Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88

By Aimee Mundt – [SOURCE]

Key Takeaways

• 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. How far into the future a court should look is to be answered having regard to the particular facts of the case (such as the nature of the company’s business and future liabilities), however usually, a court will not look far into the future because there are so many unknowns and contingencies. 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.
• Borrowers generally do not owe lenders a duty of care in making impugned representations and therefore, generally will not be liable for negligence for such representations.
• There is no doctrine of accessorial liability in negligence. 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, with the director having been 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. 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.
• For a person to be accessorily liable for misleading or deceptive conduct by a company, it is necessary to show that the person had actual knowledge of the falsity of the relevant representation, that is, knowledge of the essential facts constituting the contravention.
• To determine if an officer or employee personally engages in misleading or deceptive conduct by authorising representations made by a company, the court must consider whether the representee would reasonably regard the representation as being made by the director or employee personally and the corporation. 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 that capacity, however, 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 to the company.
• Where contravening conduct involves misrepresentations, the ultimate inquiry is causation, not reliance. The fundamental question is whether the misleading character of the representations caused the loss.

Facts

Arrium Limited (Arrium) was an Australian listed public company that operated various businesses, including its Mining Consumables (MolyCop) business.

Arrium’s financing arrangements included several facilities and bilateral agreements with several lenders. Over FY15, falling iron ore prices had an adverse impact on Arrium’s business. As a result, the Arrium Board approved the undertaking of a strategic review to address the debt position, which included a sale process for the MolyCop business and a restructuring proposal involving Arrium’s lenders agreeing to amend and extend their facilities.

Between December 2015 and February 2016, Arrium issued numerous drawdown and rollover notices, pursuant to which the lenders advanced funds to Arrium or rolled over debts. Each notice contained representations that there had been no change in Arrium’s financial position constituting a “Material Adverse Effect” (as defined by the facility agreements) (the MAE Representation) and Arrium was still solvent (the Solvency Representation). Furthermore, under the facility agreements, representations to that effect were also deemed to be made at the time the drawdowns or rollovers were effected. Each drawdown notice was signed by two signatories from Arrium’s treasury department (variously, the Signatories).

On 3 February 2016, final bids were received for MolyCop. These were regarded as unacceptable by the Arrium Board. On 11 February 2016, the Board resolved to include a Going Concern Note in Arrium’s half-year accounts.

In April 2016, the lenders rejected the recapitalisation proposal and informed Arrium that they had lost confidence in its management. On 7 April 2016, the directors of Arrium resolved to place the company into voluntary administration and, on 20 June 2019, Arrium went into liquidation.

The Proceedings

Various proceedings were commenced following Arrium’s collapse, two of which were brought by two groups of banks – the Anchorage proceedings and the BoC proceedings. In those proceedings, claims were made, relevantly, against Arrium’s CFO at the relevant time (Bakewell) and Arrium’s Group Treasurer at that time (Sparkes) for loss and damage alleged because of reliance by the lenders on incorrect representations contained in the notices and repeated at the time of the relevant drawdowns. In addition, the Anchorage appellants also made claims in their proceeding against three other members of the Arrium treasury department, each of whom had signed at least one of the impugned notices.

In summary, the plaintiffs contended that, because of misrepresentations, they advanced funds to Arrium, which they would otherwise not have advanced, and as a result, Arrium was not placed in administration at an earlier date when there would have been a better return to creditors.

Primary judge’s findings

The primary judge dismissed the claims against Bakewell, Sparkes and the Signatories and held that, amongst other things:

• the MAE Representation was not false at any time earlier than 11 February 2016;
• the Solvency Representation was not false when made;
• Bakewell and Sparkes were not liable in negligence for procuring a breach of duty owed by Arrium to the lenders and were not liable for any misleading or deceptive conduct; and
• the respective plaintiffs had not established reliance on the representations made.

Key issues on appeal

The Anchorage appellants and BBVA (one of the three BoC Plaintiffs) appealed the decisions made against them regarding their claims against Bakewell and Sparkes.

As discussed below, various issues were before the Court of Appeal (CoA).

Whether there was a change in Arrium’s financial position which constituted a MAE, such that the MAE Representation was false

The various grounds of appeal relate to whether and when a change in Arrium’s financial position constituted a Material Adverse Event (MAE).

The representation and warranty as to “no material change” was required to be made by Arrium and was to the effect that there had been no change in Arrium’s “financial position” since the end of the accounting period for its most recent accounts, which constitutes a “Material Adverse Effect”.

The term “Material Adverse Effect” was defined as “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”.

As to this issue, the CoA held, amongst other things:

• Although 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 did not err in finding that the failure to achieve the desired price of MolyCop itself was not a material change in financial position for the purposes of the MAE Representation. The conclusion of a sale price less the value it was carried in the accounts might well have been a change in financial position since this would affect the net asset position. However, it was not until after final bids were received (on 3 February 2016) that the concerns as to the viability of the sale materialised.
• The primary judge did not err in finding that there was a change in financial position that constituted a MAE by reason of the Arrium Board considering the Going Concern Note on 11 February 2016; the 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. It makes no difference even if the factors or circumstances that gave rise to the inclusion of the Going Concern Note existed as of 31 December 2015 or even earlier because the directors had not formed the requisite state of awareness at that stage.
• 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 yet to occur.
• The primary judge did not err in finding that the MAE Representation was not shown to be false on each occasion it was given before 11 February 2016.

Whether Arrium was not solvent between the first drawdown notice issued to BBVA and the last drawdown advanced by BBVA, such that the Solvency Representation was false

In substance, the Appellant argued that the primary judge’s rejection of the submission 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.

As to this issue, the CoA held:

• There is a distinction between proof of present insolvency and the prediction of the prospect of an inability to pay a future debt when it falls due. The test as to whether a company is insolvent 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. 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 usually, 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.
• 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. The correct question is whether, at the date of alleged insolvency, it can be said that the company is already unable to pay those debts when they fall due.
• It will usually be more difficult to infer insolvency based on 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. The time frame is influenced by the circumstances, including the nature of the company’s business and, if known, the future liabilities. The particular facts will influence the significance of future debts. Where the company is still trading, and the future cash flow is very uncertain, regard to future debts may make little difference. Whereas it may be determinative where its business is in run-off, and its future cash flow is known. 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.
• Therefore, the primary judge did not err in finding that Arrium was not shown to be insolvent, and as such, that the Solvency Representation was not shown to be false. Long-term debts could be of little significance in the assessment of solvency as of January and February 2016: Arrium’s debts in question would not mature for another 16 months; they were of the kind that were typically rolled-over or refinanced upon becoming due; Arrium was still trading and paying its debts when due; the market was cyclical and volatile, and it was anticipated that the prices for commodities would improve. None of the traditional indicia of insolvency was present for Arrium in January or February 2016.
• One of the purposes of s436A of the Corporations Act is to enable the directors to appoint administrators before a company becomes insolvent and, therefore, ensure that the company does not trade whilst insolvent. The Arrium Board resolving to appoint administrators on 7 April 2016 establishes no more than that the directors believed Arrium was likely to become insolvent at some future time.

Whether Arrium owed and subsequently breached a duty of care to the Anchorage appellants

As to this issue, the CoA held:

• The primary judge did not err in finding that the Arrium Entities did not owe the lenders a duty of care in making the impugned representations.
• There are cases in which a duty of care in tort may exist in parallel with a contractual obligation, however, the relationship of borrower and lender differs significantly from that between a professional and client. First, like the relationship between vendor and purchaser, the relationship is one in which the interests of the parties are inherently adverse. Secondly, 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 can take and stipulate measures for their own protection. Nor are such lenders reliant on a borrower: although no doubt for their additional protection they seek information and assurances from borrowers, they can stipulate for such contractual conditions as they consider necessary, and to make their 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 performance of the contract. The context of representations contractually deemed to be made prospectively does not sit comfortably with a duty of care in making those representations.
• The lenders had minimal vulnerability given their capacity to take measures for their own protection; their reliance on Arrium was minimal, given their position to make their informed and independent judgment as to their commercial interests; there was no proximity in a relational sense – the lenders had adverse interests, and 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.
• 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”.

Whether either Sparkes or Bakewell was liable as an accessory if Arrium did breach a duty of care owed to the Anchorage appellants

As to this issue, the CoA held:

• The primary judge did not err in finding that neither Bakewell nor Sparkes could be jointly liable with Arrium for any breach of duty by Arrium, nor as accessories for any such breach.
• 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, with the director having been so personally involved in directing or procuring the tort as to “make it his or her own” tort. 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.
• The case law shows 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: “Finally, a company director and the company itself may be regarded as joint tortfeasors where the director “is sufficiently bound up in [the company’s] acts” to make him personally liable.
• Where the director or officer is merely acting as a corporate organ in an 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. 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.
• Although there are cases in which liability of procurers or instigators has been recognised in the context of intentional torts (such as trespass, conversion), there are no cases in which it has been applied to the tort of negligence.
• 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 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. However, 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 render the director, officer or employee liable.

Where misrepresentations were made, whether Sparkes and Bakewell were knowingly concerned in the making of the representations by Arrium, thereby incurring accessorial liability for misleading or deceptive conduct

The appellants contended that Sparkes and Bakewell incurred accessorial liability for misleading or deceptive conduct on the basis that each was a “person involved” in contraventions by Arrium of the statutory prohibitions on engaging in misleading or deceptive conduct, by reason that they were “knowingly concerned” in the contraventions.

As to this issue, the CoA held:

• The primary judge was correct to find that if Sparkes or Bakewell were liable as accessories, they needed to be shown to have actual knowledge of the falsity of the relevant representation.
•  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.
• Where a contravention is of 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.
• 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.

Whether Sparkes and Bakewell personally engaged in misleading or deceptive conduct by authorising the impugned notices and therefore, the representations

Here the issue is whether Sparkes and Bakewell personally engaged in misleading or deceptive conduct by authorising the notices issued by Arrium. 

As to this issue, the CoA held:

• Although the status of an individual as an employee does not divest them of personal liability for contraventions committed as an employee, it is not sufficient for one to be liable for a corporation’s contravention merely because they are an officer or employee.
• In cases of misrepresentation, the question is whether the representee would reasonably regard the representation as being made by the director or employee as well as the corporation.
• 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 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 to the company.
• The primary judge did not err in finding that neither Bakewell nor Sparkes personally engaged in misleading or deceptive conduct, even if the representations were false.
• The representations were made by the “Authorised Officer” of Arrium as an agent, rather than in any personal capacity; the readers of the notices would not have understood Sparkes or Bakewell as making any representations personally beyond their purely ministerial positions within Arrium. Neither did anything beyond acting within the ordinary scope of their duties as officers or employees, such that their relevant acts were purely ministerial.

Where misrepresentations were made, whether Anchorage and/or BBVA had relied on the misrepresentations such that it caused the claimed loss

This issue questioned 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.

As to this issue, the CoA held:

• The primary judge did not err in finding that causation occasioning loss was not made out.
• Where contravening conduct involves misrepresentations, the ultimate inquiry is one of causation, not reliance. The fundamental question is whether the (assumed) misleading character of the representations caused the loss. The lenders had to have relied on the truthfulness of the representation itself, not the mere fact that the impugned notice was issued.
• Another way of putting it is to ask whether the fact that the representations were false and not true caused the lenders to advance funds that 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 the representation is true, then the recipient is not misled, and reliance (and causation) is not established.
• The appellants needed to establish reliance on the truth of the misrepresentations. That is, the lenders were misled, not merely that they relied on the notices having been given or the representations having been made.
• The lenders failed to adduce evidence that any lender adverted to the content of the relevant representations to rely on their truthfulness. Instead, there was substantial evidence that the lenders:
  • did not read (and therefore could not have relied upon) the representations in the notices; and
  • were carefully monitoring and making their own assessment of Arrium’s financial circumstances, rather than relying on what was represented by Arrium.