understood, they should be seen as trafficking in litigation with a view to profit. In support of that proposition, they point to analyses undertaken by at least some of the Assignees which indicate that, in assessing the price they were willing to pay for the assigned debts, they placed value on recovery under the defendants’ Directors and Officers Liability insurance. But that does not establish that they were trafficking in litigation with a view to profit. The Assignees acquired debts with a certain face value at a discounted price reflecting the costs and uncertainties associated with the recovery of those debts. If the price they paid for the debts was less than the amount they ultimately recovered, they would make a profit. But that does not establish that they acquired a bare right to sue with the intention of making a profit. They acquired debts of a certain value. The right to sue was ancillary to the acquisition of those debts and was one of the means by which the Assignees could seek to recover the face value of the debts that they acquired. There was no possibility of recovering more. Accepting that the trafficking in bare causes of action with a view to profit is still against public policy, the acquisition of the causes of action arising from the Drawdown Notices does not fall into that category. It may be that the other causes of action relied on by the Anchorage Plaintiffs do. However, in the light of what I have said, it is not necessary to pursue that issue further.

The claims in the BOC Proceeding are relatively straightforward. As I have explained, the claims are brought in respect of ten Drawdown Notices issued between 7 January 2016 and 10 February 2016. The BOC Plaintiffs rely on the express representations contained in the Drawdown Notices. They also contend that the Drawdown Notices contained an implied representation to the effect that each of the conditions precedent set out in the relevant facility agreements was satisfied. Why that is so and the utility of that claim is unclear. The facility agreements contained certain conditions precedent to the obligation to advance funds, one of which was that each of the representations required to be made under the agreement was “true and correct in all material respects and is neither misleading or deceptive in any material respect as at the date of the relevant Drawdown Notice and at the relevant Drawdown Date”. In effect, the BOC Plaintiffs contend that the relevant Arrium Entities, by the Drawdown Notices, represented that that condition had been satisfied, which is equivalent to a representation that the representations it was making were true and correct etc. Such a representation adds nothing to the underlying representations and makes little sense. It was not a case that was explained in final submissions. For those reasons, it can be put to one side.

The BOC Plaintiffs claim that the Drawdown Notices were misleading and deceptive for two reasons. One was that they represented that Arrium was solvent when it was not. The other was that they made the MAE Representation, which was false because there had been a change in financial position which had a Material Adverse Effect. They claim that Ms Sparkes engaged in the misleading and deceptive conduct in contravention of s 18 of the ACL because she authorised the issue of the Drawdown Notices up until the date her resignation took effect (on 29 January 2016). They claim that Mr Bakewell engaged in misleading and deceptive conduct in contravention of s 18 of the ACL because he was the person with the relevant authority and knowledge who instructed the February 2016 Drawdown Notices to be issued. Unlike the Anchorage Plaintiffs, the BOC Plaintiffs gave evidence of reliance.

I have already explained why I have concluded that the BOC Plaintiffs have failed to prove that Arrium was insolvent at any relevant time and why the plaintiffs have failed to prove that the MAE Representation was false at any relevant time up until 11 February 2016. However, something more needs to be said in relation to the BOC Plaintiffs’ claim that Ms Sparkes and Mr Bakewell engaged in misleading and deceptive conduct because they were the persons who authorised the relevant notices and the BOC Plaintiffs’ case on reliance.

In essence, it is the BOC Plaintiffs’ case that the Drawdown Notices were misleading for the reasons given, that Ms Sparkes authorised the January 2016 notices and Mr Bakewell authorised the February 2016 notices and that by doing so they themselves engaged in misleading and deceptive conduct.

There are two difficulties with the approach taken by the BOC Plaintiffs. First, their analysis starts at the wrong point. They identify representations that are said to be misleading and ask who is responsible for them. However, the correct approach is to identify the conduct engaged in by Ms Sparkes and Mr Bakewell and to ask whether that conduct was misleading or deceptive – that is, whether it had a tendency to lead a person into error. Second, their approach proceeds on the basis that anyone who authorised the Drawdown Notices themselves engaged in misleading and deceptive conduct. But, in my opinion, that is not the correct test.

In the present case, the conduct that is said to be misleading is the making of representations which are said to be false. In order for a person to engage in misleading or deceptive conduct by making a false representation, the person must make the representation, since it is the making of the representation that constitutes the misleading or deceptive conduct. It is not possible to set out a definitive test for determining whether a person is the maker of a representation for the purpose of the statutory provisions prohibiting misleading and deceptive conduct. That will depend on all the facts of the case. In the simplest case, the person will be the person who personally or through an agent communicates the false statement to the representee. But that is neither necessary nor sufficient. A person who prepares a document containing misleading statements with the intention or expectation that the document will be provided to other persons may be regarded as the maker of the representations communicated by the document even though that person is not the person who provides the document to those persons. On the other hand, a person who is responsible for providing a document to another person which contains false statements will not engage in misleading or deceptive conduct if properly understood the representation is not his or her representation. That explains why a purely ministerial act by a company employee will not amount to engaging in misleading and deceptive conduct, even where that act consists of the communication of a representation that is misleading.

In this context, it is relevant to bear in mind that the legislation draws a distinction between engaging in misleading and deceptive conduct and being involved in conduct that is misleading or deceptive, which includes being knowingly concerned in that conduct. Plainly, the legislation contemplates that a person can be involved in misleading and deceptive conduct in a way that falls short of engaging in that conduct. The concept of engaging in misleading and deceptive conduct must not be interpreted so broadly that it makes the accessorial liability provisions otiose.

On the approach taken by the BOC Plaintiffs, the task is to find the person responsible for the misleading conduct. As they put it in their closing written submissions “The question is “who is the real culprit for the conduct?”. One consequence of that approach, which they accept if not embrace, is that where a representation is made by a corporation that is misleading or deceptive, it will always be possible to identify at least one individual who also engaged in misleading and deceptive conduct. It will be the individual or individuals within the corporation who authorised the representation to be made. In my opinion, that proposition is not supported by the authorities relied on by the BOC Plaintiffs and would involve a radical change in the law. For one thing, it places all the focus on the representor and none on the representee and what the representee would reasonably understand from the conduct, despite the fact that the question whether conduct is misleading or deceptive is to be determined by asking the question whether it has a tendency to lead the representee into error.

The case which perhaps comes closest to supporting the BOC Plaintiffs’ submission, and one on which they place considerable reliance, is Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120. In that case, Citrofresh International Ltd, a publicly listed company which was in the business of supplying disinfectant products using an active ingredient known as “Citrofresh”, sent an announcement to the ASX stating that in a “landmark” test result, Citrofresh had demonstrated significant virucidal activity against four major viruses including HIV/AIDS. The announcement included a statement that the company believed it could now offer “a global solution” to reduce and stop the spread of HIV using Citrofresh. The text of the announcement was approved by Mr Narain, who was the company’s CEO. Mr Narain also participated in the preparation and drafting of the announcement and directed the company’s secretary, Mr Hanlon, to send it to the ASX.

ASIC brought proceedings against Mr Narain for a contravention of s 1041H(1) of the Corporations Act, which provides that “a person must not … engage in conduct, in relation to a financial product … that is misleading or deceptive or is likely to mislead or deceive”. The trial judge relevantly found that Mr Narain had not himself engaged in misleading and deceptive conduct. That was because he was not personally engaged in sending the announcement to the ASX. That conduct was engaged in by the company and the person who transmitted the announcement to the ASX.

The Full Court allowed the appeal and remitted the case for rehearing, principally on the question whether Mr Narain had breached his duties as a director by authorising the publication. It also remitted for rehearing the question whether the contents of the announcement were misleading, although it is apparent that the Full Court considered it was. In rejecting the trial judge’s conclusion that Mr Narain had not personally engaged in misleading and deceptive conduct because he did not send the announcement to the ASX, Finkelstein J, in words that are reflected in the submissions of the BOC Plaintiffs, said (at [19]):

Jacobson and Gordon JJ gave a number of reasons for reaching the same conclusion:

The facts of Narain were very different to the facts of the present case. There the representations were contained in a document that Mr Narain was involved in preparing. By instructing Mr Hanlon to send the document to the ASX, Mr Narain must have intended the representation to be made to members of the public. It is likely that members of the public who read the announcement would have understood that it had the approval of senior management if not the board of Citrofresh International.

Narain does not stand for some general proposition that in every case the person within a company who authorises the company to make a representation is to be treated as a person making the representation. In Narain, the focus was on the question whether it could be said that Mr Narain made the representations in question even though he did not himself release the announcement containing those representations. Not surprisingly, the Full Court held that it could. But as Jacobson and Gordon JJ stressed, each case must be decided on its own facts.

As I have explained, in the present case, the representations were contained in a pro forma document that was required to be issued by Arrium in order to drawdown on its facilities. The terms of the representations were determined by agreements negotiated between Arrium and its Lenders. It was not the task or responsibility of Ms Sparkes or Mr Bakewell to determine the contents of the representations made in the Drawdown Notices, nor did they. The form of the notices indicate that they were given by the Arrium Entity seeking to draw on the funds. The facility agreements required the notices to be signed by an Authorised Signatory. The purpose of that requirement was to provide a contractual mechanism by which the relevant Arrium Entity became bound by the Drawdown Notices, including the representations that they contained. It was not relevant for the Lenders to know the internal mechanism by which a decision was made to make a particular drawdown. Despite the ability of Arrium and the Lenders (who were the only persons who might rely on the notices) to reach an agreement on who else was to be taken to have made the representations contained in the Drawdown Notices, no such agreement was reached.

The BOC Plaintiffs submit that a person responsible for generating a pro forma document will be liable for its misleading representations. They rely on the decision in Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84 in support of that proposition. However, in that case the misleading representation was contained in a statutory declaration provided by a company’s chief operating officer in relation to a payment claim served in accordance with the Building and Construction Industry Security of Payment Act 2002 (Vic). That case is plainly distinguishable from the present one.

The BOC Plaintiffs also place emphasis on the fact that it was the responsibility of Ms Sparkes and Mr Bakewell to ensure that when the company drew down on any of its facilities that the representations and warranties that the company was giving under those agreements were true (to paraphrase a question asked of Mr Bakewell during the public examinations conducted by the liquidator to which Mr Bakewell gave an affirmative answer). Two points may be made about that. First, the fact that Mr Bakewell or Ms Sparkes had some internal responsibility for ensuring that the representations were true, does not mean that they made the representations. Second, to say that Mr Bakewell and Ms Sparkes were responsible for ensuring the representations and warranties were true is an over-simplification. The terms of the facility agreements were approved by the board. Ultimately, it was a board responsibility to determine whether Arrium remained solvent. The board understood that and during the period from at least January 2016 regularly passed resolutions concerning Arrium’s solvency that recognised that fact. Similarly, it was ultimately a board responsibility to determine whether Arrium could continue to drawdown on the facilities that it had approved. No doubt, if either Mr Bakewell or Ms Sparkes became aware of facts, or formed an opinion, that suggested that Arrium could no longer drawdown on its facilities, it was incumbent on them to bring that to the board’s attention (or at least to Mr Bakewell’s attention, in the case of Ms Sparkes). The board was at least as well informed as Mr Bakewell about the issues relevant to the question whether the representations were true and better informed than Ms Sparkes. The evidence does not establish that either Mr Bakewell or Ms Sparkes formed the opinion the Arrium Entities could not make the representations in the Drawdown Notices. More significantly, though, these considerations reinforce the conclusion that it was the Arrium Entities making the representations, not Mr Bakewell or Ms Sparkes.

For those reasons, I am not satisfied that either Mr Bakewell or Ms Sparkes engaged in misleading and deceptive conduct, even if the representations made in the Drawdown Notices were false.

Before addressing the BOC Plaintiffs’ case on causation, it is necessary to say something about the BOC Plaintiffs’ evidence of reliance.

As is apparent from Annexure 2 (61530, pdf) to this judgment, the relevant Drawdown Notices were given under the three syndicated facility agreements, the Westpac Facility Agreement and the BBVA Facility Agreement. BOC was only a party to the 2013 SFA. BBVA was a party to the 2013 SFA and the 2014 SFA. Westpac was a party to all three syndicated facility agreements.

Drawdown Notices under the syndicated facility agreements were sent to NAB as agent. The person at NAB responsible for dealing with the Drawdown Notices was Ms Cathy Liu. Ms Liu did not give evidence. However, her supervisor, Ms Allison Dinham, did. According to Ms Dinham, it was Ms Liu’s responsibility to check that the notice was in order and to enter the details of the notice into LoanIQ, a software platform used by NAB to service syndicated loan facilities, among other things. LoanIQ then automatically generated a “Drawdown Intent Notice” or a “Repricing Intent Notice” that was emailed to the relevant Lenders and the Arrium Treasury group via LoanIQ. At the same time, it was Ms Liu’s responsibility to upload a copy of the Drawdown Notice to Debtdomain, a global, internet based syndicated loan management system, which is accessible to Lenders through an online log-in portal. The evidence is that only the Drawdown Notice dated 27 January 2016 and the two Drawdown Notices dated 28 January 2016 were uploaded to Debtdomain. On the day before the Drawdown Date, Ms Liu set the interest rate for the drawdown amount on LoanIQ, which then generated a “Rate Setting Notice” or a “Repricing Rate Setting Notice” recording the interest rate. Those notices were automatically emailed to the relevant Lenders. On the Drawdown Date, the relevant Lenders were required to transfer their proportion of the drawdown amount into NAB’s clearing account, from where it was transferred to Arrium’s transaction account with ANZ.

Ms Dinham accepted in cross-examination that neither NAB’s Policies and Procedures manual relating to the management of syndicated loans nor any other document suggested that it was part of Ms Liu’s responsibilities to check the representations and warranties. However, Ms Dinham said that her expectation was that members of her team (including Ms Liu) should check that the representations were contained in the Drawdown Notice, since they were an important part of the document. The objective evidence suggests that none of the Lenders accessed the Drawdown Notices that had been uploaded to Debtdomain.

BOC led evidence of reliance from two witnesses – Ms Shaohui Huang, the Chief Operating Officer of BOC in Sydney, and Mr Patrick Lynam, Chief Risk Officer with BOC, Sydney Branch.

Ms Huang gives evidence of the process of advancing funds to the Arrium Entities in accordance with Drawdown Intent Notices issued by NAB, which was a process supervised by her. She did not personally review any of the Drawdown Notices. She says that she expected that NAB would only issue a Drawdown Intent Notice if the associated Drawdown Notice was compliant with the terms of the 2013 SFA. She also says that if NAB had advised her that any of the Drawdown Notices did not contain the representations and warranties required by the 2013 SFA or had advised her that the Drawdown Notices disclosed an Event of Default or that Arrium was insolvent, she would not have authorised the advance.

Mr Lynam gives evidence that, in accordance with BOC’s procedures, each customer is allocated a “PD” (that is, a probability of default) between 1 (lowest) and 15 (highest) and that BOC generally produced every four months a periodic review in relation to a customer and a more detailed annual review. BOC also classified poorer quality loans as “special mention”, “substandard”, “doubtful” or “loss”, representing deteriorating levels of risk. At a meeting of BOC’s credit committee on 19 March 2015 (which was chaired by Mr Lynam), a decision was made to classify Arrium as “special mention”, which indicated that Arrium was experiencing difficulties which, if they persisted, could result in losses. That classification continued until the appointment of administrators on 7 April 2016. Also at the meeting on 19 March 2015, Arrium’s PD score was increased from 6 to 8. It was increased again to 9 on 30 September 2015.

There were meetings of BOC’s credit committee on 8 December 2015, 21 January 2016 and 26 February 2016. The relevant parts of the minutes of the meeting on 8 December 2015 are set out earlier in this judgment. The minutes of the meeting on 23 January 2016 relevantly record:

On 23 February 2016, Mr Lynam sent an email to BOC’s head office recommending that Arrium’s PD score be increased to 11. Mr Lynam says in his affidavit evidence that his recommendation followed publication by Arrium on the ASX of the GSO recapitalisation proposal. Mr Lynam’s recommendation was accepted at a meeting of the credit committee on 26 February 2016 and implemented on 28 February 2016.

Mr Lynam says that at no time was he aware that Arrium was insolvent or that BOC had a right to refuse to advance funds to the Arrium Entities in accordance with the 2013 SFA in response to Drawdown Notices. He says that if he had been, he would have used his delegated authority as Chief Risk Officer to prevent the drawdowns from occurring.

Westpac led reliance evidence from Mr Owen. He gives evidence that in or around 24 April 2015, Westpac downgraded Arrium’s credit risk grade (CRG) from D52 to E35, which involved a change in Westpac’s assessment of the credit risk from being acceptable but not investment grade to marginal, below the standard acceptable for new business and requiring increased senior line management attention. From that time, Mr Owen’s group began to monitor the file. In September 2015, Mr Owen’s group prepared a Credit Approval Summary (CAS) that included a summary of the credit strategy relating to the exposure. That summary, which is dated 16 September 2015, assessed the CRG as F21, which involved a further downgrade and suggested that the customer was facing some difficulties which may be more than temporary, but not sufficiently great to conclude that a default or loss is “envisaged” (to use Mr Owen’s word). The outlook was also described as “negative” because of the falling iron ore and steel prices.

Between 16 September 2015 and 24 March 2016, Westpac prepared a total of 8 CASs. Those up to and including 4 February 2016 retained a CRG of F21. The CAS dated 16 February 2016 does not state a CRG. The one dated 25 February 2016 stated that the CRG was G11 and the one dated 24 March 2016 dated that it was H4. Both changes represented further downgrades. H4 indicated that full collection of interest and principal was in serious doubt. Mr Owen says that he reviewed at least one of the Drawdown Notices on Debtdomain and that it appeared to him to be in the form required by the syndicated facility agreements.

On 9 February 2016, Arrium sent a Drawdown Notice under the Westpac Facility Agreement seeking to draw down CAD9,900,000 on 12 February 2016. According to Mr Owen, it was Senior Credit Analyst, Ms Jacqueline Smith’s responsibility to review the notice to ensure that it complied with the form set out in the facility agreement and to bring anything unusual about the notice to the attention of Mr Owen. Mr Owen says that if any of the notice had been non-conforming, including if any of the representations and warranties were qualified, he would not have recommended that Westpac comply with the notice.

In the case of BBVA, reliance evidence was given by Ms Shui Yu Siu, who is the Head of Operations Control & Support Asia.

Ms Siu gives evidence of the practice that she and her team followed on receipt of a Drawdown Intent Notice or Repricing Intent Notice from NAB in relation to the syndicated facility agreements. It is apparent from that evidence that BBVA advanced funds in response to those notices. No one on Ms Siu’s team looked at the Drawdown Notices themselves. However, Ms Siu says that based on her membership of BBVA’s Loan Review Committee, she was aware that from August 2015, Arrium was assigned to “Watch List 3” in accordance with BBVA’s internal classification and “Special Mention” in accordance with the loan classification system adopted by the Hong Kong Monetary Authority. Watch List 3 indicated that the borrower was experiencing difficulties which threatened BBVA’s ability to be repaid in full. As a consequence, Ms Siu says she took special care to ensure that BBVA only advanced funds to Arrium if it was legally obliged to do so. She says that she would not have permitted funds to be advanced in response to a Drawdown Intent Notice if NAB had informed her that it had received a non-conforming Drawdown Notice or that the relevant Arrium Entity had disclosed an Event of Default had occurred – in particular that the borrower was insolvent.

As to the drawdown of USD20 million under the BBVA Facility Agreement in response to a Drawdown Notice issued on 11 February 2016, Ms Siu says that she checked whether the notice was identical to the required form set out in Schedule 3 of the BBVA Facility Agreement, confirmed that the requested amount was within the facility limit, checked that notice was signed by an Authorised Officer and informed BBVA’s Treasury Team to arrange funding for the drawdown. Ms Siu says that she noticed that the Drawdown Notice contained an additional paragraph stating that the funds were to be drawn in US dollars. She regarded that addition as immaterial because it was a US dollar facility. Ms Siu says that if any of the representations and warranties contained in the Drawdown Notices had been deleted or if the notice had disclosed an Event of Default, she would not have arranged for the funds to be advanced.

It is apparent from the evidence that, like other Lenders, BBVA closely monitored Arrium’s financial position and that that was the subject of frequent reports to the credit committee. Those reports were prepared by Mr Roberto Fernandez Jimena, who reported to the Chief Risk Officer. Mr Jimena swore an affidavit in the proceedings but was not called to give evidence. Extracts from minutes of some of the credit committee meetings have been set out earlier in this judgment. It is apparent from the minutes that BBVA was aware of the deteriorating prices for iron ore and steel and the effect that that was having on Arrium.

In the case of a claim for damages under s 236 of the ACL, the required causal nexus between the loss claimed and the misleading conduct is encapsulated in the word “because”. The question is whether the loss in respect of which a claim is made happened because of the misleading conduct. That question is to be answered in the present case by asking whether, applying common sense notions of causation, it can be said that the conduct said to be misleading materially contributed to the loans being made and therefore to the losses arising from those loans: see Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ; March v E & MH Stramare Pty Ltd (1991) 171 CLR 506. It is usual to seek to answer such questions by asking whether the loss would have occurred but for the contravening conduct. In a passage quoted by the BOC Plaintiffs, Edelman J explained that test in these terms in Lewis v Australian Capital Territory (2020) 381 ALR 375; [2020] HCA 26 at [178]:

Applying that test, the BOC Plaintiffs say that the relevant counterfactual is either one in which the representations were not made or one in which they were qualified. According to them an appropriate qualification was one in which Arrium disclosed that an Event of Default had occurred because it was insolvent (if that was the case) or one in which it stated that there had been a change in financial position which constituted a Material Adverse Effect arising from the fact that the Gearing Ratio had decreased from 0.41 as at 30 June 2015 to 0.47 as at 31 December 2015, that the ICR had changed from 4.33 to 3.77 over the same period and that it was not likely that Moly-Cop would be sold for a price sufficient to enable Arrium to repay the facilities maturing in July 2017 and trade solvently thereafter. In either case, they submit that the funds would not have been advanced.

There are a number of difficulties with this submission.

First, there is a disconnect between the BOC Plaintiffs’ case on causation and its case that the Drawdown Notices were misleading insofar as they made the MAE Representation. The MAE Representation is said by the BOC Plaintiffs to be misleading for three reasons. One is because there had been a material change in the Gearing Ratio. A second is because there had been a material change in the ICR. A third is that by 7 January 2016 it had become evident that there was no reasonable basis to expect that Arrium could obtain at least USD1.35 million for the Mining Consumables business. However, none of the reliance evidence given by the Lenders specifically address those matters. Rather, the reliance evidence is generic in nature and stated at a level of generality that makes it impossible to understand the reasoning process that forms the basis of the reliance.

Second, with one exception, there is no evidence that anyone checked to see whether the Drawdown Notices contained the relevant representations. There is no evidence that anyone from the BOC Plaintiffs did so. The evidence of the BOC Plaintiffs is that they relied on NAB to do so. However, NAB was not required to do so under the terms of its appointment as agent. It appears that it was not something required by NAB’s internal policy and procedure documents. Ms Dinham said that it was something that she expected Ms Liu to do. But there is no evidence that that expectation was communicated to Ms Liu. Moreover, the evidence suggests that in a number of respects Ms Liu failed to do what was plainly required of her by NAB’s internal procedures – such as uploading each Drawdown Notice to Debtdomain.

There is nothing surprising in the fact that it appears that no-one checked whether the Drawdown Notices made under the syndicated facility agreements contained the representations and warranties required by those agreements. Ms Dinham’s group, and the corresponding groups in the BOC Plaintiffs, were focussed on formal aspects of administrating the loans. Each of the BOC Plaintiffs had separate groups who were responsible for the customer relationship and, in particular, in monitoring Arrium’s financial circumstances and making decisions about how best to manage the obvious credit risk that they were facing. If they thought that it was worthwhile, it was open to them to investigate whether there were grounds for refusing to honour Drawdown Notices. It appears that they chose not to take that course. They must have appreciated that refusing to honour drawdown requests could have serious repercussions for Arrium’s business. Before taking that step, they wanted to know what the outcome was of the sale of Mining Consumables.

The one exception is that Ms Siu checked the Drawdown Notice given under the BBVA Facility Agreement. However, the focus of her attention appears to be on the question whether the form of the notice corresponded to the form set out in the agreement. There is no evidence that the contents of the representations were important to Ms Siu. Ms Siu does not, for example, give evidence of any concerns she had about Arrium’s financial position and the fact that she obtained some comfort from the representations contained in the Drawdown Notices.

Third, there is a difficulty in applying the “but for” test in this case because it is difficult to separate the contractual requirements in relation to the Drawdown Notices from the representations the Drawdown Notices contain. The “but for” test of causation requires that the only change that can be made in the hypothetical world is a change to the facts that constitute the wrongful act. Normally, that would involve an assumption that the misleading statements were not made. But in this case, the statements said to be misleading are required by the agreements. Consequently, the hypothetical assumption requires an assumption that a notice is given that does not comply with the relevant agreement. It might readily be concluded that a drawdown would not occur in those circumstances. But it is not possible to say whether that is because the notice does not comply with the terms of the agreement or because the lender is no longer being misled about Arrium’s financial position. The Lenders cannot elevate their refusal in the hypothetical world to comply with the Drawdown Notice because the notice did not comply with the agreement as proof that they were misled by statements contained in the Drawdown Notice.

The alternative counterfactual seeks to avoid that problem but in doing so it substitutes one set of representations for another (qualified) set. But there are a large number of ways in which the representations can be qualified, which makes the formulation of an appropriate counterfactual difficult if not impossible. The formulation of appropriate qualifications will necessarily introduce additional representations which involves a departure from the requirement that the only change that should be made in the counterfactual world is one that removes the misleading conduct.

Fourth, as I have sought to explain, the evidence indicates that the opinions that the Lenders formed on the financial circumstances of Arrium and what was in their best interests given Arrium’s financial position were formed as a consequence of their own analysis rather than the statements in the Drawdown Notices. As might be expected, the matters that were likely to affect Arrium’s ability to comply with its obligations under the facility agreements were being monitored by the Lenders’ respective credit committees, and it is plain that the decisions concerning what steps the Lenders would take to protect their interests were being taken by those committees and the relevant groups charged with the responsibility of overseeing loans which were at risk. There is no suggestion that anyone on any of those committees or a member of any of those groups placed weight on the representations contained in the Drawdown Notices.

The position is clearest in the case of the 2013 SFA. Under the terms of that agreement one of the representations on which the Lenders say that they relied was the representation that there had been no change in financial position from 31 December 2012 that had a Material Adverse Effect. However, the BOC Plaintiffs appear to have been of the opinion that such a change had occurred. Between 31 December 2012 and the dates Drawdown Notices were given under the 2013 SFA (7 January 2016 to 28 January 2016), BOC had reduced Arrium’s PD score from 6 to 9 and classified it as a “Special Mention”. Between the same dates, Westpac had downgraded Arrium’s CRG from D52 to F21 and BBVA had classified Arrium as “Watch List 3” and “Special Mention”. Downgrades had also occurred between 30 June 2015 and the relevant Drawdown Dates. On 16 September 2015, Westpac downgraded Arrium’s CRG from E35 to F21. The minutes of the credit committee on 8 December 2015 record Mr Lynam as observing that the significant fall in iron ore prices would be causing Arrium stress. It is also apparent from those minutes that Westpac appreciated that there was a risk that the sale of Mining Consumables would not proceed and that if it did not “Arrium may have material difficulties”. At the meeting on 29 January 2016, Westpac was specifically told that there was a potential write down in the mining business “but not so large as to threaten covenant compliance”. It must have understood, however, that there would be a reduction in the relevant ratio. Similarly, in the loan review dated 28 January 2016, BBVA stated that Arrium was “in a difficult financial situation due to its high dependence on the iron ore price, which has deceased by more than 40% in the last year”.

On the BOC Plaintiffs’ case, many of these points may be irrelevant because the only changes in financial position they point to are changes in the Gearing Ratio, the ICR and the prospects of a sale of Mining Consumables. However, the evidence suggests that none of these matters were important to the BOC Plaintiffs. Westpac was told on 29 January 2016 that there were likely to be write downs in the value of the mining business, which would affect the Gearing Ratio. However, it continued to make advances after that date. It must have been apparent to the Lenders that Arrium’s EBITDA was affected by the reduction in the price of iron ore and steel, which they knew about. Consequently, they must have appreciated that there was likely to be a reduction in the ICR. However, they continued to honour the Drawdown Notices.

So far as the sale of Mining Consumables was concerned, if there was a change in financial position that had a Material Adverse Effect, the change was a deterioration in the likelihood that Arrium would obtain an acceptable price for Mining Consumables. The Lenders must have appreciated that the sale of Mining Consumables was not going as well as might be hoped. In BBVA’s loan review dated 28 January 2016 it was noted that market rumours “pointed to some insufficient debr”, which appears to be a reference to the fact that there were market rumours that the sale price would be insufficient to enable Arrium to repay its Lenders. By late January, Westpac knew that only two bidders were left in the process and that Arrium was expecting final bids on 5 February 2016. Despite knowing those things, BBVA and Westpac continued to advance funds. If the final bid prices were important to Westpac’s decision to fund, it is to be expected that it would have contacted Arrium shortly after 5 February 2016 to find out what the final bids were, but it did not do so. As I have explained, the likelihood is that the Lenders were willing to wait to see what the outcome of the sales process was before deciding what to do next.

The Anchorage Plaintiffs divide their damages claim into two parts. First, they claim damages in respect of money advanced in response to the impugned Drawdown Notices (new debt). Second, they claim damages in respect of debt rolled over in response to the impugned Rollover Notices. In relation to the drawdowns, the Anchorage Plaintiffs claim the amount the Par Lenders advanced relying on the impugned Drawdown Notices together with interest (on the basis that the advances would not have been made but for the defendants’ wrongful conduct) less the amount they have recovered in respect of that debt. Mr Brendan Halligan, an expert accountant retained by the Anchorage Plaintiffs, calculates that amount as $47,510,599.

In relation to the rollovers, the Anchorage Plaintiffs calculate the damages they claim in one of two ways. First, they do so by comparing the position the Par Lenders would have been in now (assuming the debts and causes of action had not been assigned) with the position they would have been in if the rollover debt had been paid in full on the date that it was due (referred to in submissions and the expert evidence as “Scenario 1”). That involves an identical calculation to the calculation in respect of new debt. It is the difference between the amount rolled over and the amount that has been recovered in respect of the rolled over debt. The calculation of damages on that basis was ultimately abandoned for the very good reason that the Anchorage Plaintiffs were unable to make good the assumption that, if the wrongful conduct had not occurred in relation to the Rollover Notices, the relevant debt would have been repaid in full. That assumption obviously did not sit easily with the Anchorage Plaintiffs’ case that Arrium was facing a liquidity crisis and could not be maintained in the face of evidence given by Mr Tony Samuel, an expert accountant retained by HSF, to the effect that Arrium would not have had the financial capacity to repay all the debt that was rolled over.

The second way in which the Anchorage Plaintiffs seek to calculate their damages in relation to the rolled over debt (referred to as “Scenario 2”) is to assume that if the impugned conduct had not occurred, the Par Lenders would not have agreed to rollover the debt, with the result that Arrium would have gone into administration on or about 31 December 2015. The Anchorage Plaintiffs’ claim as damages the amount that has been recovered in respect of the rolled over debt and the amount that would have been recovered if Arrium had gone into administration on that earlier date. Mr Halligan calculates that amount as $47,728,347, making the total damages claim $95,238,946.

Although the BOC Plaintiffs’ claim is only made in respect of new debt, their primary method for calculating damages is similar to the method adopted by the Anchorage Plaintiffs for rolled over debt. They say that their loss is to be calculated as the difference between the amount the BOC Plaintiffs have recovered and the amount that they would have recovered if Arrium had gone into administration on 7 January 2016. Ms Dawna Wright, an expert accountant retained by the BOC Plaintiffs, calculates that amount as being $99,647,142 before discounting and interest. In their List Statement, the BOC Plaintiffs advanced an alternative claim for damages that mirrors the claim advanced by the Anchorage Plaintiffs in relation to new debt – that is, they claimed damages as the difference between the amount that they advanced in response to the impugned Drawdown Notices and the amount that they have recovered in respect of that debt (plus interest). That method was not pursued in submissions. The BOC Plaintiffs submit that it has “several obvious problems”. Specifically, they say it only compensates the BOC Plaintiffs in relation to advances made in response to the misleading conduct. It does not compensate them for loss on pre-existing debt. In addition, according to them, it fails to recognise that, but for the wrongful conduct, the impugned drawings would not have occurred, with the result that the dividend would have been different.

Before addressing the substantive issues raised by the damages claims, five preliminary points should be mentioned.

First, the defendants point out that the way the Anchorage Plaintiffs seek to put their case is not consistent with their pleading. In particular, nowhere do they plead a case that damages in relation to rollovers that occurred in response to the impugned Rollover Notices should be calculated by comparing actual recoveries with recoveries that would be made on the basis of a hypothetical earlier administration. Ms Sparkes, in particular, submits that the Anchorage Plaintiffs should be confined to their pleaded case. I do not accept that submission. Whilst it is true that the pleaded case is confined in the way that Ms Sparkes says it is, the case now sought to be advanced is consistent with evidence given by Mr Halligan. His report was served approximately one and a half years before the hearing. No point was taken at that time that the report addressed an unpleaded case. The defendants have not been taken by surprise. They filed evidence from Mr Michael Potter, an expert accountant retained by them, which addresses Mr Halligan’s evidence in detail. Accordingly, the Anchorage Plaintiffs should be permitted to advance a case in accordance with the expert evidence they have served.

Second, as I have said, the BOC Plaintiffs did advance in their List Statement an alternative case that their loss is to be measured by the difference between the amount of the impugned drawdowns and the amount they have recovered in respect of those drawdowns. By a notice of motion filed on 8 March 2021, the BOC Plaintiffs sought an advance ruling under s 192A of the Evidence Act that certain notices of appropriation they had served on the liquidators on 5 March 2021 be admitted into evidence. Those notices were said to be relevant to that alternative case. Following the appointment of administrators, Arrium (and many of its subsidiaries) and its creditors entered into Deeds of Company Arrangement (together, the DOCA) and the Lenders (or Assignees, where the debt had already been assigned) entered into a document dated 30 September 2016 known as the Override Deed. The details of the Override Deed are not important for present purposes. It is sufficient to observe that by its terms the Deed Administrators acknowledged that the Lenders and Assignees (the Financier Creditors) were entitled to the distribution of any proceeds arising from the sale of certain assets, including Mining Consumables, in priority to other unsecured creditors. By the notices of appropriation, the BOC Plaintiffs sought to appropriate amounts received under the Override Deed to debts owed to them which were not the subject of the impugned Drawdown Notices. If effective and allowed into evidence, it was said that the consequence of the appropriation notices was to increase the amount received by the BOC Plaintiffs in respect of those debts and decrease the amount received by them in respect of debts the subject of the impugned Drawdown Notices, thus increasing their claim for damages.

I dismissed the BOC Plaintiffs’ application and said that, to the extent necessary, I would give my reasons for doing so in this judgment. Having regard to the way in which the damages case was ultimately put, nothing turns on the appropriation notices. However, in my view there was a question whether the appropriation notices were effective which raised a factual question whether some previous appropriation had been made or whether the BOC Plaintiffs by their past conduct were prevented from relying on them. The defendants would have needed time to investigate that factual question. In addition, there was a real issue whether it was open to the BOC Plaintiffs to appropriate payments made some time ago for the purpose of their damages claim. The question of what damages the BOC Plaintiffs had suffered as a consequence of the impugned conduct was a question for the Court and was not one that could be manipulated by the appropriation of amounts recovered by the BOC Plaintiffs. Accordingly, it was my opinion that there was a likelihood that the defendants would be unfairly prejudiced if the notices were admitted that substantially outweighed any probative value the notices had and that therefore they should be excluded under s 135 of the Evidence Act. It was for those reasons that I made the ruling I did.

Third, the Anchorage Plaintiffs contend that, to the extent that the assessment of damages depends on a counterfactual, it was not necessary for them to prove that counterfactual on the balance of probabilities. Rather, they say that the Court is required to be satisfied that the proposed counterfactual “would have occurred as a matter of informed estimation”. In my opinion, that is not correct. The Anchorage Plaintiffs rely on a number of decisions for the proposition they advance including Malec v JC Hutton Pty Ltd (1990) CLR 638; [1990] HCA 20 at 639-90; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4 at [22]-[24] and Berry v CCL Secure Pty Ltd (2020) 381 ALR 427; [2020] HCA 27. In the last of these cases, Bell, Keane and Nettle JJ explained the position in these terms:

As is apparent from this passage, the hypothetical with which each of these judgments is concerned is one involving a lost opportunity. The cases stand for the proposition that, if a plaintiff can prove on the balance of probabilities that it has lost a commercial opportunity of some value because of misleading and deceptive conduct, then it is entitled to recover the value of that opportunity, even if the prospects of it coming to fruition were less than 50 percent. But that is not this case. It is not claimed that the Lenders lost some commercial opportunity because of the defendants’ misleading and deceptive conduct. Rather, the BOC Plaintiffs say, and must prove on the balance of probabilities, that the Lenders were worse off because Arrium was not placed into administration on 31 December 2015 rather than 7 April 2016. In order to prove that, they must prove that it was more likely than not that the Lenders would have received more in an earlier administration. They can only do that by proving on the balance of probabilities how much the Lenders would have received. It is the difference between that amount and the amount they did receive that represents the BOC Plaintiffs’ loss.

Fourth, one consequence of the approach taken by the BOC Plaintiffs – which they not only accept but embrace as one of the advantages of the approach – is that it permits them to recover losses suffered by them on advances that were not made on the basis of impugned Drawdown Notices. There is a question whether there is a sufficient connection between those losses and the impugned conduct to be able to say that the losses happened because of the impugned conduct. That raises issues concerning the test of causation under s 136 of the ACL compared, for example, to the test of causation stated in the s 5D of the Civil Liability Act in respect of negligence claims. For reasons which will become apparent, it is unnecessary to consider those issues in the context of this case.

Fifth, the BOC Plaintiffs no longer press their claim against Mr Bakewell in respect of any drawdowns prior to 8 February 2016. Nor are they entitled to recover from Ms Sparkes losses arising from drawdowns that were made after 29 January 2016. However, the BOC Plaintiffs do not explain what adjustments should be made to their claims for damages to take account of those facts. The BOC Plaintiffs’ primary case is that but for the impugned conduct, Arrium would have gone into administration on 7 January 2016. Consequently, its loss arose from the representations made in the Drawdown Notices issued on that date, not the later Drawdown Notices. But presumably some adjustment would have to be made for the fact that Mr Sparkes was not responsible for the drawdowns after 29 January 2016. On the other hand, it is difficult to see how Mr Bakewell can be held responsible for all the losses said to flow from the fact that Arrium would have gone into administration on 7 January 2016 when he was not responsible for the circumstances that led to that event. Nor does it seem logical to assess the loss arising from Mr Bakewell’s conduct on the basis that Arrium would have gone into administration at some later date, since on the BOC Plaintiffs’ case it would already have been in administration. It appears that the only way of assessing the loss for which Mr Bakewell is responsible is by taking the difference between the amount of the relevant drawdowns and the amount that has been recovered in respect of them. These points raise the question of the appropriateness of the BOC Plaintiffs’ methodology generally.

There are only two issues between the accounting experts in relation to the Anchorage Plaintiffs’ claim in respect of new debt. One is when the claim should be converted into Australian dollars, since that is the currency in which the Anchorage Plaintiffs seek judgment. The other is whether the Anchorage Plaintiffs are entitled to compound interest. The experts agree that they are both legal issues.

It is common ground that an award of damages should, so far as money can do it, put the innocent party in the position it would have been but for the wrongful conduct.

In Hungerfords v Walker (1989) 171 CLR 125, a decision that has been followed on countless occasions since, the High Court accepted that in appropriate cases, the Court could award compound interest as compensation for the loss of the use of money. In that case, the appellant accountants had negligently miscalculated the amounts of depreciation allowable as deductions in the income tax returns of the respondents over a number of years. The claim for repayment of the overpaid amounts was statute barred in respect of a number of years. Accordingly, the respondents sued the accountants for the overpaid tax. They also claimed compound interest as damages. That claim was upheld in the courts below. The Full Court of the Supreme Court of South Australia allowed interest at the rate of 20 percent per annum on the basis that the funds would have been used to repay loans that bore interest at that amount or would have been invested in the respondents’ business and earned a return of at least that amount. However, following the trial judge, the Full Court reduced the amount calculated using that interest rate to take account of the possibility that part of the money would, if available, have been used for non-business purposes.

The decision to allow compound interest was upheld by the High Court. Brennan and Deane JJ explained the position in these terms (at 152):

In the present case, but for the wrongful conduct, the Lenders would not have advanced the funds that they did. Consequently, they would have retained the funds that they advanced in whatever currency the funds were held and presumably advanced those funds to other customers. Importantly, the Lenders’ (and therefore the Anchorage Plaintiffs’) loss is not to be measured by terms of the facility agreements under which the money was advanced, but rather by the terms on which they could have lent the money to other customers. It was open to the Anchorage Plaintiffs to lead evidence relevant to those matters. They did not do so. The defendants contend that, in the absence of evidence, the Court should not assume that the Lenders would have been able to advance the funds to other customers at similar interest rates.

I do not accept that contention. The Lenders were in the business of lending money and the likelihood is that if they had not lent money to Arrium they would have lent the money to other customers. In those circumstances, they are entitled to an award of compound interest to compensate them for that loss. The only question is what assumptions the Court should make about interest rate and currency absent evidence on those matters. Of course, the Anchorage Plaintiffs must give credit for the amount they have received in respect of debts in respect of which they make a claim.

Ms Sparkes submits that the Anchorage Plaintiffs are not entitled to advance a claim for compound interest because it was not pleaded. However, Mr Halligan’s calculations included compound interest. The issue was the subject of expert evidence and argued at trial. For those reasons, in my opinion the Anchorage Plaintiffs were not prevented from advancing the claim.

While acknowledging that ultimately it is a legal question, Mr Samuel expresses the opinion that it would be appropriate to calculate interest at a simple rate at least from the date of administration because the Lenders would never have been able to obtain compound interest after that date. That view, however, rests on a misunderstanding. As I have explained, the amount that the Anchorage Plaintiffs are entitled to recover is to be measured by reference to what they would have earned if they had lent money to other customers. In my opinion, in the absence of any other evidence, it is appropriate to assume that the Lenders would have been able to lend the money they lent to Arrium to other customers at the same interest rate and that they would have lent the money in the same currencies. Accepting that assumption, the Anchorage Plaintiffs are entitled to recover compound interest at the rate at which they lent money to Arrium. It should be assumed that that money was lent in the same currencies, with the result that any conversion to Australian dollars should only occur at the date of judgment.

It may be that some discount should be made to the Anchorage Plaintiffs’ claim for compound interest to allow for the possibility that the alternative loans would also be loss making. That would be consistent with the approach (not overturned by the High Court) taken by the Full Court in Hungerfords, which discounted the respondents’ damages to take account of the fact that not all the overpaid tax would have been invested in the respondents’ business or used to pay down debt. However, the point was not taken by the defendants; and in the absence of submissions on the issue, it would be inappropriate to discount the Anchorage Plaintiffs’ claim for that reason.

The counterfactual relied on by the Anchorage Plaintiffs in relation to their claim in respect of the Rollover Notices and the counterfactual relied on by the BOC Plaintiffs in respect of the whole of their claim are essentially the same. In the case of the Anchorage Plaintiffs, it is that Arrium would have gone into voluntary administration at about the time the first impugned rollover occurred (31 December 2015), presumably on the basis that the Lenders would not have permitted the rollover because the relevant Arrium Entity had not given unqualified representations and warranties required of it, Arrium would not have repaid the relevant amount and as a consequence the directors would have appointed voluntary administrators at that time. In the case of the BOC Plaintiffs, it is that Arrium would have gone into administration at the time the first impugned Drawdown Notice was issued (7 January 2016), presumably on the basis that Arrium would not have issued the Drawdown Notice because it could not make the representations it contained and without the additional funds the directors would have appointed voluntary administrators immediately.

Neither counterfactual, however, was the subject of evidence. Neither counterfactual was put to any of the directors. That is, it was never put to the directors that if the relevant drawdowns could not be made or the relevant loans rolled over, they would have put Arrium into administration immediately. No analysis was undertaken of Arrium’s financial position as at those dates to demonstrate that it could not repay the amounts that were rolled over on 29 and 31 December 2015 or that it needed the USD43 million that was the subject of the two Drawdown Notices issued on 7 January 2016 immediately. Even assuming that it could not repay the amounts rolled over or needed the USD43 million in the near future, it is far from evident that the directors would have appointed a voluntary administrator immediately or that the Lenders would have suggested that they do so, particularly given the stage the sale of Mining Consumables had reached and the importance of all parties attached to that sale. What happened in April 2016 does not suggest that a voluntary administrator would have been appointed immediately. Just the opposite. It is apparent that the Lenders did not want to see Arrium go into administration and that they were willing to support Arrium to avoid that happening. Their attitude changed because they lost confidence in the board in circumstances where Arrium had made substantial drawings in January 2016 and the first half of February 2016 and then put forward and apparently insisted on the implementation of a proposal that would see the Lenders recover only 60 percent of the face value of their loans, including the money they had just lent. The position, however, would have been quite different in the hypothetical world. Presumably, the drawdowns and rollovers would not have occurred because Arrium would have alerted the Lenders to the fact that it could not give the required representations and warranties. At that stage the board had not committed the company to a course which depended on the Lenders agreeing to a substantial discount on their debt. Consequently, in the hypothetical world the relationship between Arrium and the Lenders would have been entirely different. The likelihood in those circumstances is that the Lenders would have been willing to support Arrium at least until the sales process of Mining Consumables was complete.

In constructing the hypothetical worlds that formed the basis of their opinions, Mr Halligan and Ms Wright have not taken as the starting point the known financial position of Arrium on 31 December 2015 or 7 January 2016 (they are likely to be materially the same) and sought to make projections from those dates about the likely course of events assuming the appointment of administrators on one of those dates and the likely returns that would be achieved based on Arrium’s circumstances at that time. Instead, they have taken as their starting point the actual outcomes achieved and sought to make adjustments which are said to reflect what the position would have been assuming a voluntary administration at the earlier time. Moreover, in making those adjustments Mr Halligan was instructed to assume, among other things that (1) “the net value realised from … an orderly sale and wind down process would have been the same as the value in fact realised when and after the Arrium Group entered into voluntary administration on 7 April 2016”; and (2) the Arrium Entities would not have needed to draw down on any debt after 31 December 2015.

Similarly, Ms Wright was asked to assume, among other things that (1) “The realisation of assets in the counterfactual Administration would have occurred on the same date and for the same amount as in the actual Administration”; (2) “The sale of business entities in the counterfactual Administration would have occurred on the same date and for the same amount as the sale of business entities in the actual Administration”; and (3) no drawdowns were made under facilities to which the BOC Plaintiffs were a party on and from 7 January 2016. The only difference in the assumptions made by them is that on the assumptions made by Mr Halligan, Arrium’s assets would have been sold for the same prices, but three months earlier. On the other hand, Ms Wright assumes that the assets would have been sold for the same price at the same time – that is, that there would have been a delay in the administration of three months.

The assumptions made by Mr Halligan and Ms Wright were not the subject of evidence. Instead, the plaintiffs invited the Court to infer that those assumptions were true. Plainly, however, both sets of assumptions cannot be true because Mr Halligan and Ms Wright assume that the sales would have occurred at different times.

In my opinion, the inferences on which the plaintiffs rely cannot be drawn. A critical assumption in relation to the sale of assets, of course, was the sale of Mining Consumables, which ultimately was sold by the administrators for USD1.23 billion in November 2016, substantially more than the prices offered in February 2016. It is not plausible that the same process would have occurred at the same time if Arrium had gone into administration three months earlier. The likelihood is that if administrators had been appointed on 31 December 2015 or 7 January 2016, they would have continued with the sale process. There is no suggestion that there were any flaws in that process. It was being conducted with expert assistance from UBS and Lazard. It is plain that the outcome was important to the Lenders. The likelihood is that the Lenders would have accepted one of the offers that was ultimately made in February 2016. There is no evidence that they believed at that time that a better price could be achieved if the sale was delayed. Arrium was not willing to sell at the prices offered because a sale at those prices would not solve its financial difficulties. However, that was not a consideration once Arrium was in administration. Rather, the only question was whether a better price could be obtained in the near future. It was uncertain at that time whether it could.

The BOC Plaintiffs submit that if Arrium had gone into voluntary administration, it would have been necessary either to postpone or to abandon the sale process while the guarantees given by the Mining Consumables entities to the Lenders were sorted out. According to them, that was a complex issue which was not resolved until six months after Arrium went into administration. However, three points may be made about that submission. First, there is no evidence before the Court that would establish that the issues that needed to be resolved before Mining Consumables could be sold would necessarily take a long time to sort out, particularly if those issues were holding up a process that the Lenders were obviously keen to see completed. It was open to the BOC Plaintiffs to lead evidence on the course of the actual administration to establish that similar delays were likely to occur in the hypothetical administration. They are matters, for example, they could have cross-examined Mr Madden on. The pressure on the Financier Creditors to reach agreement on the terms of the Override Deed would have been entirely different if administrators had been appointed in the middle of the sales process. Consequently, it cannot be assumed that they would have taken the same time to put in place an agreement between them to permit the sale to occur. Second, if the position was that the appointment of administrators would have caused a substantial delay in the sales process, that provides a strong reason for concluding that it was unlikely that the Lenders would have supported the appointment of administrators at that time. Third, even if the sale of Mining Consumables had to be delayed in the hypothetical world, that still does not demonstrate that the price that would have been obtained for Mining Consumables would have been the same as was obtained in November 2016. The likely explanation for the difference between the prices offered in February 2016 and the price obtained in November 2016 was a change in market sentiment. There is no evidence of when that change occurred. The likelihood also is that if Arrium had gone into administration at an earlier point in time, Mining Consumables would have been sold earlier. It was for the BOC Plaintiffs to prove that the administrators would have been able to get the same price as they did at that earlier point in time. They have not done so.

Nor do I accept that it can be assumed that the same price could have been achieved for Arrium’s other assets if it had gone into administration earlier. Absent any evidence to the contrary, and contrary to the assumption made by Ms Wright, the likelihood is that if Arrium had gone into administration three months earlier, its assets would have been sold three months earlier than they were. No attempt was made by the plaintiffs to analyse the sale of Arrium’s other assets to demonstrate that the market conditions were the same and therefore similar prices could have been expected if the businesses and assets had been sold three months earlier. It is apparent that the markets in which Arrium operated were cyclical and volatile. Consequently, the timing of any sale of its businesses and assets could have had a substantial effect on the price obtained for them. In fact, the evidence suggests that market conditions improved during 2016, which helps to explain why Mining Consumables was sold for a substantially higher price at the end of the year compared to those offered in February 2016. For example, a graph included in Ms Sparkes’ affidavit of the iron ore price up until August 2016 shows that the price reached an historic low in December 2015 and was substantially higher in August 2016. There were large fluctuations in price between those two dates. However, the price remained well above the historic low, although it dropped substantially in May and June 2016 and increased again after that. Ms Sparkes’ graph simply shows actual price, whereas it is the forecast price at particular dates that is likely to affect the price buyers were willing to pay for the iron ore assets. The point remains, however, that the price fluctuated substantially, and it is to be expected that the sentiment of buyers would do so as well. Consequently, it cannot be assumed in the absence of any evidence that the price achieved at one time was a reasonable indication of what might have been achieved three months earlier.

As to the assumption that in the hypothetical administration Arrium would not have needed to draw down on any debt after 31 December 2015, the BOC Plaintiffs submit that it is clear that it would not have needed to do so. They point out that Arrium had cash of $303.6 million as at 31 December 2015. According to evidence given by Ms Wright, in a hypothetical administration Arrium would have experienced a trading result somewhere between a profit of $2.4 million and a loss of $57.3 million. On the other hand, they say that the administrators would have collected a further approximately $200 million from debtors during the administration – which is the equivalent cash collected by the administrators between 7 April 2016 to November 2016. Moreover, they say that the amount of $597 million paid to trade creditors between 1 January to 31 March 2016 and the interest paid to Lenders would not have been paid. The BOC Plaintiffs submit that it is plain from those figures that there would have been sufficient cash available for the administration. They also say that Mr Samuel and Mr Potter conceded as much when giving oral evidence.

In my opinion, the position is not as clear as the BOC Plaintiffs claim that it is. Mr Samuel and Mr Potter said that they had not considered the issue in detail. The difficulty with the BOC Plaintiffs’ analysis is that they use the position as at 31 December 2015 as a proxy for the position as at 7 January 2016. However, 31 December 2015 is not a good proxy for the position as at 7 January 2016 because of the reporting initiatives undertaken by Arrium at year end to reduce debt. As Mr Potter explains in his report, one step Arrium had taken was to sell its accounts receivables under a factoring facility which resulted in the large cash at bank balance at 31 December 2015 of $303.6 million. As a result, it cannot be assumed that the administrators in the hypothetical administration would have been able to collect the same amount in trade debtors as was collected in the actual administration. Moreover, as Mr Halligan points out, Arrium deferred paying trade creditors in the amount of $189.7 million. It cannot be assumed that those trade debtors remained unpaid as at 7 January 2016. I accept, however, that the likelihood is that any additional borrowing would have been relatively small and is unlikely to have had a material effect on the damages calculation.

The assumption that Arrium would have gone into voluntary administration at the beginning of 2016 but for the impugned conduct and the assumption that Arrium would have been able in the hypothetical administration to sell its assets and business for the same price as it obtained in the actual administration are both critical to the conclusions reached by Mr Halligan and Ms Wright. Neither assumption has been made out. For that reason alone, the conclusions of Mr Halligan and Ms Wright cannot be accepted and the plaintiffs have failed to prove their loss based on a case that Arrium would have gone into administration at the beginning of January 2016 but for the defendants’ breaches of duty. It is, therefore, unnecessary to consider Mr Halligan and Ms Wright’s evidence in any detail. I should, however, say something about some of the issues raised by Mr Potter and Mr Samuel in relation to that evidence which were the subject of submissions.

Both Mr Potter and Mr Samuel accept the general approach taken by Mr Halligan and Ms Wright, which involves making adjustments to the actual position to arrive at the hypothetical position. However, they take issue with a number of those adjustments, and a great deal of evidence was devoted to the question of what adjustments should be made in circumstances where all the experts conceded that the available evidence did not allow for precise calculations and required estimates and assumptions to be made. The analysis was complicated by the fact that major changes occurred to Arrium’s financial position between 31 December 2015 and 7 April 2016, not least because of the unwinding of the reporting initiatives and the drawing down of approximately $372 million in impugned debt.

Standing back from the detail, however, several observations can be made. First, it is not suggested that between 31 December 2015 and 31 March 2016 (which was used as a proxy for 7 April 2016, since precise figures were known for the earlier but not the later date), Arrium made substantial losses. Mr Samuel says in evidence that it made a small cash operating profit, which Mr Halligan says was $8.6 million. Ms Wright records it as making a trading loss of $16.9 million, but, if correct, that is not significant in the scheme of things. Accordingly, it cannot be said that the Lenders were substantially worse off because Arrium incurred trading losses over the three months. It seems likely that if Arrium had gone into administration three months earlier, some cost savings would have been made. There was, however, no real evidence of what those savings would have been or how they should be determined. Mr Potter, when giving oral evidence, suggested that they could be as much as $60 million, but that figure must be understood as an allowance that he was prepared to make for the purposes of the calculations under consideration rather than a considered estimate of the losses. Moreover, it is unclear whether Arrium would have earned the same income as it did if it had been under administration. That issue was not the subject of considered evidence from any expert. Mr Halligan does point to the fact that in the first six months of the administration, the administrators earned a cash profit of $155.5 million, which equates to approximately $26 million per month. However, it is important to bear in mind that, in calculating that profit, the administrators were not liable for past expenses.

Of critical importance is the fact that the Lenders did advance the additional $372 million and ultimately received dividends of approximately 80 cents in the dollar in its place. The Lenders were obviously worse off to the extent that they did not recover the full amount of the drawdowns. However, the Anchorage Plaintiffs make a separate claim in respect of that loss. They were also worse off to the extent that the total pool of provable debts increased as a result of those additional advances. But in the case of the Anchorage Plaintiffs, that increase would be limited to advances made by the BOC Plaintiffs, since, as I have said, to the extent that it includes advances made by Lenders in respect of whom the Anchorage Plaintiffs make a claim, the relevant losses are claimed separately. On the other hand, it might be thought that in the actual compared to the hypothetical world the Lenders were better off because the pool of assets from which dividends were payable had been increased by the $372 million. Of course, it is not that simple, since much of the $372 million was not kept in cash but used in Arrium’s business. It is unclear how it was used but it is reasonable to infer from an analysis undertaken by Mr Potter that it was largely used in paying trade creditors and investing in the business. As a result, trade creditors were reduced (resulting in a higher dividend for remaining creditors than would otherwise have been paid) and it is likely that the value of Arrium’s businesses were increased or at least costs were incurred that would have been incurred by the administrators in the hypothetical administration. In any event, in my opinion it was for the plaintiffs to prove that some or all of the $372 million was wasted as part of proving their loss, since it was for the plaintiffs to prove the likely outcome of the hypothetical administration. Although framed somewhat differently, much of the debate between the experts turned on these issues.

Mr Potter and Mr Samuel say that, to the extent that the $372 million was used to pay trade creditors, it is already taken into account in the models they rely on since, as Mr Samuel explained, “the actual distribution rates capture actual creditors and the hypothetical distribution rate captures hypothetical creditors, best estimates of those figures”. However, according to Mr Potter and Mr Samuel, that leaves an amount of approximately $260 million. Mr Potter treated that amount as an increase in asset values comprising two parts. One was a change in cash debtors and inventory (excluding Mining Consumables assets) totalling $127.6 million. The other was items of expenditure over the period totalling $132.9 million comprising capital investment expenditure and other items which were largely transaction and restructuring costs. However, he was prepared to concede that that figure should, perhaps, be reduced to $200 million to allow for savings that the administrators would have been able to achieve in the event of an earlier administration. Mr Halligan makes no adjustment for that amount in his calculations for two reasons. First, he says that there is insufficient information to be able to do so. Second, he says that there are two off-setting items. One is based on the idea that the hypothetical administration could have lasted three months longer and the administrators would have earned a profit during that time, consistently with the profit they earned in the first six months. The other is based on the unwinding of the reporting initiatives.

Three points may be made about Mr Halligan’s response. First, as I have explained, absent any evidence, it is reasonable to infer that the $372 million was used productively in the business (including by paying creditors). The onus was not on the defendants to prove that it wasn’t. Second, there is no reason to assume that the hypothetical administration would have lasted longer than the actual one. In my opinion, it is reasonable to assume, absent some evidence to the contrary, that the hypothetical administration would have been conducted in the same way as the actual administration and that steps taken in the administration would have taken the same length of time. Third, it is not easy to understand Mr Halligan’s point about the reporting initiatives. The point appears to be that the reporting initiatives included deferring the payment of $189.7 million of accounts payable until after 31 December 2015, when they were subsequently paid. Consequently, in the actual world, those accounts payable were paid and there was a corresponding reduction in Arrium’s assets. On the other hand, in the counterfactual world, those accounts payable would not have been paid and the $189.7 million would have been available for distribution between creditors. I do not accept that analysis. The important comparison was between the position at 31 December 2015 with the position at 7 April 2016. The unwinding of the reporting initiatives was reflected in the position at 7 April 2016. To make a further allowance for it would involve double counting.

For those reasons, I am not persuaded that the Financier Creditors would have been better off if Arrium had gone into administration on 31 December 2015 (once they are compensated for losses suffered in respect of the impugned drawdowns), even on the assumptions made by Mr Halligan.

The position is not as clear in the case of the BOC Plaintiffs. Unlike Mr Halligan, Ms Wright accepted that any analysis of the BOC Plaintiffs’ loss must take into account any benefits arising in the actual world from the fact that Arrium received the impugned drawdowns. Like Mr Potter, she sought to assess those benefits by looking at changes in Arrium’s working capital between 31 December 2015 and 31 March 2016. Ms Wright assumed that Arrium’s cash balance as at 7 April 2016 was $125 million and on that basis she calculated that there was, in fact, a decrease in working capital between 31 December 2015 (as a proxy for 7 January 2016) and 31 March 2016 (as a proxy for 7 April 2016) of $30.3 million. That is, according to her, as a result of movements in working capital there was an additional $30.3 million available to be distributed in the hypothetical world. In reaching that conclusion, she made an adjustment of $70.6 million for additional creditors at the earlier date. She did not make any adjustment for capital investment expenditure and the other items which Mr Potter identified as being largely transaction and restructuring costs, on the basis that there was no evidence that they contributed to an increase in the value of Arrium’s assets. Set out below is a table taken from a spreadsheet prepared by Ms Wright comparing her position with that taken by Mr Potter in relation to working capital adjustments:

In their final written submissions, the BOC Plaintiffs accept that Ms Wright’s figures understate the cash held at the date of administration and that the appropriate cash figure is $295 million. They also accept that if 31 December 2015 is used as a proxy for 7 January 2016, then it is not appropriate to include the 4 January 2016 drawdowns totalling $58.3 million, which results in an adjustment to Ms Wright’s figures of $228.3 million. On that basis, the BOC Plaintiffs accept that there should be a working capital adjustment of approximately $198 million, which is very close to Mr Potter’s suggested figure of $200 million. However, the components are different. Ms Wright’s figure includes a $70.6 million adjustment for creditors. Mr Potter and Mr Samuel were of the opinion that that involved double counting because, according to them, the movement in creditors was already included in the assumed distribution rates. On the other hand, Ms Wright makes no allowance for capital and investment expenditure or transaction and restructuring costs.

Having regard to the ultimate position of the parties in relation to the calculations and the conclusions that I have formed on the BOC Plaintiffs damages claim generally, there is little point in attempting to analyse the underlying disputes in any detail. It is sufficient to say that I prefer the approach of Mr Potter and Mr Samuel.

In my opinion, the approach taken by Ms Wright to capital and investment expenditure and transaction and restructuring costs has the effect of reversing the onus of proof. There can be no question that between 31 December 2015 and 5 April 2016, Arrium received $372 million that it would not have received in the hypothetical world. It is the BOC Plaintiffs’ case that that hypothetical world can be created by, in effect, working backwards from the actual world. In order to do that, it is necessary to subtract the $372 million. If the BOC Plaintiffs’ case is that it is not necessary to subtract the whole of the $372 million because part of it was wasted (in the sense that it did not lead to an increase in asset values and was not used to discharge a liability) then the BOC Plaintiffs bore the onus of establishing that was the case. They have not discharged that onus in relation to the contested items of expenditure.

As to the adjustment of $70.6 million to account for a reduction in creditors between 31 December 2015 and 31 March 2016, it was, as I have said, Mr Samuel and Mr Potter’s evidence that that involved double counting. It is not entirely clear from the evidence given on this topic whether that is true or not because it appears to depend on a detailed understanding of the way in which Ms Wright’s model works. However, Mr Potter and Mr Samuel state that it was taken into account in their models because they used the actual figures for creditors at the two dates, with the result that the actual and hypothetical distributions based on the total value of creditors at the relevant dates already accounted for the movement in creditors. That, it seems to me, is a logical approach. As Mr Potter pointed out in oral evidence, it seems odd to include a movement in creditors as representing a change in distributable assets when the creditors are not an asset and they are the persons making claims to distributions which in turn affect the amount distributable to the Financier Creditors.

There are some other minor differences between Ms Wright, Mr Potter and Mr Samuel. They only have a marginal effect on the calculation of damages and were not specifically addressed by the parties in their submissions. Allowing for those differences suggests a degree of accuracy in the overall calculations which does not exist. If it ever becomes necessary to determine the question of damages, further calculations and submissions will be necessary. Consequently, there is no point in addressing those issues in the present context. There are, however, several other issues raised by the BOC Plaintiffs about which I should say something.

One issue between the experts is what percentage premium should be applied to the Financier Creditors’ distributions to reflect the fact that the Financier Creditors received a higher distribution than other creditors in the actual administration. Mr Potter and Mr Samuel used the figure of 9.7 percent, which was the figure they agreed with Mr Halligan. Ms Wright used a figure of 9.0 percent, which had the effect of decreasing the damages slightly. On the available evidence there is no real reason for choosing one figure over the other. Consistently with the principle that the BOC Plaintiffs should not recover more than they claim, I would have chosen the figure adopted by Ms Wright.

Second, it is agreed between the experts that in determining the creditors as at 31 December 2015 it is necessary to increase the figure stated in the accounts to allow for the fact that the debts owing to a number of creditors crystallised on the appointment of administrators. Mr Potter uses the actual figure in the administration of $320 million. Ms Wright seeks to derive the percentage increase in the actual administration and applies that percentage to the known trade creditors to arrive at a figure of $294 million. Both methods involve estimates. Both have their advantages. Accordingly, I would have split the difference between the experts.

A third issue concerns the date on which amounts expressed in foreign currencies are converted into Australian dollars. The question to be determined is the difference in the position the BOC Plaintiffs are in with the position they would have been in under a hypothetical administration that occurred three months earlier. I have already indicated that unless there is a good reason for making a different assumption, it should be assumed that what happened in the actual administration would have happened in the hypothetical one three months earlier. Under the actual administration, debts were converted to Australian dollars on the date of the administration. No good reason has been advanced for assuming that a different result would have been reached in the hypothetical administration. Accordingly, it should be assumed that the same principle applies.

The last issue concerns discounting and interest calculations. Ms Wright discounts cash flows in the hypothetical and actual world at the risk-free rate to 31 December 2015 (which she takes to be the loss date) and then applies interest at Court rates to arrive at the damages payable to each Bank. I would not have applied that approach. In my opinion, it has the effect of artificially increasing the BOC Plaintiffs’ damages. In my opinion, a better approach is simply to allow interest on the actual and hypothetical cash flows from the dates the relevant amounts were or would have been paid and to calculate the loss as the difference between those amounts.

As I have said, the defendants raise contributory negligence and concurrent wrongdoer defences. Having regard to the conclusions I have reached, it is neither necessary nor practical to express a view on these defences. In order to do so, it would be necessary to know the basis of the defendants’ liability. Accordingly, I do not deal with these issues in this judgment.

Mr Bakewell brings cross-claims against HSF in both proceedings. The cross-claims in both are similar. In each it is alleged that (1) HSF gave advice in relation to solvency on 18 December 2015 (the solvency advice) and advice in late December 2015 that Arrium should drawdown the remaining facilities and deposit the amount drawn down with a non-lender bank (the drawdown and deposit advice), which at no time was amended or withdrawn; (2) HSF owed Mr Bakewell a duty of care in relation to the advice that it gave; (3) if the plaintiffs succeed against Mr Bakewell, the advice was negligent and misleading and deceptive in contravention of s 18 of the ACL; (4) but for the advice, Mr Bakewell would not have engaged in the conduct which has visited liability on him; (5) accordingly, he is entitled to recover as damages from HSF the amount of his liability.

In my opinion, the cross-claims must fail for a number of reasons. It is convenient to deal with the solvency advice first.

It seems clear that the solvency advice was given. It had two aspects. First, there is the memorandum presented to the board which explains the legal test of solvency and which relevantly states that “A company will be insolvent now if it can be said with certainty, or practical certainty, that there is no way it will be able to deal with a debt falling due at some future date”. Second, there was the oral advice from Mr Nestel to the effect that (to quote from the minutes of the meeting) “there is not an insolvent trading issue at this time given the time until the Company’s next significant debt maturity and the work currently under way, but that given the Company is operating under different circumstances than it has been before, the board should consider receiving more regular information on liquidity”.

It is plain that the solvency advice is not relevant to the Anchorage Proceeding, since no allegation is made in that proceeding that Arrium was insolvent at any relevant time. The advice can only be relevant to the BOC Proceeding and the conduct alleged to have been engaged in by Mr Bakewell that is said to give rise to his liability in that proceeding. In substance, as the case was finally put, that conduct is that Mr Bakewell authorised the Drawdown Notices dated 9 and 10 February 2016. Consequently, Mr Bakewell’s case must be that he would not have authorised those notices but for HSF’s advice. Moreover, the BOC Plaintiffs claim that Arrium was insolvent at that time not because it could not pay its trade creditors as and when they became due. Rather, the case is that it could not pay its debt to the Lenders falling due in July 2017 and later. The case against HSF must be considered on the basis that that is the case that succeeds. Understood in that way, it is difficult to see how Mr Nestel’s oral advice could be relevant. That advice was plainly to the effect that Arrium was not insolvent in December 2015 because it had sufficient liquidity to pay its trade creditors but that going forward the position needed to be monitored more closely. Even assuming that having given that advice Mr Nestel came under some duty to inform the board (and Mr Bakewell) that circumstances had changed to the point where Arrium was no longer solvent, on the BOC Plaintiffs’ case the occasion for that advice never arose because there was no suggestion that Arrium became insolvent for that reason during the relevant period – that is, up until mid-February 2016.

Mr Bakewell’s case, therefore, must be that the real problem with HSF’s advice was with their legal analysis and, in particular, their test of “practical certainty” as applied to debts payable in the future. That was plainly a statement of legal opinion. To be actionable in negligence, it was necessary for Mr Bakewell to establish that HSF did not exercise reasonable care in forming or expressing the opinion. To be actionable under s 18 of the ACL, it would necessary to prove that HSF did not have a reasonable basis for the opinion: Bateman v Slatyer (1987) 71 ALR 553 at 559 per Burchett J. Mr Bakewell has made no attempt to establish either of those matters. For the reasons I have given, in my opinion, HSF’s advice was substantially correct. But even if that conclusion is wrong, it seems to me it was a conclusion that was reasonably open on the authorities. That is a fatal difficulty with the cross-claim.

Having reached that conclusion, it is unnecessary to deal with the other elements of Mr Bakewell’s case. I should, however, say something about the question of reliance and causation. The relevant hypothetical is one in which HSF would have given the correct advice. On the BOC Plaintiffs’ case that advice would have been to the effect Arrium was insolvent if it was more likely than not that it would not be able to repay the loans falling due in 2017 and beyond. It cannot be part of the hypothetical that Mr Nestel actually advised Arrium (or Mr Bakewell) that, in his opinion, Arrium was solvent applying that test. It was one thing for Mr Nestel to express an opinion on solvency on the basis of the then existing cash flows and what he understood was the relevant test. It is quite another thing for him to have expressed an opinion on solvency if that opinion required him to form a view on whether it was more likely than not that Arrium would be able to repay the Lenders when their debts fell due.

If the board and Mr Bakewell had been told what the correct test was (on the BOC Plaintiffs’ case), I am not satisfied it would have made any difference. No evidence was led by Mr Bakewell on that question and he made no submissions on it. Mr Bakewell was prepared on 16 February 2016 to state that there had been no material change in the financial position of Arrium since 30 June 2015 that would have a Material Adverse Effect on Arrium’s ability to comply with its obligations under the facility agreements evidence. It would be strange if, a week earlier, he had thought that it was more likely than not that Arrium would not be able to repay the Lenders when their debts fell due and that consequently, given the correct advice, he would not have authorised the Drawdown Notices that were issued at that time. Moreover, as the factual narrative set out earlier demonstrates, although a number of scenarios that were modelled showed that Arrium would be unable to repay the Lenders unless they agreed to write-off some of their debt, that was not true of all scenarios. In particular, the presentation by UBS and Lazard at the board meeting on 11 February 2016 indicated that the Amend and Extend (no haircut) option was a viable option on the “Equity Upside Scenario”. That adopted the then independent forecasts for commodity prices, which might reasonably be thought to be the most likely outcome. Mr Bakewell does not explain why, in the light of that information and the correct legal advice, he would not have authorised the drawdowns for which he is said to be responsible.

That leaves the drawdown and deposit advice.

If the claim against Mr Bakewell had succeeded in the Anchorage Proceeding, it would be because (to simplify):

If the claim had succeeded against Mr Bakewell in the BOC Proceeding it would relevantly be because Mr Bakewell, by giving the Bakewell Direction, authorised the representations made by virtue of the Drawdown Notices dated 9 and 10 February 2016 and, in doing so, authorised the making of the MAE Representation.

It is easy to see the connection between the case that Mr Bakewell is liable for the Bakewell Direction and the claim that HSF is liable to Mr Bakewell because of the drawdown and deposit advice. Mr Bakewell’s case is that but for the drawdown and deposit advice he would not have given the Bakewell Direction and therefore would not be liable for its consequences.

It is, however, difficult to see what the connection is between the other claims against Mr Bakewell and the drawdown and deposit advice. Mr Bakewell’s submissions are silent on the question. Unless it is said that the drawdown and deposit advice led to the Bakewell Direction which in turn led to the impugned drawdowns there is no connection between the advice and Mr Bakewell’s liability.

But even assuming that Mr Bakewell’s claim against HSF is limited to a case where he is found liable for the Bakewell Direction, there are two fundamental problems with it.

First, I am not satisfied that the drawdown and deposit advice was given. The only evidence that that advice was given by HSF in December 2015 was evidence given by Mr Bakewell of a conversation he had with Mr Nestel between 10 and 17 December 2015. It seems clear that the main purpose of the conversation was to discuss Mr Nestel’s advice that Arrium should not repay debt and should instead keep any surplus in cash, to avoid incurring new debt. Mr Bakewell says that during the conversation Mr Nestel also suggested that Arrium may as well draw down all remaining amounts under the facilities. In my opinion, it is likely that Mr Bakewell has confused the two concepts. There is no objective evidence that Mr Nestel said anything about drawing down the remaining amounts under the facilities. In his email dated 23 December 2015, he reminds Mr Bakewell of his advice about not repaying debt. If the idea of drawing down the remaining amounts was discussed during the same conversation, it is to be expected that Mr Nestel would have referred to that as well. The position appears to be that the idea of drawing down the remaining amounts came from Mr Edwards, not Mr Nestel and that Mr Bakewell has confused the advice given by Mr Nestel with the advice given by Mr Edwards. It is true that Mr Nestel did not give evidence but was obviously available to do so. Nonetheless, Mr Bakewell bears the onus of proof on the issue and I am not satisfied that he has discharged that onus.

There is evidence that the proposal to drawdown all remaining amounts under the facilities was discussed with Mr Nestel on 8 February 2016. It appears that the idea had been discussed at the board meeting on 4 February 2016 and that the board had given its tacit if not actual approval to the idea at that time. It is not clear who followed up implementation of the proposal with Ms Pearce. Ms Pearce suggests that it could have been Mr Nestel. However, that seems unlikely since the conversation (whoever it was with) prompted a call from Mr Bakewell and Ms Pearce to Mr Nestel to discuss the proposal. It might be thought that it would be unnecessary for Mr Bakewell and Ms Pearce to speak to Mr Nestel about the proposal if Mr Nestel had already advised Ms Pearce that it should be implemented. It is unclear what advice Mr Nestel gave during the conference call. Ms Pearce’s note of the conversation records the following (among other things):

Second, and following on from the point made in the previous paragraph, it cannot be assumed that the scope of Mr Nestel’s advice (even if he gave it) corresponded to the scope of the Bakewell Direction. If Mr Bakewell is liable in respect of the Bakewell Direction it is because he gave the direction and in doing so became, in some way or another, liable for the fact that the MAE Representation was false. However, it does not follow that in giving the drawdown and deposit advice Mr Nestel was saying anything about the ability of the Arrium Entities to make the MAE Representation. Mr Bakewell’s claim seems to be that in giving the drawdown and deposit advice, Mr Nestel was impliedly representing that the Arrium Entities could make the MAE Representation in the Drawdown and Rollover Notices. However, no such case is pleaded and any such case seems improbable. It could not seriously be suggested that Mr Nestel was in a position to form an opinion on whether there had been a change in Arrium’s financial position since 30 June 2015 or 31 December 2012 so as to give rise to a Material Adverse Effect or that Mr Bakewell relied or could reasonably have relied on any view impliedly expressed by Mr Nestel on that question. Mr Bakewell was in a far better position to form a view on that question himself. Some of those matters appear to have been discussed during the conversation on 8 February 2016. However, what was said to or by Mr Nestel on the subject is entirely unclear. Moreover, it seems implausible that Mr Bakewell relied on advice from Mr Nestel that the Arrium Entities could make the MAE Representation (assuming the advice was given) when he has no recollection of the conversation. In my opinion, any advice Mr Nestel gave to the effect that Arrium should not repay debt and should drawdown on the remaining facilities would have to have been understood as advice that it should do so provided that at the time it actually served the relevant notices it was satisfied that it could make the representations the notices contained.

Accordingly, had it been necessary, I would have concluded that Mr Bakewell’s cross-claim against HSF would have failed even if the case against him had succeeded.

These conclusions make it unnecessary to deal with a number of other issues raised by HSF. However, I should refer to one of them having regard to the attention it received during submissions. It is plain that the advice given by Mr Nestel in December 2015 included advice that Arrium should not repay debt but instead should deposit spare cash with a non-Lender financial institution, obviously with a view to avoiding incurring new debts. It is equally plain that Arrium did not follow that advice. HSF submitted that it was not open to Mr Bakewell to pick and choose which parts of Mr Nestel’s advice to follow and to claim damages based on that part of the advice that he did follow but not give credit for any benefit that would have flowed from that part of the advice he did not follow. They point out that no attempt was made by Mr Bakewell to quantify the value of any benefit that he received. Consequently, according to them Mr Bakewell had failed to prove his loss. Although there is force in this point, it is not clear to me that the onus of proof on this issue lay with Mr Bakewell. The point raised by HSF appears to be a point akin to a mitigation or contributory negligence point. The case is that if Mr Bakewell was going to rely on HSF’s advice then he should have followed the whole of the advice rather than only part of it and, if he had, his liability would have been lower. Put like that, the submission raises the question whether Arrium was able to follow the advice or whether it had already given irrevocable notice that it intended to repay part of the debt and whether it was reasonable to expect Arrium to follow that part of the advice, given the consequences it might have had for its half yearly financial report. It also raises the question of who bears the onus of proof in relation to the benefits that would have flowed from following the advice. Having regard to the conclusions I have reached, it is not necessary to express a view on these questions, although I am inclined to think that the onus lay with HSF.

I should mention one other point in relation to the cross-claims against HSF. During the course of the hearing, Mr Bakewell sought to amend the cross-claims by adding two particulars. One alleged that Mr Pike, Mr Andrew Rich and Mr Apathy of HSF attended the Arrium board meeting on 4 February 2016 at which time a memorandum of Mr Bakewell dated 2 February 2016 regarding liquidity and a report of UBS and Lazard regarding Project Columbus were discussed. The other alleged that advice was sought from HSF on the preparation of the 31 December 2015 accounts and that HSF knew or ought to have known of the correspondence with KPMG on the emphasis of matter issue. Those amendments were opposed by HSF and the question of whether the amendments should be allowed was left to be determined in this judgment. Having regard to the conclusions I have reached, nothing turns on the amendments. However, had it been necessary, I would have permitted the amendments. The amendments plead background facts that were already the subject of evidence and were part of the facts against which the scope of HSF’s duty of care was to be assessed. In my opinion, HSF could not have been prejudiced by the amendments.

It follows from what I have said that both proceedings and the cross-claims must be dismissed. If the parties cannot agree on costs, I will hear argument on that question at a time to be fixed with my Associate.

The orders of the Court, therefore, are: