Anchorage Capital Master Offshore Ltd v Sparkes

THE COURT: In proceedings 2021/262212 (“the Anchorage appeal”), Anchorage Capital Master Offshore Ltd and five other lenders to entities in the collapsed Arrium Group (“the Anchorage appellants” or “Anchorage”) appeal from the dismissal by Ball J of their claims against two officers of Arrium Group companies – Ms Delia Sparkes and Mr Robert Bakewell – in a judgment delivered on 17 August 2021: Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2) [2021] NSWSC 1025 (“the Primary Judgment”). In proceedings 2021/258153 (“the BBVA appeal”), Banco Bilbao Vizcaya Argentaria SA (“BBVA”) appeals from the dismissal, in the same judgment, of similar claims by it and a number of other lenders (together, “the BoC Plaintiffs”).

In addition, the Anchorage appellants and certain of the defendants at first instance against whom relief is no longer pressed (Ms Verawati, Ms Hall and Ms Lieu – together, “the Signatories”) appeal from costs orders made by the primary judge in a judgment delivered on 24 December 2021: Anchorage Capital Master Offshore Ltd v Sparkes (No 4); Bank of Communications Co Ltd v Sparkes (No 3) [2021] NSWSC 1695 (“the Costs Judgment”). Unless otherwise indicated, this judgment adopts the same defined terms as the Primary Judgment. Without intending any disrespect, for convenience we hereafter refer to Ms Sparkes and Mr Bakewell by their surnames only.

This judgment is arranged as follows:

It is desirable to summarise the primary background facts relating to Arrium’s operations and financial arrangements during the period from 2015 to the end of 2016, with particular reference to various drawdowns on financial facilities which are at the core of the appeal. The summary draws heavily on the Primary Judgment, noting that most of the facts are undisputed.

As at June 2015, the Arrium Group (“Arrium”) operated three main businesses (Mining, Mining Consumables and Steel) through a large number of subsidiaries, in Australia and abroad. [1] The Mining Consumables business (or “MolyCop”), which was the largest supplier of grinding material in the world, was colloquially described as the jewel in Arrium’s crown. [2]

Arrium’s finance arrangements included, relevantly, a number of unsecured syndicated facility agreements (“SFAs”) with various banks (“the Par Lenders”), [3] as well as transactional banking facilities provided by Australian and New Zealand Banking Group Limited (“ANZ”). [4]

The unsecured facilities with the Par Lenders were repayable on various dates from January 2017 through to July 2019. In addition to those facilities, Arrium had a series of uncommitted facilities which could be withdrawn by the relevant lenders upon notice at any time, and which were not taken into account in reports to the Arrium Board on Arrium’s liquidity position. [5]

Arrium (through OneSteel US Investments, a Delaware general partnership) had also issued notes in the US bond market with a face value of US$200 million in July 2008, and then further notes with a face value of US$200 million in June 2011 (together, the “USPP Notes”), both being repayable in tranches on various dates, the earliest tranche being in July 2015. [6]

Most relevantly, approximately $1.125 billion of Arrium’s debt was due to mature in the period from July 2017 to December 2017 (“the July 2017 Maturities”), with the balance due to mature at various times between July 2018 and July 2023. [7]

Historically, Arrium had adopted various approaches to deal with debt maturities, and typically did not repay them when they matured from free cash flow. [8] So, for example, in 2015, in anticipation of debt maturing in the following financial year, Arrium had approached lenders approximately 15 months in advance of the maturity date to discuss refinancing and had entered into the refinancing documents (the 2015 Syndicated Facility Agreement (“SFA”)) approximately 13 months in advance of the maturity date. [9]

During the financial year ending 30 June 2015 (FY15), falling iron ore “spot” prices had an adverse impact on Arrium’s business. [10] It was in this context that, in the course of 2015, Arrium engaged in a strategic review of the options available to it to address its debt position (“the Strategic Review”), in connection with which Arrium engaged a number of external advisers, including UBS AG (“UBS”) and Lazard Pty Limited (“Lazard”). [11] The July 2017 Maturities would become a current liability, for accounting purposes, in July 2016, [12] and finding a solution for Arrium’s debt position before the liability became current was an underlying objective of the Strategic Review. [13]

The Strategic Review (and in particular, the options under consideration as part of that review) was the subject of regular discussion at Arrium Board meetings from May 2015 onwards, and of numerous memoranda from Arrium’s Chief Executive Officer (Mr Roberts) and its Chief Financial Officer (Bakewell), as well as advice from external legal and financial advisers.

As approved at the 12 June 2015 Board meeting, [14] key elements of the Strategic Review (to be progressed in parallel) were: a sale process for the MolyCop business to determine the achievable sale price (which became known as “Project Columbus”); an internal review to develop plans for the Steel and Mining businesses on a standalone basis, i.e., without MolyCop (which was referred to as “Project Marco”); a process to “engage” lenders on the terms on which the company might move to a secured debt platform and subsequently refinance debt through US debt markets (which was referred to as “Project Archer”); and a “broad program for engagement with key stakeholders regarding strategic options”. [15] UBS and Lazard were appointed to advise on Project Columbus and to assist with Project Marco; Grant Samuel and Lazard to advise on Project Archer; and Herbert Smith Freehills (“HSF”) to act as legal adviser on the Strategic Review. [16]

The Strategic Review was publicly announced on 15 June 2015. [17] It was expected that the Strategic Review would be completed and announcements made publicly at the time of the half year results in February 2016.

As has been noted, the various elements of the Strategic Review were to be progressed in parallel. After the public announcement, meetings were held with the lenders in relation to the further refinancing option (i.e., Project Archer), [18] at which Project Archer was described as a two-stage process, including (as part of “Stage 1”) Arrium giving senior lenders general security over its assets and the lenders revising the covenant package and extending the July 2017 Maturities to 2019 (this was also referred to as the “Amend and Extend” proposal); and (in “Stage 2”) the pursuit by Arrium of a debt capital market issue (using the net proceeds to repay debt) and comprehensive security package. [19]

At the 18 August 2015 Arrium Board meeting, three possibilities were identified in relation to Project Columbus: [20] first, indicative bids for the MolyCop business on the high side (of above AU$2.0 billion), which would result in Project Marco being viable; second, indicative bids that were unattractive (less than AU$1.5 billion); and, third, a “grey zone”, where there was limited interest from strategic bidders (who were expected to be willing to pay more), and Arrium could be confident only of receiving between AU$1.6 billion and AU$1.8 billion, based on the interest of “sponsors” who intended to buy MolyCop with a view to resale in the medium term and would most likely themselves depend on borrowings to acquire the business.

This in turn led to three possibilities being identified for Project Marco (i.e., the remaining business after the contemplated sale of MolyCop): first, that it remained viable and attractive; second, a “Marco grey zone”, where the remaining business was viable on a base case but unattractive on a downside case; and third, where the remaining business was unviable or unattractive even on the base case. The “grey zone” price for MolyCop (of US$1.17 billion to US$1.33 billion) was identified as a price at which the viability of the sale would depend upon an assessment of Marco’s ability to trade viably when MolyCop was sold.

As to Project Archer, Bakewell reported that it had failed to achieve the required support from lenders, many of whom were of the view that Arrium needed significantly to deleverage; he noted that there had been widespread resistance to the request for an extension of facilities out to 2019, and that “the key concern of the domestic banks, as stated by more than one of them, is that by agreeing to the maturity extension element of the proposal they are effectively giving up a “trigger event” i.e., the refinancing of the July 2017 [M]aturities”.

The Board approved the FY15 financial accounts. Arrium’s audited financial reports for FY15 relevantly recorded: net assets of AU$2,554.9 million (a deterioration from AU$3,730.9 million over the financial year, reflective of a net loss after tax of AU$1,918.2 million); cash flow from operating activities of AU$112.1 million; and uncommitted finance facilities available of approximately AU$933 million. The July 2017 Maturities were in the order of approximately AU$842 million, due on or around 10 July 2017. The accounts did not contain any qualification or observation in the nature of a “going concern” note.

By 21 September 2015, indicative (non-binding) bids for MolyCop had been received from 11 parties, ranging from US$1.043 billion to US$1.4 billion (the majority below US$1.35 billion). The advice from Arrium’s advisers was that further assessment of the indicative bids was required before any recommendation could be made as to whether to proceed with the sale process.

At the 21 September 2015 meeting, Bakewell reported on discussions with the banks in relation to Project Archer, including that there was general support for the relaxation of the Interest Cover Ratio (“ICR”) covenant in exchange for the grant of security, “with the concept of a two-stage step down in the ICR covenant receiving a high level of acceptance”, but again that there was widespread resistance to the request for an extension of facilities out to 2019, and that several lenders had now advised that, “due to the timing of Project Columbus, they would prefer to wait until the outcome of that process was known before re-engaging on Project Archer”. Bakewell also advised that the low proceeds scenario for Project Columbus (i.e., the sale of MolyCop) would result in a breach of the “Shareholder Equity” covenant in the 2008 USPP Notes, and that noteholders would demand repayment if there was a breach.

On 28 September 2015, the Arrium Board resolved to accept the recommendation from UBS and Lazard that the company proceed to Stage 2 of Project Columbus, with final bids due by early December 2015. UBS and Lazard were of the opinion that there were good prospects of achieving sale proceeds of at least US$1.35 billion and advised that, on that basis, and assuming the current economic environment did not further deteriorate, Marco would be a viable standalone entity.

By 30 September 2015, the uncommitted facilities available to Arrium were approximately AU$385 million (down by around AU$198 million, due to lenders continuing to withdraw those lines).

On 13 October 2015, Arrium terminated Grant Samuel’s engagement in relation to Project Archer (the “Amend and Extend” option) effective 31 October 2015, on the basis that the company had decided not to progress Project Archer “as the contemplated transaction was not able to be achieved”. [21] Nevertheless, Bakewell and Sparkes continued to meet with representatives of the banks, and it was contemplated that, in the event that no acceptable offer for MolyCop was received, Arrium would resume discussions regarding Project Archer “or something much like it”. [22]

By 20 October 2015, the only trade bidder for MolyCop had withdrawn from the sale process, leaving only “sponsors” as bidders (each of which required finance to proceed with its bid). By early November 2015, UBS was of the view that the situation in relation to financing was very challenging.

On 9 November 2015, ANZ informed Arrium that it intended to send a notice under the review provisions of its facility offer letter (the “ANZ Prime Facility”), and on 10 November 2015, ANZ issued a notice stating that it intended to reduce a number of the facilities it had provided to Arrium. [23] This led to negotiations between Arrium and ANZ and, ultimately, [24] the provision by Arrium of cash collateral of some AU$61.7 million to maintain the transactional facilities pending development of a plan to replace ANZ as Arrium’s transactional banker.

On 13 November 2015, Arrium representatives met with representatives from Ernst & Young (“E&Y”) to discuss a proposal that E&Y undertake a limited scope review in relation to Arrium’s cash flow forecasting processes and liquidity management (which became known as “Project Polo”). The engagement letter was signed on 30 November 2015 and, in late December 2015, the scope of that work was expanded to include working with Arrium’s Group Treasury to produce a 13 week forecast, referred to as Project Polo II. [25]

There were further updates to the Arrium Board at meetings in November 2015 as to the progress of Project Columbus, as well as a revised FY16 forecast which showed the full year operating cash flow before tax as being AU$78 million unfavourable to budget, [26] and significant net operating cash outflows through to 31 March 2016.

In late November and December 2015, discussions concerning a recapitalisation or debt restructuring proposal, to take out Arrium’s existing debt at a discount (which became known as “Project Miwok”), [27] were conducted on behalf of Arrium by Lazard with GSO Capital Partners (“GSO”) and Kohlberg Kravis Roberts & Co Inc (“KKR”). There was a concern that if Arrium’s bankers were to sell its debt in the secondary debt market, then Arrium might be confronted with the prospect of having to deal with several hedge funds in addition to the Par Lenders under the facility agreements. [28] On 8 December 2015, KKR submitted an indicative proposal for a whole of company refinancing, which contemplated existing lenders being paid US$0.65 in the dollar (i.e., a 35% “haircut”). [29]

Meanwhile, on 2 December 2015, there was an Arrium Board meeting which was the genesis of what was referred to in the proceedings (and which assumed no little significance in submissions at the hearing below and on appeal) as the “Bakewell Direction”. In essence, this was a direction that the appellants contend Bakewell gave to Sparkes, to the effect that Arrium draw down all its unsecured facilities in full and deposit the cash with a non-lender bank.

At the 2 December 2015 Board meeting, Mr Edwards of Lazard addressed three capital structures that might be available if the sale of the MolyCop business did not proceed: first, the existing structure plus new “Super Senior Secured and new Subordinated Note”; second, a partial refinancing with new “Senior Secured and 2nd Lien Subordinated Debt”; and, third, “Full refinance and tender for existing debt at a discount”. The third option contemplated existing lenders agreeing to write-off approximately 30% of the face value of their debt. [30] Mr Edwards advised the Board that the third option was “to address Arrium[’s] capital structure” by using “$2 billion of new debt to tender for existing debt at a c.30% discount to face”. [31] The proposal included that Arrium “draw down all committed lines (put the cash else-where)” (i.e., with a “non-lender” bank).

Mr Roberts’ handwritten notes made during the 2 December 2015 Board meeting included, against the third option, the statements that: “[c]omplexity is getting existing lenders to take a discount” and “[a]mbitious and more complex (getting banks to take a haircut)”. In cross-examination, Mr Roberts had no recollection of what was said during the presentation, but could not recall anyone disagreeing with the suggestion that it was “ambitious” and “more complex” to have financiers agree to a “haircut”. This seems to be the first reference in the documents to the proposal that the existing lenders would “take a haircut”. Mr Roberts’ notes also included, as against option three, the item “c) draw down all committed lines (put the cash elsewhere)”. [32]

Sparkes resigned as Group Treasurer on 3 December 2015, effective from 29 January 2016. [33] Her evidence was that she was on leave for the whole period from 16 to 29 December 2015; [34] that she was not working in the office following her resignation and that she had little ongoing contact with Bakewell from that time (their relationship having become strained). [35]

By 9 December 2016, Bakewell and Arrium’s advisers (HSF and Lazard) had commenced discussions as to the necessity for a secured standby facility.

On 10 December 2015, GSO (which specialised in project and alternative financing) entered into a confidentiality agreement with Arrium in connection with proposed discussions for a refinancing deal (which was referred to as “Project Gamma”). [36]

On the same day, ANZ issued a letter terminating the ANZ Prime Facility and advising that ANZ intended to exercise its review rights to reduce certain facility limits and prohibit further draws on those facilities, and to require the provision of cash collateral (approximately AU$61.8 million in total, comprising no less than AU$30 million by 31 December 2015 and AU$45 million by 12 January 2016 to a total of AU$61.7 million by 29 January 2016), to secure various facilities and performance guarantees.

Around this time, HSF seems to have raised the need for contingency planning for insolvency (referred to in an email under the subject heading “Jacaranda”), sending an outline of the potential scope of such advice to Bakewell and Arrium’s company secretary and general counsel (Mr Edler) on 13 December 2015, with Phase 1 being initial advice, including: considerations for directors (directors’ duties and insolvent trading issues relevant to the decision to appoint voluntary administrators), the voluntary administration process, and impact on business; and Phase 2 involving more specific analysis of a number of identified topics.

“Project Jacaranda” subsequently became the name attributed to the preparation of an analysis to be put to financiers as to the likely outcome if Arrium were to go into voluntary administration. In its internal communications, HSF emphasised the need for Arrium to “cloak” this Project Jacaranda “as a project to analyse what the alternative will look like for banks if they don’t accept our discount proposal rather than suggesting any real solvency concerns”, though noting that the insolvent trading advice might be hard to “re-frame” in this way.

On 14 December 2015, E&Y provided its final report in relation to Project Polo, concluding that the existing cash flow forecast was sufficient “for its original intended purpose” but recommending that Arrium determine the optimal forecast period to cover an entire working capital cycle, for example, minimum 13 weeks projections at any point in time. [37] On the same day, Bakewell sent an email to E&Y expanding the scope of the work to be undertaken to include “advice in respect of any contingency planning in relation to liquidity events appropriate to the situation as it evolves” (as noted above, this became known as Project Jacaranda). [38] E&Y set out the agreed scope of works as being to conduct a broad scope review of Arrium’s businesses and likely returns to creditors in the event of the Board having to appoint voluntary administrators and subsequently creditors appointing liquidators and said that the context of that request “is to enable you to have a well-informed negotiation with your existing lenders regarding a comprehensive recapitalisation of the Group’s balance sheet that removes any risk in the longer term of the Board needing to consider making such an appointment if business conditions worsen”.

On 15 December 2015, UBS and Lazard provided an update to the Board on the sale process since 2 December 2015, concluding that: updated indicative final bids were likely to be low and well below indicative bids; only two bidders still appeared to be in the running, with indicative bids in the range of US$1.25 million to US$1.35 billion; and financing for bidders remained challenging.

Bakewell gave evidence that, at some time after receiving the 10 December 2015 ANZ letter and no later than 17 December 2015, he had a conversation with Mr Nestel of HSF about drawing down Arrium’s facilities. [39] In cross-examination, Bakewell placed the conversation with Mr Nestel as “certainly” being before the 18 December 2015 Board meeting.

Bakewell (who disputed that he gave a direction as such) recalled that he (Bakewell) had said that it appeared that ANZ was intent on cancelling its credit facilities, requiring Arrium to hold a lot of cash, and Mr Nestel responded that cash was the best form of liquidity and that “[t]o help ensure that you have that cash you shouldn’t pay down loans from now on. Put that cash on deposit instead”. [40] He said to Mr Nestel that he (Bakewell) would need to check with Sparkes because he did not know whether Arrium had already given notice of intention to repay an amount in December 2015; and that Mr Nestel said that “[y]ou also may as well drawdown all of the facilities to make sure you have enough cash available” and that he was entitled to draw down on those committed facilities up to the limit. [41]

Bakewell’s evidence is that he then spoke to Sparkes and asked her whether Arrium could stop repaying debt and draw down all remaining debt; that Sparkes said it could; and that he said “[o]kay, make sure we can do it, and if we can, let’s drawdown on the facilities”. [42] Sparkes, on the other hand, placed the instruction to draw down the facilities as occurring in January 2016. [43]

The timing of the Bakewell Direction, its content, and whether it was intended by Bakewell to be, or was, implemented immediately, were matters hotly in dispute. The primary judge found that the direction was given no later than 17 December 2015, but that it was likely that it was expressed as an idea worthy of serious consideration and not implemented immediately.

Iron ore prices fell dramatically during November 2015. [44] In a memorandum to the Board dated 15 December 2015, Mr Roberts provided an update in relation to the Strategic Review, in which reference was made to the need to consider alternative capital structures, including a potential discount to existing facilities and potentially new debt providers. At its 18 December 2015 meeting, the Board was provided with a report from UBS and Lazard, and a Business Scenario Planning memorandum dated 16 December 2015 from Bakewell. Also before the Board was a memorandum dated 18 December 2015 by HSF (headed “Project Jacaranda Phase 1 Memo”), which referred to anticipated refinancing discussions that “may involve the company proposing that its financiers accept a haircut on their present debt”. The Board minutes noted the advice from HSF to the effect that there was not an insolvent trading issue at that time “given the time until the Company’s next significant debt maturity and the work currently under way” but that, given that Arrium was operating under different circumstances than before, the Board should consider receiving more regular information on liquidity. [45]

The paper by Lazard included in the Board papers advised that a recapitalisation involving a haircut was unavoidable, and recommended that “[e]ngagement [with lenders in relation to the proposed sale of the MolyCop business] should occur only at the latest possible time to ensure there is a committed alternative recapitalisation plan from alternative capital providers and greater certainty of a Columbus sale before there is a risk of leaking the need for a haircut to trade creditors”.

As has been noted, the scope of the E&Y engagement was expanded to cover, inter alia, liquidity forecasting and management and contingency planning (with a signed addendum to the engagement letter).

On 19 December 2015, Bakewell signed a confidentiality agreement with Macquarie Bank regarding the provision of an interim liquidity facility and he met with Macquarie Bank on 8 January 2016 to discuss an AU$200 million secured standby facility (Macquarie Bank did not ultimately agree to provide this facility).

At some point in December 2015, Bakewell authorised the termination of an interest rate swap that was “in the money”, designed to hedge Arrium’s interest rate risk, for the purpose of avoiding the breach by Arrium of one its banking covenants (the ICR) on 31 December 2015.

Revised daily cash flow forecasts were prepared over the period 21-23 December 2015. The liquidity forecast spreadsheets prepared by a member of Arrium’s Treasury (Ms Verawati) on 21 December 2015 forecast that Arrium would have $153 million in facility “headroom” available as at 12 February 2016, and assumed that Arrium would continue repaying funds prior to 31 December 2015 and then re-draw those funds afterwards. Bakewell requested that the Treasury recheck the numbers, noting that the forecast suggested that “we run out of committed lines in early Feb”. He requested a “more refined version” of the forecast, noting the “tightness in liquidity”. After 22 December 2015, the remaining forecast repayments through to 31 December 2015 were in fact not made, except where irrevocable repayment notices had already been issued prior to 21 December 2015. The repayments that were made in December 2015 were pursuant to irrevocable repayment notices that had been given on or before 18 December 2015.

The updated liquidity forecast spreadsheets prepared by the Treasury department on 23 and 24 December 2015 forecast that Arrium would be close to fully drawn on its facilities by 12 February 2016. Internal Arrium emails in the period from 22 to 24 December 2015 also refer to an anticipated breach of the AU$150 million “Treasury Policy Liquidity Buffer” by around 2 February 2016. It is important to note that this was a buffer imposed as a matter of internal policy and the forecast breach did not involve breach of any covenant, nor an actual shortfall of cash to fund liabilities.

The liquidity forecast that ultimately went to the Board in late December 2015 (the “Week 52 Treasury Forecast”) projected that: Arrium’s liquidity position would deteriorate significantly between December 2015 and mid-February 2016 and would fall below its Treasury Policy Liquidity Buffer; and that, at least by February 2016, Arrium’s liquidity position would be extremely tight and would require close monitoring to ensure the availability of funds to continue to meet Arrium’s obligations and continue its operations. [46]

Email communications between Bakewell and various of Arrium’s advisers (Lazard, UBS and HSF) on and around 23 December 2015 include an email from Mr Nestel to Bakewell on 23 December 2015 in which Mr Nestel said that “[a] key message to your team that we discussed a couple of weeks back perhaps worth you repeating to them is not to pay down any of the unsecured bank lines this month but deposit amounts to reduce net debt”. [47] In a further email on 23 December 2015, Mr Nestel referred to a call with “Sarah” (Ms Pearce) and “Mark” (Mr Edler), and suggested that if notices had not gone into the banks (to pay down facilities on 31 December 2015), it would be prudent to retain spare cash in deposits rather than having to re-draw it. [48]

On 28 December 2015, Mr Roberts circulated a “Short Term Cash Flow” forecast showing the drawn debt of Arrium under the existing finance agreements exceeding AU$2.7 billion; and he emailed various members of the Board stating that the “current position outlines the importance of the Standby Facility as well as the whole of company refinancing with KKR and GSO”.

On 29 December 2015, E&Y sent an engagement letter to Arrium as to preparation of a report modelling returns to creditors in the event of an external administration of the Arrium Group.

On 29 December 2015, Arrium issued a drawdown notice under the Morgan Stanley Facility Agreement for US$37.5 million. [49] This precipitated a request on 30 December 2015 by email from a representative of Morgan Stanley for a call with Sparkes “as soon as possible”, to discuss the drawdown notice. [50] That telephone call, which took place on 31 December 2015, became the subject of a separate claim by Morgan Stanley (see below).

