Anchorage Capital Master Offshore Ltd v Sparkes

[2023] NSWCA 88

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

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

Hearing dates:

1 – 5 August 2022

Date of orders:

9 May 2023

Decision date:

09 May 2023

Before:

Ward P, Brereton JA, Griffiths AJA

Decision:

1.   Leave to appeal from the decision of the primary judge in respect of the costs orders made with respect to the Signatories is granted to the Anchorage appellants, but the appeal is dismissed with costs.

2.   Leave sought by the Signatories to appeal from the decision by the primary judge not to make an indemnity costs order in their favour is refused and their cross-summons is dismissed with costs.

3.   To the extent not dealt with by orders (1) and (2), each of the appeals is dismissed with costs.

Catchwords:

CONSUMER LAW – Misleading or deceptive conduct – Passing on misrepresentations –Where representations made in drawdown and rollover notices – Whether the representations were false at the time of the notices – Whether employees are personally liable for authorising the notices containing the misrepresentations

CONTRACTS – Construction – Interpretation – “change in financial position” – Whether decrease in bid value of asset was a material change in financial position –Whether inception of Going Concern Note a change in financial position – Whether “financial position” can be interpreted as limited to accounting standards

CORPORATIONS – Insolvency – Whether company insolvent – Application of test under Corporations Act 2001 (Cth) – Whether practice of company regarding debt arrangements relevant – Whether cyclical nature of business relevant – Where negotiations occurred between borrowing company and (perhaps acersecomic) lenders regarding a “haircut” to debts owed

CORPORATIONS – Voluntary administration – Power to appoint administrators under Corporations Act 2001 (Cth) s 436A before company becomes insolvent – Resolution to appoint administrators – Whether company insolvent at that time

COSTS – Party/Party – Bases of quantification – Indemnity basis – Relevant considerations in relation to an indemnity costs order

NEGLIGENCE – Causation – Misrepresentation – Whether reliance on misrepresentation causing loss

NEGLIGENCE – Duty of care – Novel categories – Whether a company as borrower owed a duty of care to its lenders

NEGLIGENCE – Liability of accessories in tort – Liability of employee where making representations on behalf of employer – Where employee not acting in a personal capacity

NEGLIGENCE – Misleading or deceptive conduct – Joint tortfeasor – Where standard of knowledge is “knowingly concerned”

Legislation Cited:

Australian Securities and Investments Commission Act 2001 (Cth), ss 5, 12DA, 12GF

Building and Construction Industry Security of Payment Act 2002 (Vic)

Civil Liability Act 2002 (NSW), s 5D

Competition and Consumer Act 2010 (Cth), Schedule 2, ss 2, 236

Corporations Act 2001 (Cth), ss 79, 95A, 436A, 1041H, 1041I

Evidence Act 1995 (NSW) ss 69, 140

Fair Trading Act 1987 (NSW), s 42

Insolvency Act 1986 (UK) s 123

Supreme Court Act 1970 (NSW), ss 79, 101

Trade Practices Act 1974 (Cth)

Cases Cited:

A I McLean Pty Ltd v Hayson [2008] NSWSC 927

A v State of New South Wales (2007) 230 CLR 500; [2007] HCA 10

Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 46 ACSR 504

Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2) [2021] NSWSC 1025

Anchorage Capital Master Offshore Ltd v Sparkes (No 4); Bank of Communications Co Ltd v Sparkes (No 3) [2021] NSWSC 1695

Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (No 2) (1999) 95 FCR 302; [1999] FCA 1161

Australian Competition and Consumer Commission v IMB Group Ltd [2003] FCAFC 17

Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd [2011] FCA 522

Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342

Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120

Australian Securities and Investments Commission v Rent 2 Own Cars Australia Pty Ltd [2020] FCA 1312; (2020) 147 ACSR 598

Bank of Australasia v Hall (1907) 4 CLR 1514; [1907] HCA 78

Belconnen Lakeview Pty Ltd v Lloyd [2021] FCAFC 187; (2021) 156 ACSR 273

Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239

British Thomson-Houston Company Ltd v Sterling Accessories Ltd [1924] 2 Ch 33

Brookfield Multiplex Ltd v Owners Strata Plan No 61288 (2014) 254 CLR 185; [2014] HCA 36

Butt v Tingey [1993] FCA 530; (1993) ATPR (Digest) 46-110

Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232

C Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317

Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25

Cassidy v NRMA Health Pty Ltd [2002] FCA 1228; (2002) ATPR 41-891

Cassidy v Saatchi & Saatchi Australia Pty Ltd (2004) 134 FCR 585; [2004] FCAFC 34

CBS Songs Ltd v Amstrad Consumer Electronics plc [1988] AC 1013

CH Real Estate Pty Ltd v Jainran Pty Ltd; Boyana Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37; (2010) 14 BPR 27,361

Crocodile Marketing Ltd v Griffith Vintners Pty Ltd (1989) 28 NSWLR 539

David Browne Contractors Ltd v Petterson (as Liquidator of Polyethylene Pipe Systems Ltd (In Liq)) [2018] 1 NZLR 112; [2017] NZSC 116

Digi-tech (Aust) Pty Ltd v Brand [2004] NSWCA 58; (2004) ATPR (Digest) 46-248

Dimension Data Australia Pty Ltd v Kepper [1999] FCA 1446

Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Fernandez v Glev Pty Ltd [2000] FCA 1859

Finishing Services Pty Ltd v Lactos Fresh Pty Ltd [2006] FCAFC 177; [2007] ANZ ConvR 93

Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522; [2003] FCAFC 313

Gardam v George Wills & Co Ltd [1988] FCA 289; (1988) 82 ALR 415

Generics (UK) Ltd v H Lundbeck A/S [2006] EWCA Civ 1261

Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547; [1971] HCA 2

Heydon v NRMA Ltd (2000) 51 NSWLR 1; [2000] NSWCA 347

Houghton v Arms (2006) 225 CLR 553; [2005] HCA 59

House v The King (1936) 55 CLR 499; [1936] HCA 40

Housman v Camuglia [2021] NSWCA 106

Idoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 599

Innes v Short & Beal (1898) 15 RPC 449

Insurance Commissioner v Associated Dominions Assurance Society Pty Ltd (1953) 89 CLR 78; [1953] HCA 94

JR Consulting & Drafting Pty Ltd v Cummings [2016] FCAFC 20; (2016) 329 ALR 625

Keller v LED Technologies Pty Ltd (2010) 185 FCR 449; [2010] FCAFC 55

Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd [2006] FCAFC 117; (2006) 234 ALR 241

Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 219 ALR 555

Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385

Martin v Watson [1996] AC 74

McDonald v Deputy Federal Commissioner of Land Taxation (1915) 20 CLR 231; [1915] HCA 54

Medical Benefits Fund of Australia v Cassidy (2003) 135 FCR 1; [2003] FCAFC 289

Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195

Myer Stores Ltd v Soo [1991] 2 VR 597

Neal v Ambulance Service (NSW) [2008] NSWCA 346

Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1994) ATPR 41-315

Performing Right Society Limited v Ciryl Theatrical Syndicate Limited [1924] 1 KB 1

Petrie v Lamont (1842) Car & M 93; 174 ER 424

Pittmore Pty Ltd v Chan (2020) 164 NSWLR 62; [2020] NSWCA 344

Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1; [2004] FCAFC 175

Rainham Chemical Works Ltd (In Liq) v Belvedere Fish Guano Co Ltd [1921] 2 AC 465

Re Cheyne Finance plc [2007] EWHC 2402 (Ch); [2008] 2 All ER 987

Re Cube Footwear Pty Ltd [2013] 2 Qd R 501; [2012] QSC 398

Re Octaviar Ltd; Public Trustee (Qld) v Octaviar (No 8) [2009] QSC 202; (2009) 73 ACSR 139

Richardson & Wrench (Holdings) Pty Ltd v Ligon No 174 Pty Ltd [1994] FCA 488; (1994) 123 ALR 681

Richtoll Pty Ltd v WW Lawyers Pty Ltd (in liq) [2016] NSWCA 308

Rinbridge Marketing Pty Ltd v Walsh [2000] FCA 1738

Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84

Ross v Lane Cove Council [2017] NSWCA 299

Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53; [2003] HCA 75

Sabaf v Meneghetti [2002] EWCA Civ 976; [2003] RPC 264

Schumann v Abbott [1961] SASR 149

Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621

Su (t/as Ausviet Travel) v Direct Flights International Pty Ltd (No 2) [1999] FCA 78; [1999] ATPR 41-677

The Koursk [1924] P 140

Townsend v Haworth (1875) 48 LJ Ch 770

UGL Rail Pty Ltd v Wilkinson Murray Pty Ltd [2014] NSWSC 1959

Westbay Seafoods (Aust) Pty Ltd v Transpacific Standardbred Agency Pty Ltd [1996] FCA 630; (1996) ATPR (Digest) 46-162

Wheeler Grace and Pierucci Pty Ltd v Wright [1989] FCA 162; (1989) 16 IPR 189; (1989) ATPR 40-940

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028

XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448; [1985] HCA 12

Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65

Yuille v B & B Fisheries (Leigh) Ltd [1958] 2 Lloyds Rep 596

Texts Cited:

M Jones and A Dugdale, Clerk & Lindsell on Torts (23rd ed, 2020, Sweet & Maxwell)

Category:

Principal judgment

Parties:

2021/258153
Banco Bilbao Vizcaya Argentaria, SA (Appellant)
Delia Sparkes (First Respondent)
Robert Calvin Bakewell (Second Respondent)

2021/00262212
Anchorage Capital Master Offshore, Ltd (First Appellant)
ACMO Finance (Ireland) Designated Activity Company (Second Appellant)
Midtown Acquisitions LP (Third Appellant)
Deutsche Bank Aktiengesellschaft (Fourth Appellant)
Commonwealth Bank of Australia (Fifth Appellant)
Robert Bakewell (First Respondent)
Delia Sparkes (Second Respondent)

Representation:

Counsel:

AJ Bannon SC, C Colquhoun SC, M Ellicott, M Jaireth (Anchorage)
DL Williams SC, ML Rose, ND Riordan (Sparkes)
PW Collinson KC, PA Meagher (BBVA)
MR Pesman SC, EAJ Hyde, AE Munro, DP Farinha (Bakewell)
BF Katekar SC, EL Beechey (Verawati, Hall, Lieu)

Solicitors:

Gilbert + Tobin (Anchorage)
Norton Rose Fulbright Australia (Sparkes)
King & Wood Mallesons (BBVA)
Baker McKenzie (Bakewell)
Gadens (Verawati, Hall, Lieu)

File Number(s):

2021/262212; 2021/258153; 2022/17031

Publication restriction:

N/A

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2021] NSWSC 1025

Date of Decision:

17 August 2021

Before:

Ball J

File Number(s):

2019/00316305; 2018/00104383

HEADNOTE

[This headnote is not to be read as part of the judgment]

Arrium Limited (Arrium) was an Australian listed public company which, through a number of subsidiaries within the Arrium Group, operated across several countries, including Australia. Arrium’s businesses included its Mining Consumables (MolyCop) business (which was described as the jewel in Arrium’s crown).

Arrium’s financing arrangements included several unsecured facility agreements and bilateral agreements with a number of lenders, as well as transactional banking arrangements with ANZ. As at mid 2015, some $1.125 billion of debt (the July 2017 Maturities) was due to mature between July and December 2017. For accounting purposes, the July 2017 Maturities were about to become a current liability in the upcoming FY16 accounts.

Over FY15, falling iron ore prices had an adverse impact on Arrium’s business. The Arrium Board approved the undertaking of a strategic review to address the Group’s debt position, which review encompassed a number of different aspects to be progressed in parallel, including: a sale process for the MolyCop business; a review of the remaining Arrium businesses as to their viability after any such sale; and a recapitalisation or restructuring proposal which would involve Arrium’s lenders agreeing to amend and extend their facilities. It ultimately transpired that any recapitalisation proposal would require lenders to agree to a significant write-off of the existing debts owed by Arrium.

Between December 2015 and February 2016, under the facility agreements, Arrium issued numerous drawdown and rollover notices pursuant to which the lenders advanced funds to Arrium or rolled over debts in relation to funds that had already been advanced. Each such notice contained, as required under the facility agreements, representations (relevantly) to the effect 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 a representation that 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 (in accordance with a recommendation from its auditors, KPMG, and after debate since mid-January as to the need for and content of such a disclosure) resolved to include a Going Concern Note in Arrium’s half-year accounts, KPMG having noted several risks regarding Arrium’s finances which gave rise in its opinion to a material uncertainty as to whether Arrium would continue as a going concern.

In April 2016, the lenders rejected the recapitalisation proposal that had been put to them 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.

Various proceedings were commenced following Arrium’s collapse, which were all listed to be heard together. One of those sets of proceedings (an insolvent trading claim by the liquidators against Arrium’s directors) was resolved during the course of the hearing. The other two sets of proceedings were brought by two groups of banks (being lenders to the Arrium group or assignees of claims by certain of the lenders) – the Anchorage proceedings and the BoC proceedings. In those proceedings, claims were made, relevantly, against Arrium’s CFO at the relevant time (Mr Robert Bakewell) and Arrium’s Group Treasurer at that time (Ms Delia Sparkes) for loss and damage alleged to have been suffered as a result of reliance by the lenders on incorrect representations contained in the impugned notices and repeated at the time of the relevant drawdowns. 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 (the Signatories).

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

At first instance, the primary judge dismissed the claims against Bakewell and Sparkes, as well as those against the Signatories. Amongst other findings, the primary judge held that the MAE Representation was not false at any time earlier than 11 February 2016 and that the Solvency Representation was not false when made. The primary judge held that Mr Bakewell and Ms Sparkes were not liable in negligence for procuring a breach of duty owed by Arrium to the lenders; and were not liable for, or as accessories in relation to, any misleading or deceptive conduct. Further, the primary judge held that the respective plaintiffs had not established reliance on the representations made in the impugned notices. In a separate judgment as to costs, the primary judge made costs orders (on the ordinary basis in favour of the Signatories and on the indemnity basis for part of the costs in favour of the respondents in the Anchorage proceeding).

The Anchorage appellants and BBVA (one of the three BoC Plaintiffs) appealed from the decisions made against them in respect of their claims against Mr Bakewell and Ms Sparkes. The Anchorage appellants also sought to challenge certain of the costs orders, as did the Signatories.

The key issues before the Court of Appeal were as follows:

(i)    whether there was a change in Arrium’s financial position which constituted a MAE, such that the MAE Representation was false;

1. 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;

2. whether Arrium owed and subsequently breached a duty of care to the Anchorage appellants;

3. whether either Ms Sparkes or Mr Bakewell was liable an accessory if Arrium did breach a duty of care owed to the Anchorage appellants;

4. whether Ms Sparkes personally owed a duty of care to one of the lenders (Morgan Stanley) when making representations as to Arrium’s position in a telephone conversation on 31 December 2015 which followed the issue of a drawdown notice to Morgan Stanley;

5. whether a direction given by Mr Bakewell (referred to as the “Bakewell Direction”) was first given on or by 21 or 22 December 2015, as the appellants contended, or not later than 17 December 2015, as the primary judge found: and whether it was an instruction that Mr Bakewell expected or intended would be complied with immediately (as opposed to being simply an idea worthy of serious consideration);

6. where misrepresentations were made, whether Ms Sparkes and Mr Bakewell were knowingly concerned in the making of the representations by Arrium;

7. whether Ms Sparkes and Mr Bakewell personally engaged in misleading or deceptive conduct by authorising the impugned notices, and therefore, the representations;

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

9. whether Morgan Stanley relied on the conversation with Ms Sparkes on 31 December 2015;

10. whether or to what extent the Anchorage appellants required leave to challenge the Costs Judgment;

11. whether the primary judge erred in requiring the Anchorage appellants to pay the defendants’ costs on an indemnity basis; and

12. whether leave should be granted to the Signatories to appeal from the decision of the primary judge not to order costs in their favour on an indemnity basis; and, if leave be granted, whether his Honour erred in not awarding indemnity costs order in their favour.

The Court held (dismissing the appeals):

As to Issue (i):

1. The primary judge did not err in rejecting the respondents’ contention that the expression “financial position” in the MAE Representation should be construed narrowly so as to be limited to changes in Arrium’s financial position as disclosed in its balance sheet: [162]; and once that construction is rejected, little may turn on whether the primary judge erred in preferring an intermediate construction of the expression as opposed to the broad construction for which the appellants had contended: [168].

2. To the extent necessary, the Court would, like the primary judge, have adopted the intermediate construction for the reason that the provision’s purpose was to protect a lender from a change that would have been disclosed to it if accounts at the date of the relevant drawdown notice and respective drawdown date, such that the term is concerned with the financial position as represented in the accounts: [169]. If unconfined to the Accounts, the term would be so vague and potentially extensive that its scope would be indeterminable; the parties would have been unlikely to have intended this: [169].

3. 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: [186]. The conclusion of a sale price less the value of which it was carried in the accounts, might well have been a change in financial position, as similarly might be a devaluation of the MolyCop asset, since this would affect the net asset position (changes in which his Honour accepted would fall within the concept of a change in financial circumstances as they would be reflected in the accounts). 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, and the value of the MolyCop business was not written down at any relevant time: [186].

1. 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 ([200]); 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: [200]-[203]. It makes no difference even if, as contended by both sets of appellants, 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, because the directors had not at that stage formed the requisite state of awareness: [201].

2. It follows from the finding by the primary judge that there was a change in financial position constituting a MAE from 11 February 2016 that, at the date of the last of the impugned drawdown in the BBVA case on 16 February 2016, and not in respect of the drawdown notice pursuant to which it was made, which was dated 10 February 2016: [207]. Thus, BBVA ground 23 is made good, however, the Court’s 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 immaterial: [208].

3. 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; even if there was a MAE, it cannot render the MAE Representation(s) false before the relevant change of financial position occurred (which was on 11 February 2016): [209]-[210].

4. The MAE Representation was not confined to monetary obligations under the facility agreements but included other obligations, including the ratio covenants. However, the mere fact that the ratio covenants had less “headroom” to operate does not establish a significantly increased risk of breaching the ratio. Therefore, the primary judge did not err in finding that the changes in the Gearing Ratio and ICR did not constitute a change in financial position that was a MAE at least before 11 February 2016: see [225].

As to Issue (ii):

8. As the primary judge recognised, there is a distinction between proof of the relevant fact (present insolvency) and the prediction of the prospect of an inability to pay a future debt when it falls due: [245]. Whether a company is insolvent concerns a company’s present inability to pay all debts, as and when they become due and payable; it is only insolvent when it is unable to pay its debts as and when they fall due: [244].

9. The primary judge did not err in finding that Arrium was not shown to be insolvent, and therefore that the Solvency Representation was not shown to be false: [263]. Long-term debts could be of little significance in the assessment of solvency as at January and February 2016: Arrium’s debts in question would not mature for another 16 months; they were also of the kind that were typically rolled-over or refinanced upon becoming due; Arrium was still trading and paying its debts when they fell due; the market they operated in was cyclical and volatile and it was anticipated that the prices for commodities, including iron ore, would improve: [248]. None of the traditional indicia of insolvency was present for Arrium in January or February 2016: [253]; [263].

Insurance Commissioner v Associated Dominions Assurance Society Proprietary Limited (1953) 89 CLR 78; [1953] HCA 94, distinguished.

10. One of the purposes of s 436A 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: [257]. The Arrium Board resolving to appoint administrators on 7 April 2016 establishes no more than that the directors were of the opinion that Arrium was likely to become insolvent at some future time: [257]. This conclusion is supported by the fact that on 1 April 2016, the lenders had lost confidence in the Board: [258].

As to Issue (iii):

11. 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: [272]. The lenders had minimal vulnerability given their capacity to take measures for their own protection, with 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 not proximity in a relational sense – the lenders to Arrium had adverse interests; and conformance and coherence in the structure and fabric of 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: [268]; [270].

As to Issue (iv):

12. In obiter. As to whether a person is liable as an accessory to a tort, the question is whether a person is liable as a joint tortfeasor, such that the cause of action against each joint tortfeasor is the same, such as where the tort has been committed by one on behalf or in concert with another: [276]-[290]. Therefore, the liability for each tortfeasor is principal, not accessorial, in nature: [290].

The Koursk [1924] P 140; Petrie v Lamont (1842) Car & M 93; 174 ER 424; Townsend v Haworth (1875) 48 LJ Ch 770n; Innes v Short & Beal (1898) 15 RPC 449; XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448; [1985] HCA 12; CBS Songs Ltd v Amstrad Consumer Electronics Plc [1988] AC 1013; Myers Stores Ltd v Soo [1991] 2 VR 597; Sabaf v Meneghetti [2002] EWCA Civ 976; Generics (UK) Ltd v H Lundbeck A/S [2006] EWCA Civ 1261, considered.

13. In obiter. The primary judge did not err in finding that neither Mr Bakewell nor Ms Sparkes could be jointly liable with Arrium for any breach of duty by Arrium, nor as accessories for any such breach: [300]. 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: [293]. 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: [293]-[299]. 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: [299].

JR Consulting & Drafting Pty Ltd v Cummings [2016] FCAFC 20; (2016) 329 ALR 625, considered.

Yuille v B & B Fisheries (Leigh) Ltd [1958] 2 Lloyds Rep 596; Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd [2011] FCA 522, distinguished.

As to Issue (v):

14. The primary judge erred in holding that Ms Sparkes owed a personal duty of care in respect of the 31 December conversation; rather, Ms Sparkes was acting only in her capacity as an officer of Arrium such that Morgan Stanley would have understood she was acting in said capacity; there was nothing she did to represent that she was acting in a personal capacity: [303]-[304].

As to Issue (vi):

15. In obiter. The primary judge did not err in finding that the Bakewell Direction was first raised by Bakewell before 18 December 2015, and in a manner which was not intended to nor understood to have mandatory or immediate effect, and no action was taken to implement it until it was restated on 8 February 2016 to Ms Pearce: [326]. On balance, the objective evidence favours the view that the initial conversation occurred before 18 December: [319]. The absence of reaction to the Bakewell Direction before February 2016, the absence of communication regarding this instruction and the repetition of the instruction in February 2016 all tell against any understanding that the Bakewell Direction was to be implemented immediately: [321]-[323]. Further, there was nothing to show that those who had authorised an impugned notice before 8 February 2016 were aware of the Bakewell Direction (especially given that Ms Sparkes was on leave) and therefore they were not acting upon it: [324]

As to Issue (vii):

16. The primary judge was correct to find that if Ms Sparkes or Mr Bakewell were liable as accessories, it was necessary that they be shown to have actual knowledge of the falsity of the relevant representation: [343]. As to whether an individual is liable as an accessory, the starting point is the language used in the statute: [330]. 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: [330]. Further, 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: [342].

Australian Competition and Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17; Australian Securities and Investments Commission v Rent 2 Own Cars Australia Pty Ltd [2020] FCA 1312; (2020) 147 ACSR 598; Butt v Tingey [1993] FCA 530; (1993) ATPR (Digest) 46-110, considered.

Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65, discussed.

17. The primary judge did not err in finding that it was not established that either Ms Sparkes or Mr Bakewell was wilfully blind to the falsity of the MAE Representation: [354]. Wilful blindness equivalent to actual knowledge may be found from a combination of suspicious circumstances and a failure to make inquiry, but constructive knowledge does not suffice: [346]. Although Ms Sparkes knew that there had been a negative change in Arrium’s financial position, there was no evidence that she knew this amounted to a MAE: [348]. Further, if Ms Sparkes was not negligent in making enquiries; she was not wilfully blind: [351]. Similarly, there was no evidence which suggested that Mr Bakewell had turned his mind to the accuracy of the MAE Representation(s): [352].

Australian Competition and Consumer Commission v IMB Group Ltd [2003] FCAFC 17; Butt v Tingey [1993] FCA 530; (1993) ATPR (Digest) 46-110, applied.

As to Issue (viii):

18. 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 that they are an officer or employee: [356]. 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, or in other words, to whom the conduct is in law attributable: [362].

Cassidy v Saatchi & Saatchi Australia Pty Ltd (2004) 134 FCR 585; [2004] FCAFC 34; Gardam v George Wills & Co Ltd [1988] FCA 289; (1988) 82 ALR 415, discussed.

Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120, distinguished.

19. The primary judge did not err in finding that neither Mr Bakewell nor Ms Sparkes personally engaged in misleading or deceptive conduct, even if the representations were false: [371]. The representations made through the use of “We” in the impugned notices were required by the underlying facility agreements, and 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 Ms Sparkes or Mr Bakewell as making any representations beyond their purely ministerial positions within the company: [370].

As to Issue (ix):

20. The primary judge did not err in finding that causation occasioning loss was not made out: [395]. Where contravening conduct involves misrepresentations, the ultimate inquiry is one of causation, not reliance, and 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 (assumed) misleading character of the representations caused loss: [381]. The lenders had to have relied on the truthfulness of the representation itself, not the mere fact that the impugned notice was issued: [394(1)].

21. The lenders failed to adduce evidence that anyone on behalf of any lender adverted to the content of the relevant representations so as to rely on their truthfulness, rather, there was substantial evidence that the lenders did not read the representations in the notices: [388]-[390]; [394(3)]. Rather, there was evidence adduced that the lenders were carefully monitoring and making their own assessment of Arrium’s financial circumstances, rather than relying on what was represented by Arrium: [391]; [394(4)].

As to Issue (x):

22. In obiter. The primary judge did not err in finding that, if Ms Sparkes did owe Morgan Stanley a personal duty of care, there was no reliance on her representations so as to occasion loss: [399]. Evidence suggested that Morgan Stanley probably made its own assessment of Arrium’s financial circumstances and the risks of honouring or not honouring the relevant drawdown notice, and did not rely on anything Ms Sparkes said: [398].

As to Issue (xi):

23. The Anchorage appellants did not require leave to appeal from the indemnity costs order against Ms Sparkes or Mr Bakewell, as they had substantive grounds of appeal as of right, and had the right to challenge the indemnity costs order; the appeal raised bona fide substantive grounds and challenged the indemnity costs order and is not an appeal as to “costs only” within the meaning of s 101(2)(c) of the Supreme Court Act 1970 (NSW): [416]. Conversely, the Anchorage appellants did require leave to appeal against the Signatories, as it was a costs only judgment: [417].

Housman v Camuglia [2021] NSWCA 106, followed.

24. As a general rule, leave to appeal will only be granted where there is an issue of principle or general importance, or an injustice can be demonstrated with reasonable clarity: [418]. Where leave to appeal is required in respect of an order made in the exercise of judicial discretion, the applicant for leave must identify an arguable error of the kind described in House v The King: [418].

Ross v Lane Cove Council [2017] NSWCA 299, considered.

House v The King (1936) 55 CLR 49; [1936] HCA 40, applied.

As to Issue (xii):

25. The primary judge, in exercising discretion to award indemnity costs, was entitled to consider, as a matter of the relevant fact, whether a party who has been provided a genuine offer of compromise sought an extension of time before the offer expired, as each case will turn on its own facts: [422].

26. The primary judge was entitled to determine what weight to give to unchallenged evidence regarding a party’s assertion that it had little time to consider the strengths and weaknesses of its case, and it may be inferred that the primary judge considered factors including the size and strength of a party’s legal team: [423].

As to Issue (xiii):

27. The Signatories failed to demonstrate any House v The King error to warrant a grant of leave: [429]. The objective evidence demonstrated that the Anchorage appellants were not hoping for a better offer to be made in the future, as opposed to whether a joint or global offer were to be made on behalf of multiple opposing parties; the latter is a relevant consideration for a judge to take into account when making an order as to costs: [430].

INDEX

JUDGMENT	[1]
I BACKGROUND	[4]
Arrium’s financing arrangements	[5]
Strategic review	[11]
The 18 August 2015 Arrium Board meeting	[16]
The 21 September 2015 Arrium Board meeting	[20]
Events in October and November 2015	[24]
The 2 December 2015 Arrium Board meeting	[30]
Some developments post the 2 December 2015 meeting	[33]
The initial “Bakewell Direction”	[41]
The 18 December 2015 Arrium Board meeting	[45]
Developments in mid to late December 2015	[48]
The 31 December 2015 telephone conversation	[56]
The 7 January 2016 Arrium Board meeting	[62]
The drawdown notices	[64]
The 15 January 2016 Arrium Board meeting	[69]
The 20 January 2016 Arrium Board meeting	[72]
The 21 January 2016 Arrium Board meeting	[74]
Evolution of a Going Concern Note	[76]
The 4 February 2016 Arrium Board meeting	[89]
The Bakewell Direction restated	[93]
Further drawdown notices	[97]
The 11 February 2016 Arrium Board meeting	[99]
Arrium opens account with Bank of Queensland	[103]
The 16 and 17 February 2016 Arrium Board meetings and the half-year accounts	[107]
The facilities are fully drawn down	[116]
The 20 February 2016 Arrium Board meeting and recapitalisation with GSO	[117]
The GSO recapitalisation deed	[119]
Some events in late February – March 2016	[122]
Financiers withdraw support and Arrium enters voluntary administration	[138]
Commencement of proceedings	[143]
II - ISSUES	[144]
III - The MAE REPRESENTATION (Anchorage grounds 1 - 7; BBVA grounds 23 - 33; Bakewell-BBVA Contention 1; Bakewell-Anchorage Contention 1 - 4; Sparkes-BBVA Contention 1; Sparkes-Anchorage Contention 1)	[153]
Proper construction of “financial position”	[159]
Was there a relevant change in Arrium’s financial position?	[171]
The “failure” of the MolyCop sale process	[177]
The Going Concern Note	[188]
Did the relevant change in financial position constitute a MAE?	[204]
Did the primary judge err in confining the MAE analysis to risk of inability to repay the facilities?	[211]
IV -THE SOLVENCY REPRESENTATION (BBVA grounds 1 - 22)	[226]
The significance of long-term debts (BBVA grounds 1 – 3)	[230]
Was insolvency established? (BBVA grounds 4 – 22)	[249]
Conclusion	[263]
V - NEGLIGENCE (Anchorage grounds 21 – 32; Sparkes-Anchorage contention 2)	[264]
Did Arrium owe and breach a duty of care? (Anchorage grounds 21-25)	[265]
Are Sparkes and Bakewell liable as accessories? (Anchorage grounds 26 – 29)	[273]
Did Sparkes breach a personal duty of care in the 31 December conversation? (Anchorage grounds 30 – 32; Sparkes-Anchorage contention 2)	[301]
VI – MISLEADING OR DECEPTIVE CONDUCT (Anchorage grounds 8 – 20; BBVA grounds 34 – 35)	[305]
The Bakewell Direction (Anchorage grounds 8-13)	[306]
Whether Sparkes and Bakewell were knowingly concerned in the making of such representations by Arrium (Anchorage grounds 14 – 20)	[327]
Actual knowledge of falsity required	[329]
No evidentiary basis for factual finding of wilful blindness	[344]
Whether Sparkes and Bakewell personally engaged in misleading or deceptive conduct by making the representations (BBVA grounds 34 – 35)	[355]
VII – CAUSATION AND RELIANCE (Anchorage grounds 33 – 39; BBVA grounds 36 – 40)	[372]
Reliance on the representations in the notices (Anchorage grounds 33 – 37; BBVA grounds 36 – 40)	[375]
Reliance on the 31 December conversation (Anchorage grounds 38 – 39)	[396]
VIII – COSTS	[400]
The Costs Judgment relevantly summarised	[403]
Determination of the Anchorage appellants’ matters	[416]
Determination of Signatories’ leave to bring cross-appeal	[427]
IX - CONCLUSION	[435]
Orders	[438]

Judgment

1. 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”).

2. 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.

3. This judgment is arranged as follows:

1. Part I – Background;

2. Part II – Issues;

3. Part III – The MAE Representation;

4. Part IV – The Solvency Representation;

5. Part V – Negligence;

6. Part VI – Misleading or Deceptive Conduct;

7. Part VII – Causation and Reliance;

8. Part VIII – Costs;

9. Part IX – Conclusion.

I BACKGROUND

4. 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.

Arrium’s financing arrangements

5. 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]

   1. Primary Judgment at [25].

   2. Primary Judgment at [25].

6. 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]

   3. Primary Judgment at [4], [15].

   4. Primary Judgment at [37].

7. 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]

   5. Primary Judgment at [36].

8. 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]

   6. Primary Judgment at [38].

9. 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]

   7. Primary Judgment at [62], [248].

10. 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]

    8. See the report of the respondents’ expert, Mr Quentin Olde (“Olde MAE Report”) at [136].

    9. Olde MAE Report at [131].

Strategic review

11. 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]

    10. Primary Judgment at [62]-[63].

    11. Primary Judgment at [62], [64].

    12. Primary Judgment at [63], [108].

    13. See Mr Roberts’ evidence in cross-examination at T 1368.14-19.

12. 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.

13. 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]

    14. Primary Judgment at [67].

    15. Primary Judgment at [67].

    16. Primary Judgment at [69].

14. 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.

    17. Primary Judgment at [71].

15. 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]

    18. Primary Judgment at [72]ff.

    19. Primary Judgment at [73].

The 18 August 2015 Arrium Board meeting

16. 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.

    20. Primary Judgment at [74].

17. 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.

18. 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”.

19. 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.

The 21 September 2015 Arrium Board meeting

20. 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.

21. 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.

22. 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.

23. 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).

Events in October and November 2015

24. 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]

    21. Primary Judgment at [77].

    22. See Sparkes’ affidavit affirmed 24 September 2020 at [105].

25. 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.

26. 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.

    23. Primary Judgment at [80].

    24. See below at [36].

27. 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]

    25. Primary Judgment at [81].

28. 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.

    26. Primary Judgment at [85].

29. 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]

    27. Primary Judgment at [98].

    28. See Sparkes’ affidavit affirmed 24 September 2020 at [140].

    29. Primary Judgment at [99].

The 2 December 2015 Arrium Board meeting

30. 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.

31. 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 2^nd 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).

    30. Primary Judgment at [94]-[95].

    31. Primary Judgment at [94].

32. 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]

    32. Primary Judgment at [96].

Some developments post the 2 December 2015 meeting

33. 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]

    33. Primary Judgment at [97].

    34. See Sparkes’ affidavit affirmed 24 September 2020 at [15].

    35. See the Primary Judgment at [141] which sets out an extract from her public examination.

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

35. 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]

    36. Primary Judgment at [99].

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.

37. 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.

33. “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.

34. 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”.

    37. Primary Judgment at [104].

    38. Primary Judgment at [106].

35. 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.

The initial “Bakewell Direction”

41. 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.

    39. Primary Judgment at [127], [465].

42. 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]

    40. Primary Judgment at [127].

    41. Primary Judgment at [128].

43. 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]

    42. Primary Judgment at [129].

    43. Primary Judgment at [141].

44. 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.

The 18 December 2015 Arrium Board meeting

45. 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]

    44. Primary Judgment at [107] and see Mr Roberts’ memorandum for the Board meeting on 18 December 2015.

    45. Primary Judgment at [125].

46. 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”.

47. 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).

Developments in mid to late December 2015

48. 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).

49. 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.

50. 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.

51. 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.

52. 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]

    46. See the primary judge’s analysis of the Arrium forecasts at [130]-[140] of the Primary Judgment.

53. 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]

    47. Primary Judgment at [130]-[137].

    48. Primary Judgment at [138], [140].

54. 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”.

55. 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.

The 31 December 2015 telephone conversation

56. 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).

    49. Primary Judgment at [146].

    50. Primary Judgment at [146].

57. 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”.

    51. Primary Judgment at [147]-[148].

    52. Primary Judgment at [147].

    53. Primary Judgment at [148].

    54. As outlined in the Primary Judgment at [416].

58. 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]

    55. Primary Judgment at [151].

    56. Primary Judgment at [150].

59. 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.

    57. Primary Judgment at [152].

60. 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]

    58. Primary Judgment at [153].

61. 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”.

The 7 January 2016 Arrium Board meeting

62. 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.

    59. Primary Judgment at [154].

    60. Primary Judgment at [156]-[157], [466].

63. 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.

The drawdown notices

64. 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]

    61. See Primary Judgment Annexures 1 and 2 at [9] and [18].

65. 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.

    62. Primary Judgment at [244]-[245], [299].

    63. Primary Judgment at [267]-[268].

66. 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).

67. 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”.

68. 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 15 January 2016 Arrium Board meeting

69. 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]

    64. Primary Judgment at [158].

    65. Primary Judgment at [159].

70. 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.

    66. Primary Judgment at [160].

71. 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.

358. Primary Judgment at [431].

397. 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.

398. 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.

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

VIII – COSTS

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

1. an appeal (or alternatively an application for leave to appeal) by the Anchorage appellants in relation to the order that they pay the defendants’ costs on an indemnity basis on and from 6 March 2021; and

2. an application for leave to cross-appeal by the Signatories in relation to the primary judge’s refusal to award them costs on an indemnity basis from 15 January 2021.

401. For the reasons that follow:

1. The Anchorage appellants do not require leave to appeal in respect of Bakewell and Sparkes. Leave to appeal should be granted in respect of the Signatories. However, the appeal by the Anchorage appellants against all the respondents should be dismissed, with costs.

2. Leave for the Signatories to cross-appeal should be refused, with costs.

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

The Costs Judgment relevantly summarised

403. 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:

     359. Costs Judgment at [12]-[14].

“Where a party that has made an informal offer of compromise does better as a result of a judgment of the court than it would have done if the offer had been accepted, the court may in the exercise of its discretion make a more favourable order for costs in favour of that party than it otherwise would have done. Generally, for the court to exercise its discretion in that way, two conditions must be satisfied. First, the offer must be a genuine offer of compromise. Second, it must have been unreasonable for the offeree not to accept it: Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8] per Basten JA (with whom McColl and Campbell JJA agreed).

Whether an offer is a genuine offer of compromise is to be answered objectively having regard to the particular circumstances of the case. In order to be a genuine offer of compromise, the offeror must give something away: Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368 per Giles J. However, what that something is depends on the circumstances of the case. In some cases, an offer to “walk away” may be sufficient where, for example, the costs are substantial and the offeror’s prospects of success are good: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [26], [30] per Santow JA.

Whether it was unreasonable for the offeree not to accept the offer depends on a number of factors including the following:

(a)   the stage of the proceeding at which the offer was received;

(b)   the time allowed to the offeree to consider the offer;

(c)   the extent of the compromise offered;

(d)   the offeree's prospects of success, assessed as at the date of the offer;

(e)   the clarity with which the terms of the offer were expressed;

(f)   whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it.

See Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435 at [25] (per Warren CJ, Maxwell P and Harper AJA), which was cited with approval in Miwa at [12].”

404. 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 Anchorage Defendants’ offer to settle all of the Anchorage Plaintiffs’ claims against them on the following terms (the Anchorage Defendants Offer):

(a)   payment by or on behalf of the Anchorage Defendants of the total sum of $10 million (the Anchorage Settlement Sum) to your clients (or as they may direct in writing) within 28 days of acceptance of the Anchorage Defendants Offer;

(b)   the Anchorage Settlement Sum will be paid, and received, in full and final settlement of all claims that the Anchorage Plaintiffs have, may have or may claim to have against any of the Anchorage Defendants arising out of or in connection with their respective roles as directors, officers and/or employees of A.C.N. 004 410 833 Limited (formerly Arrium Limited) (in liquidation) or any subsidiary thereof; and

(c)   your clients agreeing to the dismissal of the claims made by the Anchorage Plaintiffs against the Anchorage Defendants (without prejudice to the cross-defendant’s continuing cross-claim against the cross-defendants, HSF), with:

(i)   no order as to costs as between the Anchorage Plaintiffs and the Anchorage Defendants; and

(ii)   any extant costs orders as between the Anchorage Plaintiffs and the Anchorage Defendants being vacated.”

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

406. 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.

407. 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:

     360. Costs Judgment at [34]-[36].

     361. Costs Judgment at [37].

1. The trial had already started and the first witness (Bakewell) was expected to give evidence on the day after the offer expired. [362]

2. The Anchorage appellants had the benefit of reviewing extensive pre-trial written submissions from the defendants and it could be expected that the strengths and weaknesses of the respective parties’ cases would have been investigated in the context of the mediation, the consequence being that the Anchorage appellants had been allowed ample time to make a proper assessment of the reasonableness of any offer on the basis of a complete understanding of the defences raised by the defendants. [363]

3. The Anchorage appellants’ case largely failed for reasons that were raised in the defendants’ pre-trial written submissions. [364]

4. Noting that the reasonableness of the offer was to be assessed as at the time that it was made, it was relevant that costs were increasing rapidly and there could be developments during the trial that altered the assessment of the parties’ prospects of success, which explained why it was reasonable to give the Anchorage appellants only a limited time in which to accept the offers. [365]

5. The Anchorage appellants were represented by “well-resourced, competent and experienced legal advisers” and they did not complain that the time that they were given was insufficient to consider the offers. [366]

   362. Costs Judgment at [38].

   363. Costs Judgment at [38].

   364. Costs Judgment at [38].

   365. Costs Judgment at [39].

   366. Costs Judgment at [40].

408. 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).

     367. Ms Merrick’s affidavit affirmed 7 August 2019 at [18].

409. 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:

“… We discussed with you at the mediation on 18 December 2020 being in a position to engage with your clients in connection with a possible settlement shortly following receipt of any settlement offers from the other insured defendants in the week commencing 11 January 2021. That remains our position and we await any such offers. Finally, quite apart from our respective differing views on the merits of the claims against your clients, Mr Bakewell pleads proportionate liability defences involving your clients and such defences present material challenges to a settlement on the terms you have proposed.

To assist our clients to consider the possibility of a settlement with your clients, please can you confirm whether, as part of any settlement involving your clients on the terms you have proposed:

1.   Your clients would be prepared to cooperate with the Anchorage Plaintiffs in respect of the Anchorage Proceedings on reasonable request including by making themselves available:

(a)   to give evidence in the Anchorage Proceedings as reasonably requested; and

(b)   to answer questions and to provide information or documents as reasonably requested.

2.   Mr Bakewell would be prepared to agree to:

(a)   cease pleading and abandon any proportionate liability defences involving your clients;

(b)   call your clients as witnesses in the Anchorage Proceeding; and

(c)   consent to an order that each of the Anchorage Plaintiffs and Mr Bakewell may cross examine your clients.”

…

410. 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”.

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

412. 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.

413. 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:

“Even so, in my opinion, it was reasonable, particularly having regard to the terms of the offer, for the Anchorage Plaintiffs to wait to see what the outcome of the mediation was before deciding whether to accept an offer in those terms. The mediation would have permitted the Anchorage Plaintiffs to raise issues that were relevant to the question whether their clients should accept the offer such as those raised in their solicitors’ email dated 8 January 2021. The mediation left open the possibility that the Anchorage Plaintiffs could have reached a global settlement, which would have been very relevant to their assessment of the offer having regard to their own future legal costs. The mediation would also have permitted the Anchorage Plaintiffs to raise issues of confidentiality, which would be relevant if the claims against the other defendants were not settled at the same time.”

368. Costs Judgment at [29].

369. Costs Judgment at [30].

414. 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.

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

Determination of the Anchorage appellants’ matters

416. 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.

     370. [2021] NSWCA 106 at [83] per Leeming JA (with whom Bell P and White JA agreed).

417. The position is different, however, with respect to the 3^rd, 4^th and 5^th 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.

418. 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]

     371. See, for example, Ross v Lane Cove Council [2017] NSWCA 299 at [2]–[3] per Macfarlan JA.

     372. (1936) 55 CLR 499 at 505; [1936] HCA 40 (“House v The King”).

419. 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.

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

421. 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.

     373. As is made clear in the Costs Judgment at [37], [40].

     374. From the Costs Judgment at [38]-[41], summarised above at [407].

422. 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.

     375. Costs Judgment at [38]-[40].

423. 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.

     376. Costs Judgment at [38].

424. 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]

     377. Costs Judgment at [34]-[36].

416. 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.

417. 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.

Determination of Signatories’ leave to bring cross-appeal

427. 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.

428. 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:

1. it was an irrelevant consideration that the Anchorage appellants might get a better offer in the future; and

2. the finding was contrary to the evidence in circumstances where the Anchorage appellants did not say that the reason why they did not accept the Signatories’ offer was because they wished to await the outcome of the mediation.

429. 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.

430. 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.

431. 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.

432. 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.

433. 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.

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

IX - CONCLUSION

435. For the foregoing reasons, we conclude that:

1. The primary judge did not err in rejecting the contention that the expression “change in financial position” should be construed narrowly so as to be limited to changes in Arrium’s financial position as disclosed in its balance sheet; nor in rejecting the appellants’ position that it referred to Arrium’s financial position generally and without limitation; and in preferring an intermediate construction that it referred to such changes in financial position as would appear in notional accounts prepared at the relevant date when compared to those for the last accounting period.

2. The primary judge did not err in finding that the decrease in the likely sale value of the MolyCop business (or the “failure” of the MolyCop sale process, if it be correctly so characterised) was not a material change in financial position for the purposes of the MAE Representation; nor did his Honour err in not finding that a relevant change of position occurred as at 21 December 2015 (or January 2016) when Arrium’s management became aware of the events or conditions that ultimately gave rise to the material uncertainty disclosed in the Going Concern Note in the HY16 Accounts.

3. The Going Concern Note represented a change in Arrium’s financial position as at the date on which 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 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 the factors or circumstances that gave rise to the inclusion of the Going Concern Note subsisted as at 31 December 2015 or even earlier, because the directors had not at that stage formed the requisite state of awareness to trigger a requirement to include a Note in the Accounts.

4. Those conclusions dictate that the MAE Representation was not shown to be false on each occasion on which it was made before 11 February 2016.

5. It follows from the finding that there was a change in financial position constituting a MAE from 11 February 2016 that, at the time of the last of the impugned drawdowns in the BBVA case (a drawdown under the BBVA Bilateral Agreement of US$20 million on 16 February 2016 pursuant to a drawdown notice dated 10 February 2016), the MAE Representation which was automatically repeated on the date of this drawdown (but not that in the drawdown notice dated 10 February 2016) was incorrect. This is because the MAE Representation was made not only in the drawdown notice but deemed to be repeated at the time of the actual drawdown. Ground 23 of the BBVA appeal is thus made good, but nothing turns on this in light of our conclusions as to reliance and causation.

6. The primary judge did not err in finding that the changes in the Gearing Ratio and ICR did not constitute a change in financial position that was a MAE, at least before 11 February 2016.

7. 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.

8. 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.

9. The primary judge was 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, or in making the representations contained in the drawdown and rollover notices.

10. 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.

11. His Honour erred in holding that Sparkes owed a personal duty of care in respect of the 31 December conversation. The notice of contention in this respect therefore succeeds. It is then unnecessary to consider whether she breached any such duty.

12. The primary judge was right to hold that Bakewell first raised the issue of the “Bakewell Direction” before 18 December 2015, 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.

13. 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.

14. 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, and accordingly that they were not liable as accessories.

15. 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 drawdown notices were false.

16. His Honour did not err in holding that reliance, and thus causation, was not established, either in respect of the representations contained in the drawdown notices, or in respect of the 31 December conversation.

436. 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.

437. The appeals should be dismissed, with costs.

Orders

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

1. Leave to appeal from the decision of the primary judge in respect of the costs orders made with respect to the Signatories is granted to the Anchorage appellants, but the appeal is dismissed with costs.

2. Leave sought by the Signatories to appeal from the decision by the primary judge not to make an indemnity costs order in their favour is refused and their cross-summons is dismissed with costs.

3. To the extent not dealt with by orders (1) and (2), each of the appeals is dismissed with costs.

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Endnotes

Decision last updated: 12 May 2023