No representative of Morgan Stanley gave evidence of the conversation, but there were in evidence two contemporaneous documents made by representatives of Morgan Stanley, [51] being an internal email from Ms Park of Morgan Stanley reporting on the call [52] and a file note of the conversation prepared by Ms Wong of Morgan Stanley, as marked up by Ms Park, [53] on which the Anchorage appellants relied on these documents to allege that Sparkes made certain representations. [54] In both of those documents there is reference to confirmation (by Sparkes) that the company would be in compliance with the covenants as of December 2015, and that “[we] are comfortable” with the representations made in the drawdown request letter. Ms Park’s email records Sparkes as saying that Arrium “may resume ‘project archer’ which was offering security in exchange for lower covenants”.

Sparkes denied that she had said some of the things set out in the file note (such as the statement that one of the reasons that liquidity was weaker was because of restructuring costs) on the basis that she did not know them to be true. She said that she did not tell Morgan Stanley that there was a realistic prospect that the banks might be asked to take a “haircut” on the whole of company refinance (which she did not know at the time), nor that ANZ was threatening to cancel its facility unless it obtained cash collateral. [55] However, although she did not recall having said that “[we] are comfortable with all of the representations made”, Sparkes accepted, by reference to the email, that she had said something to that effect. [56]

On 3 January 2016, Mr Edwards of Lazard sent an email to Bakewell and others referring to the position with ANZ, [57] in which he outlined two scenarios: the first was that liquidity was available through the annual peak in working capital in February, the forecast showing that a sizeable buffer was likely to be sufficient to allow time for Projects Columbus and Miwok to complete (providing for significant deleveraging), and for the implementation of the operating cost savings to return the underlying businesses to cashflow positive; and the second was that providing the AU$60 million cash collateral to ANZ would exhaust most or all of available sources of liquidity and put the Arrium Group into a position that at some point in February 2016 it may not be able to pay its trade creditors when due.

Bakewell’s evidence was that Mr Nestel advised that at that stage Arrium was in the first of those two scenarios, and that this meant that it was clearly solvent. [58]

The first scenario was Mr Edwards’ preferred scenario. As to the second scenario, he outlined two “tactics” if it eventuated (namely, (A) to offer no compromise, and (B) to offer ANZ a lesser amount of cash and/or alternative collateral), commenting that the risk with option (A) included, first, that ANZ would not be comfortable with leaving in place the $200m plus overnight exposure facility “if we state to them [ANZ] that $60m would ‘tip’ the company into insolvency” and, secondly, that “ANZ may insist upon a full bank meeting” – so that option (B) was preferred. He also observed that an all lender meeting, which was likely under option (A), risked “derail[ing the] Columbus sale process”, and would precede E&Y’s Jacaranda analysis so “we won’t be well ‘armed’ for any brinkmanship”, and would also “precede and likely derail a KKR style proposal that we would most effectively present to all existing lenders at the same timing as proposing a ‘haircut’ to them”.

At its 7 January 2016 meeting, the Board was advised by UBS that there remained at least two bidders working to submit a bid for Project Columbus (Argand/Cerberus and Platinum Equity). The Board considered a joint written advice from HSF and Lazard, which recommended the provision to ANZ of the cash collateral sought by ANZ, and that Arrium seek to put in place an additional AU$200-250 million secured standby facility. [59] Also included in the Board papers was an 8 week liquidity forecast as at 4 January 2016, containing a graph which forecast that some debt would be repaid in March 2016. [60] The 8 week forecast recorded that: by about 1 February 2016, Arrium would be in breach of the AU$150 million Treasury Policy Liquidity Buffer; from 5 February 2016, drawn debt would be within AU$100 million of available funding lines; and at about 11 February 2016, Treasury Net Debt, adjusted for working capital and cash collateral of AU$70 million, breached available lines adjusted for the liquidity buffer less $100 million. The Board resolved to approve the provision of approximately AU$61.7 million of cash collateral security to ANZ, to prevent the withdrawal of transactional facilities and Arrium having to operate on a cleared funds basis.

Also on 7 January 2016, GSO outlined a “strawman proposal” to Lazard and HSF involving a headline recovery to the banks of 70% of par.

It was against this background that, between 29 December 2015 and 16 February 2016, but chiefly after 7 January 2016, Arrium issued drawdown notices, and drew down funds pursuant to them, under the various SFAs and bilateral facility agreements with Westpac and BBVA. [61]

Each drawdown notice repeated representations which the SFA’s required be made by Arrium that, as at the date of each notice and each drawdown date, Arrium was solvent (“the Solvency Representation”) and that there had been no change in its financial position which constituted a material adverse event (as defined in the respective facility agreements) (“the MAE Representation”). [62] In accordance with the Arrium Group’s Treasury Policy, Sparkes authorised and directed the preparation of the January drawdown notices, which were then prepared by Ms Verawati and signed by Ms Verawati and another employee (either Ms Hall or Ms Lieu). Bakewell directed the preparation and issuing of the February drawdown notices. [63] The February drawdown notices were prepared by Ms Verawati and signed by Ms Hall and Ms Verawati.

On 8 January 2016, Sparkes, Bakewell and Mr Edwards attended a meeting with Macquarie Bank to discuss the provision of an AU$200 million standby facility to Arrium (which did not eventuate).

On 12 January 2016, Ms Verawati and Sparkes attended a meeting concerning Project Polo with E&Y. During the meeting, there was some discussion as to the possibility of asking the lenders to “take a haircut”. In an internal email to Bakewell on 12 January 2016, Sparkes said that it appeared that the NAB and Westpac were “still assuming a knockout price for [C]olumbus”.

On 13 January 2016, Lazard indicated to Arrium that any proposal from KKR would likely involve a larger “haircut” for existing lenders than under KKR’s earlier indicative proposal.

The papers for the Board meeting on 15 January 2016 included a liquidity update prepared by Bakewell, which included a forecast that indicated that net debt would remain within the Treasury Policy Liquidity Buffer after allowing for the cash collateralisation of the ANZ facilities. [64] The minutes recorded that the Board considered the liquidity update and, having regard to the advice from HSF tabled at the 18 December 2015 meeting, considered that Arrium continued to be able to pay its debts as they fell due. [65]

The papers also included an update dated 15 January 2016 on Project Columbus, prepared by UBS and Lazard, which noted that two bidders (Argand/Cerberus and Platinum Equity) remained very active, and that the end of January or early February continued to be the target for binding bids. [66] The minutes recorded that, based on the condition of the financial markets and feedback from bidders, it was unlikely, if and when final bids were received, that the bids would be fully financed and unconditional.

The Board also received a presentation as to progress on “Project Lightning” (a project to revise the mine plan in response to falling iron ore prices), the opportunities for which were said to be relatively small. [67] Lazard informed the Board that discussions with Macquarie Bank concerning a standby facility had fallen away.

On 20 January 2016, Bakewell was advised by Lazard that it had received detailed feedback from one of the Project Columbus bidders (Argand/Cerberus), to the effect that “they wouldn’t meet their return hurdles if they had to fund the acquisition with 60-70% equity and as a result their valuation had reduced substantially (we read this as US$200-250m, from their US$1.25- 1.35Bn range)”. Lazard observed that this represented a “significant downward revision of [Argand/Cerberus’] value range” and that this feedback from Argand/Cerberus confirmed that it would be unlikely for the transaction to proceed as the price would be unacceptable to Arrium. Lazard prepared a “Recapitalisation Update” dated 20 January 2016, advising that achieving a “high price for Columbus which is sufficient to repay all current debt and provide working capital funding for Marco” was “highly unlikely”. For the purposes of exploring the outcomes remaining open, Lazard assumed a sale price of US$1.1 billion, consistent with the feedback from Argand/Cerberus.

Also on 20 January 2016, E&Y provided a draft report on Project Jacaranda, which considered liquidation of assets values and possible returns on a hypothetical forced liquidation scenario, forecasting total lender recoveries of between 26.1% and 43.2% and lower recoveries for non-lender creditors. [68] The modelling assumptions for Project Jacaranda included that all businesses other than MolyCop would be placed into liquidation and that MolyCop would be placed into various insolvency processes with the business and “assets sold on an individual basis”.

The papers for the 21 January 2016 Board meeting included a monthly liquidity outlook model that included a cash flow forecast for a 13 week period. Bakewell reported in his covering memorandum that this draft liquidity forecast indicated that net debt remained within the Treasury Policy Liquidity Buffer after allowing for cash collateralisation of the ANZ facility. [69] A similar graph to the 7 January 2016 version was presented, in a different form, prepared using a model created by E&Y, which forecast a material amount (approximately AU$100 million) of undrawn committed facilities remaining into April 2016. [70] The minutes recorded that, having considered the liquidity update and verbal update from Bakewell, Arrium continued to be able to pay its debts as they fell due. [71]

The Board papers also included a memorandum prepared by Mr Roberts providing an update in relation to the Strategic Review, including updates as to Project Marco and Project Lightning; [72] together with a paper from UBS and Lazard updating Project Columbus and Lazard’s Recapitalisation Update, [73] and the E&Y Project Jacaranda report. As to Project Columbus, the paper stated that two bidders remained very active in the process, and there was a verbal update from Mr Kleijn (of Lazard) that expressed confidence that the transaction was likely to proceed at a price in the mid-range at a level acceptable to the Board. [74] As to the paper in relation to recapitalisation, four options were identified. [75] The recapitalisation options considered in it assumed a significant discount (or “haircut”) for existing lenders’ debts. [76]

From at least 20 January 2016, it seems in the context of preparing a draft review report on the HY16 accounts, Arrium’s auditors KPMG raised concerns about whether some qualification should be included in the accounts as to whether Arrium was a going concern. [77]

A draft Going Concern Note was forwarded by KPMG to Bakewell on 20 January 2016, as referred to in an internal HSF email of that date. The draft Going Concern Note stated that the Arrium Group was in compliance with debt covenants as at 31 December 2015 and, based on estimates, was forecast to remain in compliance for at least 12 months from signing the directors’ report on the half year financial statements but that deterioration in forecast cash flows as a result of adverse variation in the key assumptions that had been noted “may adversely impact compliance with debt covenants and debt obligations over this period”. The draft referred to a risk that Arrium would not achieve forecast operating cash flows, realise sufficient cash proceeds from asset sales or receive the ongoing support of financiers, which gave rise to material uncertainty as to whether the Arrium Group would continue as a going concern.

This issue was also raised in a draft report dated 21 January 2016, which was included in the papers for Arrium’s Audit and Compliance Committee (“ACC”) meeting on 3 February 2016. Bakewell sought advice from HSF as to the “strategy” to be adopted with KPMG in relation to the draft Going Concern Note.

Various drafts of what ultimately became the KPMG letter in relation to the Going Concern Note were prepared, the first, seemingly, being a letter dated 1 February 2016 in which KPMG advised Bakewell as to its assessment of the Arrium going concern considerations for the half year ended 31 December 2015. This draft referred to a cash flow scenario analysis that Arrium had recently conducted, which showed that, under scenarios where current steel and iron ore prices continued, the company would breach debt covenants in the next financial year, and that, in the event that the MolyCop sale and/or the restructuring of Arrium’s debt was not able to be achieved (or an alternative recapitalisation scenario eventuated, such as Arrium being acquired) then there appeared to be a possibility that administrators may need to be appointed. The draft noted that raising equity from the market was not a viable option at that time, and also that the outcome of negotiations with current and alternate lenders was uncertain and subject to change depending on a number of factors outside Arrium’s control, giving as an example market conditions and the credit risk appetite of lenders.

On 22 February 2016, GSO agreed to provide an emergency US$140 million standby facility to Arrium under an interim facility agreement.

Arrium continued to make drawdowns over the period from 21 January 2016 to 29 January 2016, the surplus funds ultimately being deposited in an account which would later be opened with the Bank of Queensland (“the BOQ Account”). [78]

Bakewell and Ms Pearce (who replaced Sparkes on the latter’s retirement effective 29 January 2016) met with representatives of Westpac on 29 January 2016. According to notes of the meeting, Westpac representatives were told that covenant compliance “30/6/16 [was] ok but tight” and that there were six bidders for MolyCop, two of whom were active, one was semi-active and three were not active, with letters of offer expected by 5 February 2016. [79] Mr Owen of Westpac then reported internally within Westpac that one of the three possible outcomes was that, in the event of weak or no offers being made in the MolyCop sale process, Arrium would “immediately set about negotiating a re-finance of the July 2017 maturing tranches which would otherwise become ‘current’ in the 30 June 2016 accounts”; and that the timeframe for that negotiation would “run up to 30 June 2016”.

On 29 January 2016, Bakewell sent an email to Mr Nestel attaching a draft Board paper which was said to refresh Project Archer “ie our approach to lenders in Q1 FY16 offering security over the assets of the company in exchange for an ‘amend and extend’ deal”. The proposal involved lenders increasing their exposure to Arrium by providing further funding, in return for gaining security. On 1 February 2016, following further discussion with Mr Roberts and Mr Edwards, Bakewell circulated a revised draft of that paper, which included a “key section” headed “additional liquidity requirements”, addressing “what commitments are the board likely to require from lenders” and referring to a need for AU$400 million in additional liquidity. Bakewell there anticipated that “the announcement of a failed Columbus process” would result in “withdrawn uncommitted lines and potential for adverse changes in creditor terms”.

On 2 February 2016, Ms James (Arrium’s Head of Strategy) sent an email to Mr Roberts in relation to the draft Board memorandum of 1 February 2016 headed “Project Archer Refresh”, suggesting that Arrium seek advice from HSF on the issue of Arrium’s ability to grant security. In that email, Ms James expressed the opinion that Arrium could not refinance “this level of debt” based on current earnings, even if US bond markets were open (which they currently were not). Mr Roberts forwarded the email to Ms Pearce, addressing Ms James’ email by proposing that Arrium “check with HSF”. Ms Pearce then forwarded the email chain to Mr Nestel.

Mr Nestel’s response recorded his understanding of the paper being that it was to demonstrate that a fall back option was available to Arrium (albeit less than ideal) in the event that the banks were not willing to accept a haircut required under either a recapitalisation or Columbus sale, that option being essentially to amend and extend the current facility – to push out near term maturities and provide a holiday from or loosening of financial covenants. Mr Nestel observed that this might or might not include provision of additional committed funding from banks. He advised that the key point was that such an option did not need to offer the banks any additional security and that references to it should be removed from the paper for three reasons: first, that such an offer was not necessary to “induce” banks to agree to it, because it would be their rejection of alternatives that would drive them to agree; second, that providing security to one group (the banks) may undermine confidence of another group (trade creditors) that they will be paid; and, third, that the Board would need to assess the position of Arrium and the viability of the fallback option at the time a request for security was made. Mr Nestel noted that if the “amend and extend” proposal was merely “kicking a problem down the road”, then a grant of security to secure existing debt might be problematic from a Board as well as a lender perspective.

Also, on 2 February 2016, Mr Roberts prepared a “Strategic Review Update” for consideration by the Board at its upcoming 4 February 2016 meeting. Mr Roberts foreshadowed that a Project Archer update would be circulated separately, which would outline an updated proposal to grant security for a revised covenant package and extended term, as an alternative to Project Columbus and/or a whole of company recapitalisation (i.e., Project Miwok). It does not appear that any such update was ultimately circulated.

On 3 February 2016, final bids for the MolyCop business were received from the remaining two bidders, Platinum Equity and Argand/Cerberus. The offers were for at least US$825 million (which the respondents here argue was more than sufficient to enable the July 2017 Maturities to be met). The highest bid value was US$1.1 billion. However, that bid involved Arrium’s existing lenders “rolling over” around US$800 million of existing debt to the MolyCop business specifically. The highest fully-financed bid value was US$825 million (which the appellants point out is well below – by almost 40% – the US$1.35 billion that Arrium’s advisers had indicated, in September 2015, would leave Project Columbus in the “grey zone” in a “downside” scenario).

Also, on 3 February 2016, there was a meeting of Arrium’s ACC, Arrium’s auditors (including Mr Young from KPMG) and HSF representatives. [80] The meeting considered Arrium’s 31 December 2015 half year financial statements. The minutes of the meeting record a verbal update from Mr Young that KPMG agreed with the accounts being prepared on a going concern basis and that “the disclosure in Note 1 will be finalised with the Company on the basis of the outcomes of work being completed by the Company over the coming weeks in respect of impairment testing and other matters regarding the accounts as well as the progress of the Strategic Review to the date on which the accounts are finalised”.

At the 4 February 2016 meeting, Mr Roberts provided the Board with a verbal update “regarding a draft proposal regarding the Company’s existing lenders to amend the covenants and extend the tenor of existing committed finance”, in which Mr Roberts indicated that “on the basis of modelling work done to date, the proposal would be able to proceed without an agreed compromise of existing lender debt and in continuing compliance with existing financial covenants; and that work will be continued to finalise the proposal, with accompanying financial analysis”. The oral evidence of two directors (Ms Goldsworthy and Ms Warnock) was that Mr Roberts did not convey to the Board that, after consultation with HSF, the proposal no longer involved the provision of any security by Arrium; rather, the directors continued to assume that the “amend and extend” proposal involved the provision of security to the lenders.

The Board was presented with a paper prepared by UBS and Lazard as to the details of the final bids from the two bidders for the MolyCop business, together with a memorandum dated 2 February 2016 setting out the four funding scenarios prepared in connection with Project Miwok. [81] Lazard explained that the GSO Proposal involved an illustrative discount of approximately AU$1,258 million (approximately 45%) and noted that it “may be difficult to convince existing lenders to take a c.45% haircut”. [82]

The papers included a liquidity forecast dated 2 February 2016 prepared by Bakewell, confirming that the net debt remained within the Treasury Policy Liquidity Buffer for the ensuing 8-week period. [83] There was also a 13 week forecast, prepared as at 15 January 2016, which indicated that in the final week of the forecast period the forecast net debt exceeded the committed funding lines post the liquidity reserve; and that there was a continuing “focus on ways through working capital management to improve the liquidity position across the forecast period”. [84]

On 8 February 2016, KPMG sent Bakewell an updated draft letter in relation to KPMG’s “going concern” considerations, setting out the matters that provided the basis for KPMG’s opinion that there may be material uncertainties relating to Arrium’s ability to continue as a going concern. [85] KPMG considered that there was sufficient evidence of material uncertainties to warrant expanded disclosure in the notes to the HY16 financial report, including that: there were uncertainties around the sale of MolyCop, the fact that Arrium needed to negotiate amendments to existing debt arrangements and the fact that two potential alternative lenders had provided conditional indicative proposals to restructure existing debt. [86]

As has been noted, Sparkes deposed to a conversation with Bakewell in early to mid-January 2016 in which she raised with Bakewell that she had heard he was thinking about “maxing out all the facilities”, and Bakewell responded that HSF had advised Arrium to do so as the banks might cease complying with the company’s funding requests, but that “[a]nyway we may not go down that path”. [87]

Ms Pearce gave evidence that, on or about 8 February 2016, she had a discussion with one of Mr Nestel, Mr Edler or Ms James, in which she (Ms Pearce) was asked “[h]ave you drawn down on the facilities?” and she was told that there had been discussions during the Board meeting to draw down the remaining capacity on all the available facilities and that Bakewell should have told her. Mr Edler did not recall such a conversation, and the primary judge concluded that, given subsequent events, it was unlikely that the conversation Ms Pearce recalled was with Mr Nestel. [88] (His Honour considered it unlikely that Mr Nestel would follow up on whether Ms Pearce had put into effect a proposal discussed at the Board meeting.)

Following that conversation, Ms Pearce sent an email to Bakewell advising that “we will prepare drawdown notices in anticipation” (in context, this seems to be a reference to an anticipated discussion with Mr Nestel). [89] A telephone conference call was organised that evening between Ms Pearce, Bakewell and Mr Nestel. Ms Pearce’s evidence was that, during that call, Bakewell said words to the effect that “[w]e should drawdown on all available headroom for the remaining facilities”. [90] Ms Pearce’s handwritten file note of that discussion included the following: “not enivetible [sic; inevitable] we are giving a hair cut” (“amend & extend paper”); “not in breach”; no EOD [event of default] and “point of drawing? Maintain liquidity, we will be entitled but they may refuse”. [91]

Bakewell had no recollection of the 8 February 2016 conversation but also had no reason to doubt that he had a telephone call with Ms Pearce and Mr Nestel on that date. Bakewell also had no recollection of instructing Ms Pearce to draw down the remaining facilities but was certain that he never said that Arrium should draw down all remaining funds regardless of whether they were entitled to do so. Bakewell accepted in cross-examination that a decision was made to draw down the remaining facilities (as in fact occurred), and that it was unlikely that that decision was made by Ms Pearce. [92]

Further drawdown notices were issued over the period 9 to 11 February 2016. These included one to HSBC, dated 10 February 2016, which requested US$13 million on 16 February, [93] to which further reference is made below. Between 22 December 2015 and 11 February 2016, almost all of Arrium’s committed lines of finance were drawn down.

On 9 February 2016, in the context of communications about the Capital Structure Options Paper prepared by Lazard regarding the possible restructure of Arrium, Mr Nestel sent an email to Mr Edler, which was copied to Bakewell amongst others, conveying the collective advice of HSF and Lazard to “deposit cash with a non-syndicate bank ASAP”. It appears from the context of the email chain that this was in response to a concern that Lenders might exercise rights of set-off if the proceeds of the drawdowns were deposited with a syndicate bank. Also on 9 February 2016, E&Y sent to Bakewell and Mr Edler a revised Project Jacaranda model, which forecast lender recoveries of between 19.5% and 36.2% in an insolvency of Arrium.

A liquidity update memorandum dated 10 February 2016 from Bakewell, prepared for the 11 February 2016 Board meeting, recorded that the 8 week liquidity forecast assumed that “committed debt facilities are fully drawn from 15 February 2016, with those drawings being held as cash on deposit and used to fund the on-going operations [of] the group, as a result the drawn debt position on the graph is equal to total committed debt facilities”. Bakewell noted that the net debt remained within the Treasury Policy Liquidity Buffer over the 8 week period, but that the net debt adjusted for cash collateral crossed the total available line adjusted for liquidity buffer over the final two weeks of the forecast period. [94]

The papers for the 11 February 2016 meeting included a UBS/Lazard update on the status of Project Columbus, which contained details of Platinum Equity’s revised bid for MolyCop (a reduction in the total offer to US$1.05 billion but an increase in equity contribution); and a recapitalisation update and Strategic Review option analysis paper, which identified three strategic options: first, the recapitalisation proposals from GSO (“Gamma”) and KKR (“Kenobi”); second, the “amend and extend” proposal (both with and without a “haircut”) (i.e., Project Archer); and, third, a Columbus sale (based on both an updated Platinum Equity proposal and an Argand/Cerberus all cash proposal). [95] Absent a Columbus sale, the requirement for additional working capital as part of a recapitalisation meant that both Gamma and Kenobi would require that lenders accept a “haircut” of 42%. Lazard noted that none of the options was currently in a form that could readily be executed and that future negotiations were required. A “key model assumption” for the “amend and extend” option was “provision of a new working capital facility of A$215m”. Lazard noted that the “requirement for a new working capital facility will be received [by lenders] unfavourably”. There was no reference to the provision of security to lenders.

The minutes recorded that: [96]

Thus the Board noted that there were matters of uncertainty attending Arrium’s continuance as a going concern.

On 12-13 February 2016, there were email communications between Bakewell and Mr Edwards, the latter asking “where the cash is currently located … Just wanted to make sure it’s not at ANZ or another lender” (consistent with there being a concern as to potential set-off or claw-back of the amounts). Bakewell responded to Mr Edwards on 13 February 2016 at 10:05 am, saying that “[c]ash is mainly with BTMU [Bank of Tokyo-Mitsubishi UFJ] and some non lender banks offshore. Still can’t find a non lender bank to give us an account. Waiting to hear back from UBS”. Bakewell forwarded to Mr Roberts the email from Mr Edwards (but not his response to it), saying “we haven’t contacted B[O]Q yet re a bank account” and asking if Mr Roberts wanted to make that call, in response to which Mr Roberts suggested that Bakewell contact the CFO of BOQ, Mr Rose. [97] On 14 February 2016, Bakewell received an email from Mr Rose at BoQ relating to the opening of a deposit account.

By letter dated 15 February 2016 to Bakewell, KPMG finalised its going concern advice. The letter stated KPMG’s opinion that there was evidence of material uncertainties relating to Arrium’s ability to continue as a going concern and documented the basis on which KPMG considered that there may be material uncertainties. Under the heading “KPMG considerations”, KPMG set out key circumstances and other information that KPMG considered in assessing whether material uncertainties existed, along the lines of the 8 February 2016 draft.

On 16 February 2016, in response to a request from HSBC in connection with the drawdown notice dated 10 February, Bakewell and Mr Brooks (Arrium’s Group Financial Controller) provided an additional statement confirming the truth of the representations and warranties required to be repeated under the facility agreement as at the drawdown date, being 16 February. [98]

Also on that date, Bakewell caused a separate account to be opened with BoQ and steps were taken to transfer $100 million into the BOQ Account. Bakewell received an email from Ms Pearce stating that a “[f]irst lot of funds have been transferred by swift $71m (ANZ then have to clear this to BOQ, if they haven’t done so by around 2pm BOQ will advise us so we can chase). We will make an additional transfer in about an hour of approx. $29m”.

The Board met on 16 February 2016, which continued on 17 February 2016. Included in the papers were: a revised forecast for FY16 and a management estimate for FY17; and a liquidity update dated 15 February 2016 from Bakewell, which included eight and 13-week forecasts prepared as at 8 February 2016. The commentary to the 8 week forecast stated that it indicated that over the period net debt remained within the Treasury Policy Liquidity Buffer except for the final day of the period; that this was the peak position and that it “progressively comes back into compliance by 29 April”. [99] In a memorandum dated 15 February 2016 to the Board, Mr Roberts stated that he anticipated that his recommendation would be that the best option to pursue was the Gamma proposal (i.e., the GSO recapitalisation proposal) with the interim facility. [100]

An update was provided on Project Polo (i.e., the cash flow forecasting process), the Board noting advice that the initial week on the 13-week model showed that Arrium had time to complete further work being undertaken as part of the Strategic Review; that Arrium had sufficient liquidity over the forecast; and that over that period Arrium’s scheduled payments were able to be paid in the ordinary course. [101]

On 17 February, the Board approved the HY16 accounts (for the period ended 31 December 2015). They recorded net assets of $2,328.4 million (a deterioration from $2,554.9 million, reflecting a net loss after tax of around AU$235.8 million for the six months); net operating cash outflow of AU$155.9 million; a reduction in available uncommitted finance facilities (after lenders withdrew uncommitted funding lines); and a write down of assets as a result of impairments.

The HY16 accounts included as Note 1 the “Going Concern” note. [102] Relevantly, it stated that the financial statements had been prepared on a going concern basis, contemplating the realisation of assets and discharge of liabilities in the ordinary course of business; that in the event that assumptions varied significantly from those forecast, the Arrium Group considered that it had options available to meet its obligations, including the divestment of significant businesses or assets and sourcing of additional or alternate funding or terms from financiers; that Arrium continued to progress its previously announced strategic review; and that debt reduction continued to be a key priority. It stated that Arrium was in compliance with its debt covenants at 31 December 2015 and, based on the Group’s estimates, was forecast to remain in compliance for at least 12 months from the signing of the report; but that:

Note 14 in the Accounts (Events after Balance Sheet Date) stated that “[t]here have been no other circumstances arising since 31 December 2015 that have significantly affected or may significantly affect: (a) Arrium’s operations; (b) the results of those operations; or (c) the state of affairs of Arrium in future financial years”. In the Auditors’ Report, KPMG as a matter of emphasis drew attention to the directors’ assessment of going concern in Note 1, and stated that the matters outlined in that note indicated the existence of a material uncertainty that may cast doubt on the Arrium Group’s ability to continue as a going concern and that therefore the Arrium Group may be unable to realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. [103]

Also included in the papers was a presentation dated 16 February 2016 prepared by Lazard and UBS entitled “Review of Recapitalisation Strategic Options”. This review considered five options. [104] Lazard and UBS recommended that the option of “amend and extend” with no debt forgiveness not be considered any further by the Board, as it “results in both liquidity shortfalls and covenant breaches”. As to the option of “amend and extend” with agreed debt forgiveness, this option involved: provision of a working capital facility of $247 million; lenders agreeing to write-off approximately 30% of the total debt owed to them (equating to a write-off of circa AU$836 million); and an extension of July 2017 Maturities and the facilities due in 2018 to 2021. There was no reference to the provision of security to lenders. One of the considerations identified by Lazard and UBS in relation to this proposal was that lenders would, in effect, be asked to provide the substantial new working capital facility “immediately post the drawdown of the remaining ~$200m of facility headroom to be repaid net of the significant haircut”.

Lazard and UBS advised that the only two options worth considering further were, first, Gamma (which involved a debt forgiveness of approximately 48%) and, second, an “amend and extend” option with the existing lenders with an agreed debt forgiveness of approximately 29%, and fresh lending by existing lenders. [105] On balance, of those options, the advisers preferred entry into a recapitalisation agreement with GSO. [106] Lazard and UBS advised the Board to approve Gamma involving a 48% lender debt forgiveness, and further consideration of the “amend and extend” with a 29% lender agreed debt forgiveness. Lazard and UBS also advised that the execution risk associated with the GSO recapitalisation proposal was “high”, citing a number of risks including that “lenders don’t agree to the debt forgiveness”.

The papers included Mr Roberts’ advice that the recapitalisation proposal was “the only option available to the Company which provides a ‘solution’ to the current financial position and performance of the Company”. [107]

Arrium released its half year 2016 financial results to the ASX on 17 February 2016, following which it indicated to lenders that it would fund the appointment of a lenders’ adviser on terms to be negotiated. [108]

By 17 February 2016, the Arrium facilities were fully drawn down. From 29 January 2016 to 16 February 2016, Arrium had drawn down some US$80.3 million and CA$9.9 million from the lenders’ facilities (being the total of facilities drawn down under: the 2014 SFA (US$6.8 million); the Morgan Stanley Bilateral Facility Agreement (US$37.5 million); the CBA Bilateral Facility Agreement (US$16.0 million); the BBVA Bilateral Facility Agreement (US$20.0 million); and the Westpac Bilateral Facility Agreement (CA$9.9 million)).

On 18 February 2016, HSBC requested Arrium to withdraw the drawdown request of 10 February, as it was “concerned about Material Adverse change in the financial accounts”. [109]

Included in the Board papers for its 20 February 2016 meeting was a memorandum dated 20 February 2016 prepared by Bakewell in relation to solvency. [110] There was also a presentation prepared by Lazard and UBS providing an update in relation to negotiations with GSO (and supporting on balance the proposal to enter into a recapitalisation deed with GSO). In a memorandum also dated 20 February 2016, Mr Roberts summarised the effect of the recapitalisation deed. [111] In a memorandum of the same date, Bakewell explained the interim secured debt facility as providing “additional liquidity to mitigate any potential liquidity events and as a prudent step to put in place as a standby short term liquidity facility”. [112]

The Board resolved to delegate to a subcommittee authority to finalise negotiations with GSO and approve the final terms of a recapitalisation deed. [113] On 22 February 2016, Arrium entered into a recapitalisation deed and interim facility agreement with GSO, [114] under which GSO agreed to provide Arrium with: up to US$927 million in funding, including a US$665 million facility to be used partially to repay existing lenders, on the condition that Arrium’s lenders agree to extinguish or retire the balance of the debt owed to them (a “debt compromise”) representing an implied “haircut” of approximately 50%; and a senior secured interim facility of US$140 million (approximately AU$200 million) secured over the MolyCop assets. [115] The broader GSO Proposal contemplated that GSO would provide Arrium with, inter alia, a secured AU$500 million working capital facility (conditional upon Arrium’s lenders agreeing to write-off approximately half the debt owing to them).

The GSO recapitalisation deed required both parties actively to pursue the contemplated recapitalisation to the exclusion of competing proposals (unless not pursuing a competing proposal would likely result in a breach of directors’ duties). The full terms of the arrangement were to be agreed and finalised by 5 April 2016 (or as otherwise agreed).

On 22 February 2016, Arrium announced on the ASX that it had entered into a recapitalisation proposal with GSO.

By 29 February 2016, Arrium had breached the Arrium Group Treasury Policy Liquidity Buffer (though once again it should be noted that this was an internal measure and not a breach of a covenant under the facility agreements).

There was correspondence in February and March 2016, respectively, from solicitors acting for the lenders (King & Wood Mallesons (“KWM”)) and solicitors acting for CBA (Henry Davis York)) raising concerns as to the ASX announcements regarding the half-year report for the period ending 31 December 2015 and the recapitalisation proposal, as to whether breaches had occurred regarding representations and warranties and material adverse change (and in the case of the CBA solicitors’ correspondence, as to whether there had been an insolvency event).

Meanwhile, by 1 March 2016, Bakewell was seeking authorisation to draw down on the GSO interim facility due to concerns about liquidity, referring to an accompanying liquidity update in his Board memorandum. Authorisation was presumably provided during the 2 March 2016 Board meeting, and the drawdown notice was issued on 3 March 2016 for US$50 million, with a drawdown date of 17 March 2016. As included in his memorandum for the 2 March 2016 Board meeting, Bakewell advised the Board that the cash balance in Australia from 23 March 2016 was in deficit and that, while balances from the overseas business had been used to manage the cash needs of the group when required in previous periods, the net debt position at this time did not allow the flexibility to move cash around the group to meet the needs of the group efficiently.

On 14 March 2016, Bakewell provided a liquidity update to the Board, which indicated that Arrium would exhaust its available facilities (including the GSO interim facility) by April 2016. Bakewell noted “the potnertial [sic, potential] need to draw further funds”, drawing attention to the fact that “[c]reditor payments are AU$775.8 million for the 8 week forecast period”, and to evidence of various trade creditors tightening their terms.

On 15 March 2016, representatives of Arrium and its advisers (UBS, Lazard and HSF) met with various financial advisers representing all lenders under relevant finance agreements (with the exception of Morgan Stanley with respect to the Morgan Stanley Facility Agreement). [116] At this meeting, the financial advisers to the lenders observed, amongst other things, that the financier group (Arrium’s existing lenders and noteholders): recognised that a restructuring of the Arrium Group was necessary and desirable (especially in light of the information received on the outcome of the Columbus process and its liquidity position); did not want to “go down a path that leads to the insolvency of the group” and accordingly were supportive of a process that leads to a solvent restructuring of the group (potentially including options that include an amend and extend of the existing financier debt and no immediate cash pay down); wished to support such a restructuring process by putting in place a “safe environment” for the group to work through such a restructuring (including specifically their willingness to put in place a standstill in order to provide the group with sufficient time to run a further market process, and to assess, negotiate and implement an alternative recapitalisation resulting from that process; and wished to replace the GSO interim facility with a replacement facility in the same principal amount as the GSO interim facility but at a cheaper rate). In this context, the financial advisers indicated that they would consider providing further interim secured funding in future if the Arrium Group demonstrated a need for additional funds to fund the liquidity needs of the group through the alternative recapitalisation process.

On 16 March 2016, Bakewell sought authorisation to draw down on the GSO interim facility for an additional US$50 million. Authorisation was provided and the drawdown notice was issued on 18 March 2016, with a drawdown date of 4 April 2016.

On 17 March 2016, the Board was informed by Mr Edwards that Mr Anderson of McGrathNicol (acting for the lenders as their investigating accountants) had approached Arrium’s advisers, indicating that Arrium’s lenders: first, did not want the company to go into administration, that they recognised the value destruction in an administration, and that they wanted management to continue to operate the company; and, second, were prepared to enter into a “support agreement” which would include a standstill on lenders exercising rights, such as might arise in the context of a future covenant breach (and that the lenders were expecting to provide a term sheet to the Company for this arrangement shortly). Further, it was said that the lenders were prepared to provide or takeover an interim secured facility on terms no less favourable to the company than the GSO interim facility and potentially at lower cost and for an amount of no less than US$140 million (being an amount that would cover the company’s current forecast liquidity needs), and to consider requests to provide additional liquidity beyond that interim facility limit based on need (but their view of the company’s liquidity was that there was no such need).

The Board was further informed that Mr Anderson had indicated that “the ‘informal and initial feedback’ from the banks, though not yet formalised or confirmed by the lenders is that they are not minded to accept the current GSO proposal and would not object if the GSO proposal were to lapse”, but that the banks wished the company to “re-open the strategic review to explore all options”. The Board noted that Arrium’s existing lenders had indicated a capacity to consider an “amend and extend” proposal.

On 21 March 2016, the lenders communicated to Arrium that they would likely reject the GSO Proposal. They proposed, as an alternative, a “Lender Support Arrangement”, pursuant to which lenders offered to grant Arrium a seven month “standstill” to pursue recapitalisation discussions, and to provide a US$140 million secured facility to replace the secured GSO interim facility. Arrium’s noteholders put forward a similar proposal. The offer from the lenders was conditional upon Arrium not entering into any arrangements that gave effect to the GSO proposal. Mr Owen explained that the specific rationale behind the offer was a desire to “get rid of GSO” because, as a result of the deal done by Arrium with GSO, GSO held security over the “jewel asset” (i.e., MolyCop). Mr Owen’s evidence was that “[w]e were concerned that they might seize on a default event in their own facility, foreclose on that security and, through whatever means, in effect, steal it”.

On 23 March 2016, Mr Roberts responded to McGrathNicol in relation to the GSO proposal, stating that the lenders’ actions to withdraw existing facilities had placed significant pressure on Arrium’s liquidity position, and had resulted in the increase in drawings under committed bank facilities and in the company needing to draw on the GSO secured interim facility; but that Arrium’s position was to continue to work constructively with the lenders and their advisers.

On 29 March 2016, Arrium met with lenders to discuss the proposed Lender Support Arrangement. The lenders expressed frustration at the lack of engagement from Arrium on their proposal. Mr Roberts told lenders that the “[l]iquidity position of the business is very tight”. Mr Owen considered that Mr Roberts was “adamant that a standstill would not be viable” unless the lenders agreed to provide fresh funding to Arrium in the range of $400 million to $700 million. Mr Roberts emphasised that if the company were “to go out on 5 April and indicate [that the] company has rejected [the] GSO proposal… our trade creditors and customers would find it highly unsettling and could move very quickly”; and said that “to reject [the] GSO proposal without an alternative would place significant risk on the company and is not something the company could manage liquidity around today”. The lenders reiterated that they were unlikely to support the GSO proposal and “asked for a proposal from the Company regarding a response on the banks’ form of standstill agreement and amend and extend proposal”. Arrium was provided with a letter dated 29 March 2016 in which KWM advised that “the lenders’ strong preference is to agree a standstill and recapitalisation bid process with the company”.

On 30 March 2016, Bakewell provided to the Board a further liquidity update, stating that “[c]reditor payments are AU$907.7 million for the 8 week forecast period”, and drawing attention to various trade creditors tightening their terms. The update recorded a material negative variance compared to the forecasts prepared on 18 March 2016. Cash forecasts indicated that by 16 May 2016 Arrium’s overall cash balance (in Australia and overseas) would be just $2 million (plus US$40 million in the GSO interim facility). It was noted that this was consistent with the E&Y 13-week forecast prepared on 4 March 2016 for the week commencing 16 May 2016.

On 30 March 2016, Bakewell sought authorisation to draw down the full remaining balance of the GSO interim facility, in an amount of US$40 million, observing that “Australian cash balances are negative from 21 April to 21 May”. The Board resolved to approve a further drawdown notice under that facility for US$40 million, which would have exhausted the facility. The drawdown notice was issued on 31 March 2016, with a drawdown date of 13 April 2016. Thus, by the end of March 2016, Arrium had drawn down or requested to draw down all available funds under the GSO interim facility. (Following the appointment of the administrators, [117] this last drawdown notice was not funded.)

In a memorandum dated 30 March 2016, HSF noted the then position of holders of the USPP Notes (“Noteholders”) and that of the lenders other than Morgan Stanley; including the Noteholders’ inclination to reject the GSO recapitalisation proposal and belief that the company should undertake a new sale or recapitalisation process; and the lenders’ strong preference to agree a standstill and commence a new recapitalisation bid process with the company (the Noteholders expressing the opinion that the GSO facility would adversely affect the new sale or recapitalisation process, and the lenders indicating a wish to replace the GSO facility).

On 31 March 2016, Arrium responded to the lenders’ proposal, Mr Roberts conveying a counterproposal to the standstill proposal and Mr Edwards sending a separate email conveying Arrium’s counterproposal on the “amend and extend” proposal. The counterproposals were intended by Arrium to put to the lenders “a position that would be acceptable to the Company”; and clarified that Arrium required very substantial and immediate fresh funding as part of any lender support arrangement, including a “new super senior secured facility” with a maturity date of 30 June 2021 of not less than AU$450 million, reinstatement of “commodity and FX” financial lines, and provision of “committed and insured receivables purchase funding for the Prime Platform of A$[125]m” for the duration of the standstill period. The proposal put forward by Arrium envisaged that some “[l]evel of debt forgiveness” might be required.

Arrium’s proposal, and in particular its requirement of further funding, was unacceptable to the lenders. On 1 April 2016, the lenders held an “all bank meeting” at which it was decided that they were not prepared to invest new money with the existing management team. They unanimously rejected the GSO proposal, [118] and expressed a preference for voluntary administration. By letter dated 1 April 2016, Morgan Lewis, representing the Noteholders, confirmed their rejection of the GSO recapitalisation plan, but contemplated a draft standstill agreement (as sent to Arrium on 21 March 2016) which provided for: a reasonable standstill period to allow for the expanded sale and recapitalisation process; forbearance in respect of non-payment defaults which may have occurred prior to the standstill period, or occur during it, under the USPP Notes; and consideration of all recapitalisation and value-maximisation alternatives available to Arrium, including debt/equity recapitalisation and provision of financing to bidders in the expanded sale and recapitalisation process.

By letter dated 1 April 2016, NAB (as agent of the three SFAs) rejected the GSO recapitalisation plan, withdrew the lender support documents that were provided on 21 March 2016 (being the lenders’ offer of a seven month “standstill” period, during which lenders would forbear from exercising any rights against Arrium), and thereby withdrew the lenders’ support for Arrium.

On 2 April 2016, Bakewell informed the Board that “if the second GSO drawdown cash is received, the Company would have sufficient cash in Australia into mid-May”. The minutes make reference to the change in the lenders’ position the preceding evening, which, if confirmed, meant that the company was likely to be insolvent, with the lenders now preferring voluntary administration and wanting the company to undertake contingency planning for an administration with their advisers McGrathNicol.

On 6 April 2016, Arrium released an ASX announcement noting Bakewell’s resignation as CFO. [119]

On 7 April 2016, the Board resolved that the company was insolvent or likely to become insolvent at some future time, and that administrators should be appointed, thereby placing Arrium in voluntary administration, with Grant Thornton partners appointed as the administrators. [120] At that time, Arrium held a total of AU$295 million in cash, [121] of which AU$128.9 million was held in the BOQ Account.

On 12 April 2016, partners of KordaMentha were appointed administrators in place of Grant Thornton for Arrium. After their appointment, KordaMentha reviewed the previous MolyCop sale process. By no later than 12 May 2016, KordaMentha had determined to conduct a new sale process. On 2 August 2016, a standstill agreement was entered into by various of the lenders, Morgan Stanley and the Noteholders, the purpose of which was to facilitate the MolyCop sale. The MolyCop business was ultimately sold by the administrators on 4 November 2016, for US$1.23 billion. [122]

The Anchorage appellants commenced proceedings in the Supreme Court on 4 April 2018. After Arrium was placed in liquidation (on 20 June 2019) and public examinations, the liquidators commenced proceedings, by originating process dated 5 July 2019, against the Arrium directors for insolvent trading. The liquidators’ proceeding was settled during the course of the hearing below and was dismissed. Meanwhile, the BoC Plaintiffs had commenced their proceedings on 10 October 2019.

It is convenient at this point to identify the essential cases propounded by each appellant against each respondent.

In short, the Anchorage appellants rely only on the MAE Representation, and an additional oral representation said to have been made by Sparkes in her telephone conversation with Morgan Stanley on 31 December 2015 (“the 31 December conversation”). They contend that the MAE Representation was a negligent misrepresentation on the part of Arrium, for which Sparkes and Bakewell are said to be liable on the basis that they directed or procured it. The Par Lenders allege in addition that it constituted misleading or deceptive conduct on the part of Arrium, in which Sparkes and Bakewell were knowingly concerned so as to incur accessorial liability. The Anchorage appellants also contend that the 31 December conversation conveyed a negligent representation on the part of Sparkes personally. They say that because of each of the misrepresentations, they advanced funds to Arrium between 7 January and 16 February 2016, which they would not otherwise have advanced, and they complain that Arrium was not placed in administration at an earlier date, with a better return to creditors.

BBVA relies on both the MAE Representation and the Solvency Representation. It contends that they constituted misleading or deceptive conduct engaged in by Sparkes and Bakewell personally. It says that because of the misrepresentations, it advanced funds to Arrium between 7 January and 16 February 2016 which it would not otherwise have advanced, and Arrium was not placed in administration at an earlier date, with a better return to creditors.

To elaborate, at first instance, it was sought to impose liability on Sparkes and Bakewell on the following bases:

However, all those issues arise only if the MAE Representation or the Solvency Representation was misleading. His Honour held that neither was misleading when it was made. Both Anchorage and BBVA challenge that conclusion in respect of the MAE Representation; that is dealt with in Part III (the MAE Representation). BBVA also challenges the conclusion in respect of the Solvency Representation; that is addressed in Part IV (the Solvency Representation).

Anchorage and BBVA’s challenge to the conclusion, in respect of all the bases of liability propounded, that reliance on any misrepresentation, and thus causation, was not established, is dealt with in Part VII (Causation and Reliance).

In the Costs Judgment, the primary judge relevantly [137] ordered that:

The successful defendants below included the officers of Arrium who had signed impugned drawdown notices in addition to Sparkes, namely Ms Verawati, Ms Hall and Ms Lieu. The primary judge rejected the Signatories’ application for indemnity costs from the earlier date of 15 January 2021, based on a Calderbank offer of settlement made by them on 23 December 2020.

Anchorage’s appeal (or alternatively application for leave to appeal) from the order that they pay the defendants’ costs on an indemnity basis from 6 March 2021; and the Signatories’ application for leave to cross-appeal from the primary judge’s refusal to award them costs on an indemnity basis from 15 January 2021, are dealt with in Part VIII (Costs).

The various grounds of appeal (and of the notices of contention) relating to the issues as to whether and when a change in Arrium’s financial position occurred that constituted a Material Adverse Event (“MAE”), which are relevant to the claims based on the representations made in the impugned drawdown and rollover notices and at the time of the drawdowns or rollovers pursuant to those notices, are conveniently addressed together.

The representation and warranty as to “no material change” (the MAE Representation) was one that was required to be made by the Arrium parent company (see cl 14.1 extracted below) and was to the effect that there had been no change in the Arrium’s “financial position” since the end of the accounting period for its most recent Accounts (which was 30 June 2012 in the case of the 2013 SFA, or 30 June 2015, in the case of the other facilities) which constitutes a “Material Adverse Effect”. The terms of the MAE Representation contained in cl 14.1 relevantly are as follows:

The term “Material Adverse Effect” was 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” (which term included the facility agreements). The term “Accounts” was also defined in cl 1.1; it is not necessary here to set out that definition or that of the term encompassed in that definition, “Australian Accounting Standards”. Nor is it necessary to consider the two respects in which there was a difference in the relevant terms of the facility agreements (those being identified by the primary judge [138] ).

As the primary judge recognised, the MAE Representation involves two components or limbs: first, a change in the financial position of Arrium in the relevant period (which, as has been noted differed in the various facility agreements); and, second, that such change be one which constituted a MAE (i.e., a change in financial position which had a material adverse effect on the ability of a member of the Arrium Group to perform its obligations under a Transaction Document; in other words, a material increase in the risk of an inability to perform those obligations).

At times during the appeal submissions there seemed to be some elision of those two concepts (i.e., a change in financial position and that such a change constitute a MAE) but it is important to consider them separately. A change in financial position of itself is not sufficient to render the MAE Representation false, it will be so only if it is one that materially increases the risk of inability to perform obligations under the facility agreements. The primary judge well recognised this, [139] noting that various of the changes relied upon by the Anchorage appellants were not so much “changes” as circumstances existing at a particular point in time which might be said to be a consequence of, or likely to cause, a change in financial position. [140]

It should also be noted that, in its terms, the MAE Representation is not limited to the ability to perform monetary obligations (i.e., for example, repayment of debts due under the facilities) but on its face would extend to other obligations under the facility agreements (this being the premise of BBVA grounds 29-30, which relate to the covenants in relation to the maintenance of ICR and Asset:Liability ratios). The primary judge focused on whether there was a change in financial position which materially increased the risk of Arrium being able to repay the facilities (and, most immediately, the July 2017 Maturities). [141]

The proper construction of “financial position” as used in the MAE Representation is the subject of ground 28 of BBVA’s notice of appeal, ground 6 of the Anchorage appellants’ notice of appeal, and ground 1 in each of the four notices of contention. In summary, the appellants contend for a broad construction, namely that “financial position” refers to the financial position of the Arrium Group generally (or, as BBVA puts it, [142] anything which relates to the financial affairs of the company), whereas the respondents contend for a narrow construction, namely that it is confined to the financial position as disclosed on the company’s balance sheet. The primary judge preferred an intermediate interpretation, namely that it means “all of the financial information contained in the Accounts”, [143] such that a change in position is ascertained by reference to information that would have been contained in the accounts had those accounts been prepared at the time that the relevant MAE Representation was made. [144]

On appeal, the respective parties essentially adhered to the positions they adopted at the hearing (though both BBVA and the Anchorage appellants maintain that even on the primary judge’s “intermediate” interpretation, there was a relevant change of financial position – and the Anchorage appellants go further and argue that, even on the narrow interpretation that his Honour rejected, there was a change of financial position). There is no complaint about the primary judge’s exposition of the principles of construction that were to be applied, [145] though there were opposing submissions as to whether there was a presumption that “financial position” was intended to have a recognised technical meaning (and indeed as to whether it has a technical meaning in an accounting sense at all). Fundamentally, however, the complaints concern the conclusion his Honour ultimately reached as to the meaning of “financial position”.

The respondents submit that the primary judge correctly rejected the appellants’ broad construction, but say that his Honour erred in adopting the intermediate construction. They contend that his Honour ought to have held that the term “financial position” bore what they contend is its “technical meaning” according to the Australian Accounting Standards referred to in the definition of “Accounts”, which they say is limited to the variables disclosed in a balance sheet. [146]

In our opinion, his Honour was correct (broadly for the reasons his Honour gave) to reject the narrow construction contended for by the respondents.

First, the evidence did not in our view establish that “financial position” had a technical meaning in an accounting sense such as would warrant reading into the clause a limitation to information disclosed on the balance sheet. Mr Olde (the insolvency expert called by the respondents), for example, appeared to accept that the term “Statement of Financial Position” in AASB 101 meant something different from the phrase “financial position” itself, and that even in an accounting context the term might be used to describe matters going beyond the balance sheet. To the extent that reference was made to the use of the term in a technical accounting sense, that seems to convey something different from the concept that the term has a technical accounting meaning as such.

Secondly, as to the varying usage in the financial agreements of the terms “financial position” and “financial condition”, those terms are not used consistently in the financial agreements, [147] and even if “financial condition” is a wider notion than “financial position”, that does not require that “financial position” be confined to the balance sheet.

Thirdly, we do not accept that any broader construction would render otiose the term “financial position” in the clause defining the MAE Representation: it is far from inconceivable that there could be an event which has a material adverse effect on a company’s ability to perform its obligations under a facility agreement, yet does not impact on its financial position.

Finally, there is no warrant for reading into the relevant clause a limitation to information contained in the balance sheet. Had the parties intended to refer only to balance sheet changes, then it would have been easy to express that notion in the clause. The fact that any broader construction may give rise to difficulties in making the requisite comparison is not an answer to construing the clause according to its natural meaning.

As we do not accept the narrow construction, it is unnecessary to address the pleading point maintained by the Anchorage appellants to the effect that any contention that “financial position” was a term of art should have been pleaded; or that such a contention is inconsistent with the respondents’ pleaded cases, expert evidence and opening submissions.

Once the respondents’ narrow construction is rejected, little may turn on whether the broad construction contended for by the appellants (as opposed to the intermediate construction adopted by his Honour) is correct, as both have the same result in terms of the identification of a change in financial position. In that regard, Senior Counsel for the Anchorage appellants made clear that they could “live with” his Honour’s interpretation of “financial position”, because the relevant change was one that would be information that would appear in the notional accounts. [148] Senior Counsel for BBVA similarly did not contest the proposition that what was required was a comparison of the position as if accounts were notionally prepared at the time of the drawdown notices. [149]

However, to the extent that it is necessary, we would, like the primary judge, adopt the intermediate construction. The context is the phrase “change in the Group’s financial position since the end of the accounting period for its most recent Accounts”. The purpose of the provision is to protect a lender from a change that would have been disclosed to it if it had accounts at the date of the relevant drawdown notice (and the actual date of drawdown). That implicitly indicates that the term is concerned with the financial position as represented in the Accounts. Moreover, the “Directors’ Declaration” in the Accounts refers to “the consolidated financial statements and accompanying notes” as giving “a true and fair view of the Group’s financial position” (emphasis added). Unconfined to the accounts, the term “financial position” would be so vague and potentially extensive that its scope would be indeterminable; the parties are unlikely to have intended this.

Thus, we reject the grounds in each notice of contention relating to the proper construction of “financial position”, and ground 28 of the BBVA appeal and ground 6 of the Anchorage appellants’ appeal.

The issue as to whether (and when) there was a relevant change in Arrium’s financial position is the subject of, or included in, grounds 24-28 of BBVA’s notice of appeal, grounds 1-5 and 7 of the Anchorage appellants’ notice of appeal (to the extent that these encompass the finding of change in financial position); and grounds 2-4 of Bakewell’s notice of contention in the Anchorage appeal (which again encompass the finding of change in financial position). At the heart of those complaints, however, is the finding that any change in position was one that had the requisite effect (being the MAE, which is addressed in due course): Sparkes, for example, says in her submissions that it is uncontroversial that, on the primary judge’s intermediate construction, changes in financial position occurred over the relevant periods, but maintains that unless those changes had a material adverse effect they were of no moment for the purposes of assessing the accuracy of the MAE Representation. Whether any change was a MAE is, however, a separate question.

The relevant changes in financial position that his Honour found had occurred were summarised as falling into four categories, being: changes in the balance sheet of Arrium (and, most significantly, its net assets); changes in Arrium’s profitability; changes in the Gearing Ratio and ICR; and the going concern disclosure (the last being the focus of most of the complaints raised by the appellants). [150]

In oral submissions on the appeal, the relevant change in financial position was identified by the respective appellants in the following ways.

The Anchorage appellants identified the relevant change in financial position by reference to the KPMG correspondence as to the going concern disclosure in the context of the then draft Going Concern Note (the 15 February 2015 letter in particular), which identified the key circumstances that KPMG had considered in assessing whether material uncertainties existed that might cast doubt on Arrium’s ability to continue as a going concern. [151] The KPMG letter (drafts of which had been under consideration from at least 20 January 2016) raised the issues facing Arrium as including the deteriorating ore prices, the increasing cash outflows and increasing debt. In their submissions in reply, the Anchorage appellants further say that by early February 2016 it was recognised that final bids for MolyCop were unlikely to enable the ongoing viability of Marco (i.e., the remaining business after a sale of the MolyCop business).

BBVA, for its part, identifies the key change as being the effective failure of the MolyCop sale process; i.e., that by 4 February 2016 it was unlikely that MolyCop would be sold for a satisfactory price in order to enable Arrium to meet its preferred mechanism for dealing with the July 2017 Maturities, and noting that there were discussions with GSO and KKR in anticipation of the provision of recapitalised financing which at all times contemplated the lenders accepting a reduction in indebtedness. [152] However, BBVA also places reliance on changes in the ICR and Asset:Liability ratios, [153] noting that by January 2016 there were forecasts that the ICR covenants would be breached (on the “spot scenarios” analysis). Insofar as the construction adopted by the primary judge of “change in financial position” involved information that would be included in notional accounts as at the date of the relevant notices and drawdowns, BBVA says that by 12 January 2016 it is impossible to imagine that the preparation of accounts would not then have included a Going Concern Note. [154] (However, there is no evidence that such a note was contemplated before about 20 January 2016.) Of course, insofar as BBVA, in its oral submissions on appeal, [155] put the change in financial position as occurring earlier (i.e., by 18 December 2015), on the basis that by that time Arrium had commenced the process of preparing for a recapitalisation option which involved not paying lenders the full amount of its indebtedness, and that this created material uncertainty as to its ability to continue as a going concern, it is self-evident that such a “change in financial position” could not be one that included any “failure” of the MolyCop process, since final bids were not received until early February 2016, and until then the sale process on any view of things was ongoing.

Leaving aside, for the moment, the question whether any of those identified changes in financial position constituted a MAE, the challenges as to the findings made in relation to the alleged changes in financial position per se appear to be: first, the complaint raised by ground 32 (and part of ground 33) of BBVA’s grounds of appeal that the primary judge erred in finding that the decrease in the likely sale value of the MolyCop business (or the “failure” of the MolyCop sale) was not a material change in financial position; second, the contention that a relevant change of position occurred not when the Board decided to include a Going Concern Note in the Accounts but earlier, either when the underling uncertainties referred to in the Note arose, or at least when management (apparently as distinct from the Board) became aware of them (encompassed as part of grounds 24-28 of BBVA’s grounds of appeal and grounds 1-5 of the Anchorage appellants’ grounds of appeal); and, third, the complaint that the inclusion of the Going Concern Note did not (as found by the primary judge) constitute a change in Arrium’s financial position (encompassed in grounds 2-4 of Bakewell’s notice of contention in the Anchorage appeal proceeding). Some of those grounds also encompass a challenge to the finding that the relevant change of financial position was a MAE, but that aspect is considered later.

Turning first to the complaint as to his Honour’s finding, [156] that the decrease over time in the likely sale value of MolyCop was not a change in financial position (BBVA ground 32), it should be noted at the outset that the respondents cavil with the proposition that there was a “failure” of the MolyCop sale process as such. In any event, their position is that a “failure” of negotiations in relation to the MolyCop sale process is not a change in financial position (though it seemed to be accepted that it would be relevant to whether the risk of an inability to perform obligations under the facility agreements had materially increased; i.e., relevant when considering whether any such change in financial position was a MAE).

BBVA ground 32 also appears to challenge the observation made by his Honour that the BoC Plaintiffs did not explain why the figure of US$1.35 billion was critical to the question whether the change had a MAE (which falls for consideration in the context of the MAE grounds of appeal). BBVA ground 33 sets out the finding that BBVA says the primary judge ought to have made in this regard (namely, that the failure of the MolyCop sale comprised a change in Arrium’s financial position and that it had a MAE on its ability to perform its obligations under the facility agreements). At present, we are focusing only on whether the “failure” of the MolyCop sale process constituted a change in financial position.

As to whether there was a “failure” of the sale process as such (the predicate for these grounds of appeal), BBVA maintains that Arrium’s ability to repay the July 2017 Maturities in full by July 2017 was dependent upon Arrium’s ability to sell MolyCop for a sufficiently high price that the remaining Arrium businesses could service the residual debt burden and trade viably, noting that Project Columbus had been Arrium’s “preferred” mechanism for meeting its repayment obligation in respect of the July 2017 Maturities since September 2015 (when Grant Samuel’s engagement in relation to Project Archer was terminated). BBVA says that this was Arrium’s only real hope of repaying the July 2017 Maturities in full and on time. (The respondents challenge this proposition; Sparkes noting that the primary judge identified a number of other realistic possibilities through which those obligations might have been met.)

BBVA argues that, by at least 7 January 2016 (and on, any view, no later than 4 February 2016) Project Columbus had failed because MolyCop could no longer be divested for a price sufficient to enable Arrium to repay the July 2017 Maturities and to continue to trade viably thereafter (and says that it was as a result of the failure of Project Columbus that Arrium resolved to progress negotiations with third parties for a restructuring involving lenders taking a substantial haircut on their debts).

As to the primary judge’s observation that there was no explanation as to why a sale price of US$1.35 billion was critical, BBVA points to its closing submissions to the primary judge on the issue of insolvency. Relevantly, BBVA points to the UBS/Lazard advice from late November 2015 (and the modelling undertaken by them over the relevant period), as well as Bakewell’s memorandum to the Board for the 18 December 2015 Board meeting and Mr Roberts’ recommendation to the Board on 28 September 2015 that the MolyCop sale should proceed, where final bids were at least US$1.35 billion. Indeed, BBVA argues that by 7 January 2016 even a “grey zone” price of US$1.35 billion would no longer have been sufficient to allow Marco (i.e., the remaining Arrium businesses) to remain solvent after the divestment of MolyCop (based on its calculations as to Arrium’s reported net debt as at 31 December 2015 of AU$2.076 billion and assumptions as to the likely transaction costs and taxes, together with the relevant contributions of the various businesses to Arrium’s cash flows).

Bakewell argues that the evidence did not establish that US$1.35 billion was the “floor price” for a sale and says that the evidence established that a price of US$1.2 billion combined with the updated business plan, and the further updated business plan incorporating anticipated “Project Marco” savings, would have been sufficient (Bakewell noting that there was a variety of views within Arrium as to the likely price achievable). Bakewell further says (and BBVA relies on this as acceptance of the proposition that if this was a MAE, it occurred before the 10 February 2016 drawdown notice issued in relation to the BBVA Bilateral Agreement) that it was not until the final bids were received by the Board on 4 February 2016 that it was, or should have been, apparent that the Project Columbus sale process was unlikely to achieve a sufficient sale price for MolyCop in order for the sale to proceed as a viable strategic option at that point in time (referring to the updates from Arrium’s external advisers as to the expected bids during January 2016).

Sparkes, similarly, points to the fact that final bids for MolyCop were not due until 3 February 2016, and contests the contention that a sale of the MolyCop business would not generate sufficient proceeds to reduce the Arrium Group’s net debt position to a sustainable level to be serviceable by the Arrium Group’s remaining businesses going forward. In that regard, Sparkes says that the US$1.35 billion figure is based on the mid-proceeds spot scenario (or “grey zone”) and says that statements that a particular sale price would be “sufficient” or “not sufficient” say nothing about the range between those integers (i.e., relevantly, a range between US$1.35 billion and US$1.2 billion). Sparkes argues that the vice in the analysis by Mr Hardie (the expert called by the Anchorage appellants) is the adoption of the higher figure (noted as “sufficient”) and then its treatment as being a “necessary” one. Sparkes maintains that none of the documents to which Mr Hardie referred suggests that a minimum sale price of US$1.35 billion was necessary for the MolyCop business. Further, Sparkes points out that Project Columbus remained an option under consideration by the Arrium Group for some time after the submission of final bids on 3 February 2016, and that it was not until the 20 February 2016 Board meeting that the Board resolved to enter into the GSO recapitalisation plan (instead of accepting one of the offers made by Platinum Equity or Argand/Cerberus). Sparkes also points out that the Arrium Group was able to borrow funds under the existing facility agreements throughout the period from the commencement of the Strategic Review and the decision to pursue Stage 2 of Project Columbus up to the receipt of final bids on 3 February 2016. Sparkes also argues that there was no financial requirement for the sale of MolyCop to proceed in February 2016 (noting that it was ultimately sold on 4 November 2016 for a price of US$1.23 billion – nearly eight months before the July 2017 Maturities fell due for payment).

In response, BBVA points out that the submission by Sparkes that the sale process remained viable at least up until 20 February 2016 (when the Board resolved to enter into the GSO recapitalisation plan), does not reconcile with the finding of the primary judge. [157] BBVA notes that the cash offer of US$825 million received on 3 February 2016 was rejected by the Board on 4 February 2016, and that no other bids were sought or received in the period from 4 February 2016 until Arrium went into administration. As to Sparkes’ submission based on the range of prices, BBVA notes that by mid-January 2016 Arrium’s advisers were assuming final bids at a level below US$1.2 billion (which was consistent with actual bids received on 3 February 2016).

It is not necessary to reach a concluded view on whether the sale process “failed” as such (although it is difficult to resist the conclusion that, by 3 February 2016, the outcome of the bid process was such that it was unlikely that Project Marco would remain viable without agreement being reached by the lenders for a substantial reduction in indebtedness going forward – which was the effect of the external advice that Arrium was receiving). That is because we consider that the proposition that the “failure” of the MolyCop sale process (assuming it be correctly characterised as such) amounts to a change in financial position is incorrect – it conflates the two concepts referred to above (i.e., a change in financial position, and its effect - namely whether it constituted a MAE).

We do not accept that his Honour erred in concluding that the outcome of the sale process was a not change in financial position as such. The conclusion of a sale for a price less than the value at which it was carried in the accounts might well have been a change in financial position. But it cannot be said that the failure to achieve a desired price itself constitutes such a change. Unaccepted offers, though no longer inadmissible, seldom provide a solid foundation for a conclusion as to value. [158] Similarly, a devaluation of the MolyCop asset might well fall within the concept of a change in financial position, since this would affect the net asset position and, as the primary judge accepted, changes in the net asset position would fall within the concept of a change in financial circumstances, [159] because they would be reflected in the accounts. However, as his Honour noted, it was not until after final bids were received (on 3 February 2016) that the concerns as to the viability of the sale materialised, and the value of the MolyCop business was not written down at any relevant time.

Grounds 32 and 33 of the BBVA appeal grounds, to the extent that they challenge the correctness of the finding that the “failure” of the MolyCop sale process (or the decrease over time in the likely sale value of that asset) was not a change in financial position, therefore fail.

The second and third areas of complaint relate to the time at which the change in financial position reflected in the Going Concern Note occurred. The Going Concern Note was included in the 2016 HY Accounts pursuant to AASB 101 paras 25 and 125, which relevantly respectively provide:

As has been recorded, various draft iterations of what ultimately became the KPMG letter in relation to the Going Concern Note were the subject of discussion with HSF and with Bakewell from at least 20 January 2016. While his Honour accepted that there was some discussion as to whether such a note should be included in the HY16 Accounts in the second half of January 2016, his Honour noted that it was not until the ACC meeting on 3 February 2016 that KPMG proposed its inclusion; that it was not formally raised by KPMG until 8 February 2016; and that it was first raised with the Board on 11 February 2016. [160]

The primary judge, having noted the requirement under AASB 101 for the inclusion of such a note when management is aware of material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, accepted that the inclusion of the Going Concern Note “represented a change in financial position”. [161] His Honour placed the timing of the change in financial position as when Arrium’s Board accepted that it was appropriate to include the Going Concern Note (which was at its meeting on 11 February 2016).

Bakewell, by his notice of contention, disputes that the Going Concern Note in any way represented a change of financial position constituting a MAE.

BBVA contests both the proposition that it was the formation of a view by the Board (as distinct from “management”) that there were “material uncertainties” that triggered the requirement to include the Going Concern Note (emphasising that the disclosure obligation in AASB 101 is triggered by awareness by management, not the Board – a distinction which, below, we reject), and the proposition that it was the decision to include the Going Concern Note (as distinct from the existence of the material uncertainties which informed it), that represented a change in financial position. [162] BBVA argues that the fact that management may not have formed the subjective view that it was necessary or appropriate to include a Going Concern Note in the upcoming Accounts until some time after 7 January 2016 is not to the point. BBVA complains that the primary judge’s analysis elides the going concern assessment (which may be a matter of opinion) and the disclosure of material uncertainties (which are matters of fact). [163]

The relevance of this timing issue is predicated on BBVA’s submissions that the factors giving rise to the material uncertainty as to going concern that were identified in the Going Concern Note were extant as at 31 December 2015 (as it says is evident from Note 14 of the HY16 accounts), and were known to management by no later than 7 January 2016. Accordingly, BBVA says that, consistently with AASB 101, the requirement to include the Going Concern Note in the half-year accounts arose no later than 7 January 2016, by which time management was “aware” of the factors that were ultimately were identified in the Going Concern Note; and hence that, on his Honour’s construction of “financial position”, the primary judge ought to have found that a relevant “change in financial position” had occurred by 7 January 2016, by reason of management having become aware by that time of “factors giv[ing] rise to uncertainty which may be material” that would need to be disclosed in a going concern note in the half year accounts. [164] .

Much of the debate in respect of the challenge to the finding that the inclusion of the Going Concern Note was itself a change of financial position addressed what it was about the Going Concern Note that was amounted to the change of financial position: the decision to include it, the existence of the “material uncertainties” referred to in it, or the underlying financial circumstances that created the material uncertainties. The answer to that question largely determines when the relevant change occurred.

The primary judge concluded: [165]

While there are some ambiguities in that passage, and although the primary judge referred to the “inclusion” of the note as “represent[ing]” a change in financial position, the passage read as a whole indicates that his Honour treated the formation by directors of the view that it was appropriate to include such a note in the Accounts as the occasion of the “change in financial position”. This is consistent with his Honour’s later statement that “the decision of the directors to include that disclosure in the accounts was a change in financial position” and that “[t]he decision to include that disclosure was a Material Adverse Effect”, which in terms appears to treat the “decision” as the change in financial position (not the disclosure itself). [166]

In resolving this question, the starting point is our conclusion above that a “change in financial position” occurs when accounts (including the financial statements and notes) [167] notionally prepared at the relevant date would differ from those prepared at the end of the last preceding accounting period. The next step is to identify the trigger for inclusion of a going concern note which, under AASB 101 para 25, is “[w]hen management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern”. Thus it is management’s awareness – of uncertainties that may cast doubt on the ability to continue – that triggers the obligation to disclose. That refers, in our opinion, to a state of awareness by “management” not merely of the underlying circumstances, but of the complex notion of “material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern”. If, but only if, “management” is aware of matters that meet that description does the requirement to include a note arise. It follows that accounts notionally prepared at a date before management had that state of awareness would not have included a note, and it further follows that it was only when management achieved that state of awareness that a change in financial position, as we understand that term, occurred.

We do not accept the submissions of Bakewell and Sparkes to the effect that the formation of an opinion by management could not of itself be a change in financial position. [168] It is not the formation of such a state of awareness in isolation that matters, but its formation in the context that it rendered it obligatory to disclose in the Accounts that there was significant doubt as to the entity’s ability to continue as a going concern. Nor do we accept their submissions that the Note did not evidence a change of financial position and did no more than confirm that Arrium would continue as a going concern for the following 12 months. Inclusion of the Note in the Accounts represented a most significant change from accounts which contained no such disclosure, because an entity attended by no such uncertainty is in a very different position from one where there is such uncertainty.

As to BBVA’s submission that “management” is a distinct concept from the Board, the requirement to prepare compliant accounts and certify them is an obligation of the directors – that is to say, the Board. In our opinion, the references in AASB 101 para 25 to “management” are references to the Board of Directors.

Accordingly, in our view, the Going Concern Note represented a change in Arrium’s financial position when the directors became aware of material uncertainties casting significant doubt upon the entity’s ability to continue as a going concern. The primary judge’s finding of fact, set out above, that absent any other evidence, this occurred on 11 February 2016, when the issue was considered by the board for the first time, is unimpeachable.

So understood, it makes no difference even if, as both sets of appellants contend, the factors or circumstances that gave rise to the inclusion of the Going Concern Note subsisted as at 31 December 2015 (noting that the Going Concern Note speaks as to the position at that date) or even earlier, [169] because the directors had not at that stage formed the requisite state of awareness. However, we will address the position on the alternative view that it was the underlying facts and circumstances which objectively gave rise to material uncertainties, rather than the directors’ appreciation of them and that they gave rise to material uncertainties, that constituted the relevant change of position.

On that alternative hypothesis, there is considerable force in the submission that the facts and circumstances underlying and giving rise to the Going Concern Note (in particular deteriorating iron ore prices, increasing cash outflows and increasing debt) subsisted as at 31 December 2015. However, it is a different matter to say (as BBVA in effect contends in grounds 24-25 of its notice of appeal) that the existence of those matters as at 31 December 2015 itself amounted to a change in financial position. This is chiefly because they would not themselves have been reflected in the Accounts, and they do not appear to have given rise to the material uncertainty that was ultimately acknowledged in the Going Concern Note until the deterioration in the likely sale value of MolyCop became apparent on receipt of the final bids in early February 2016. Thus, even if the relevant change in financial position was the objective existence of the state of affairs that gave rise to the inclusion of, and was reflected in, the Going Concern Note, then it did not exist until the deterioration in the likely sale value of MolyCop, which did not occur until the final bids were received in early February 2016. (Moreover, even if it were to be accepted that the facts and circumstances identified in the KPMG letter and the Going Concern Note existed as at 31 December 2015 and would of themselves have constituted a change in financial position as at that date, the import of such a conclusion for the present appeals would necessarily depend on whether such a change in financial position constituted a MAE.)

Accordingly, BBVA’s grounds 24, 25, 26 and 27; Anchorage’s grounds 1, 2, 3, 4,and 5, and Bakewell’s contentions 2, 3 and 4 in the BBVA appeal, to the extent that they impugn his Honour’s conclusion that there was a change in Arrium’s financial position when and only when on 11 February 2016 the Board the directors became aware of material uncertainties casting significant doubt upon Arrium’s ability to continue as a going concern, all fail. [170] We consider below the further complaint embedded in many of those grounds as to whether there was error in the conclusion that such change constituted a MAE.

The nub of grounds 25-27 of BBVA's notice of appeal, grounds 1-5 of the Anchorage appellants’ notice of appeal and grounds 2-4 of Bakewell’s notice of contention in the Anchorage appeal proceeding, appears to be the second limb or component of the MAE Representation, namely, whether the relevant change in position was such as to constitute a MAE. It is not in issue that this requires an objective assessment and that the assessment to be made is of the risk of inability to perform the obligations as they stand (not obligations as they might later be amended). [171]

At the outset, it should be noted that, insofar as BBVA seeks to rely on the Going Concern Note in the HY16 Accounts as a basis for various grounds of appeal (see BBVA grounds 23, 24, 25, 26, 27), Bakewell complains that the Going Concern Note in the HY16 Accounts formed no part of BBVA’s case as conducted before the primary judge; that BBVA made the forensic decision not to plead or particularise the Going Concern Note as a MAE; and that it should not now be permitted to advance such a case on appeal.

BBVA’s response to this (which we accept) is that it is open to BBVA to rely on the findings made by the primary judge at [341] and [352] of the primary judgment, those being findings made in the proceeding brought by it against Bakewell and binding on the parties, regardless of how the case might have been pleaded.

Turning then to the substantive grounds of appeal on the MAE issue, it is convenient first to address ground 23 of BBVA’s notice of appeal, which is in essence a stand-alone ground. This ground effectively turns on a matter of timing. The primary judge found that there was a change in financial position constituting a MAE from 11 February 2016. [172] The last of the drawdowns in issue in the BBVA case was a drawdown under the BBVA Bilateral Agreement of US$20 million on 16 February 2016, pursuant to a drawdown notice dated 10 February 2016. As has been noted, the MAE Representation was made not only as at the time of the drawdown notice (in this case 10 February 2016) but also as at the time of the actual drawdown. Logically, therefore, as at the date of this drawdown (16 February 2016), on his Honour’s findings the MAE Representation in relation to that drawdown must have been incorrect (because there had been a change of financial position constituting a MAE from 11 February 2016).

Thus, BBVA ground 23 is made good, but only in respect of the deemed representation repeated on the date of the drawdown, and not in respect of the drawdown notice pursuant to which it was made, which was dated 10 February 2016. Our below conclusions on the issues of reliance and causation apply a fortiori to a deemed representation given automatically, with the consequence that BBVA’s success on this ground is ultimately immaterial.

The balance of the grounds regarding the MAE issue contend that there was a change in financial position constituting a MAE by the beginning of 2016 (on the basis that, by then, the Arrium Group was unable to repay the July 2017 Maturities in full as and when they became due and payable, and for that reason had committed itself to a course which could only succeed if lenders were willing to accept less than full repayment of their debts); or even earlier (the Anchorage appellants contending for no later than 21 or 22 December 2015). However, these grounds may be shortly addressed, as they are disposed of by our conclusion, above, that the relevant change of financial position did not occur until 11 February 2016. Accepting that this change was a MAE, it logically could not render false a MAE Representation made before the change occurred. It matters not that there may have been a material increase in the risk of Arrium being unable to perform its obligations under the facilities at an earlier date if the relevant change in financial position referred to in the stipulated form of representation had not yet occurred.

His Honour did not err in concluding that the MAE Representation was not shown to be false on each occasion it was given before 11 February 2016.

By its ground 31, BBVA challenges the primary judge’s finding that the adverse changes in the Gearing Ratio and the ICR (which his Honour accepted were changes in financial position) did not themselves constitute a MAE, because “it was 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”. [173] His Honour accepted that the changes in Gearing Ratio and ICR relied upon by BBVA met the description of a change in financial position. His Honour then proceeded to address whether those changes materially affected Arrium’s ability to perform its obligations, but only in the context of obligations to repay the facilities and, most immediately, those due in July 2017. [174]

BBVA contends that the primary judge adopted an unduly narrow view of the scope of Arrium’s “obligations under the facility agreements”, and says that such obligations were not confined to Arrium’s obligation “to repay the facilities when they became due”, [175] but extended to obligations to comply with other covenants, specifically those as to the Gearing Ratio and the ICR (“the ratio covenants”).

Consistently with their submissions as to the obligation to make payments due under the SFAs, BBVA submits that it was not necessary (to establish a MAE) to demonstrate that the change in ratios resulted in, or would result in, a breach of the ratio covenants; [176] rather, it was sufficient to demonstrate a material increase in the risk that Arrium would breach those covenants; and that his Honour should have concluded that there was a material increase in that risk.

Insofar as the primary judge said that the BoC Plaintiffs had not explained how those changes had a MAE “on Arrium’s ability to comply with its obligations under the relevant facility agreements”, [177] BBVA says that this issue was the subject of detailed written submissions at first instance, to which the primary judge did not refer.

The BoC Plaintiffs’ submissions at trial, [178] asserted that the two ratio covenants were themselves relevant obligations under the facility agreements, as well as with the obligations to repay the facilities and to pay interest; and proceeded to explain how and why those covenants were at risk of being breached on the facts during the relevant period. The point made by the primary judge, that there was no explanation as to how breach, or the risk of breach, of the ratio covenants had a MAE as defined, does not address whether there was an increased risk of non-compliance with the ratio covenants themselves.

BBVA submits that so to construe the MAE clause is consistent with the objective commercial purpose of the MAE clause.

BBVA argues that the changes in the financial ratios reflect underlying changes in the financial position of Arrium (the relevant changes in Gearing Ratio being attributable to a decrease in net worth and an increase in net debt and the relevant changes in ICR being attributable to a decrease in underlying EBITDA and increase in net debt and resultant interest obligations); and that, understood in this way, a material worsening of Arrium’s net worth or material increase in net debt will, all else being equal, necessarily make it more difficult for Arrium to comply with the Gearing Ratio covenant, just as a material decrease in EBITDA or increase in net debt will make it harder to comply with the ICR.

In that regard, BBVA says that, as at 31 December 2015, Arrium was on the cusp of breaching the covenants relating to the ICR and Gearing Ratio (in the sense of having very little covenant headroom left); and that such changes in financial position (reflected in the ratios) materially increased the risk that Arrium would not be able to comply with its obligations under the relevant financial covenants. In particular, as to the Gearing Ratio, BBVA says that there was a reduction in the covenant headroom of approximately 45% from 30 June 2015 (0.14) to 31 December 2015 (0.08), such that even a relatively minor movement in Arrium’s net debt or net worth could cause a breach of the Gearing Ratio; and, as to the ICR, the reduction was of approximately 57% from 30 June 2015 (0.98) to 31 December 2015 (0.42). Hence it is said that those changes plainly adversely affected Arrium’s ability to comply with the financial covenants in that they materially increased the risk that Arrium would breach those covenants.

BBVA argues that the statement in the Going Concern Note in the HY16 Accounts to the effect that, although the Arrium Group was in compliance with its debt covenants as at 31 December 2015, further deterioration in cash flows in the ensuing 12 months “may require a request for certain covenant relief”, supports a conclusion that the risk of breach of the covenants had materially increased.

As noted above, there is no doubt that the primary judge focused on whether the change in financial position materially increased the risk of inability to repay the debts due under the facilities, and particularly those maturing in July 2017. That is perhaps not surprising given the focus both at the time and in the expert evidence on the ability of the Arrium Group to meet its upcoming financial commitments and its ability to continue as a going concern. However, we accept that the MAE Representation was not confined to the risk of inability to perform monetary obligations under the facility agreements, and hence that a change in financial position that constituted a MAE in relation to compliance with other obligations in the facility agreements (such as the ratio covenants) could fall within the MAE Representation.

There is an obvious circularity in the proposition that a change in financial position constituted by reduction in the margin (or “headroom”) in respect of the ratio covenants is a change constituting a MAE on the basis that it materially increases the risk of inability to meet the obligations contained in those very same ratio covenants. However, that does not dictate that the MAE clause should be construed as being limited to the financial obligations under the SFAs. As BBVA submits, the broad ambit of the term “obligations” as used in that clause encompasses not only the repayment obligations, but also other obligations under the facility agreements. Thus in considering whether a change in the Gearing Ratio and ICR (which his Honour accepted was a change in financial position) constituted a MAE, it is necessary to consider whether it involved a material increase in the risk of breach not only of the financial covenants, but also of the Gearing Ratio and ICR covenants . To that extent, BBVA’s submissions should be accepted.

However, it does not follow from the fact that “headroom” or “margin” is reduced, that there is a significantly increased risk of breaching the ratio covenants. In short, one can sail close to the wind without incurring significantly increased risk of transgressing. Indeed, the point of such ratios is to establish parameters, the breach of which will evidence an increase in risk. Caution should be applied in drawing a conclusion of a materially increased risk of a breach just from the circumstance that one is close to the line.

While we accept that it was not necessary to establish a breach of the financial covenants in order for the MAE Representation to be false by reference to a change in financial position represented by a change in the ratios, we are not persuaded that the evidence established a material increase in the risk of breach of those financial covenants prior to the time at which the MAE Representation had otherwise become false, namely 11 February 2016. In particular, the time at which there was a material increase in the risk of breach of those ratio covenants cannot be gleaned from the spot scenario analyses in December 2015 (which had contemplated a breach of the financial covenants in particular circumstances), because that analytical process was in effect stress testing on downside scenarios, and dependent on the view taken as to the likely movements in the spot prices for iron ore. [179] Nor does it follow from the terms of the Going Concern Note in the HY16 Accounts, which relevantly stated:

The Note forecast ongoing compliance for at least 12 months. It merely foreshadowed that certain events – which were not the change in the ratios, but external events, and which had not yet materialised – might adversely impact compliance. That of itself is insufficient to establish that there was already a materially increased present risk of non-compliance. Perhaps more importantly, it illustrates that it was not the change of financial position in question (that is, the change in the ratios), but external events, which were the source of any risk of non-compliance.

Accordingly, we do not accept that there was error in the primary judge’s conclusion that the changes in the Gearing Ratio and ICR did not constitute a MAE, at least before 11 February 2016. In any event, even if the mere fact of reduction in the Gearing Ratio and ICR (by reference to the reduction in covenant headroom as a result of underlying changes in Arrium’s financial position) as at 31 December 2015 materially increased the risk of inability to comply with those financial covenants, so as to render the MAE Representation false at that earlier time, nothing ultimately would turn on this, given the conclusions we reach below on the questions of reliance and causation.

The facility agreements contained, and the drawdown notices repeated, a representation to the effect that Arrium and each of its subsidiaries was solvent at the date of the relevant 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 (“Solvency Representation”). [180] By grounds 1 to 22 of its notice of appeal, BBVA complains that the primary judge erred in rejecting the contention advanced at trial by it and the other BoC Plaintiffs that the Solvency Representation was false, by reason that Arrium was insolvent between 7 January 2016 (when the first impugned drawdown notice was issued) and 16 February 2016 (when the last drawdown was advanced). Although the grounds of appeal are elaborate and expansive, and impugn various steps in his Honour’s reasoning that underpins the conclusion that the BoC Plaintiffs had failed to prove that Arrium was insolvent during the relevant period, the ultimate question for this Court on an appeal by way of rehearing is whether his Honour was wrong to so conclude.

As the primary judge recorded, it was common ground that the BoC Plaintiffs bore the onus of proving insolvency, that solvency was to be determined at a group level (because of cross-guarantees and inter-company loans between companies in the Arrium Group), and that the test of insolvency for the purposes of the relevant facility agreements was that stated in the Corporations Act 2001 (Cth) (“Corporations Act”), s 95A, which provides that:

As his Honour also explained, the case on insolvency advanced below was a “narrow and atypical” one, and did not include any assertion that Arrium would run out of cash before July 2017: [181]

Thus the insolvency case rested on the proposition that by 7 January 2016, Arrium was unable to repay banking facilities which would not become payable until July 2017.

In substance, BBVA’s grounds 1 – 3, while expansively expressed, impugn the primary judge’s rejection of the submission of the BoC Plaintiffs that it would suffice for them to prove “on the balance of probabilities, that the company is not able to repay a debt falling due on some future date”, and his Honour’s acceptance that where proof of insolvency depended on the long-term debts here in question, it required a “high degree of certainty” as at the date of alleged insolvency that Arrium would be unable to repay them 16 months later. This position reflected the advice which had been given by HSF to the Arrium Board on 18 December 2015, that:

His Honour said: [182]

The reference in the above passage to way in which Fullagar J had expressed his conclusion was to the judgment in Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd, [183] in which it was found that a life insurance company was insolvent on the basis of liabilities that would not become payable for years. That conclusion was reached because it was apparent, on examination of the financial position and prospects of the company, that although the company would be able to pay policyholders who made claims for the next several years, at some stage it would not be able to continue to do so. Fullagar J said (emphasis added): [184]

Although Fullagar J did not purport to state a test of general application, it is notable that his Honour observed that in a case of longer term liabilities, the position is not so straightforward as in that of an ordinary commercial undertaking, and requires a cautious approach; and also that his Honour expressed his state of satisfaction in terms of what was “highly probable –practically certain” and involving “a high degree of probability”.

In Bank of Australasia v Hall, Griffith CJ (with whom Barton, O’Connor and Isaacs JJ agreed, and Higgins J in dissent expressed a similar view on this point) said (emphasis added): [185]

This supports the view that the test is directed to a present inability to pay all debts as and when they become due and payable, including debts that will become payable in the immediate future. [186]

The existence of a liability, which will not fall due until some time in the future, but which the debtor could not have any expectation of paying when it ultimately does fall due, may found a conclusion of present insolvency. In Byblos Bank SAL v Al-Khudhairy, Nicholls LJ (with whom Slade LJ and Neill LJ agreed) said: [187]

The example given by his Lordship is the antithesis of the present case, where the company had assets which very substantially exceeded its liabilities and, as the primary judge observed, would ordinarily be expected to be able to realise them or secure borrowings against them sufficient to repay its long term debts.

In Lewis v Doran, [188] Palmer J observed that when the question of insolvency arises prospectively (emphasis added):

His Honour’s reference to the “near future” is redolent of Griffith CJ’s reference to the “immediate future”. On appeal, in Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran), Giles JA said: [189]

Again, the reference to the “immediate future” is notable. In Re Cheyne Finance plc, [190] Briggs J (as Lord Briggs JSC then was) observed that that passage provided “a helpful explanation of the question how far into the future the inquiry as to present insolvency may go” and that “in short it is a fact-sensitive question depending upon the nature of the company’s business and, if known, of its future liabilities”. [191] Re Cheyne concerned the effect of alterations to the insolvency test in English law, [192] which introduced a “more flexible and fact-sensitive requirement encapsulated in the new phrase ‘as they fall due’”, [193] corresponding with the long-standing Australian test. After extensive reference to Australian authority, Briggs J concluded that the extent to which future debts will be relevant to a company’s solvency will be heavily dependent on the particular facts; and that where the company is still trading, so that the profile of the future cashflow is very uncertain, regard to future debts may make little difference, whereas where its business is in run-off, and its future cashflow known, future debts may be of critical relevance. [194]

In David Browne Contractors Ltd v Petterson (as Liquidator of Polyethylene Pipe Systems Ltd (In Liq)), [195] Glazebrook J, delivering the judgment of the Supreme Court of New Zealand constituted by William Young, Glazebrook, Arnold, O’Regan and Ellen France JJ, said:

There, the expression adopted was “reasonably temporally proximate”.

It is notable that in all the cases to which reference has been made, insofar as timeframes are suggested, they are in terms of months rather than years. While this is by no means determinative, such an approach accords with accounting practice in treating as “current” assets and liabilities, those which are realisable or payable within 12 months.

The test is concerned with present inability to pay all debts, as and when they become due and payable. A company is insolvent only when it is unable to pay its debts as and when they fall due. His Honour rightly recorded that it was uncontroversial that the test of insolvency is prospective, so 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; [196] that how far into the future the Court should look is a question to be answered having regard to the particular facts of the case; and that normally, a court will not look far into the future because there are so many unknowns and contingencies, though sometimes it may be appropriate to do so. [197]

The primary judge rightly recognised a distinction between proof of the relevant fact – present insolvency – and prediction of the prospect of inability to pay a future debt when it becomes payable. The relevant question is not whether, at the date of alleged insolvency, it is more probable than not that the company will be unable to repay all its debts when they become due at some long distant date; as the primary judge put it, that is only to say that the company is likely to become insolvent at some time in the future. [198] The distinction between a company that is insolvent, and one that is likely to become insolvent in the future, is enshrined in legislation. [199] The correct question is whether, at the date of alleged insolvency, it can be said that the company is already in a state of inability to pay those debts when they fall due.

The cases to which reference has been made illustrate that it will usually be more difficult to infer insolvency on the basis of liabilities that will not be payable for years than from debts payable within months – which supports the view that a higher degree of certainty is required to support such an inference in those circumstances. As Giles JA said, the time frame is influenced by the circumstances, including the nature of the company’s business and, if known, of the future liabilities. As Briggs J said, the significance of future debts will be influenced by the particular facts, and where the company is still trading and the profile of future cashflow is very uncertain, regard to future debts may make little difference, whereas where its business is in run-off, and its future cashflow known, it may be determinative. Generally speaking, the longer the period to elapse before a debt becomes due, and the greater the potential for intervening events to impact the company’s ability to pay it, the less sound a basis it will provide for a conclusion of present insolvency.

Undoubtedly there are cases, of which Associated Dominions is perhaps the paradigm, in which it can be seen now that the company has liabilities which, when they mature even some years in the future, it will be unable to pay. If it can be said, at the date of alleged insolvency, that the company is already unable to pay those debts when they mature in the future, it will be insolvent. But such a conclusion requires a high degree of assuredness that that will be the case. The primary judge did not err in holding that before drawing a conclusion of insolvency based on long term liabilities, a high degree of probability that the company would be unable to repay them when they fell due is required. Even if the company is “balance sheet” insolvent in the long term, it may be necessary to consider its prospects in the meantime, as to whether it might be able to generate sufficient profit to pay the long term debt. [200] However, if the company is “balance sheet” solvent, that will be very telling in the case of long-term debts, as it will usually indicate that it will have sufficient assets and time to realise them to discharge its long-term liabilities.

In Associated Dominions, Fullagar J was rightly concerned by the circumstance that policy holders whose claims would mature in the near future would be paid in full, at the expense of other policy holders whose claims would mature in the more distant future. That situation is far removed from a contest between trade creditors on the one hand, and financiers whose long-term loans would not mature for some years, on the other. Here, there was clear balance sheet solvency, by a substantial margin: as at 31 December 2015, Arrium had total assets of $6,196.9 million and net assets of $2,328.4 million, and given the time available, it was to be expected that in the normal course of events Arrium would, if necessary, be able either to sell assets or to raise finance on their security sufficient to repay the facilities falling due in July 2017. The debts in question would not mature for another 16 months. They were of a kind which were typically rolled-over or refinanced upon becoming due. Arrium was still trading, and paying its debts as and when they fell due. The market was volatile and cyclical, and it was anticipated that the price for commodities, in particular iron ore, would improve. In those circumstances, the long-term debts could be of little significance in the assessment of insolvency as at January and February 2016.

It was and is uncontroversial [201] that the fact of insolvency was one which the BoC Plaintiffs bore the onus of proving, on the ordinary civil standard, namely the balance of probabilities. [202]

His Honour identified the principal elements of the BoC Plaintiffs’ case that Arrium was at the relevant time insolvent, as follows: [203]

His Honour’s conclusion that the BoC Plaintiffs had not proven that Arrium was insolvent from 7 January 2016 was reached on the following bases.

BBVA grounds 4 to 22, though elaborately and expansively expressed, all amount to an attack on steps in the reasoning which underpins the primary judge’s conclusion that Arrium was not insolvent. As has been noted, on an appeal by way of rehearing, the ultimate question for this Court is whether his Honour was wrong to so conclude, and it is unnecessary to address each of the challenges to each step in the underlying reasoning.

The starting point is that none of the traditional indicia of insolvency was present. Until administrators were appointed on 7 April 2016, Arrium in fact continued to pay all its debts as and when they fell due. As the primary judge observed, according to its half-year accounts as at 31 December 2015, about which there was no suggestion of any defect, Arrium had total assets of $6,196.9 million and net assets of $2,328.4 million. Thus, on a balance sheet test it was manifestly solvent, and given the time available – that is to say, more than 17 months from 16 February 2016 until the facilities matured in July 2017 – it was to be expected that in the normal course of events Arrium would, if necessary, be able either to sell assets or to raise finance on their security sufficient to repay the facilities when they fell due. [208]

It was therefore only if a sale of the MolyCop business was essential to sustaining solvency, and there was only a limited window within which it could take place – that the failure to consummate such a sale by the beginning of 2016 could support a conclusion of insolvency. As his Honour explained, the BoC Plaintiffs contended that this was the case, because Arrium would run out of cash within a few months of the failure of the initial attempt to sell MolyCop. [209] Although Ground 17 complains that the primary judge erred in holding that the BoC Plaintiffs should not be permitted to advance such a case because it had been disavowed, his Honour in any event rejected it on the merits, not being satisfied that Arrium would run out of cash at any time before July 2017. [210] That conclusion was based on consideration of the evidence of three experts and the business records of Arrium, most particularly its 8 week, 13 week and 17 week liquidity forecasts, none of which suggested that it would run out of cash before the July 2017 Maturities fell due. [211] While some of the cash flow forecasts indicated that Arrium would impinge on its “liquidity buffer”, that was usually towards the end of the relevant forecast period, when the figures were historically conservative, and more importantly, impinging on the (internally mandated) liquidity buffer does not equate to an insufficiency of cash, but only to the margin of adequacy being less than management preferred. [212] His Honour’s thorough analysis of that material and the findings based on it [213] are not impugned by any of the grounds of appeal, which have been drawn with great care, specificity and detail. In sum, the expert evidence and Arrium’s business records did not sustain the contention that Arrium would run out of cash prior to the July 2017 Maturities falling due.

BBVA however contends (by its grounds 20 and 21) that the primary judge erred by failing to have regard to subsequent events – in particular, that Arrium was placed into voluntary administration by its directors on 7 April 2016 – as evidence that Arrium was insolvent at the relevant earlier time, and to conclude that during the relevant period, Arrium’s “commercial reality” was that none of a “do nothing” strategy, an “Amend and Extend”, a recapitalisation, the sale of the Mining Consumables business, or a par refinance, were options available to Arrium to repay the July 2017 Maturities as and when they fell due, and accordingly that Arrium was insolvent. Ground 22 complains that the primary judge erred in holding that a loss of confidence of the lenders in the Arrium Board occurred on 1 April 2016 and was a “a dramatic change in circumstances” pertaining to the assessment of Arrium’s solvency during the relevant period.

Again it may be accepted, as was uncontroversial, that while the question of solvency is to be determined by reference to the circumstances as they were known or ought to have been known at the date at which the question of solvency is assessed and not in hindsight, the Court can have regard to what subsequently happened, to the extent that actual events shed light on what was likely at the time when the question of solvency falls to be assessed. [214] However, the fact that Arrium’s directors resolved to appoint administrators on 7 April 2016 is not evidence that it was insolvent at that date, let alone at any earlier date. The administrators were appointed under the Corporations Act, s 436A(1), which provides that a company may appoint an administrator if the directors resolve that (emphasis added):

One of the purposes of s 436A is to enable directors to resort to it before the company becomes insolvent – and thereby to ensure that it does not trade while insolvent. The resolution adopted is consistent with, and establishes no more than that, the directors were as at 7 April 2016 of the opinion that Arrium was likely to become insolvent at some future time, not that it was insolvent on 7 April 2016. And, as the primary judge pointed out, even if Arrium was insolvent on 7 April 2016, that would not be evidence that Arrium was insolvent in January or February 2016. [215]

BBVA submitted that the fact that on 7 April 2016 Arrium was placed into administration by its Board supported a finding that, in the relevant period, it was not part of Arrium’s “commercial reality” that it would continue to trade beyond 7 April 2016. But that overlooks the very substantial change in circumstances when on 1 April 2016 the lenders, who had until then been supportive of Arrium, announced that they had lost confidence in the Board, whereupon the prospects of a satisfactory outcome radically diminished – following which administrators were appointed. As his Honour explained, when, in or about January 2016, it became apparent that Arrium was not going to get an acceptable price for MolyCop as a result of the then current sales process, three main possibilities remained: first (and preferably, so far as Arrium was concerned), refinancing the whole of its debt, most likely with GSO; secondly, reaching an agreement with current lenders in relation to its banking facilities; or thirdly, doing nothing immediately and addressing the issue later in the year, when market conditions were expected to improve. His Honour regarded each of those options as a realistic possibility as at 16 February 2016 (and before). [216] But his Honour did not, as suggested by BBVA ground 4, hold that the existence of these “realistic possibilities” sufficed to evidence Arrium’s solvency. Reference was made to their existence, not as evidence of solvency, but as reasons why, so long as they existed, an inference could not be drawn from the directors’ appointment of administrators on 7 April 2016 that Arrium was insolvent in February 2016. That these possibilities, or at least some of them, appeared to be remote does not detract from their capacity to explain why their ultimate evaporation might prompt prudent directors to appoint administrators, not having done so earlier.

His Honour considered that the BoC Plaintiff’s burden of proving insolvency included 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”. [217] This is impugned by BBVA grounds 5 and 7. At first sight, his Honour’s conclusion appears inconsistent with the established principle that it is for a party contending that a debt is not due in accordance with its contractual terms to so prove, and that a mere theoretical possibility of raising funds from external sources is insufficient to sustain solvency. However, as the primary judge explained, principles which have evolved in the context of debts due to trade creditors require caution in their application to long-term debts to financiers of large public companies whose working capital is historically provided in large part by debt rather than equity, and where it is conventional for such debt to be rolled-over or refinanced rather than extinguished when it falls due: [218]

The very nature of debt finance of that kind is such that extension, rolling-over or refinancing is the ordinary commercial reality. In that context, his Honour was in our opinion right to hold that in this case, proof of insolvency involved proof that the loans would not be rolled over or refinanced.

But even if that conclusion be incorrect, it matters not. That is because this is not a case where the ability of Arrium to remain solvent depended on the forbearance of creditors. Again it may be accepted, as was uncontroversial, that a debt is taken to be owing at the time stipulated in the contract, absent evidence proving 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 that there is an imminent compromise between the creditor and the debtor; that while the possibility of an alteration to the amount or due date of a debt is relevant, a mere theoretical possibility of a compromise would not preclude a finding of insolvency; and that the party asserting that a company’s contract debts are not payable at the times contractually stipulated bears the burden of making good that assertion by satisfactory evidence. [219] But here, Arrium’s solvency did not depend on any such forbearance, which if proved by a company, may sustain a finding of cashflow solvency despite a balance sheet deficiency, or despite the inadequacy of cash inflows to satisfy debts that were technically due but which creditors agreed to defer. Here, Arrium did not need to prove any such forbearance, because at least until 16 February 2016, its assets were prima facie ample to satisfy all its liabilities within the available time.

For this reason, the complaints that the primary judge erred in holding that a finding of “a realistic possibility” or reasonable expectation that Arrium may be able to “deal with” the July 2017 Maturities by a recapitalisation, amend and extend or by “doing nothing” evidenced its solvency, and in not casting upon the respondents the onus of showing that the relevant debts were not due and payable as contractually stipulated (being BBVA grounds 4, 6 and 7) are misconceived. Neither his Honour’s analysis nor ours depends on any assumption that the facilities were not due and payable as contractually stipulated; both proceed on the basis that, at least until February 2016, Arrium had sufficient assets and time with which to pay or refinance them, when they became due in July 2017. Indeed, his Honour expressed himself to be unpersuaded, on the balance of probabilities, that before 16 February 2016 Arrium was more likely than not unable to raise sufficient cash to repay the July 2017 Maturities over the ensuing 16 months (if that be the correct test). [220] We respectfully agree with that conclusion, which the grounds of appeal do not specifically impugn.

Where none of the traditional indicia of insolvency were present; where until administrators were appointed on 7 April 2016, Arrium in fact continued to pay all its debts as and when they fell due; where as at 31 December 2015 Arrium had total assets of $6,196.9 million and net assets of $2,328.4 million, and on a balance sheet test was manifestly solvent; where it had 16 months in which to realise assets or to raise finance on their security sufficient to repay the July 2017 Maturities when they fell due; where there was every prospect (borne out by events) that commodities prices would improve; and where its cash forecasts did not suggest that it would run out of cash in the meantime, it was not proved that as at February 2016 Arrium was unable to pay its debts as and when they fell due. His Honour’s ultimate conclusion that Arrium was not shown to be insolvent, and thus that the Solvency Representation was not shown to be false or misleading, was therefore correct.

As has been foreshadowed, in this section the following issues are addressed, which arise upon the assumption that the representations or either of them were misleading:

His Honour did not accept that Arrium owed the lenders a duty of care in making the representations prescribed by the terms of the facility agreements, or that Arrium Finance Pty Limited (“Finance”) or Arrium Iron Ore Holdings Pty Ltd (“AIOH”) (the two Arrium Entities on whose behalf the relevant drawdown notices were signed) owed the lenders a duty of care in making the representations contained in the impugned notices. [221]

The myriad relevant factors that inform whether a duty of care arises include foreseeability of harm to the plaintiff; vulnerability of the plaintiff to harm from the defendant’s conduct (including the capacity and reasonable expectation of a plaintiff to take steps to protect itself); reliance by the plaintiff upon the defendant; any assumption of responsibility by the defendant; proximity (in a physical, temporal or relational sense) of the plaintiff to the defendant; the existence or otherwise of a category of relationship between the defendant and the plaintiff; the existence of conflicting duties; and conformance and coherence in the structure and fabric of the common law. [222]

The primary judge reasoned: [223]

There are of course cases – of which the obligations of professionals to their clients are perhaps the paradigm – in which a duty of care in tort may exist in parallel with a contractual obligation. However, the relationship of borrower and lender differs in significant respects from that between a professional and client. First, like the relationship of vendor and purchaser, the relationship is one in which the interests of the parties are inherently adverse. Secondly, at least generally speaking a lender, far from being vulnerable to the borrower, is well able to protect itself. That is accentuated in the case of commercial lenders, who are very well able to take and stipulate measures for their own protection. Nor are such lenders reliant on a borrower: although no doubt for their own additional protection they seek information and assurances from borrowers, they are in a position to stipulate for such contractual conditions as they consider necessary, and to make their own informed commercial judgments.

Further, it is significant that not only were the representations prescribed by the relevant facility agreements, but equivalent representations were deemed automatically to be repeated by dint of the contract. Clause 14.3 of the facility agreements relevantly provided:

In this case, the lenders had minimal vulnerability, having regard to their capacity to take measures for their own protection and the reasonable expectation that they would do so; their reliance on Arrium was minimal, given their position to make their own informed and independent judgment as to their commercial interests; there was no assumption of responsibility by Arrium; there was not proximity in a relational sense, because the interests of Arrium and the lenders were fundamentally adverse; the relationship of lender and borrower is not one of a class in which a duty of care conventionally arises; and conformance and coherence in the structure and fabric of the common law favours leaving the rights and obligations of commercial parties to the contractual terms by which they agree that their relationship was to be governed. All those considerations tell against the superimposition on those contractual terms of a tortious duty of care.

As the primary judge explained, there is no reason to superimpose an additional and different set of rights and obligations upon those contractually agreed by the parties, and to do so would be inconsistent with the “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”. [224] The circumstance that 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”, cannot create rights and obligations that do not otherwise exist.

The primary judge was therefore right to hold that the Arrium Entities did not owe the lenders a duty of care in making the representations contained in the facility agreements, and that Finance and AIOH did not owe the lenders a duty of care in making the representations contained in the drawdown and rollover notices. In those circumstances, the question raised by Anchorage ground 25, whether Arrium breached any such duty, need not be addressed.

Even if Arrium did owe a relevant duty of care, that would avail Anchorage on this appeal only if Sparkes and Bakewell could be rendered liable for a breach by Arrium of any such duty. The primary judge held that “accessorial liability based on directing and procuring a tort is not available in respect of a negligence claim”. [225] Ground 26 complains that this was erroneous. Anchorage contends that the primary judge ought to have found that Bakewell directed or procured Arrium’s breach of duty (grounds 26, 27 and 28), and likewise in respect of Sparkes (ground 29).

His Honour’s reasoning was that while there was a general principle, explained by Lord Buckmaster in Rainham Chemical Works Ltd (In Liq) v Belvedere Fish Guano Co Ltd, [226] 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, [227] the principle had most often been applied in intellectual property cases, [228] and had not been applied to the tort of negligence; [229] and the principle could not be applied to the law of negligence, as there was no satisfactory way of characterising the mental state required of a putative accessory to negligence to incur liability. [230]

Anchorage submitted that there was a well-established principle of liability for procuring and directing a tortious act of a company, and that it was not limited to statutory torts involving intellectual property. [231] However, this is not a principle of company law, and if it is a principle of tort law, there is no reason why it would be confined to acts of a company, as distinct from those of a natural person. As will appear, the cases which hold that a director who procures his or her company to commit a tort may be jointly liable with the company [232] are but an application of the more general principle of tort law that where two or more persons take “concerted action to a common end” and in the course of that action any one of them commits a tort, all are liable as joint tortfeasors. [233] Thus the question pertains to the liability of an instigator or procurer of a tort. It is convenient to address this first in general, and then specifically in its application to the tort of negligence.

This kind of liability in tort law is not the same as accessorial liability in the criminal law (to which accessorial liability under statutory provisions such as the Australian Consumer Law is closely analogous). In tort law, the question is whether a person is liable as a joint tortfeasor. It is a characteristic of liability as a joint tortfeasor that the cause of action against each tortfeasor is the same. [234] As explained in Clerk & Lindsell on Torts: [235]

At the core of the concept of joint tortfeasorship is the notion of a single tort committed by one on behalf of or in concert with another. In the leading case of The Koursk, Bankes LJ said: [236]

Scrutton LJ answered the question: “What is meant by ‘joint tortfeasors’?”, as follows: [237]

Sargant LJ, after referring to the definition in Clerk & Lindsell on Torts to which Bankes LJ had referred, added: [238]

That this is the basis for the liability of procurers and instigators of a tort appears from a number of cases. The first is Petrie v Lamont, [239] in which Tindal LCJ said:

In Townsend v Haworth, [240] the defendant sold chemicals to be used by the purchaser in infringement of a patent, and agreed to indemnify the purchaser should the patent be valid. Mellish LJ said: [241]

In Innes v Short & Beal, [242] Bigham J said:

In XL Petroleum, [243] Caltex retained Turnbull, an industrial plumber, to spike underground petrol tanks on land which XL was entitled to occupy. Caltex (the instigator) and Turnbull (the performer) were held liable as joint tortfeasors.

In CBS Songs Ltd v Amstrad Consumer Electronics Plc, [244] Lord Templeman (with whom Lord Keith of Kinkel, Lord Griffiths, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle agreed) said:

In response to a submission that even if Amstrad did not authorise infringement and was not an infringer itself, nevertheless it was guilty of a common law tort, namely incitement to commit a tort, his Lordship said: [245]

In Myer Stores Ltd v Soo, [246] McDonald J, before citing the passages from The Koursk, which have been set out above, said:

Similarly, the person who procures a prosecution to be instituted can be liable for the tort of malicious prosecution, even where the actual prosecutor is not. [247] That illustrates that the liability of an instigator of a tort is not accessorial, but depends on it being “the instigator’s own tort”.

In Sabaf v Meneghetti, [248] Peter Gibson LJ, giving the judgment of the Court said:

In Generics (UK) Ltd v H Lundbeck A/S, [249] Jacobs LJ, with whom Neuberger and Chadwick LJJ agreed, citing that passage, said:

The present significance of these cases is that they show that instigators or procurers of torts are liable as joint tortfeasors because of their own tortious act, albeit that the act may be performed on their behalf by another. In other words, although another person may be the instrument by which the tort is committed, there is nonetheless a tort committed by the instigator. This is a form of principal, not accessorial, liability. Thus the liability of one who procures a tort is not accessorial in nature, and requires such involvement as to make it the alleged (joint) tortfeasor’s own tort, so that the same cause of action lies against it as against the actual infringer.

That the potential liability of a company director for tortious acts of the company is an emanation of this doctrine is apparent from the following statement in the current (23rd) edition of Clerk & Lindsell on Torts: [250]

It also appears in the discussion by Bennett, Greenwood and Besanko JJ in JR Consulting & Drafting: [251]

Thus, the liability of a director for procuring a tort of the company is a form of joint liability, the director and the company being joint tortfeasors. Where the director or officer is merely acting as a corporate organ in the ordinary way, no such liability arises, just as a director of a company is not liable for inducing a breach of contract by the company where the director is no more than the individual through whom the company acts. [252] In order to incur liability as a joint tortfeasor, the director must be so personally involved in directing or procuring the tort as to “make it his or her own” tort, above and beyond reasonably and in good faith directing the company’s decision-making as a director. What is required to visit liability on a director was compendiously reviewed by the Full Federal Court in JR Consulting & Drafting, in a passage which, though lengthy, is so instructive as to merit being set out in full: [253]

There can of course be joint liability in negligence, as many of the cases to which reference has already been made show. These include cases of vicarious liability, and cases where tortfeasors act in concert. In cases of vicarious liability, joint liability is imposed on an employer or principal because the employee or agent’s tort is attributed to the employer or principal, and the tort is considered as having been committed “on behalf of” the employer or principal. Otherwise, the incurring of joint liability depends upon there being such “concerted action to a common end” that each can be said to have committed the tort, so that if it was committed by one, it was committed on behalf of or in concert with the other.

However, although there are cases in which liability of procurers or instigators has been recognised in the context of intentional torts (such as trespass, conversion, false imprisonment and malicious prosecution), the researches of counsel and of the Court have discovered no case in which it has been applied to the tort of negligence. Why this is so becomes apparent once it is appreciated, as explained above, that the liability of a procurer as a joint (or even sole) tortfeasor is not accessorial but principal, in which it is implicit that the same cause of action lies against the procurer as against the actual infringer. When applied to the tort of negligence, this dictates that an essential element of the cause of action against the alleged procurer is that he or she personally owes the plaintiff a duty of care.

Anchorage referred to Yuille v B & B Fisheries (Leigh) Ltd. [254] In that case, personal injuries were sustained by the plaintiff skipper of a fishing vessel of which the first defendant company was the owner, and the second defendant was the managing director. The plaintiff sued both, alleging that the vessel was unseaworthy. It was held that the second defendant (admittedly the alter ego of the company) knew or had the means of knowing of the defects; that there was a failure of management on his part; that an officer of the company was capable of being a joint tortfeasor with the company, which would also be vicariously responsible for his wrongful acts; that the second defendant had sent the ships to sea in an unseaworthy condition, which caused the plaintiff’s injury; and as the plaintiff’s right was a personal right against the second defendant in his personal capacity and not qua owner of the vessels, there was no limitation of liability. In response to an argument that the second defendant owed no duty to the plaintiff, Willmer LJ, after referring to Rainham Chemical, observed that it limited the circumstances in which directors would be liable to acts expressly directed by them [255] , and cited the dictum of Tomlin J in British Thomson-Houston Company Ltd v Sterling Accessories Ltd [256] (a patent infringement case) that “[n]ow I apprehend that where it is sought to fix a defendant with liability for a tort it must be established either that he is himself the tortfeasor or that he is the employer or principal of the tortfeasor, in relation to the act complained of, or at any rate the person on whose instructions the tort has been committed.” Willmer LJ then reasoned: [257]

It is clear that what was established was not accessorial liability for the company’s tort, but liability on the part of Mr Bates as a principal, for breach of a personal duty owed by him, for which he was jointly liable with the company.

The same outcome can be seen in the decision of Barker J in Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd. [259] The plaintiff had advanced a loan on security of property, relying on a valuation which it contended was made negligently. It sued the company which provided the valuation, and also the individual director who prepared it. Although Barker J referred to the issue of when a director might be liable for his or her company’s conduct, as to when a director may be held liable for the company’s conduct, [260] his Honour held that the director personally owed the plaintiff a duty of care. [261]

Both cases illustrate that a doctrine of accessorial liability in negligence would serve no purpose, because the circumstances which would potentially attract liability on that basis would attract liability as a principal in any event. That is because a person could potentially incur liability for procuring a negligent act only if he or she owed and breached a personal duty of care. In those circumstances, accessorial liability adds nothing. An instigator or procurer commits the tort of negligence if and only if he or she personally owed and breached a duty of care to the victim. Such circumstances may often arise in incorporated professional practices, where the individual practitioner as well as the incorporated entity will owe the client a duty of care. [262] But where there is no personal duty of care, the mere fact that the director or officer or employee is the instrument by which the breach of the company’s duty is initiated or committed does not, in the absence of a personal duty of care, render the director, officer or employee liable.

Except in respect of Sparkes in the 31 December telephone conversation, Anchorage did not allege that Bakewell or Sparkes personally owed them a duty of care. Indeed it was because they did not allege any such duty that they were driven to invoke accessorial liability. However, absent a personal duty of care owed by them, Bakewell and Sparkes could not be jointly liable with Arrium for any breach of duty by Arrium, and the primary judge rightly held that they could not be liable as accessories for any such breach.

The primary judge held that in respect of the 31 December conversation Sparkes owed a personal duty of care, but did not breach it. Sparkes by her notice of contention challenges the finding that she owed such a duty, while Anchorage challenges the finding that she did not breach it.

In holding that there was a personal duty of care, the primary judge reasoned: [263]

With respect, we differ from that reasoning. Sparkes was acting and acting only in her capacity as an officer of Arrium. The request for information was addressed to her in that capacity. Morgan Stanley would or ought to have understood that she was acting in that capacity. Sparkes did nothing to take herself outside the role of so acting, such as to make any such representation as she might have made her own, rather than one by or on behalf of her employer. All the considerations referred to above for concluding that Arrium did not owe a duty apply to Sparkes, but with additional force: even if there was a relevant relationship between Arrium and Morgan Stanley, there was no such relationship between Sparkes and Morgan Stanley. Moreover, imposition of a duty in those circumstances would give rise to conflicting duties to her employer and to third parties such as Morgan Stanley.

The notice of contention in this respect therefore succeeds. His Honour erred in holding that Sparkes owed a personal duty of care in respect of the 31 December conversation. It is then unnecessary to consider whether, as Anchorage asserts by its grounds 30 – 32, she breached any such duty.

The issues are, upon assumption that the representations were misleading:

The Anchorage appellants’ case that Bakewell incurred accessorial liability in respect of contravening conduct by Arrium depends in large part on the so-called Bakewell Direction (indeed, the Anchorage appellants describe this issue as the central focus of their “knowingly concerned” case against him). [264] It is convenient first to address the challenges to the primary judge’s conclusions concerning it. However, even if these challenges to the primary judge’s findings in relation to the Bakewell Direction were upheld, that would not ultimately avail the Anchorage appellants, as our conclusions in respect of liability for procuring negligence, [265] and accessorial liability for misleading or deceptive conduct, [266] mean that requisite elements for him to be liable as an accessory to Arrium’s negligence or misleading or deceptive conduct could still not be established.

The Anchorage appellants pleaded that “[i]n 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 …”, defined as “the Bakewell Direction”. [267] The Bakewell Direction was relied on as evidence that there had been a change of financial position having a material adverse effect, and to demonstrate that Bakewell procured Arrium’s alleged breach of duty, and was relevantly “involved” in Arrium’s alleged misleading or deceptive conduct. At trial, the Bakewell Direction was also relevant to a contention that Bakewell personally owed the lenders a duty of care which he breached in giving the direction. As has been noted, [268] this contention, which was rejected by the primary judge, [269] is not pressed on appeal.

Bakewell accepted that he gave “the Bakewell Direction” to Sparkes no later than 17 December 2015, he said following a conversation he had with Mr Nestel. But he also said that the instruction was qualified, in that it was left to Sparkes to decide whether the instruction could be followed consistently with Arrium’s obligations under the facility agreements. [270]

As has been noted, [271] according to Bakewell, he had a conversation with Mr Nestel some time between 10 and 17 December 2015 about drawing down the facilities (Bakewell said it was certainly before the 18 December 2015 Board meeting); whereas Sparkes said that she did not know about any drawdown direction prior to January 2016. The primary judge did not accept Bakewell’s account of his conversation with Mr Nestel. To the extent that the question of drawing down the facilities was discussed: his Honour observed, by reference to the 22 and 23 December 2015 emails, [272] that Mr Nestel’s advice was to the effect that, instead of repaying debt and then redrawing it, Arrium should hold any spare cash on deposit to avoid incurring new debts. [273] However, while acknowledging that it was not easy to reconcile Bakewell’s evidence as to giving the instruction with what he said had prompted it (namely, his conversation with Mr Nestel), the primary judge nevertheless accepted Bakewell’s evidence that he first gave the Bakewell Direction (albeit in qualified form) no later than 17 December 2015. [274] In so concluding, his Honour referred to Mr Roberts’ handwritten notes of the 2 December 2015 Board meeting, which recorded the idea of drawing down all remaining facilities being first raised by Mr Edwards, and concluded: [275]

Referring to the revised cash flow forecast that Ms Pearce had sent to Bakewell on 24 December 2015 and her explanation of it, the primary judge said that it was plain that neither Mr Nestel’s advice nor Bakewell’s alleged instruction was acted on, at least in December 2015. [276]

Thus, the primary judge accepted that Bakewell first gave the Bakewell Direction no later than 17 December 2015; [277] but that it was expressed as an idea worthy of serious consideration rather than a direction to be implemented immediately and was not acted on immediately; [278] and that it was repeated to Ms Pearce on or about 8 February 2016, following which it was implemented. [279] A crucial consequence of this was that, absent a more detailed analysis of Arrium’s liquidity needs in January 2016, his Honour was not satisfied that the drawdowns made prior to 8 February 2016 were made as a consequence of the Bakewell Direction, whereas those made after 8 February 2016 were made in accordance with it. [280]

The Anchorage appellants contend that the Bakewell Direction was given after the Board meeting of 18 December 2015, but before 22 December 2015; [281] that it was an instruction that Bakewell expected or intended would be complied with immediately; and that each drawdown and rollover notice issued after it was given – not just those after 8 February 2016 – was given as a consequence of it. The significance of these contentions is that:

As to the issue of timing, the Anchorage appellants submit, first, that it was the recognition at the 18 December 2015 Board meeting that it was now the position that it would be necessary to consider alternative funding that was the trigger for the Bakewell Direction; secondly, that Bakewell was “not exactly sure” of the date of his conversation with Sparkes and Ms Pearce in which the direction was given, and could not point to anything other than his recollection for saying that it occurred no later than 17 December 2015; and thirdly that the explanation he proffered for why the 18 December 2015 repayment notices were honoured – namely that his direction exempted irrevocable repayment notices which had already been issued – pointed to the direction being given after those notices had been issued on 18 December.

As to the first point, the Anchorage appellants do not suggest that the Bakewell Direction was a Board decision, but that it was Bakewell’s own initiative. There is therefore no reason why it could only, or would more probably, have been given after rather than before the 18 December Board 2015 meeting, especially given that it had been raised by Mr Edwards at the 2 December 2015 meeting. As Bakewell submits, it does not follow from his evidence in cross-examination, [282] to the effect that he agreed that as at 18 December 2015 he wanted the Board to note his intention to provide cash collateral to ANZ, that it was at the 18 December 2015 Board meeting that he had formed such an intention; indeed, as a matter of logic, it would be likely that he went into the Board meeting with that intention already formed. As to the second point, Bakewell’s understandable inability to fix with precision the date on which he had the conversation does not detract from confidence that in placing it – as he did in his affidavit evidence – between two significant events, namely, the 10 December 2015 ANZ letter (which understandably raised concerns at the time), and the 18 December 2015 Board meeting. [283]

At first, the third point appears to have some force. Bakewell had deposed that in his conversation with Mr Nestel no later than 17 December, he had said:

In cross-examination, Bakewell responded to the suggestion that no-one indicated to him that the Direction could not be complied with:

However, his Honour did not accept at least part of Bakewell’s version of his conversation with Mr Nestel. That was based, not on a preference for one witness over another, but on the overall logic of events. On the other hand, his Honour’s acceptance of Bakewell’s certainty that he gave the Bakewell Direction before 18 December 2015 appears to have been based, at least in some part, on his impression of Bakewell as a witness.

Moreover, there were other matters which pointed to the Bakewell Direction having pre-dated 18 December 2015. Mr Nestel’s email of 23 December 2015 places the conversation in which there was discussion about not repaying debt as taking place in the two weeks before 23 December 2015, which is consistent with Bakewell having had a conversation with Sparkes about that subject before 18 December 2015. And most significantly, Sparkes was on leave for the whole period from 16 to 29 December 2015, [284] which tells against her being given the Bakewell Direction during that period.

Viewing this evidence as a whole and recognising as the primary judge did that perfect reconciliation of it is impossible, Bakewell probably mistook the origin of the idea of drawing down all facilities as being his conversation with Mr Nestel rather than Mr Edwards, and conflated it with Mr Nestel’s suggestion about not paying down debt; and had a conversation with Sparkes about the dual concept. On balance, the objective evidence (in particular, Sparkes’ absence on leave from 16 December 2015) favours the view that the initial conversation occurred before 18 December 2015, as Bakewell – whose evidence in this respect the primary judge, having had the advantage of seeing and hearing him, accepted – maintained.

As to the nature of the initial direction, his Honour’s conclusion that it was an idea for consideration rather than a direction for immediate implementation was again not founded on acceptance of the evidence of any particular witness, but a conclusion based on the logic of events. In this respect it is to be borne in mind that Bakewell’s acceptance that he had given such a “direction” to Sparkes in December 2015 was hedged in terms “if we can”; and his Honour’s conclusion that its effect was not mandatory and immediate is broadly consistent with that evidence. That neither Sparkes nor Ms Pearce had any recollection of any such direction before 8 February 2016 itself weighs against anything which they regarded as mandatory or immediate having been said earlier. It is, as Bakewell submits, implausible that the conversations that Sparkes recalls having with Ms Pearce in mid-January 2016, and then with Bakewell, could have occurred if Sparkes had received an unequivocal direction from Bakewell a month earlier.

That view is reinforced by the apparent absence of any reaction to it. It is not so much that debt was repaid pursuant to the 18 December 2015 notices that is significant. More importantly, the liquidity forecast prepared on 11 December 2015 and presented at the 18 December 2015 Board meeting did not show all debt being drawn at any time covered by the period of the forecast, and although it was likely prepared before the “direction”; neither did the forecast prepared for the board meeting on 7 January 2016, which projects that some debt would be repaid in March 2016. It is, as Bakewell submits, implausible that he would have allowed the Board to be provided with the cash forecasts that were provided to it at Board meetings in January 2016, had he already instructed that all lines were to be fully drawn down. Only in anticipation of the Board meeting on 19 January 2016 did the forecast suggest that drawn debt would approach the facility limits, and even then only in March 2016. It is the forecast that is relevant, rather than the fact that no further repayments were actually made, because the forecast is indicative of the intention and understanding at the time it was made. All that tells against any there being any understanding before February 2016 that the “direction” was one to be implemented immediately.

In this respect, there is also force in Bakewell’s submission that it might reasonably be expected that had anyone in the Arrium Treasury thought that he had directed that all lines be drawn down, such an instruction would be reflected somewhere in the extensive email correspondence between him and the relevant Arrium Treasury officers in this period – particularly in circumstances where much of that correspondence was directed to liquidity forecasting. Yet there is no mention of any such instruction at all. As Bakewell submits in this way, the correspondence is inconsistent with an instruction to be acted on immediately. [285]

So too is the fact that the Bakewell Direction was “repeated” on 8 February 2016, following which it was immediately acted on. If he had given such a direction in December 2015 and expected it to be implemented, then there would have been no occasion to restate it to Ms Pearce in February 2016. What happened on and following 8 February 2016 points against any mandatory and immediate direction having been given in December 2015.

As to implementation, the matters which favour the view that no mandatory and immediate direction was given in December also weigh in favour of the conclusion that drawdowns made before 8 February 2016 were not made pursuant to the “Bakewell Direction”. That in January 2016 Arrium was forecasting that some debt would be repaid in March 2016, [286] is not consistent with implementation of the Bakewell Direction. Sparkes was absent on leave for the remainder of December 2015. Until 8 February 2016, Ms Pearce was unaware of the Bakewell Direction. Thus there is nothing to show that those who authorised drawdown notices before 8 February 2016 were aware of the Bakewell Direction, and if they were unaware of it they could not have been acting upon it. It is not apparent that whatever Bakewell said in December 2015 caused any departure from Arrium’s usual drawdown program as described by Sparkes prior to 8 February 2016. [287] More probably than not, as Bakewell submits, what occurred was that until then, the Arrium Treasury team continued to make drawdowns in the ordinary course, and the Board received liquidity reports consistent with that approach.

While it is true, as the Anchorage appellants emphasise in their submissions in reply, [288] that all available lines were drawn down fully by about mid-February 2016, it does not follow that this was the result of any direction given in December 2015, just because the idea was first aired at that time. Their contention that it is objectively improbable that those in the Arrium Treasury department would have ignored a direction from the CFO, let alone without there being some written record, far from supporting the view that it was implemented in December 2015, supports the conclusion that whatever was said in December was not viewed as mandatory and was not implemented. Insofar as the Anchorage appellants place emphasis on the lack of a written record in this context, it is more telling that there was no record of the giving of any such direction in December 2015.

Ultimately, the issues of timing, content and implementation of the Bakewell Direction are all inter-related. On reviewing the whole of the evidence, as on rehearing, for the above reasons we reach the same conclusion as the primary judge. The logic of the events is that Bakewell first raised the issue before 18 December 2015 (before Sparkes went on leave), but in a manner which was not intended nor understood to have mandatory or immediate effect, and no action was taken to implement it until it was restated, in direct terms, to Ms Pearce on 8 February 2016.

The appellants contend that Sparkes and Bakewell incurred accessorial liability on the basis that each was a “person involved” in contraventions by the Arrium Entities of the statutory prohibitions on engaging in misleading or deceptive conduct, by reason that they were “knowingly concerned” in the contraventions. [289] A person who suffers loss or damage by conduct of another person in contravention of the prohibition may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. [290] 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. [291] In order for a person to be “knowingly concerned” in a contravention, the person must have actual (not imputed or constructive) knowledge of the essential facts constituting the contravention, although it is not necessary for the person to know that those facts constitute a contravention. [292]

Although the primary judge concluded that Bakewell “plainly … knew the facts from which the conclusion of falsity could be drawn”, [293] and that Sparkes “knew that there had been a change in Arrium’s financial position”, [294] his Honour held that the claims for accessorial liability on this basis must fail in any event because it was not established that Sparkes or Bakewell actually knew each of the essential elements of the contravention, and in particular that the MAE Representation was false. [295]

By their ground 14, the Anchorage appellants contend that knowledge of the falsity of the relevant representation was not required, and that it sufficed that the alleged accessory knew facts which falsified the representation. This raises a longstanding controversy as to whether, in order to incur liability as an accessory, knowledge that the representation is false is required (the narrow view), or knowledge of facts which would have falsified the representation if they had been adverted to, suffices (the wider view). There are authorities supportive of both views. [296]

The starting point for consideration of this question must be the language of the statute, which visits liability on a person who is “knowingly concerned” in a relevant contravention. Where the contravention is the prohibition on engaging in misleading or deceptive conduct, one can be “knowingly concerned” in it only if one knows that the conduct is misleading or deceptive. Knowledge of facts which, had one thought about it, might have led one to conclude that the conduct was misleading or deceptive, does not equate to knowledge that the conduct was misleading or deceptive. At least short of wilful blindness, the law in this area has eschewed liability for imputed or constructive knowledge. [297] Knowledge of facts which if adverted to might have caused one to realise that the representation was false is not knowledge that it was false, but at the highest the means of ascertaining it was false. Thus, on the plain words of the statute, to be “knowingly concerned” requires knowledge that the representation is misleading or deceptive, not merely the means of ascertaining that it was.

Both lines of authority claim to derive from the judgment of the High Court in the leading case of Yorke v Lucas, [298] in which the plurality said (emphasis added): [299]

Those passages point to a requirement of knowledge of the falsity of the representations. Their Honours referred to “knowledge of the essential matters which go to make up the offence”, a reference to the facts constituting the elements of the offence. One of those essential matters is that the conduct is misleading or deceptive. Brennan J said: [300]

His Honour later continued: [301]

It is true that his Honour speaks of a requirement for “knowledge of the acts constituting the contravention and of the circumstances which give those acts the character which s 52 defines, namely, ‘misleading or deceptive or … likely to mislead or deceive’”. However, his Honour also explained that the provision did not extend liability for a contravention to a person who procures the corporation to engage in contravening conduct “if that person is honestly ignorant of the circumstances that give that conduct a contravening character”. One of the essential circumstances that gives the conduct a contravening character is that the representation is misleading.

Arguments and reasoning that favour the broader view tend to focus on:

Accordingly, Yorke v Lucas does not support the wider view.

The decision of this Court in Adler v Australian Securities and Investments Commission [302] has been cited in support of the wider view. In it, Giles JA, after referring to Yorke v Lucas, observed: [303]

With great respect, those observations overlook that there are as many cases which apply the principle that knowledge of the essential facts includes knowledge that the relevant conduct is misleading. However, his Honour’s conclusion, insofar as it is that knowledge that the facts constituted a contravention is not required, is with respect plainly correct, and consistent with all the cases. In other words, knowledge of the legal characterisation of the conduct as contravening conduct is not required.

Other authority of this Court supports the narrow view. In CH Real Estate Pty Ltd v Jainran Pty Ltd; Boyana Pty Ltd v Jainran Pty Ltd, [304] Basten JA, with whom Beazley JA and Young JA agreed, said:

So too does the most recent relevant decision of the Full Federal Court. In Belconnen Lakeview Pty Ltd v Lloyd, [305] in response to a submission that the primary judge had wrongly held that in order to establish accessorial liability for misleading or deceptive conduct it is necessary, in the case of misrepresentations, to establish actual knowledge of the falsity of the statement, [306] Griffiths, Davies and Moshinsky JJ concluded: [307]

The difficulties presented by the wider view may be seen from the example given by McPherson AJA in Heydon v NRMA Ltd, in which his Honour said (in obiter): [308]

To the contrary, with great respect, in our opinion a person who knows that another is going to make certain representations, but does not know that they are misleading, cannot be said to be knowingly concerned in the other engaging in misleading conduct.

It follows that the primary judge was right to hold that to establish liability of Sparkes or Bakewell as an accessory, it was necessary that they be shown to have actual knowledge of the falsity of the relevant misrepresentation.

The Anchorage appellants further submit (by their grounds 15 to 20) that in any event, at least “wilful blindness” is sufficient to satisfy the narrow test was established.

The difficulties of proving an allegation of wilful blindness were referred to by White J in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq): [309]

While wilful blindness equivalent to actual knowledge may be found from a combination of suspicious circumstances and a failure to make inquiry, [310] constructive knowledge (which is often expressed in terms of “ought to have known” or “had the means of knowing”) does not suffice. [311]

The relevant essential matter was that the MAE Representation was false because there had been a change which had a material adverse effect. On any view, that was not an obvious fact. It was a conclusion, the reaching of which by Sparkes or Bakewell would require the formation on their part of a complex opinion, based on the (contestable) meaning of the representation, and analysis of a substantial amount of financial information. One cannot be “wilfully blind” to a matter to which one does not advert. Thus it was necessary to show, at the least, that Sparkes and Bakewell adverted to the truth or otherwise of the MAE Representation.

The primary judge accepted that Sparkes knew that there had been a change in Arrium’s financial position, but not that she appreciated that that change was such as to amount to a MAE, assuming that there was one. Anchorage submits that it can be inferred that 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. Anchorage lists a catalogue of “key facts in relation to Sparkes’ knowledge and involvement” [312] - which, as that phrase bespeaks, conflates her knowledge with her involvement (or “concern”). As to her knowledge, those facts establish that she knew that there had been a negative change in Arrium’s financial position, [313] which was of concern to her. [314] But they do not establish that she adverted to whether such a change amounted to a MAE. Sparkes gave evidence that she did not regard ensuring that the representations were accurate as part of her responsibilities. [315]

It might have been different, had it been accepted that in the 31 December conversation Sparkes had said, as was alleged, that she was comfortable with the representations made in the notice of 29 December 2015, but the highest finding of fact is that she may have 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. [316] Indeed, it was Anchorage’s case in negligence that Sparkes (and other signatories) did not turn their mind to the question whether the MAE Representation was true or false. [317]

As the primary judge explained, it is unclear which of the financial information necessary to inform the analysis that might result in an opinion that there had been a MAE was known to Sparkes, and it cannot be inferred from such information as was available that she must have formed such an opinion – particularly when there was at least a reasonable basis for reaching the opposite conclusion, as the primary judge did. [318] Further, as the primary judge explained: [319]

If she was not negligent in not making enquiries, a fortiori she was not wilfully blind.

As to Bakewell, the appellants embrace the primary judge’s finding that he “plainly … knew the facts from which the conclusion of falsity could be drawn”. [320] However, that is only a finding of means of knowledge. Again, Anchorage listed a catalogue of matters said to found an inference of wilful blindness on the part of Bakewell – a serious allegation of deliberate and intentional misconduct. Some of the matters invoked went more to his being relevantly “concerned”, than to his knowledge. None showed that he turned his mind to the accuracy of the MAE Representation. His acceptance that he was “ultimately responsible” for the representations in the notices – which perhaps went too far, as it was the Arrium Board that was ultimately responsible – does not in any event involve any acceptance that he turned his mind to their accuracy. It does not follow from the circumstance (of which he was admittedly aware) that Arrium’s position had deteriorated, that he was aware that there had been a “material adverse effect” within the meaning of the MAE Representation. Bakewell gave evidence that, despite being aware that there had been an adverse change in Arrium’s financial position as at December 2015, he did not turn his mind to whether it reflected a “material” reduction in its capacity to meet its obligations. [321] He said:

His evidence in that respect was evidently accepted by the primary judge, and there is no reason why we should differ. Moreover, it was not put to him in cross-examination that he deliberately ignored any suspicious circumstance.

Accordingly, the primary judge did not err in concluding that it was not established that Sparkes or Bakewell actually knew that (or were wilfully blind as to whether) the MAE Representation was false.

Here the issue is whether, as the BoC Plaintiffs contended at trial and BBVA contends on appeal, Sparkes and Bakewell personally engaged in misleading or deceptive conduct by authorising the January 2016 Notices and the February 2016 Notices respectively. The primary judge was not satisfied that either Bakewell or Sparkes engaged in misleading or deceptive conduct, even if the representations made in the relevant notices were false. [322]

This is essentially a question of attribution of the contravening conduct. Where the contravening conduct is making a misrepresentation, it is the person who makes the misrepresentation who engages in the contravening conduct. No doubt the status of an individual as an employee does not divest that person of personal liability for contraventions committed while an employee. [323] But it does not follow that where a corporation engages in contravening conduct through an officer or employee, the conduct is necessarily to be attributed to the employee as well as to the corporation.

In Cassidy v Saatchi & Saatchi Australia Pty Ltd, Moore and Mansfield JJ said: [324]

In Gardam v George Wills & Co Ltd, French J (as his Honour then was) said: [325]

These cases indicate that the question is whether the representee would reasonably regard the representation as being made by the director or employee as well as by the corporation.

There have admittedly been cases in which a director of a corporation has been held to have engaged personally in contravening conduct. The highpoint, upon which BBVA’s case chiefly relied, is Australian Securities and Investments Commission v Narain. [326] In that case, ASIC brought proceedings against Mr Narain for a contravention of Corporations Act, s 1041H(1), 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”, in circumstances where a company of which he was CEO sent a misleading announcement to the ASX. Mr Narain had participated in the preparation and drafting of the announcement, had approved it, and had directed the company secretary to send it to the ASX. The trial judge relevantly found that Mr Narain had not himself engaged in misleading or deceptive conduct, because he had not personally sent the announcement to the ASX, which conduct was engaged in by the company and the company secretary who transmitted it to the ASX. On appeal, the Full Court rejected the trial judge’s conclusion that Mr Narain had not personally engaged in misleading or deceptive conduct because he did not send the announcement to the ASX. Finkelstein J said: [327]

Jacobson and Gordon JJ gave several reasons for reaching the same conclusion: [328]

Thus it may be accepted that the status of an employee or officer does not necessarily immunise one from personal liability for contravening conduct engaged in in that capacity; but the question is whether the role of the individual was more than merely ministerial. Unless it is, the conduct is not attributable to the individual but only to the company. With respect to Finkelstein J, a search for “the real culprit” is liable to distract from the question, which his Honour rightly identified, namely, to whom the conduct is in law attributable.

As the primary judge explained in distinguishing Narain, there the relevant representations were contained in a document that Mr Narain was involved in preparing and which, by instructing Mr Hanlon to send it to the ASX, he must have intended be conveyed to members of the public; importantly, members of the public who read the announcement would have understood it to enjoy the approval of senior management if not the board of the company. In those circumstances, he was regarded as having made the representation, along with the company. [329]

Another case invoked by BBVA was CH Real Estate v Jainran. Jainran entered into a contract to purchase a commercial property including a service station and a convenience store from the vendor Boyana Pty Ltd, a company controlled by Mr Sgro. CH Real Estate was the real estate agent. Jainran rescinded the contract and sought return of its deposit and damages from both the agent and Mr Sgro for misleading or deceptive conduct. Bryson AJ gave judgment against Boyana, holding that Jainran had validly rescinded the contract, and also awarded damages against the agent for misleading or deceptive conduct, and against Mr Sgro for his own conduct or as an abettor under s 75B of the Trade Practices Act. On appeal, Mr Sgro argued that there was no misleading or deceptive conduct on his part and that he was not responsible under s 75B for Boyana’s misrepresentations. Basten JA (with whom Beazley JA agreed; Young JA not deciding) held that Mr Sgro’s involvement was such as to render him liable for misleading or deceptive conduct under s 42 of the Fair Trading Act 1987 (NSW) (emphasis added): [330]

Notably, in CH Real Estate v Jainran, Sgro was the directing mind of the company and gave the relevant instructions, he was “the human embodiment of the corporation”. In those circumstances, a representation made by the corporation would inevitably be regarded as made also by him.

Another case relied on was Robinson v 470 St Kilda Road Pty Ltd, [331] in which 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). It is plain enough that where a statutory declaration is provided, the declarant would reasonably be regarded as personally making the representations in it.

It was submitted for BBVA that in CH Real Estate v Jainran and Narain, liability was founded on the act of directing or authorising the corporation’s representation, as distinct from an independent representation by the director. But in our view that is not so. A person who directs or authorises another to engage in conduct does not thereby necessarily himself or herself engage in that conduct (although he or she might well do so if the relationship is one of principal and agent). He or she may be liable as an accessory, being a “person involved” in a contravention, but that is a different question, addressed above. This distinction, between “engaging in conduct” that contravenes the prohibition, and “being a person involved” in such a contravention, is established in the legislation. An officer, employee or agent who merely directs or authorises a corporation’s relevant conduct does not thereby engage personally in that conduct; he or she does so only if the conduct would reasonably be attributed to him or her by the representee.

That analysis is supported by the judgment of Keane JA (as his Honour then was, with whom Williams JA and Atkinson J agreed) in Downey v Carlson Hotels Asia Pacific Pty Ltd (emphasis in original): [332]

Here, the conduct in question is the making of the representations contained in the drawdown notices. It is useful at this point to recapture them: Schedule 3 of the facility agreement is in the following terms:

Thus the representations were made by “We”, being Arrium – as they were required to be made by the facility agreements. Insofar as they were signed by an “Authorised Officer”, it was manifestly in their capacity as an authorised officer or agent of Arrium, as required by the facility agreements, in order that Arrium be bound, and not in any personal capacity. The readers of the drawdown notices would not have understood Sparkes or Bakewell to have any involvement in the making of the representation beyond their purely ministerial acts as organs of the company. Neither did anything beyond acting within the ordinary scope of their duties as officers or employees, such that their relevant acts were purely ministerial. No reasonable reader of the notices would understand the representations to be made by Sparkes or Bakewell personally. Neither Sparkes nor Bakewell made any relevant representation.

The primary judge rightly was not satisfied that either Bakewell or Sparkes personally engaged in misleading or deceptive conduct, even if the representations contained in the notices were false.

The issue is whether, because of the misrepresentations (assuming them to have been false), Anchorage and/or BBVA advanced funds to Arrium between 7 January and 16 February 2016, which they would not otherwise have advanced.

In respect of Anchorage’s negligence case against Sparkes, the primary judge held that factual causation was not established, in particular because reliance on the supposed misrepresentations was not established. In the absence of evidence that anyone on behalf of the lenders read or relied on the representations, his Honour declined to infer reliance from the circumstance that giving the drawdown notices in which they were contained was an essential step in the process by which loans were made or rolled over, in the context of substantial evidence that the lenders were well informed of Arrium’s position and making their own independent judgments. [333] The claims for misleading or deceptive conduct failed for the same reasons, [334] as too did the claims for accessorial liability. [335] The claims based on the 31 December conversation similarly failed, in the absence of evidence of reliance, and having regard to the insignificance apparently attributed by Morgan Stanley to its contents. [336] Those conclusions were equally applicable and fatal to Anchorage’s claims against Bakewell.

The claims of the BoC Plaintiffs also failed on causation because, although unlike Anchorage they adduced some evidence of reliance, there was (with one exception) no evidence that anyone on behalf of the lenders even checked to see whether the notices contained the relevant representations, [337] and, in the case of the sole exception, the focus was on checking the form and not the contents or accuracy of the notice; [338] moreover, the evidence indicated that the opinions of the lenders about 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 notices. [339]

The essence of the appellants’ case on causation is that but for the relevant breach of duty or misleading or deceptive conduct, the notices would not have been issued, or would have been appropriately qualified; and that had they not been issued, or had they been appropriately qualified, the drawings the subject of those notices would not have been advanced.

The appellants contended that the Par Lenders (in the case of Anchorage) and BBVA suffered loss because of the contraventions, on the basis that the provision of an unqualified notice was necessary and sufficient to oblige the lenders to advance funds in accordance with the notice, as they did. However, the provision of a conforming notice did not of itself oblige the lenders to advance funds; they were obliged to do so only if other conditions precedent were satisfied, including whether objectively (as distinct from according to representations in the notice) there was then any subsisting Event of Default or Potential Event of Default (which included whether Arrium was the subject of a material adverse change or was insolvent, the former of which involved an assessment of whether there had been a change which constituted a MAE). [340] Mere repetition in the drawdown notice of the contractually stipulated representations did not oblige the lenders to advance the moneys, if those conditions precedent were not satisfied. In other words, if a lender formed the opinion that there had been a material adverse change, it could decline to make an advance, notwithstanding the provision of a conforming drawdown notice. This is illustrated by the actions of HSBC in refusing to honour a compliant drawdown notice on 11 February 2016 because of its concerns as to the MAE Representation, as described by the primary judge: [341]

Moreover, as the primary judge explained, the appellants’ submission that reliance is to be inferred because the giving of the notices was an essential step in the process by which the loans were made or rolled over addresses the wrong issue; his Honour rightly highlighted the crucial difference between reliance upon the fact that a conforming notice has been given, and reliance upon the truth of the representations contained in it: [342]

Here, only reliance on the truth of the relevant representations could establish loss because of the contravening conduct. BBVA submitted that his Honour was mistaken in considering that causation was not established because it was not proved that the lenders were actually misled by the misrepresentations, as distinct from asking whether a human actor would have acted differently but for the misleading conduct. They submitted that the primary judge “accept[ed] that the Lenders relied on the Drawdown … Notices in making…the loans”, [343] and that “[i]n the present case, but for the wrongful conduct, the Lenders would not have advanced the funds that they did”, [344] from which a finding of causation ought inexorably to have followed; but that his Honour did not undertake a conventional “but for” or counterfactual approach to causation, considering it insufficient to demonstrate that the drawdowns would not have occurred had the impugned drawdown notices not been given or been appropriately qualified.

This submission is far from entirely accurate. First, while his Honour made the finding that the lenders relied on the drawdown notices, that was a finding of reliance on the notices, and not of reliance on any relevant misrepresentation contained in them. A chief vice in the appellants’ submissions is the conflation of reliance on the notices, with reliance on the truth of the relevant representations contained in them. As will appear, it does not follow from the fact that the lenders relied on the notices that they relied on the truth of any misrepresentation contained in them. Secondly, the “finding” that but for the wrongful conduct, the lenders would not have advanced the funds, was in fact not a finding but an alternative assumption, made only for the purpose of considering the quantum of damages, in circumstances where his Honour had already plainly found that the lenders did not rely on the “wrongful conduct”. [345]

Thirdly, his Honour did consider the potential counterfactuals, while pointing to the difficulties in formulating them in the relevant context: [346]

BBVA rightly submits that the ultimate inquiry is causation, not reliance. [347] However, while personal reliance (by the plaintiff) is not always necessary to establish causation, reliance on the misleading conduct at some point is necessary to provide a causative connection (which might be that a third party’s reliance on the defendant’s misrepresentation caused the plaintiff’s loss). [348] Moreover, the “but for” test which is inherent in counterfactual analysis, while often useful, is not the entire inquiry as to causation. The fundamental question is whether the contravening conduct – relevantly, the (assumed) misleading character of the representations in the notices – caused loss. Australian Consumer Law s 236 (and its analogues) are concerned with loss occasioned because of the misleading conduct. In this respect, there is a difference between the fact that the representation was made, and its misleading character. Causation relevantly involves reliance on the misleading quality, not just the fact, of the misrepresentation.

Another way of putting it is to ask whether the fact that the representations were (on relevant assumptions) false and not true caused the lenders to advance funds which they would not otherwise have advanced. Detriment is occasioned by misleading conduct only if the recipient is in fact misled. If a misrepresentation is made but the representee knows the truth, or does not care whether or not the representation is true, then the recipient is not misled, and reliance (and causation) is not established.

The appellants’ causation case does not address the causative effect of the misleading character of the relevant representations, as distinct from the effect of the fact that the representations were made (regardless of their accuracy), or of the notices in which they were contained (which had contractual consequences quite apart from the truthfulness of the representations in them). That is particularly significant where, as here, the representations were contractually required to be made and were prospectively automatically repeated, and had a contractual consequence; it cannot be presupposed that a representation which is given automatically and contractually is true.

Thus it was necessary for the appellants to establish reliance on the truth of the misrepresentations, that is to say, that the lenders were misled, not merely that they relied on the notices having been given. Proving reliance required that it be established that the advances were made, not merely because the relevant representations were made, but because they were misleading. Mere reliance on the fact that a conforming notice had been given, without advertence to the truth of the representations in it, does not equate to reliance on the misrepresentation.

His Honour was not prepared to draw an inference of reliance in the absence of evidence that anyone on behalf of any lender had read and believed the relevant representations. Anchorage submitted that his Honour erroneously had regard to the appellants’ failure to adduce evidence of reliance, on the basis that such evidence would have been inadmissible by Civil Liability Act 2002 (NSW), s 5D(3). That submission is misconceived. Section 5D(3) provides as follows:

It is doubtful that s 5D(3) precludes the receipt of statements of officers of a corporate plaintiff. [349] However, that question need not be explored. Nor need it be considered how s 5D(3) might operate in the context of parallel statutory claims to which the Civil Liability Act does not apply. That is because s 5D(3) only precludes the adducing of evidence on the hypothetical question of what the plaintiff would have done but for the negligence. It does not preclude the adducing of evidence of what the plaintiff did as a result of the negligent act. In the context of a medical advice case, a patient may permissibly give evidence that he or she agreed to undergo an operation because the doctor recommended it; what is not permitted is evidence as to what the patient would have done had different advice, which was not given, been given.

Here, the question on which evidence was lacking was not what the lenders would have done but for the negligence, but what they did because of the (assumed) negligence. Section 5D(3) did not preclude evidence that some officer of the lenders read the representations in the drawdown notices, believed them to be true, and because they believed them to be true, authorised the drawdown. In any event, evidence could have been adduced (as it was by the BoC Plaintiffs) of the practices and procedures in place from which an inference might have been drawn as to what impact a qualified representation in a drawdown notice would have had. [350]

Accordingly, the adducing of evidence of reliance was not precluded by Civil Liability Act s 5D(3). No such evidence was adduced by Anchorage. The BoC Plaintiffs adduced some potentially relevant evidence, from Ms Siu (Head of Operations Control & Support Asia at BBVA) to the effect that funds would not have been advanced in response to a drawdown notice if the notice did not contain the stipulated representations and warranties, or disclosed an Event of Default; [351] and from Ms Dinham (the facility coordinator of NAB), to the effect that if the stipulated representations were omitted or materially amended or qualified, then Ms Liu (the relevant Agency Administration Officer from NAB) was required to bring such matters to the attention of Ms Dinham, who in turn would have brought them to the attention of the head of NAB’s agency business. [352] However, that establishes only that whether the representations were made would be checked as a matter of form, not that any attention would be given to their content and accuracy. As his Honour explained: [353]

Thus, with the exception of Ms Siu, it was not established that any lender even checked whether the representations were contained in the drawdown notices, let alone adverted to whether they were true. And in the exceptional case of Ms Siu, while she checked that the representations were included, there was no evidence that she gave any attention to the accuracy of the representations they contained. What Ms Siu checked, and what Ms Liu was supposed to check, was that the representations were made; it did not matter to them whether or not they were true. The advances were made because the contractual requirement was satisfied, not because the lenders were misled.

That reasoning would not be affected by the alleged error in his Honour’s finding that NAB was not required to undertake such checking, although the complaint is not correct: cl 31.9 of the facility agreements merely required NAB to inform participating lenders if it became aware of an Event of Default, which does not impose an obligation to check that the drawdown notices contained the stipulated representations. But even if NAB were so obliged, it would not alter the position that in fact there was no evidence that Ms Liu did so, while there was evidence that on many occasions NAB failed to upload the drawdown notices to the platform known as ‘Debtdomain’ so as to make them available to the lenders participating in the syndicate, meaning that there was positive proof that the syndicated lenders on many occasions could not have relied upon the MAE Representation in advancing the loan funds, because they were never provided with the drawdown notices which contained them.

The difficulties with establishing causation do not end there. In addition, his Honour referred to “substantial evidence” that the lenders were aware of Arrium’s deteriorating financial position and that the sale of MolyCop for an acceptable price was essential if the lenders were to be repaid in accordance with the terms of their respective facility agreements; that the lenders knew that if that sale did not occur, it would be necessary to reach some agreement with Arrium to vary the terms of the facilities; and that the lenders were aware of the change in Arrium’s financial position between FY14 and FY15. [354] His Honour noted that by about October 2015, a number of lenders had placed Arrium on a watchlist, and transferred the file to the asset management group within the lender, to monitor and closely manage Arrium’s financial position and their loans to it. His Honour also observed that 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 MolyCop did not proceed for an acceptable price. His Honour said: [355]

Then his Honour concluded: [356]

Returning to the issue in the context of the BoC Plaintiffs, his Honour said: [357]

Accordingly, as to the case on causation in respect of the representations contained in the notices:

His Honour therefore rightly held that causation was not established.

As to Anchorage’s case against Sparkes based on the 31 December conversation, his Honour said: [358]

Anchorage submits that a finding of causation ought logically have followed from his Honour’s findings that Sparkes owed Morgan Stanley a duty of care; that the call was requested by Morgan Stanley in order better to understand Arrium’s position; that it was reasonable for Morgan Stanley to rely on what it was told by Sparkes, and that Morgan Stanley was vulnerable in the sense that it had no other means of ascertaining the relevant information.

That argument is undermined by the conclusion, above, that Sparkes did not owe a relevant duty of care. But that aside, it conflates the existence of a duty with reliance on a misstatement made (on relevant assumptions) in breach of it. None of the four matters identified is evidence of reliance. No one gave evidence that they believed or trusted – rather than doubted – what Sparkes said. Even if (as Anchorage submits) there was no evidence that Morgan Stanley via Mr Ball “must have had considerable knowledge of Arrium’s financial circumstances”, that does not undermine his Honour’s conclusion, founded on Ms Park’s characterisation of the call as “not extremely helpful”, and the absence of any other evidence, that Morgan Stanley probably made its own assessment of Arrium’s financial circumstances and the risks of honouring and not honouring the drawdown notice, and did not rely on anything Sparkes said.

Again, his Honour did not err in holding that, in this respect too, causation was not established.

As noted above, the issues which arise for determination are:

For the reasons that follow:

It is convenient to summarise the Costs Judgment before addressing the Anchorage appellants’ matters and the Signatories’ application for leave to cross-appeal.

There was no challenge to the correctness of the primary judge’s summary [359] of some of the relevant principles as to the indemnity costs consequences flowing from an unreasonable rejection of an informal offer of compromise:

All the defendants in the Anchorage proceedings at first instance made an informal offer of compromise on 3 March 2021, which was the third day of the trial. The offer stated in part:

The offer was said to be open until 5pm on 5 March 2021.

The offer was made against the background of an unsuccessful mediation which had taken place over the course of three days in December 2020 before it was adjourned to a convenient date in early 2021 after the Christmas holiday period. In fact the mediation resumed on 12 and 16 February 2021. As noted, the offer was made on the third day of the trial after the Anchorage appellants, BBVA and the first to fourth defendants in the Anchorage proceeding had completed their oral opening submissions. Bakewell was scheduled to be the first witness after the openings had concluded. The offer was effectively open for only 51 hours.

The primary judge held that the 3 March 2021 offer was a genuine offer of compromise. [360] His Honour then focused on the primary question (in the context of determining whether it was unreasonable of the Anchorage appellants not to accept the offer), namely whether the Anchorage appellants were given sufficient time to consider the offer. The primary judge said that there “is more force in the submission that the plaintiffs were not given sufficient time to consider the offers”, [361] before stating that “in the context” he had concluded that sufficient time had been provided. This was because:

Turning now to the 23 December 2020 offer made by the Signatories, it invited the Anchorage appellants to agree to the dismissal of the proceedings as against them, there being no order as to costs between the respective parties and any extant costs order as between those parties being vacated. Initially, the offer was expressed to be open until 5pm on 8 January 2021. There was evidence that, as at August 2019, the Signatories had already incurred costs of nearly $600,000. [367] Their estimated total costs if the matter went to trial were expected to be approximately $2 million (not including the costs of briefing senior counsel).

In response to the 23 December 2020 offer, the Anchorage appellants’ solicitors sent an email dated 8 January 2021. They claimed that the time available to consider the offer was not reasonable, added that they were awaiting offers from other defendants and enquired as to additional settlement terms. The 8 January 2021 response relevantly said:

In an email response dated 11 January 2021, the Signatories’ solicitors stated inter alia that the 23 December 2020 offer “was made shortly after a week of formal mediation (which we note is theoretically ongoing at this stage), which mediation was conducted by two of Australia’s leading mediators”.

The Signatories’ solicitors agreed in that email to keep the offer open until 5pm on 14 January 2021.

Ms Platford, a partner acting for the Anchorage appellants, gave evidence below to the effect that the Anchorage appellants expected that the defendants would put forward a settlement offer in the week commencing 11 January 2021 and, that if such an offer was received from all the defendants, the offer would deal with any issues concerning the proportionate liability defences which the defendants had pleaded.

The primary judge concluded that, even if it was a genuine offer of compromise (which his Honour found unnecessary to determine), it was reasonable for the Anchorage appellants to reject it. His Honour noted that the offer was made at a time when the mediation (which had involved formal sessions on 14, 17 and 18 December 2020 and continued informally thereafter) had been adjourned and that it was not made as part of a mediation session. [368] But his Honour then explained [369] why it was reasonable for the Anchorage appellants to await the outcome of the mediation before deciding whether to accept the 23 December 2020 offer in the following terms:

As a consequence, the primary judge determined it inappropriate to order the Anchorage appellants to pay the Signatories’ costs on the ordinary basis until 14 January 2021 and on an indemnity basis thereafter. Rather, his Honour made the global costs order now impugned by the Anchorage appellants, namely that they pay the costs of the defendants on the ordinary basis until 5 March 2021 and on an indemnity basis thereafter, on the basis that the Anchorage appellants unreasonably rejected the offer of compromise made by all the defendants – including the Signatories – on 3 March 2021.

We will address the moving parties’ primary submissions in the next section of these reasons for judgment.

There is a threshold question as to whether the Anchorage appellants require leave to appeal from the indemnity costs order pursuant to s 101(2)(c) of the Supreme Court Act 1970 (NSW). To the extent that leave is required, neither Bakewell nor Sparkes opposed the grant of leave but each urged the Court to reject the appeal. Having regard to the decision in Housman v Camuglia, [370] leave is not required in respect of those two respondents because the Anchorage appellants have substantive grounds of appeal as of right and, even if all those grounds fail, it may challenge the indemnity costs order as of right. In the case of both those parties, the Anchorage appellants’ appeal, which raises bona fide substantive grounds as well as challenging the indemnity costs order, is not an appeal as to “costs only” within the meaning of s 101(2)(c) of the Supreme Court Act.

The position is different, however, with respect to the 3rd, 4th and 5th respondents (i.e. the Signatories). In their case, the Anchorage appellants’ appeal is from a judgment as to costs only, thus leave to appeal is required.

There was no dispute as to the relevant principles. Leave to appeal will generally only be granted where there is an issue of principle or general importance, or an injustice can be demonstrated with reasonable clarity. [371] Where leave to appeal is required in respect of an order made in the exercise of judicial discretion (as is the case here), the applicant for leave must identify an arguable error of the kind described in House v The King. [372]

This is a case where leave to appeal should be granted to the Anchorage appellants in respect of the Signatories. We are satisfied that there is at least an arguable error of principle with regard to the significance of the fact that the Anchorage appellants did not seek an extension before the 3 March 2021 offer lapsed.

For the following reasons, however, the Anchorage appellants’ appeal against all respondents should be dismissed.

First, we strongly doubt the Anchorage appellants’ claim that their failure to complain that they had insufficient time to consider the offers was a “central plank” in the primary judge’s reasoning. That matter was undoubtedly taken into account, [373] but it is plain [374] that it was one of several matters which were taken into account in exercising the primary judge’s discretion to award indemnity costs.

Secondly, we reject the Anchorage appellants’ claim that the primary judge effectively reversed the onus of proof borne by the respondents to establish that refusal of the offer was unreasonable. The primary judge was entitled to take into account, as a matter of relevant fact, that the Anchorage appellants did not seek an extension of time before the offer expired. It is erroneous for the Anchorage appellants to describe that as the taking into account of an irrelevant consideration. The fact that no extension of time was sought formed part of the relevant factual context within which the issue of costs fell to be determined in this particular case. We do not consider that any general rule should be inferred from the fact that the primary judge took this matter into account. Each case necessarily turns on its own facts, a matter which the primary judge plainly appreciated as is evident from his Honour’s observations. [375] We see little, if any, value in descending into a comparative analysis of the detailed facts of other cases, as urged by the Anchorage appellants. To do so would be to descend into the wilderness of single instances, rather than focus on matters of principle.

The Anchorage appellants complain that the primary judge failed to act upon unchallenged evidence given by Ms Platford, that their “solicitor and Counsel team were fully occupied on the trial” when the 3 March 2021 offer was received. It was a matter for the primary judge to determine what weight he would give to that evidence, even if it was unchallenged. It is evident from his Honour’s observations [376] that he considered that the Anchorage appellants (and their legal advisers) had adequate time to assess the strengths and weaknesses of their case. It may be inferred that his Honour also took into account the size and strength of the Anchorage appellants’ legal team, which comprised two partners from a major Australian law firm (together with several senior associates and employed solicitors) as well as two senior counsel and four junior counsel.

Finally, and for completeness, we reject the Anchorage appellants’ contention that the 3 March 2021 offer should be viewed as a “tactical weapon” by the defendants which had the sole purpose of obtaining a costs protection. We consider that the offer was a genuine offer of compromise for the reasons given by the primary judge. [377]

The Anchorage appellants have not established any House v The King error in the primary judge’s reasoning. Rather, we consider that their appeal constitutes an impermissible invitation to the Court to re-exercise the costs discretion in the absence of demonstrating any such error.

For these reasons, although the Anchorage appellants should have leave to appeal against the costs order as applying to the Signatories, their appeal against all respondents should be dismissed, with costs.

As noted above, the Signatories seek leave to bring a cross-appeal against the Anchorage appellants in respect of the primary judge’s failure to make an indemnity costs order in favour of the Signatories from 15 January 2021. The Signatories’ 23 December 2020 offer was open for acceptance until 14 January 2021.

The Signatories claim that the primary judge committed a House v The King error in finding that it was not unreasonable for the Anchorage appellants to reject the Signatories’ offer because it was reasonable for them to “wait and see what the outcome of the [adjourned] mediation was before deciding whether to accept an offer in those terms” (at [30] of the Costs Judgment). They claim that this was an error because:

For the following reasons, we find that the Signatories have failed to demonstrate any arguable House v The King error so as to warrant a grant of leave.

Neither of their claims is sufficiently tenable so as to warrant a grant of leave. As to the first matter, we reject the Signatories’ contention that it is irrelevant to take into account the possibility that a better offer may be made at some point in the future, when viewed in the context of this particular matter. As already noted, the mediation was adjourned after three days of formal sessions in December 2020. The evidence demonstrates that the Anchorage appellants were not hoping for a “better offer” in the future as claimed by the Signatories, but rather were expecting a joint offer to be made on behalf of all defendants in the proceedings following the resumption of the mediation sometime in 2021. Such a joint offer could appropriately deal with the proportionate liability defences raised in the proceeding and would facilitate the settlement of the entire proceeding.

We accept the Anchorage appellants’ submission that their response to the 23 December 2020 offer is consistent with public policy objectives to encourage litigants to terminate their litigation and avoid wasteful and unreasonable resources. This was because the appellants were engaged in ongoing mediation and there was a sensible desire to seek to achieve a global settlement.

As to the second matter, there is no arguable substance in the claim that the primary judge’s reasoning was contrary to the evidence. The primary judge’s finding at [30] of the Costs Judgment was not inconsistent with Ms Platford’s evidence that, despite the adjournment of the mediation in December 2020, there was still a possibility that the Anchorage appellants would receive a settlement offer from all defendants. Ms Platford had an expectation, presumably based upon the exchange of correspondence relating to the 23 December 2020 offer which is summarised above, that all the defendants in the Anchorage proceedings could put forward a global settlement offer in the week commencing 11 January 2021. If such an order was received, it would deal with issues concerning proportionate liability defences.

In the light of our findings on these matters which relate to the question whether it was unreasonable for the Anchorage appellants to reject the offer, it is unnecessary to address the separate issue raised by the Signatories in their summary of argument and draft notice of cross-appeal, namely whether the 23 December 2020 offer was a genuine offer of compromise. As noted, the primary judge found it unnecessary to determine this matter, a position which we also adopt.

For these reasons, the cross-summons seeking leave to cross-appeal should be dismissed, with costs.

For the foregoing reasons, we conclude that:

The above conclusions dictate that, even if the MAE Representation was misleading, the appeal must fail, and at multiple levels. In those circumstances, it is also unnecessary to consider the grounds of appeal concerning quantification of loss and damage (Anchorage grounds 40-46; BBVA grounds 41-48), which do not arise. The Anchorage appellants do not require leave to appeal from the indemnity costs order in relation to either Sparkes or Bakewell. Leave to appeal from the indemnity costs order should be granted in respect of the Signatories, but the Anchorage appellants’ appeal against all respondents should be dismissed. The Signatories should not be granted leave to appeal against the primary judge’s decision not to make an indemnity costs order in their favour from 15 January 2021, with the consequence that the Signatories’ cross-summons seeking leave to cross-appeal should be dismissed, with costs.

The appeals should be dismissed, with costs.

For the above reasons, the following orders should be made: